A look back in time helps demystify insurance underwriting
Life insurance underwriting has been around a long time. Since the first life insurance policy issued in 16th century England, the practices supporting fair and competitive life insurance risk selection have evolved often apace with emerging technologies, but the principles that undergird underwriting remain remarkably unchanged.
Living benefits, via disability and critical illness insurance, are considered relative newcomers to the marketplace. Still, the earliest forms of these coverages have been available for a long time. The second American president, John Adams, signed the Act for the Relief of Sick and Disabled Seamen in 1798 (1). The law required seafarers to put aside twenty cents per month from their wages in order to fund medical care for other sailors who fell sick or became disabled. This group of seamen were so vital to trade and commerce, that the law created a provision for the building of hospitals for sick seamen. This is perhaps one of the earliest examples of what we now consider accident and sickness and disability insurance.
Critical illness is the youngest member of the life and living benefits insurance family. It was the brainchild of South African Dr. Marius Barnard who launched the first version in 1983 under the ominously titled Dread Disease Insurance. The premise was groundbreakingly simple: get diagnosed with a covered illness, survive 30 days and collect the claim payment. Critical illness made its way to our shores a few years later and remains a powerful protection tool that continues to benefit Canadian insurance buyers, often in ways that have been described as life changing and life saving.
Consider the differences in underwriting
How and why are these distinct products underwritten? Understanding and considering these differences is a worthwhile endeavour for advisors in managing client expectations and taking an informed approach when submitting both living and life benefit cases.
Let’s start by discussing the end points the underwriter keeps in mind with each of the products. For life insurance, end of life (or mortality) is the long-view consideration. How does the compilation of medical, financial and lifestyle information impact longevity? In 2020, the average life expectancy in Canada was 80 years for men and 84 years for women, a combined average of 82 years (2). In 1981, average life expectancy was 75.5 years (3). As a result, life insurance premiums have dropped and coverage has never been more affordable, especially for younger lives who are healthy, non-smokers. With the introduction of smart life-insurance applications using artificial intelligence, risk-sensitive algorithms and higher non-fluid limits, the purchase of life coverage has never been easier.
Disability insurance introduces a different dynamic to the protection it provides. The underwriting end point is founded on illness, known as morbidity and its’ impact on the ability to work. Consequently, any condition potentially limiting or preventing that ability, by definition disabling, takes on great underwriting importance. This is the case even if that condition is not life threatening and potentially irrelevant for life insurance underwriting. Another dynamic shift is the potential for multiple claims to be submitted by the insured for the duration of their coverage. To more fully address morbidity-focused underwriting and the multiple claims potential, DI underwriters make use of specific impairment exclusions, longer benefit waiting periods and limited benefit-payment periods as the case requires. This allows DI insurers to offer protection to more clients, even if on a modified basis.
Let’s take a mood disorder, such as depression, and compare how it might be viewed from a life vs. living benefits underwriting perspective. Depending on its severity, depression can be a serious illness, affecting every aspect of life. Among the most catastrophic outcomes is suicide, which could be the precipitating event for a life insurance claim. The consideration for disability underwriting slants toward being able to work. It is estimated that there are 12 billion lost days of work annually related to depression worldwide (4). In Canada, approximately 500,000 miss work each week due to mental health concerns (5). These numbers argue in favor of a more conservative approach to underwriting. As we know, the possibility of multiple claims and extended work absences looms over any disability insurance application that reports a history of depression or other mood-related disorders.
Critical illness pushes the end point approach to the front of the line. Neither death nor disability are considerations with CI protection. Rather, diagnosis of a covered illness along with a stipulated, short survival period is all that is required to file a claim. Pricing is based on incidence of disease, defined as the probability of occurrence of a given medical condition. One example is that of myocardial infarction (heart attack) where a heart attack survivor can be diagnosed and back to work sometimes within a few weeks or months and fully eligible for the policy benefit.
Because a simple diagnosis is the end point, CI underwriting requires extraordinary focus on risk factors and family history. Smoking, high blood pressure and lifestyle habits are more closely scrutinized. Family history that may provide insight into a predisposition to a particular covered illness or illnesses is of paramount importance, more so since the introduction of the Genetic Non-Discrimination Act (GNA) of 2017, which forbids insurers, among others, from using genetic test results without the client’s express authorization.
Bringing it home: Submitting life and living benefits cases
There is no one-size-fits-all approach for clients submitting life and living benefits at the same time. Good advanced underwriting will focus on currently prescribed medications, time lost from work and family history details. One thoughtful approach is to review and compare the underwriting requirements for the carriers and products under consideration. It may make sense to secure coverage with carriers and products that require less underwriting evidence as stated on the requirements chart. Once initial coverage is in place, additional requirements are submitted with the request for the additional coverages. Another approach is simply asking the underwriter who has just approved a life case, how a DI or CI product might be evaluated. The key is being aware of requirement differences and taking a best practices approach.
For more information on the underwriting processes for life and living benefits, contact your local PPI office.
- Statues and Stories. Act for the Relief of Disabled Seamen. Statutesandstories.com. April 29, 2018.
- Life Expectancy in North America 2020. Statista.com. January 20, 2021.
- Country Economy. Canada – Life Expectancy at Birth. Countryeconomy.com. n.d.
- Dobson, Kathleen G., Mustard, Cameron, Smith, Peter M., Vigod, Simone N. Trends in the Prevalence of Depression and Anxiety Disorders Among Working-Age Canadian Adults Between 2000-2016. Statcan.gc.ca. December 16, 2020.
- Chai, Carmen. 500,000 Canadians Miss Work Each Week Due to Mental Heath Concerns. Globalnews.ca. May 5, 2017.
This article is provided by Know the Risk, an educational website that contains underwriting information for insurance professionals, available exclusively to Advisors affiliated with PPI (login required).