The protection gap that exists in the UK is well known.
Research conducted by the Money Advice Service this year highlighted that almost one third (32 per cent) of UK adults have had a serious financial shock in the past five years and just over a third (35 per cent) had insurance in place to guard against it.
A prolonged absence from work through ill health, resulting in lost or reduced earnings, is one such shock.
According to recent figures published by the Office of National Statistics, average regular pay (excluding bonuses) for employees in Great Britain was £463 a week before tax and other deductions.
Although employment contracts will vary, an employee who is off work for between four days and 28 weeks due to health reasons is entitled to a legal minimum of just £88.45 – known as Statutory Sick Pay.
With a shortfall of £374.55 every week and little savings to fall back on, it would not be long before problems are encountered in paying essentials like the mortgage or rent, utility bills, food or even fast broadband by 2020.
Financial advisers have a key role to play in tackling the protection gap and providers should do their utmost to help demystify the process of underwriting individual income protection insurance.
Underwriting income protection contracts differs from critical illness cover or life insurance because conditions considered irrelevant to the critical illness or life insurance underwriter might take on greater significance for income protection.
For example, an individual with back problems is unlikely to worry a life insurer as the chances of the condition resulting in death are very remote indeed.
However, it is of significant concern to an income protection provider due to the fact that it could lead to a long-term absence from work and a claim being made.
When it comes to assessing an applicant, there are a number of tools available to an income protection underwriter; the application form, telephone interviews, questionnaires, GP reports, blood tests, nurse screenings, chest X-rays and electrocardiograms.
Different providers will have different processes – something which is undoubtedly a major frustration to advisers – but the information that the underwriters are seeking to extract will be much the same.
They are looking for a complete picture of the applicant’s health and lifestyle, and to establish the likelihood of a claim being made in order to ascertain whether they are able to offer cover and what the rate will be.
It is not unusual to be able to make a decision based on the application form alone where all the details have been included.
Full medical disclosure is required; the nature of any condition, when the diagnosis was made, what treatment has been prescribed, whether it has resulted in any time off work, and if so, for how long and when.
The underwriter needs to be aware of all diagnosed conditions, whether they are ongoing or not.
Some applicants and their advisers prefer the convenience and reassurance of a telephone interview with a nurse or the submission of GP reports and questionnaires.
For others, requests for additional information can be frustrating but in every case, the underwriters need all the material in order to conduct their work.
Any information that is missed – deliberately or otherwise – could result in a future claim being void which is not in the interest of consumer or insurer. It can be that the provision of information will mean that an exclusion or loading will not be applied.
Often there are conditions that people are not sure if they should tell the provider about or not. The advice to clients and their advisers has to be: if in doubt, declare it. That way, a claim is unlikely to be declined for non-disclosure.
When making their assessments, underwriters will take into account not just a condition itself, but also what the applicant does for a living and again the deferred period applied for.
For example, a non-smoker who suffers from mild asthma would be significant on a zero-period application but irrelevant to a 52-week deferred period.
It is not just the applicant’s own medical history which is important - there are hereditary conditions to consider.
If a first-degree relative has a history of heart disease, strokes or certain forms of cancer, the underwriter needs to know as statistically this can increase the risk of the applicant suffering from the same condition.
The type of work and location will also be examined.
There are some occupations that are very difficult to cover due to the likelihood of injury or the duration of a career.
For example, a professional footballer who is prone to injury and only has a short career does not fit the model. Income protection is a long-term contract which runs through to the typical retirement age of between 50 and 70 years-old and most professional athletes retire in their mid to late 30s.
Various jobs require applicants to travel overseas.
Some income protection contracts will allow for this but difficulties may be encountered where an applicant is based outside of the United Kingdom for more than six months or are not paying UK tax.
Generally speaking, people of non-domiciled status are not eligible for income protection contracts.
A further area of consideration is lifestyle; alcohol and tobacco consumption as well as potentially hazardous hobbies.
Some providers will charge higher rates for smokers – particularly if they smoke an excessive amount or the consumption of tobacco is likely to have a detrimental impact on an existing condition.
Likewise, alcohol consumption above recommended limits would warrant further investigation. Due to associated problems, particularly when it comes to mental health, current recreational drug use also presents issues.
In addition, certain hobbies or pastimes may affect whether an applicant is offered cover or the premiums that they pay.
There is not a definitive list of activities that prohibit cover as this is down to the individual provider, but examples include motocross, hang gliding and point-to-point racing.
Certain providers, rather than automatically excluding a particular activity, will look at the applicant’s accident record while participating in that activity in order to reach their decision.
While it would be unreasonable to expect advisers to understand all the ins and outs of the underwriting process, it is useful to have an appreciation to help guide clients in the disclosure process. After all, declined claims are a reputation risk for both adviser and insurer.
Ensuring that the client has declared full and accurate information at all stages, health and financial circumstances are updated regularly, premiums have been paid and the claim is genuine, minimises the possibility of a provider declining a pay-out – a situation that we all want to avoid.
Underwriting has come a long way in recent years and it will continue to evolve. In time we will see even greater use of technology to deliver even more bespoke underwriting solutions to consumers.
Hopefully this will offer the consumer peace of mind that what they are paying for will be there for them when they need it most.
Sue Seymour is chief underwriter of Cirencester Friendly
Key Points
The UK population is heavily under-protected
When it comes to contracts, conditions considered irrelevant to the critical illness or the life insurance underwriter might take on greater significance for income protection
A further area of consideration is lifestyle
