Underwriting sits behind every protection recommendation, and R05 uses it to test whether you understand that a quotation is only an indication. The questions usually take one of two forms: what will the insurer do with this medical history, or what happens now the client has given an inaccurate answer.
What the insurer is assessing
Underwriting looks at four categories of risk.
| Factor | Examples |
|---|---|
| Medical | Personal medical history, height and weight, blood pressure, cholesterol, mental health history, family history of hereditary conditions |
| Lifestyle | Smoking and nicotine use, alcohol consumption, recreational drug use |
| Occupational | Manual trades, working at height, offshore work, armed forces, professional sport |
| Pursuits and residence | Motor sport, diving, climbing, aviation, foreign residence and travel |
Financial underwriting sits alongside these for larger cases, checking that the amount of cover is justified by income, liabilities or business need. It is why income protection benefit is capped as a percentage of earnings and why very large life sums assured require evidence of need.
The evidence an insurer may request
- The application form answers, which form the basis of the contract
- A general practitioner report, with the applicant consent
- A targeted medical questionnaire for a specific condition
- A medical examination, including nurse screening, blood tests and an electrocardiogram at higher sums assured
- An accountant letter or payslips for financial underwriting
The applicant has a right to see a general practitioner report before it is sent to the insurer under the Access to Medical Reports Act 1988, which is a favourite one mark question.
The decisions an underwriter can reach
- Standard rates, cover on ordinary terms
- Rating, an increased premium, expressed as a percentage loading on life and critical illness cover or as a per mille addition per thousand of sum assured for occupational risks
- Exclusion, cover granted but a specified condition or activity excluded, common for back conditions and hazardous sports on income protection
- Increased deferred period, used on income protection instead of, or as well as, a loading
- Postponement, a decision deferred until a condition stabilises or an investigation concludes
- Decline, no cover offered
For income protection, an exclusion or a longer deferred period is often preferable to a decline, and the adviser must explain the practical effect. An excluded back condition on a policy for a manual worker removes a large part of the value of the cover.
Non disclosure under CIDRA
The Consumer Insurance (Disclosure and Representations) Act 2012 changed the burden. A consumer no longer has to volunteer everything material. They must take reasonable care not to make a misrepresentation in answer to the questions the insurer asks. That places the onus on insurers to ask clear questions.
The remedy then depends on the type of misrepresentation.
| Type | Insurer remedy |
|---|---|
| Deliberate or reckless | Avoid the policy, refuse all claims and keep the premiums |
| Careless, and the insurer would have declined | Avoid the policy and return the premiums |
| Careless, and the insurer would have charged more | Reduce the claim proportionately to the premium actually paid |
| Careless, and the insurer would have applied an exclusion | Treat the policy as if the exclusion applied |
| Honest and reasonable answer | Pay the claim in full |
Note the proportionate remedy, because it is the most commonly examined. If the client paid two thirds of the premium that would have been charged, the claim is reduced to two thirds.
For business insurance the Insurance Act 2015 applies instead, with a duty of fair presentation of the risk and similar proportionate remedies, which matters for key person and shareholder protection cases.
Practical adviser duties
The adviser should never complete a form on the client behalf without reading the answers back, should encourage full and accurate answers, should keep a record of what the client said, and should warn the client of the consequences of an inaccurate answer. Where a client asks whether something minor is worth mentioning, the answer is always yes if the question asks for it.
Answering the exam question
Identify the risk factor, state the likely underwriting outcome and why, then say what the adviser must explain to the client. If the question involves an inaccurate answer, classify it as deliberate, reckless or careless first, because the remedy follows automatically from that classification.