Importance of Medical Risk Assessment in Personal Insurance
Risk assessment is of great importance for private personal insurance. Using the concepts of selection and antiselection, the necessity of risk assessment and the medical examination is demonstrated. This article also describes what options exist for assessing insurance risk and how the assessment is carried out in the different lines of insurance.
The fundamental principle behind the concept of insurance is the principle of solidarity, guided by the maxim “One for all, all for one.” This principle is fully implemented in social insurance. In IV, for example, the entire Swiss population is insured from birth. There is no option to join or not. A risk assessment is not required, because compulsory participation automatically creates an insured collective that corresponds to the entire population with its spectrum of risks. In addition, the terms and conditions are uniform; there is no possibility, for example, to determine the sum insured individually. The insured persons’ probabilities of becoming disabled therefore correspond to those of the general population.
The situation is different with voluntary insurance, e.g. in private life insurance. If insurance were taken out voluntarily, it would predominantly be people who consider their risk of falling ill, becoming disabled or dying to be increased who would insure themselves. This so-called adverse selection would mean that the claim frequency in such a collective based on voluntariness would be higher than in the general population. Inevitably, premiums would have to be increased and, following the trend, adjusted further and further. Insured persons with good risks would no longer be willing to pay high premiums for their own risk, which they assess as low; little by little, they would leave the insurance pool. This development would not only entail further premium increases and the ruin of individual insurers, but ultimately also the end of private insurance as a whole.
To counter this behavior, which is geared toward individual advantage, there are various options, e.g.:
- Restriction of the possibility to join:
including limiting the entry age or excluding people with risk-relevant pre-existing conditions and—depending on the product—people who are currently unfit for work - Postponement:
including temporary refusal to cover the risk, combined with an offer of revision (reassessment of insurability after a certain period, e.g. in the event of response to therapy or after completion of treatment) - Exclusion clauses:
e.g. generally for health conditions that already exist at the time the policy is taken out
These measures have the disadvantage that they are coarse and not effective in every individual case. A postponement, for example, makes little sense for chronic and degenerative diseases. Exclusion clauses also show weaknesses and can lead to interpretation problems and unfairness: If one wanted to exclude type 2 diabetes including consequential diseases from insurance coverage, then if renal insufficiency or a heart attack occurred later, there might be disagreement as to whether this renal or cardiovascular disease was caused by the excluded diabetes.
An individual risk assessment is most likely to do justice to the respective situation, because the individual’s risk situation can be examined and the underwriting terms can be set on a case-by-case basis. The increased risk for people whose mortality or morbidity is significantly above the statistical average of the insured pool and who are not insurable under standard terms can be compensated by premium surcharges.
Experience shows that in Switzerland, in individual life insurance, less than 1% of applications are rejected and in less than 10% risk surcharges are imposed or exclusions applied. In group life insurance (occupational pension provision), these figures are significantly lower.
How risk assessment is carried out
It must be stated at the outset that any type of risk assessment may only be carried out with the consent of the person to be insured. Insurance applications therefore contain a declaration of consent with the following or similar wording:
“Furthermore, XYZ Insurance is authorized to obtain relevant information from public authorities and other third parties in connection with the conclusion of the contract, the administration of the contract, or any potential insured event. In particular, by signing, the person to be insured authorizes treating physicians, hospitals and other third parties to provide the medical service of XYZ Insurance with all information required in connection with the insurance application and the administration of the contract. For this purpose, they expressly release the above persons and institutions from the duty of confidentiality.”
Claims with high insured benefits naturally place a greater burden on the insurance pool. Risk assessment is therefore more extensive for high sums insured than for low ones.
The simplest type of risk assessment is the health declaration. The applicant, for example, signs a declaration with the following wording:
“I declare that I am healthy and fully fit for work.”
This very rudimentary confirmation can be expanded arbitrarily in scope:
“I declare that I am healthy and fully fit for work and do not take any medication.”
The next level is a questionnaire to be answered by the person to be insured. Depending on the sum insured and the product—and depending on the company—the questions vary in number and content.
- on medical matters
current state of health, personal and family medical history, consumption of stimulants and addictive substances - on leisure and occupation
sports and travel activities as well as education and current professional activity
The third level comprises the medical examination and is used for high and very high sums insured. The person to be insured is invited to arrange an examination, in accordance with the insurance company’s requirements, with a medical specialist of their choice. The basis for the examination is the four-page Medical Examination Report of the Swiss life insurance companies. The doctor, together with the person to be insured, records the medical history and documents the results of the clinical examination. The document is used by all Swiss life insurers, but also by other personal insurers.
Depending on the amount of the insured benefits and the age of the applicant, this medical examination is supplemented by laboratory screening and, if applicable, further investigations.
