2: Basic principles &

Underwriting
Tirana, Albania – April 2012
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AGENDA

Legal principles

Underwriting procedure

Medical, occupational, financial factors

Substandard risks

Premium calculations
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Legal principles

The 5 essentials of a valid contract

Offer & acceptance
Consideration
Capacity to contract
Insurable interest
Consensus ad idem
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Capacity to contract

UK Minors = persons under

18 yrs of age; Scotland - 16 yrs

Mentally disordered people

Companies: key person

insurance

The insurer: must be authorised by the

local financial authority
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Insurable Interest

Life Assurance Act 1774 stipulated that:-

no interest, no insurance;

interested person (proposer)

must be named in the policy;

no greater sum than the

insurable interest can be recovered.
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Insurable Interest

“ An interest recognisable by law, in

the life assured such that death would
cause a loss capable of valuation in
money terms. The loss must result
from death as a result of some legal
obligation or liability, and a mere
moral obligation is not enough”
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Examples of Insurable Interest

Unlimited interest on own life/ spouse. No

evidence is necessary

Creditor on life of a debtor

An employer on an employee – key person
insurance.

A partner in business on other partners

Spouses & civil partners – unlimited

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NO insurable interest is presumed:

A parent on child
A child on its parents
A beneficiary under a will on the testator …
there is only hope of benefitting
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When insurable interest must exist

“ Interest need only exist at policy

inception – the situation at claim stage is
not relevant. “
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Consensus ad idem

Defined as ‘complete agreement of mind’

Caveat emptor – let the buyer beware –

does not apply to life assurance contracts

Duty of utmost good faith – uberrima fides.

There is a duty to disclose all material facts.

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Material fact

“ every circumstance is material

which would influence the judgement
of a prudent insurer in fixing the
premium or determining whether he
will take the risk”

Marine Insurance Act 1906

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Duty of disclosure

The proposal calls for:-

Declaration highlighting consequence of failure to
disclose material facts.
Warning that if in doubt, facts should be disclosed.
Clear questions in the proposal form.

Reasonable questions – not expecting knowledge

that the proposer is unlikely expected to possess

Statement that a copy of the policy & conditions are

available upon request.
Statement that a copy of the proposal form is available.
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Duty of disclosure

What need not be disclosed

Duration of duty

Consequences of breach of duty

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Court case in Malta related to BREACH OF UTMOST GOOD FAITH

The Court of Appeal yesterday confirmed a judgment which voided a number of insurance policies on
the ground that the insured had failed to make disclosure of a material fact when applying for the policy.
The judgment was delivered by Chief Justice Vincent Degaetano, Mr Justice Joseph D. Camilleri and Mr
Justice Joseph A. Filletti in a case filed by Catherine Mifsud, widow of George Mifsud and her three
children against HSBC Life Assurance (Malta) Ltd (formerly Mid-Med Life Assurance Co Ltd).
The Mifsud family told the court that Mr Mifsud had died on December 8, 1999. He had three insurance
policies with HSBC, including a loan protector policy for Lm20,000 (€46,587), a personal protector for
Lm20,000 and another personal protector policy for Lm46,000 (€107,151).
According to the Mifsuds, the bank had refused to honour these polices on Mr Mifsud's death. The
Mifsuds requested the First Hall of the Civil Court to order the bank to pay the proceeds of these policies
to Mr Mifsud's heirs.
But the first court declined to so do, ruling that when Mr Mifsud had applied for the policies, he had failed
to inform the bank that he was seriously ill. His heirs then filed an appeal to the Court of Appeal. In
yesterday's judgment, the Court of Appeal pointed out that in March 1997, Mr Mifsud had completed two
proposal forms and that two insurance policies had been issued by HSBC
.
Mr Mifsud signed another proposal form in October 1998, but although he had paid the first premium, by
the date of his death, the bank had not formally accepted to insure him.
Mr Mifsud died of cancer in December, 1999 and HSBC Life Assurance (Malta) Ltd refused to honour
the policies on the grounds that the deceased had failed to give correct information on the state of his
health. HSBC claimed that it had resulted that Mr Mifsud had undergone surgery at the Royal Marsden
Hospital in London in April 1997

Cont .../2.
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Court case in Malta related to BREACH OF UTMOST GOOD FAITH

It resulted further that at the time he had applied for the first two insurance policies, Mr Mifsud had
undergone a CT scan. Consequently HSBC concluded that Mr Mifsud had already undergone medical
tests before applying for insurance and had failed to declare this issue. It was this fact that had led
HSBC not to honour the insurance policies.
Mr Mifsud's heirs, however, claimed that the deceased was not aware of his terminal illness when he
completed the proposal forms. But the court noted that Mr Mifsud had clearly stated that he had not
received any medical treatment prior to completing the forms, even though the evidence showed that
he had been undergoing medical tests at the time.
The medical evidence showed that Mr Mifsud had been undergoing tests since December 1996.
The Court of Appeal said it was clear that when Mr Mifsud applied for insurance cover, he was
conscious about his health problems. The court, therefore, dismissed the appeal and confirmed the
first court's judgment.

Source: www.timesofmalta.com/.../man-knew-of-his-ill-health-when-he-applied-for- insurance

Reported on Tuesday, 03 June 2008
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The 5 essentials of a valid contract

OFFER COUNTER OFFER

= The proposal = Acceptance
Letter

If premium is paid by Direct

Mandate or Standing Order,
30 days cooling off apply. CONSIDERATION
= Payment of initial
(Fin. Serv. & Markets Act 2000)
premium

Issue of Policy
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UNDERWRITING
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Underwriting

The procedure of assessing a

proposal & deciding whether to
accept the risk, and if so, at what
premium.
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Underwriting

Premium rates – per mille (per

GBP1,000 SA)

Ordinary rates – based on average

mortality experience

Assess the factors that effect the risk eg.

Under-average lives
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Underwriting – the proposal form
3 sections. Details:
to identify the life assured
of the contract
of the life risk

The declaration
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Underwriting -the proposal form
Proposal procedure:-
Proposers’ index checked
Consider total SA on any one life
Non-medical limits
Free cover / guaranteed acceptance
Reinsurance – retention limit
Access to Medical Reports Act 1988 (UK)
Proposers’ rights to access medical reports
PMAR – Private Medical Attendant Report
MER – Medical Examination Report
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Occupational hazards

Source: www.onlyinmalta.com
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Occupational hazards

Source: www.onlyinmalta.com
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Underwriting -the proposal form
The risk factors:-
Medical – hereditary diseases (see genetic
testing)
Occupational
Hazardous sports & pastimes
Residential
Financial
Moral
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Dealing with substandard risk
The risk levels for under-average lives:-
Increasing extra risk
Reducing extra risk
Constant extra risk

The options:-
Ordinary rates but for a shorter term
Exclusion
Monetary extra (premium loading)
Rating up – charging for an older age
Debts, Postponement or Declinature
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Calculation of premiums

Natural premiums – the pure or net premium for any

given age.
Level premium system – same premium charged
throughout policy term.
Interest on premiums – reserves are invested in the life
fund
Premium loadings – a net premium adjustment
Frequency loading – for premiums payable other than
annual. Additional charge covers insurer’s administrative
expenses.
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