‘You say discrimination, insurers say differentiation’: how life insurance firms assess risk

The case of a former X Factor singer claiming that she had to abandon her plans to secure a home loan after being denied life insurance twice due to being classified as “obese” has caused discussion to re-emerge about the stressful process of becoming a homeowner and the role insurers play.

Life insurance is a standard requirement banks impose before providing a home loan.

The role of insurance companies in particular, however, has been placed under the hot seat. The former X Factor singer Celine Agius says that after being rejected by several insurance companies for life coverage due to her weight, at the time 180kg, she set to work and burned off a staggering 50kg, remaining determined to secure a home loan.

 She made a second attempt to get a life insurance policy but says that she was again denied due to still being classified as obese, with one particular company giving her a two-month period to drop a further 20kg to meet the parameters of its risk appetite.

As anger in public forums poured in, BusinessNow.mt turned to the Malta Insurance Association (MIA) to understand the methodology behind providing life coverage, and why insurance companies sometimes choose to deny coverage to people like Celine.

Adrian J Galea, Director General of the MIA, shed light on how these decisions are taken, as well as the scope of life insurance and why it is different from other insurance products:

“Life insurance provides protection, usually to the insured’s next of kin, in the case of an early demise of the insured person. It is therefore intended to safeguard the next of kin whenever the inevitable happens.

“In comparison to most other insurance policies, such as motor, home, travel, etc…a life insurance policy is considered to be a long-term product, whereas most other policies are normally renewable annually, or within a specific period – for example travel insurance covers a specific duration.”

Here, Mr Galea points out that as an insurer, when assessing whether to provide life insurance coverage to an applicant, companies must take a decision today about a risk which might materialise, or not, over the span of several years.

“Once a life insurance policy is issued, the insurer cannot introduce or change the terms throughout the duration of the policy itself.”

Therefore, in the business of life insurance, companies are required to take long term decisions based on circumstances that may or may not change, without the ability to alter premiums or payments based on increased or reduced risk throughout an individual’s life.

How do life insurance companies assess applications for life insurance coverage?

When customers approach an insurance company and express an interest in a particular insurance product, insurers would normally ask for more information about the ‘risk’ involved, Mr Galea says.

“They do so because once an insurance policy is issued, risk is transferred to the insurance company in exchange for a price – the premium payable periodically. Insurers therefore need to understand the risk involved and take a decision whether they should accept this risk unconditionally or not.

“If they do, they might consider the risk to be on the high side and hence introduce special terms which are referred to as exclusions and/or higher premiums.

“This ‘appetite’ for risk is not something which changes from one day to the next – it is based on several criteria, including but not limited to the company’s risk strategy which is normally determined at board level, internal and external research and data that insurance companies update from time to time, the company’s own reinsurance treaty (insurers normally insure some of the risks they take, and in order to do so, they are given a set of parameters within which they can operate, what they can accept and what not).

“This process of ‘assessing’ the risk presented to them is known as ‘underwriting’ which, as you can imagine differs from one insurance company to another.”

Added challenges of life insurance policies

Therefore, the process of granting life insurance coverage involves considering an applicant’s risk factors, and, should this risk be considered high, insurers may impose different terms or refuse to take this risk on board.

“In the case of a life insurance product, there is an added challenge in that the underwriting unit needs to consider the entire life span of the product, which may be well in excess of twenty years.”

And, as previously stated, this differs to any other insurance coverage in that it is not updated periodically, while the insurer cannot change the terms at any stage of the coverage.

Claims of discrimination

In the case of the former X Factor singer, she claimed “blatant discrimination”. When asked about the term, Mr Galea says:

“You refer to the word ‘discrimination,’ insurers on the other hand refer to ‘differentiation’ of risk.

“Ultimately this is what it is – because every risk presented to an insurer is different to another and we can’t expect insurers to throw all the risks in one pot and treat every risk on the same level. That would be highly discriminatory for those policyholders who would not present any risks to the insurer at all.

“This is why careful drivers are compensated with a No Claim Discount – you benefit from lower premiums if you don’t claim. On the other hand, those who claim on a regular basis will not only forfeit any such NCD, but they actually run the risk of having the insurance company declining cover at the next renewal. Risk differentiation which works positively in favour of existing policyholders as opposed to discrimination, which has negative connotations.”

Mr Galea adds, however, that as an association, the MIA “empathises with such individual cases because ultimately everyone deserves a chance and wants to be treated fairly.” Here, he points to a case last year where an individual called out the denial of life insurance coverage, which also stopped him from securing a home loan and becoming a homeowner, due to previous illness.

This case led to a similar outcry, with Government stepping in to introduce a scheme where it would act as guarantor for similar cases.

When solutions were being discussed, the MIA was consulted together with other stakeholders such as the Malta Financial Services Authority and the Malta Bankers Association.

“Ultimately however, it became very clear that there was no failure either from the insurers or bankers, because they both have a right to assess the risk being presented as part of their business routine.

“The Government then introduced a scheme of its own.”

High-risk lifestyles

As part of the process of assessing risk, insurance companies give weight to whether the conditions that an individual presents, say respiratory issues, are attached to their lifestyle, such as smoking.

“If data and information clearly characterise high risk individuals, such as those who regularly smoke or drink alcohol in abundant quantities, then insurers would clearly recommend changes before a life insurance policy is issued.

“Insurance companies are expected to assess the risk, as it would be foolish to take on a risk for a few hundreds of euro in premium each year when there is a strong possibility that a huge pay out would materialise a few years down the line through a claim.

“And, similarly, banks would also require all the necessary assurances to ensure that once loan facilities are issued, the capital and interest due is repaid back over time. These are normal, sound principles applied universally and there is absolutely nothing discriminatory about that.”

Competitive market

Here, Mr Galea says that companies are operating in a highly competitive landscape, considering Malta’s limited market size, and actively try to retain loyal customers. This includes doing their utmost not to deny coverage, he adds.