Danger, men at work

Without doubt, occupational underwriting remains the poor relation to its more glamorous medical and financial cousins.

The introduction of more stringent safety regulations in most industrialised countries has caused fatal accidents in the workplace to fall. Most actuaries would confirm, however, that an individual's occupation still presents a significant risk to mortality and morbidity assumptions when pricing any life and health product. It therefore remains an integral part of the underwriting process.

An example of just how important occupation underwriting can be is dramatically portrayed in statistics from the recent conflict in Afghanistan. By 8 January, five journalists had lost their lives in the hostilities, a frightening statistic, given that overall Western losses ' including combat personnel ' have so far been kept to a minimum.

To identify a 'dangerous' or more correctly 'hazardous' occupation, underwriters have to take a number of different factors into consideration. In addition to all of the information on the application form ' residence, sport/recreational activities, medical history and so on ' that helps us to build a mental picture of the applicant, in identifying dangerous occupations we should also consider the following broad categories:

• Physical hazard.

• Environmental hazard.

• Moral risk.

• Other underwriting considerations.

In conjunction with these, we also apply the control cycle to take account of emerging experience. As the roles of occupations evolve through social, economic and technological changes among others, so our experience changes.

Such experience has been witnessed on income protection (IP) policies. We have seen teachers being moved from occupation class one to occupation class three as a result of poor claims experience. Obviously, if it is not remedied, this was unanticipated at the time of classification and can pose a serious threat to an insurer's pricing and profitability.

The importance of each of the risk factors varies subject to the type of product being selected, but it is worth pointing out that the industry has developed considerably in recent years to provide cover at standard rates for as many individuals as possible.

Options available to the underwriter are:

• To impose a rating.

• To restrict the extent of the cover ' for example, excluding any disability-related benefits when considering critical illness (CI) cover.

• To apply an exclusion ' again, this usually applies to additional benefits only.

• To decline the application ' in practice, it is only IP policies that suffer this decision. Occupations that may be declined for IP are generally unskilled manual workers.

It has been well documented in the past that for mortgage (life) applications, roughly 5% of lives will be rated and 1% either postponed or declined. For CI cover, the corresponding figures are 15% and 5%, reflecting the much higher risks associated with this product. In examining these figures it is reasonable to assume that very few applications are rated as a result of occupation alone. There will also be medical and other factors taken into account.

The same cannot be said for IP policies, where occupational risk factors are fundamental to product pricing. It is a well-understood fact that IP has generally suffered from poor claims experience. So it is a task in itself for many insurers to provide IP to standard lives on a profitable basis. Non-standard lives may possibly be viewed to be of secondary importance. However, having pre-defined occupation classes for IP means that there is often less of a requirement to underwrite for occupation, as much of this has already been done.

Disability products are subject to further complications arising from the definition of disability. There are many occupations that are viewed as too high risk to be offered terms on an own occupation basis. Examples are classes of surgeons and musicians. In these instances, it is common for the definition of disability to be restricted to either an any occupation or a task-based definition. To follow we will take a look at the four risk factors.

Looking at the hazards

The underwriter needs to consider the following when assessing those who work:

• At heights.

• With explosives.

• In extreme weather conditions.

• Under water.

• With moving machinery.

• With high voltage.

• Underground; and

• In the aviation industry.

Many of these physical hazards will represent an increased risk of morbidity and, in some cases, mortality.

Depending on the information given ' a case in point would be an individual's exposure to explosives which may range from fitting 'live' weapons to aircraft to actually diffusing bombs ' the underwriting decision may vary from offering standard rates to declining elements of the cover.

Here, it is the extent of the exposure to the hazard that will provide the final decision.

The occupation itself may not be hazardous, but the surrounding environment may pose an increased risk. Examples of such environments are:

• Construction sites.

• Noxious fumes and toxic substances.

• Moving machinery/factories.

• Dust/airborne particles.

• Forestry.

• Fishing.

• Asbestos.

Industries that are most commonly associated with hazardous occupations are:

• Oil/natural gas (offshore, commercial diving, weather and the like).

• Construction (heights, electricity, power machinery, explosives, mining).

• Armed forces.

• Aviation.

• Fishing industry (climatic risks).

Occupational carcinogens are encountered in many occupations. In the EU, roughly 16 million people are exposed to carcinogenic agents at work. Between 300 and 350 such agents have been identified, including benzium, chromium, nickel and asbestos.

Although estimates vary, these agents remain significant factors with 4% to 9% of all cancers being thought to be occupational in origin and 15% of male lung cancers attributable to occupational exposure.

Psychological stress is now considered a major source of occupational illness. Sleep disturbances, burnout syndromes and depression are increasingly attributed to work-related stress. Epidemiological evidence also shows stress to be a key risk factor for cardiovascular disorders, with stress being implicated particularly in coronary heart disease and hypertension. In some circumstances, there may well be a moral risk attributable to an individual's occupation.

Such occupations could put the individual at risk from alcohol, drug abuse or even violence. Examples of such occupations are pub landlords and security personnel.

Although certainly not a moral risk, occasionally an underwriter may also be faced with high profile individuals operating in political or religious fields. Given the increasingly volatile world situation, after 11 September, this in itself creates new challenges.

A matter of title

Other underwriting considerations include:

• Ambiguous titles such as director, manager, supervisor and the like. In these situations, further information would be required detailing the exact duties of the applicant. A managing director of a small family business is likely to have a very different role to one in a company employing a large number of employees.

• Qualifications, experience and training. These will indicate to what extent the applicant has been trained in their occupation ' this may define the extent to which safety measures will be followed in a specific occupation.

• Age may determine how long they are likely to be at risk and how suited an individual may be to a specific role. A professional footballer may be a good example where age is a critical factor in assessing an IP risk.

• Whether the applicant is working full- or part-time.

• Whether the applicant has more than one occupation. This is particularly important for income protection policies.

• Seasonal variations in employment.

• Any travel involved with the occupation. This can be a vital risk factor due to potentially high risks associated with some parts of the world.

The insurance industry has adapted positively in aiming to provide cover wherever possible. There are even insurers that specialise in this field as niche providers.

Occupational underwriting often takes third place in favour of medical and financial underwriting. However, occupation does represent a real threat to product pricing assumptions, particularly given the popularity of the numerous disability-related benefits now available.

It is for this reason that it must continue to be a major consideration during underwriting. Taking this a step further, the information needs to flow through to the actuarial pricing to ensure that proper risk management allows a refined rating structure.