Disclosure and underwriting – why is it so important?
By Nicholas van Der Nest: Divisional Director - Risk Products, Liberty Life
There is a misconception that not disclosing ALL information when being underwritten for a risk policy is okay or may be seen as just a ‘white lie’. When considering products such as critical illness, disability, life and health cover it is of utmost importance to firstly understand the underwriting process. Even if the process may seem mundane, rather be completely honest when filling in your application form than risk the possible consequences of non-payment when it counts. Remember, non-disclosure does not only relate to medical risk, but to all aspects including, avocation, occupation, financial, ownership, solvency etc.
Let’s take an example of a possible case to illustrate the importance of disclosure. In 2010, Mr Lotter visited his GP regarding a patch of flaky skin on his back. He thought nothing about it, but was referred by his GP to consult his dermatologist in order to confirm a diagnosis of eczema and exclude any other potential diagnoses. The flaky skin healed soon after, and upon seeing this, Mr Lotter cancelled his appointment with the dermatologist.
A few weeks later, Mr Lotter was approached by his independent financial adviser (FA) to conduct an annual review of his financial plan. During this review his FA suggested that he takes a critical illness policy of R500 000, which Mr Lotter happily agreed to as he recently became a father.
Mr Lotter and his FA filled in the application form and reached a question that asked about all occasions his GP had recommended referrals for tests or treatments. Mr Lotter alleged that his FA replied that the insurance company only needed details of appointments that related to serious conditions and did not believe that his referral for what he thought had been eczema, fell into that category. As a result Mr Lotter did not disclose his referral to the dermatologist and signed the form ‘honestly’ believing that he had disclosed everything.
Two years later, Mr Lotter received devastating news that he had skin cancer. He made a claim on his new critical illness policy as it covered critical illnesses such as cancer. His insurer subsequently rejected his claim, based on "material non-disclosure" - the insurers' jargon for Mr Lotter’s failure to disclose the information of his referral to a dermatologist.
Nicholas Van Der Nest: Divisional Director - Risk Products, Liberty Life says, “When your insurer is requesting ALL information, provide them with EVERYTHING to avoid claims being refuted. In Mr Lotter’s case, the application asked for ALL occasions his GP had referred him for tests or treatments which he interpreted as only relating to serious conditions. Rather tell the insurer too much than too little and ensure that when you need a claims pay-out, this will not be rejected.”
What is full disclosure?
When you apply for an insurance policy you are asked to provide information about your current and historic health status. This includes illnesses or diagnosis you may have received. The information supplied by you is then used to calculate your premiums based on your personal level of risk of becoming a claimant.
If you don’t disclose a medical condition, that condition cannot be underwritten, which means it is not considered when calculating your premium. As your premiums were calculated without taking into account this condition, any potential claims resulting directly or indirectly from that condition will in all likelihood be rejected by the insurer.
For example, if you have or had diabetes and do not declare this on your policy application form and you lose a foot as a result of poor circulation (a known complication of diabetes), your claim may not be paid.
Pricing for risk
When calculating a risk premium, Liberty aims to be fair to all policyholders by ensuring that risk premiums are commensurate with a policyholder’s particular level of risk. If this practice was not followed, healthy individuals would effectively subsidise less healthy policyholders and the average premium for these healthy individuals would have to increase overall.
Liberty’s approach to non-disclosure
If the non-disclosure…
· …would not have changed the underwriting decision, it is not taken into account at claims stage.
For example, not disclosing a common cold that does not affect your overall health status.
· …would have changed the underwriting decision but is not relevant to the cause of the claim, the entire policy is re-rated. A penalty is deducted and the claim is assessed using the revised cover amount.
For example, not disclosing a family history of cardiovascular disease, but claiming as a result of a motor vehicle accident.
· …is relevant to the cause of the claim, we will consider the policy to be null and void from the start and the claim will be turned down. Liberty will, however, refund premiums paid after making allowance for any costs associated with the contract, e.g. expenses and commissions paid.
For example, not disclosing a previous heart attack and claiming for a heart attack.
“It is important to disclose all information about your health and lifestyle when you take out a policy. Full, accurate and complete disclosure will ensure a fair underwriting decision and a good claims experience. Non-disclosure, even if unintentional, is one of the main reasons claims are rejected or not paid in full. If you don’t tell your insurance company what they need to know, your claim may not be paid the way you expect and this defeats the purpose of taking out cover in the first place,” Van Der Nest concludes.
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