Are you too risky for insurance?

Have you ever applied for a life insurance policy and had your proposal turned down by the insurance company?

Incredible as it may sound to some, particularly given the aggressive sales pitch adopted by many players in recent times, insurance companies do reject applications they think are too risky.

And how do insurers decide who gets a cover and who doesn’t? Well, based on a process called risk-classification or underwriting.

An insurance company’s performance is judged among other things by its claim ratio — the lower the ratio, the better is the performance. To achieve this, the companies follow a stringent underwriting process.

The insurer’s underwriters identify and calculate the risk of loss from policyholders, establish appropriate premium rates, and write policies that cover this risk.

Each insurance company uses its own set of underwriting guidelines for determining whether or not the company should accept a proposal.

In life insurance, this decision process sometimes requires medical evidence of the applicants. The applicant may be required to provide the following information (for life insurance) to enable underwriters assess mortality risks and determine appropriate premiums:

Age
Gender
Height and weight
Health history (often family health history)
The purpose of the insurance (estate planning, business or family protection, etc)
Marital status and number of dependants such as children
The amount of insurance the applicant already has, and any additional cover he proposes to buy
Occupation (some are hazardous, and increase the risk)
Income (to determine suitability)
Smoking or tobacco use (smokers typically have shorter lives)
Alcohol (excessive drinking reduces life expectancy, too)

Each insurer sets its own underwriting standards of what is acceptable, insurable risk. Then each application for insurance is reviewed to determine if the individual meets those standards.

There are four common categories:

Preferred: If you are a better-than-average risk (i.e. in good health, with no dangerous occupation or health history) you may be charged the preferred or lowest rate.

Standard: If you are considered an average or typical risk, you will be charged the standard rate.

Rated: If you pose an above-average risk (say you have high blood pressure, smoke, or engage in skydiving every weekend), you may be classified as an increased risk and charged a higher premium.

Declined: If you are rated as uninsurable (perhaps due to a serious illness), you may be denied coverage entirely.