How insurers assess risk for different types of protection

When you apply for life insurance it pays a benefit upon death while a living benefit product pays a benefit upon a disability or illness. The insurance company’s analysis of your risk, and its impact on the insurance premium you pay, depends on the type of product you choose. Let’s take a look at how an insurance underwriter may assess your risk for the different coverage types…

Life insurance

For life insurance, end of life, or mortality, is the long-view consideration for the insurer’s underwriter as they assess your risk. How does the compilation of information, medical, financial and lifestyle 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 (1). In 1981, average life expectancy was 75.5 years (2). 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

Disability insurance (DI) 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 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.

Critical illness insurance

Neither death nor disability are considerations with Critical Illness (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: an example

Let’s take a mood disorder, such as depression, and compare how it might be viewed from a life insurance 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 (3). In Canada, approximately 500,000 miss work each week due to mental health concerns (4). These numbers argue in favor of a more conservative approach to disability underwriting. 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, so the insurer’s underwriter takes that into account when assessing risk and determining a premium.

There is no one-size-fits-all approach that insurers use when assessing risk for life and living benefits coverage. Speak with your advisor to discuss your coverage needs and how an insurer may view your risk for a particular type of protection.