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What is Underwriting? How does Underwriting work?

Anybody who is interested in getting any form of insurance cover will, at some stage, come up against underwriting and often don’t know what it actually means. Many people get concerned about it but it is not really a process to worry about.

So, what is underwriting?

It is simply the process that the insurance company uses to work out the level of risk they are accepting in providing you with insurance cover. They need to know some stuff about you (age, medical history, occupation) to enable them to decide if they are prepared to gamble on you.

They expect you to be honest with the things you tell them (this is called ‘Disclosure’ and we will get to that – it’s IMPORTANT!).

But possibly the best way to describe underwriting is by using an example:

“You are looking to buy a second-hand car. Now, you know that it will not be in new showroom condition. After all, it has been around the block, has some miles on the clock, and a few nicks and dings that come with those miles. But you do want to know if there are any serious problems – things that will be expensive at some time in the future. So, you take it for a test drive, maybe get a mechanic to have a look at it and check out its service history. Then, based on all that, you decide to buy or not buy it.”

And that is exactly what the insurance company is doing with underwriting.

Like you (wanting to buy a car) they want to give you insurance cover (and also get your premiums) and they know you are probably not in a new condition but they also want to be reasonably sure that your ‘big end’ isn’t going to break the minute you get the car because it was a problem that already existed. If, after a year or so of driving the car, something really serious goes wrong (that could not have been reasonably foreseen) that is unfortunate but not your fault and it is when your insurance kicks in.

But my bank has given me insurance without any underwriting!

EVERY insurance policy gets underwritten!

It just depends on when.

Many banks (and other retail outlets) will happily insure you while asking only a few questions. Then all you have to do is pay the monthly premium and you are covered.

That is … until you make a claim! (And the most important part of having an insurance policy is the ability to make an accepted claim.)

And, at that point, your bank wants to know everything about you! Now is when they are going to do the underwriting (as we said every policy gets underwritten!).

And should you have any problems that you knew about when you took your insurance or even came up during the course of your cover that you didn’t ‘disclose’ they can decline your claim?

“But they didn’t ask me any questions!” you say.

Probably not. They don’t have to. Because it is the client’s obligation to tell the insurer anything ‘material’ that could have a bearing on getting that insurance. And the reality is that most people are not insurance experts, don’t realize that, and don’t do it.

So, when is the best time to do underwriting?

From, for example, a bank’s perspective, it is best to do it later. When they underwrite you for a claim lodged at a later stage of your life, like the second-hand car, you will have more miles on you and more things that will have gone wrong. And that gives them many more reasons to decline your claim. And, if they can, they will!

Most actual insurance companies do their underwriting when you apply for your cover – before they issue a policy. And they ask a lot of questions! They do that because the Insurance company gets ONE shot at getting it right. This means they need to get all the information first and then make a decision. Because, once they have issued a policy, they are obliged to honor the terms of that policy – even if they missed something that was disclosed and could have meant they would not have issued the policy.

And it also means they can’t decline a claim for something that has happened to you (even those things that you had already told them about) while your policy is ‘in force’.

What’s this ‘Disclosure’ thing?

Disclosure is simply the requirement to tell the Insurance company anything that is ‘material’ that can have an effect on their decision to insure you or not.

Now just what is ‘material’ can be a matter of a great deal of discussion because what seems like a small thing to you may be important to an insurance company. Remember they work on statistics and probability.

So, working out the ‘material’ things to disclose can be a minefield. The Insurance companies simply say ‘tell us everything’ but that could be a nightmare. Do you really need to tell them you had bad flu ten years ago and were off work for two weeks? (Probably not!). But if that flu caused ongoing respiratory problems then they would certainly want to know about that.

In fact, deciding what is material is more “art than science’ but a good Broker will be able to steer you in the right direction. We pretty much know the stuff the insurance companies are interested in but the best course to follow is ‘if you are not sure – disclose it’.

But here is the IMPORTANT part about Disclosure:

If you do know something that could have a Material effect on your insurance cover, you are obliged to ‘disclose’ it to the insurance company. This is really important because if when you make a claim it is discovered that you were not completely honest (or lied or just chose not to reveal it) the Insurance company will be within its rights to decline the claim.

And, in the worst cases, they can also ‘void’ the policy. This simply means that the policy is torn up. It goes away. Doesn’t exist. And all the money you paid in premiums goes away with it! No, you don’t get that money back!

What if I just forgot stuff?

That will depend on your insurer.

Some are very strict in their policies. But there are some that realize we are all human and can make honest mistakes. Those insurers will look at this on a case-by-case basis.

If this happens to you that is when you really need a Broker by your side, dealing with the insurance company. Because dealing with claims is a big part of what we do. And we know the policies, as well as the insurance company and, are prepared to argue on your side. If you have any experience with this why not get in touch – info@boldinsurance.co.nz – and we will see if we can help you – at no cost, of course.

Some of the questions are really intrusive!

Yes, they are. But they are mostly historical.

Things will have happened to you in your life and the Insurer wants to know about them so they can make an informed decision. But if the probability is that they are unlikely (but not guaranteed) to happen again they will almost certainly not affect your insurance application. Insurance is based on patterns and probability. The Insurer just wants to know about them so they can rule them out or be aware that it is part of the risk they are taking in providing you with insurance.

But sometimes clients can be embarrassed by their medical history. Frankly, as Brokers, we have heard most of it before and the Insurance companies have as well. Disclosing this stuff can be vital and, importantly, Brokers and Insurers are obliged by law to maintain your privacy.

Nothing wrong with me!

Great! So, let’s tell the insurer that and they will be happy to cover you.

But if you do have some health issues it is possible that the Insurer will still cover you. They may require that a certain issue be ‘excluded’ from the cover (i.e. if you ever suffer from that again you can’t claim) or they may apply a ‘loading’ which just means you will be paying a little more for the cover.

And here’s why that is not all bad.

If something is ‘excluded’ you will still be covered for all the other things that may happen to you.

If your premium is ‘loaded’ you will pay more but you will know that you are at higher risk and that it is even more important for you to actually have the insurance. While none of us like paying more for things sometimes it just makes sense.

So underwriting is a fact of insurance life. Dealing with the process yourself can be confusing and daunting. The application forms can be long and some of the questions downright head-scratching.

So, our best advice is, if you are interested in insurance cover (of any kind), get a Broker to help you. They know what they are talking about (or should!), how to navigate the type and levels of insurance you need, untangle the answers to the many questions and ensure you don’t fall into the ‘non-disclosure’ trap. Plus, they will do it at no cost to you – (at least, we will!).

If you need some help sorting this out just email us - info@boldinsurance.co.nz - with your question.