Disclosing information

Have you ever wondered why it is that insurance companies ask so many questions on applications for life and health insurance? It can seem highly intrusive, but in fact they are not just being inquisitive; your answers could make a massive difference to the cost parents pay for family protection.

Insurance has been with us for a long time – its history goes back much earlier than the eighteenth century when life ‘assurance’ (as it used to be known) was first made popular. In fact it was so popular that people started insuring the lives of famous people in a form of betting that brought about the first Gaming Act. Insurance on ships’ cargoes stretches back as far as the Phoenicians. (So much for the history lesson; try testing your children on their knowledge.)

In all that time, it has been important to the people offering insurance – the underwriters – to gather as much information about what they were covering as possible, in order to charge the right premium.

After all, insurance companies have to collect enough money to provide for claims, administration and acquisition costs (including commission) and a level of profit. If they cannot get their sums right, there is simply not enough money in the pot to pay claims (which logically occur after the other expenses – but not profits – have been met). So getting premiums right is essential.

Of course, it is impossible to tell in advance when a particular individual will fall ill, be injured or die. What an insurance company can do is to estimate the likelihood of different groups of people to be affected, based on a number of factors, such as age, occupation, where they live, their height/weight/medical history and so on. In fact there are a wide range of factors that can affect health and life expectancy, including lifestyle and family history.

It is therefore reasonable for insurance companies to seek to determine how an individual is likely to be exposed to different forms of risk, in order to ensure that the correct level of premium is charged to reflect the likelihood of a claim occurring. In this way, each person makes a fair contribution towards covering payments to those who do suffer a loss.

Less certain is whether genetic testing, which can today make far better predictions about how individuals will be affected by various conditions, can fairly be used to assess the level of premiums that an individual should pay. Some might argue that this is simply a further refinement of a medical questionnaire or examination; others could respond that, because the information is so accurate, it is unfair to the individual – a step too far.

Risk of declinature

What many people may not realise is that full and accurate disclosure at application stage might not just affect the premium paid for insurance, but also determine whether or not a claim is paid out, should the event occur. Because insurance companies rely on the information given to them in an application form – and to a doctor in the case of a medical examination – in order to set the appropriate premium, they are entitled to assume that this information is correct. If it is not, they are legally entitled to repudiate a claim (and return the premiums) on the basis that a contract never existed.

So it is not just an application for insurance that might be rejected, but the claim as well.

Money laundering

Questions can also relate to confirming the identity of the person taking out insurance. This is because premiums paid today can become claims of a much larger magnitude at some time in the future. If steps are not taken to ensure that the same person is involved at each stage – and that they are who they say they are – there is a danger that criminals could use insurance policies to ‘launder’ money. Regulations are in place to prevent this.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your independent financial adviser.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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