When the average client wants to take out life or critical illness cover, they usually find that the...
When the average client wants to take out life or critical illness cover, they usually find that the major life offices are falling over themselves to offer cover. But when the applicant is not perceived to be an average risk, for instance if they have been ill, how generous are traditional providers in granting terms?
People will not always meet standard underwriting criteria, and while this may make it harder to find them cover, it does not necessarily mean they will not obtain cover altogether. Even if a client cannot satisfactorily answer all the underwriting questions, the application may still be worth pursuing because providers have varying attitudes towards people with impaired health. Depending on their medical history clients may find they are still offered protection but with higher premiums, or that they will be accepted but with specific exclusion clauses.
Tony Worthington, communications manager at Swiss Re, says: "A lot depends on the underwriting philosophy of the insurer. They have to make the decision whether to rate it, to exclude it for a while, or to decline it altogether. A high declinature rate among insurers would imply cherry-picking and non-acceptance of impaired lives."
The major life offices are becoming more flexible in their approach to underwriting impaired life cover as the term market becomes ever more competitive and margins are squeezed, but it still remains a niche area for them at around 3-4% of the total insurance underwritten. Rosalind Pearson, research and planning manager of personal finance at Swiss Life, says: "Our aim is to offer cover to as many people as possible. In some cases we may have to divert or defer the decision for a year or two, or perhaps exclude the condition from a critical illness policy, but we only decline or postpone fewer than 5% of all cases."
While all life offices claim to take a flexible approach to underwriting life and critical illness cover for impaired lives, there are clear differences between them in terms of how far they are prepared to go.
Research from Countrywide shows that some of the major insurance providers can be grouped together as to which conditions they are more amenable to when underwriting applications for impaired lives albeit subject to premium loadings or exclusions. For example, most life offices will now offer cover to asthma sufferers, and both Legal & General and Scottish Amicable can be flexible on multiple sclerosis. Canada Life and Swiss Life are comfortable with providing cover following cancer, while Friends Provident and Royal Sun Alliance will usually insure following a stroke.
independent assessments
This research can be useful in identifying possible insurers, but the companies cannot be relied upon to accept every case because they assess each independently. Ian Morgan, research and development consultant at IFA group Hallmark Limited, says: "We use the whole gamut of life insurers for placing impaired lives, but who we go to depends on the individual case. Different providers do give better rates for different risks, but you could not really put a file together on this. They look at cases individually, at height, weight, how long ago the illness occurred and what treatment they are on now, so who we use does vary from case to case."
Life offices have few consistent rules when dealing with impaired lives and because of this, underwriters from the major insurance companies find it difficult to make generalisations about how different conditions will be treated. Most impaired life applications are underwritten on an individual basis and decisions are based upon both the condition of the applicant and the provider's own criteria. Therefore, depending on the health and attitude of the individual as well as the flexibility of the insurer, some conditions may either result in premium loading or in refusal. And some life offices will offer exclusions on critical illness policies in certain circumstances.
Tony Bartholomew, manager of underwriting central services at Friends Provident, says: "With life cover it is very unusual to refuse applications. 98% or 99% of cases will be accepted on standard terms, or with higher premiums, but critical illness is a different ball game. There are 20 to 30 different types of illness on critical illness contracts and the underwriting risk is much harder to assess on standard terms. Because there are varying degrees of heart attack, and because what caused it can be an important factor in getting cover, we can offer cover with certain exclusions because we are here to give cover if we can."
However, not all the major life offices are prepared to offer exclusion clauses within critical illness plans due to the possible knock-on effects of the initial condition. Tony Jupp, chief underwriter at Norwich Union, says: "Most critical illness claims are for heart attack, cancer or stroke. But even if heart attacks were excluded, we still could not split out the individual risk and reduce the premiums, so we do not exclude these core conditions from policies. Insurers may not be able to protect themselves just by excluding heart attacks from the policy, because the next claim could be brought on by the heart attack."
He adds: "We have a product based on the volume market. With critical illness the thought process changes from the risk of dying to the risk of contracting a critical illness and we have to look more closely at applications. If, with critical illness, a person is overweight, takes no exercise and smokes they would not be the sort of applicant we are looking for, but they can be dealt with quite satisfactorily on the life side."
Dale Tranter, protection researcher at Countrywide, says that while there is a degree of flexibility regarding impaired lives, they are only a small part of the market for the major insurers. He says: "The big insurers deal with volume and if they have got to stop to underwrite it in more detail and get more information then, from their point of view, it is extra time and paperwork which costs money. Most of the big insurers will put around 90% through on ordinary premiums. They provide a decent service at a reasonable price for the majority of applicants."
Alternative routes
If the risk is judged to be too great by the major life offices then another option may be to check out what is available from one of the Lloyd's syndicates. Traditionally the Lloyd's syndicates have been seen as specialist insurers for short - term and high-risk areas, such as cover for visits to areas of the world not covered by other insurers, and also for impaired life cover. Tranter says: "Lloyd's syndicates are more flexible than most life offices but they are likely to be more expensive. They are not allowed to insure for more than a 10-year term, but they can be quite flexible at the bottom end with very short-term policies for one month, three months, six months, and so on."
Dr Krish Shastri, group marketing director at Cassidy Davis, says that if people find that they cannot get insurance because they have only recently suffered the impairment, then a Lloyd's syndicate may still be able to help. He says: "If someone has had a heart attack within the last year, they may be able to take out a short-term policy over 12 or 24 months so they are covered over the critical period. Then when they apply again for cover they may get better terms because they are able to demonstrate a period of recovery."
The Lloyd's syndicates are processing more impaired life business, reflected by the fact that they are adopting some of the application procedures used by the major life offices designed to speed up the process. Phillip Wolski, managing director at Wren Life, says: "All our initial underwriting is done by machine, which is parameter driven and growing all the time. If the application fails here it is then referred to our specialist underwriters. A key advantage the Lloyd's syndicates have is the speed of response we are faster than life offices."
Shastri says that another strength of the syndicates is that they can offer customised underwriting aimed at impaired lives. "Life offices are gently beginning to feel their way in this market. This type of environment does not fit well with the life companies because by definition they aim at the mass market with a speedy administration system," he says.
Morgan says that while the Lloyd's syndicates are more esoteric, there is a definite role in the market for them. "They market themselves at the more unusual risks and the more impaired cases. They are smaller, specialised insurers and not really in competition with the other life offices. While they can be very quick to give answers they can also be a lot more expensive."
There is now a greater acceptance of impaired lives among life offices, but there are still distinctions between what the large providers and the Lloyd's syndicates will accept. The major life offices cover more conditions than they used to and they will give more conditions individual consideration, even if this means higher premiums or exclusions.
Ben Marquand is a staff writer