In most cases, the insurer can make an underwriting decision on the basis of the documents mentioned. However, if the person to be insured declares pre-existing conditions relevant to insurance medicine, current and medically substantiated information must be obtained from the treating medical specialist.
For the assessment, the information on the exact diagnosis is particularly important, together with additional information such as:
- severity (e.g. tumor classification)
- therapy (e.g. medication, surgeries)
- course (e.g. laboratory values, follow-up findings)
- onset of illness (initial manifestation or initial diagnosis)
- recovery or residual symptoms (e.g. [partial] remission, prognosis)
The insurer depends on the information from the questionnaire and examination being current, complete and truthful. This is in the interest of all members of the insurance pool, who are entitled to equal treatment and fairness. In the event of untrue or incomplete information provided by the person to be insured, the insurer has the right under Art. 4 and 6 of the VVG to withdraw from the contract. This can have serious consequences for the policyholder or beneficiary, because in the event of a claim they risk being denied the urgently needed insurance benefits.
The legal responsibility of the medical professional for truthful, objective and complete information is set out in OR, Art. 398: The doctor acts within the framework of a “simple mandate” and “is liable to the principal for faithful and diligent execution of the business entrusted to him.”
Risk assessment in the various lines of insurance
Individual life insurance
Individual life insurance
Since taking out the policy is voluntary, a sum-dependent risk assessment is practically always carried out. For smaller sums insured, a health questionnaire must be completed. For larger sums insured, and depending on the insurer’s risk appetite, more extensive medical examinations are required. It is estimated that 3–5% of all policies require a medical examination. This figure varies between insurers and reflects the respective product range, the target group and, ultimately, the company-specific underwriting philosophy.
Group life insurance (occupational pension plan)
Group life insurance (occupational pension plan)
Occupational pension provision is regulated by law. For mandatory benefits, no risk surcharges or coverage restrictions are permitted, which makes a risk assessment unnecessary. For supplementary (over-mandatory) benefits as well, the risk of adverse selection is low, since in principle a collective must be insured according to plan and an individual cannot apply for coverage at their own discretion. The risk assessment therefore primarily aims to ensure that no very high benefits are admitted into the insured pool at insufficient premiums. The underwriting practices and medical examination limits of the various insurers and pension institutions in Switzerland differ considerably. In smaller groups, the subjective risk is higher than in large companies or affiliations. In large companies, it is not possible to cater to individual health situations when developing the pension plan, whereas the owners of an SME could theoretically make adjustments based on their personal circumstances. The risk assessment thus depends not only on the insured benefits, but also on the size of the employer.
Fewer than 1% of people insured under a collective policy are called in for a medical examination.
Collective daily sickness benefits insurance
Collective daily sickness benefits insurance
There is no statutory compulsory insurance for this line of insurance. As a rule, the admission conditions depend on the size of the company and the salary to be insured. If a business owner wishes to insure themselves and their associated small business for a self-determined daily allowance, a questionnaire almost always has to be completed due to the risk of antiselection.
For larger companies with a planned, salary-dependent insurance covering all employees, however, it may be that no questionnaire is required up to considerable total payrolls. A health declaration is always required, however.
Who assesses the medical information?
The questionnaires are evaluated by medically trained staff of the company’s medical service and, where appropriate, supplemented with information already available from previous policies and claims. If necessary, additional information is obtained from the treating medical specialist. Clear, simpler cases are assessed by the risk underwriter themselves. More complex matters—especially those involving additional test findings such as echocardiograms and X-ray images—are submitted to the company’s consulting physician for assessment.
How are increased risks compensated?
As mentioned at the outset, individuals whose probability of death or disability deviates significantly from the norm due to pre-existing conditions, acute or chronic health disorders, or other risk factors must expect premium surcharges, coverage restrictions, or even rejection.
Risk of death
Risk of death
The premium surcharges are calculated based on the statistically expected excess mortality. Such surcharges may be temporary or permanent.
Risk of disability to work
Risk of disability to work
The probability of occurrence of the insured event is statistically less predictable, as it is influenced by subjective factors. In the case of mental illnesses or conditions with pronounced pain symptoms (e.g., rheumatic diseases), risk compensation through an additional premium alone is often not possible and therefore requires an exclusion clause.
Data basis
The calculation of mortality and disability (morbidity) is based on:
- Studies from the medical and insurance medicine specialist literature
- Data from national and international health organizations
- Biometric portfolio analyses (BPA) (evaluations of insured portfolios) by major insurance and reinsurance companies
On this basis, leading reinsurers have developed underwriting guidelines for their customers—the primary insurers. These enable an easy-to-apply, objectively grounded, evidence-based risk assessment.
Summary
In summary, it can be said that the medical examination is indispensable for the functioning of voluntary personal insurance. Not only does the insured community benefit from its value in the form of affordable, risk-appropriate premiums, but the individual customer also benefits through an insurance offer tailored to their personal situation.