The Factors Defining Risk
Insurers are an interesting breed. They invariably are the opposite of what the public believe.
The average punter in the street has a perception that
an insurer will accept the responsibility or transfer of
“risk” for a given cost “the premium”.
While this is essentially true, insurers want to define the “risk” in advance and clearly stake out the extent of their exposure. They collect data and use past experience to establish “the premium.”
The factors vary based on the insurance required.
In the case of insuring a house the age, size, construction, renovations, location, building security, utility supplies and use (family home, weekend retreat or rental) are all considerations. Some of these also have subsets. For location this will include, rural, suburban, urban and geographical issues (cliff top, seaside, earthquake zone, flood plain etc).
For life or disability cover the risk factors include gender, smoking status, occupation, recreational activities, family medical history and personal medical history.
Where the risk is great (such as a house on an eroding cliff or past cancer survivor) the insurer will simply defer, decline to quote entirely, add an exclusion or load the premium on the policy.
While we, as policy holders, insure for the unexpected the insurer uses data and experience to build an expectation of frequency of the “unexpected”. This allows the calculation of a premium in line with the frequency and size of anticipated claims.
This world gets thrown upside down when the “unexpected” is even unexpected for the insurance industry. At this time this is exactly what Covid-19 has become. It arrived on these shores and has had a significant impact on both the physical well being of New Zealanders as well as the financial health of the country.
Certain Board members of one NZ Life Insurer thought this must surely present a new business opportunity as it was a new “risk” to the market. However, the company executive and board members with insurance knowledge had to highlight that at this given point in time the risk and exposure were not quantifiable and therefore establishing a premium was difficult if not impossible.
By and large, the response from insurers was exactly the opposite. The appetite for risk diminished and policy types that might bring greater exposure (primarily income and mortgage protection policies) were suspended or have had limits placed on the cover available.
Insurers’ reticence was due to both an increased financial exposure - income claims potentially going longer for businesses and industries that had been shut down and were yet to return to pre-Covid-19 levels of activity. Plus, benefit levels being established on pre-Covid-19 earnings that would leave applicants over insured.
Some of the criteria being considered as part of the application requirements include:
- Identifying those businesses and industries that have participated in the Government Wage Subsidy Scheme and the Extension
- Limiting the size of insured benefit levels (disability policies) if a business has taken the Government Wage Subsidy Scheme and the Extension
- Restricting qualifying income for the calculation of claim payments to earnings after 1 January 2020
- At the time of claim measuring “pre-disability income” as the earnings in the last 12 months
- Limiting the benefit period on disability policies to a maximum of a five year claim payment where the Government Wage Subsidy Scheme and the Extension have been taken up
- Excluding claims arising from Covid-19 infection
The good news for policy holders is that these restrictions do not apply to your existing policies as an insurer usually can not alter the terms of the policy other than premium increases and these need to be generic rather than policy holder specific. Applying for the Wage Subsidy and Extension do not limit your potential claim. Your pre-disability income will still be measured over your best 12 consecutive months in the past 36 months. A claim will continue until you are able to return to work or you have reached the cease date of either age 65 or 70.
For new applicants the situation is different and these limits are not necessarily intended to be permanent. While you still have financial exposures within your business, family, home and income there are ways to overcome these restrictions.
Establishing policies that will still meet your vulnerabilities is possible. For example, where long term disability benefits (to age 70) are being sought but are currently being limited to 5 year benefits it is possible to combine disability income protection and lump sum Total Permanent Disablement covers to achieve the same long-term goal. Flexibility in your insurance programme to ensure you can transition to better suited policies in the future is sensible as well as regular review of lump sum benefits to ensure you don’t become over insured in the future.
As the Covid-19 landscape evolves both on the medical front and economic front insurers will continue to evolve their offerings. Make sure you achieve the best that is available for you today and continue to monitor and review over time.
It may take a vaccine before we can quantify the unexpected this time.