By: Nic Smit – Head of Product and Pricing at FMI (a Division of Bidvest Life Ltd)
A guide to how we assess risk for income protection
Between my wife working as a financial adviser and me working at FMI, the conversations we have with people we meet often involve explaining what income protection is. The most asked question during these conversations is “How much will income protection cost me?”, to which I usually give a typically actuarial answer of “It depends”.
It’s usually understood that not everyone pays the same premium for insurance – younger lives are generally healthier and pay less, and it’s understood that smokers pay more. But someone’s occupation is an additional factor that determines the premium they’ll pay for income protection. An accountant for example, will pay less for income protection compared to a mechanic.
Why? There are two main reasons for this:
- The more obvious reason is occupation risk. The type of work an individual performs could cause them to become injured and submit a claim. If we consider our example from earlier, a mechanic may injure themselves while repairing a vehicle, and the long-term impact of performing manual labour all day does have a deteriorative impact on their joints. However, an accountant is not exposed to the same occupational risks.
- The second and less obvious reason relates to sensitivity to claim. Income protection claims pay a benefit while an individual is unable to perform their specific occupation. Imagine what would happen if an accountant slipped at home and broke their leg. This would typically result in a short-term claim because once an accountant is able to get around on crutches, they should return to work. The same is not true for a mechanic – they cannot be expected to repair vehicles while on crutches. For the same injury, they would be in claim for longer than the accountant.
As you might expect, most insurers view some occupations as having such a high risk of causing an injury that it prohibits them from taking out income protection cover altogether (like miners, policemen and soldiers). On the other hand, some occupations are so sensitive to claim that they are typically unable to take out income protection cover at any price. An example of a usually declined occupation in the industry is a professional tennis player. While it is much more likely that a mechanic becomes injured from performing their occupation than a tennis player (the first risk we discussed above), the tennis player is way more sensitive to minor injuries than a mechanic.
Some examples of occupations highly sensitive to claim would include:
- Musicians must have very accurate fine motor skills in order to produce music worth listening to.
- Gym instructors need to be able to demonstrate and assist in various physical exercises which requires complex movements and the ability to handle weights.
- Professional sportsmen need to be 100% fit in order to compete.
Income earners who perform these sensitive occupations are usually not at risk of suffering serious injuries from their work. For example, while most insurers would not cover a professional tennis player, they would cover a lawyer who played a lot of tennis in their spare time. This is because a minor injury like a torn hamstring would not result in the lawyer being unable to perform their occupation, while the same injury would likely mean that a professional tennis player is unable to work for months. In other words, it is not the playing of tennis itself that is risky, but rather that the requirement to pay a claim whenever the life insured is unable to play tennis is too risky.
At FMI we have a different view. We believe everyone needs to protect their income, so this approach doesn’t sit right with us. That’s why we developed our Event Based product, to help provide cover for those that would traditionally be declined.
Look out for forthcoming articles in this series where we dive a little deeper into how risk is assessed for income protection, the issues we face as an industry, and the various approaches we at FMI are adopting to address these challenges. These should prove to be invaluable sources of information for any clients who may have questions around how we assess risk.