Financial Underwriting
- Introduction
- Types of Cover
- Information relating to Mortgage/Loan Cover
- Types of Financial Evidence
- Personal Cover
- Business Cover
- Mortgage Payment Insurance (MPI)
- Income Protection Benefit (IPB)
Introduction
Financial underwriting is an assessment of whether the proposed sum assured and product are reasonable when considering the
potential financial loss
Benefits of Financial Underwriting
To be able to maintain competitive premium rates by:
- Reducing the number of early lapses that contribute to additional costs
- Minimising the impact of anti-selection that creates higher than the predicted number of claims
- Eliminating fraudulent claims which would otherwise drive up premiums for the vast majority of genuine policyholders
Underwriting Considerations
- Is there a valid insurable interest between the life to be assured and the proposer?
- Is there a clearly identifiable financial loss in the event of the insured event happening?
- Does the proposed contract match how the financial loss emerges; e.g. is the contract term appropriate?
- Is the proposed sum assured commensurate with the potential financial loss?
- Will the proposer be able to continue paying the premiums during the contract term?
Financial Evidence is required on:
- Life applications where the sum assured is above £800,000
- Critical Illness Cover (CIC) applications where the sum assured is above £500,000
- Income Protection Benefit (IPB), submitted on or before 31 January 2010, where the cover is above £3,000. For IPB applications that are submitted on or after 1 February 2010 the financial assessment will take place at Claims stage and not during the Underwriting process
Additional information regarding financial evidence:
- For employed, evidence of earnings includes P60, statement from an employer or accountant. For self employed, a copy of latest accounts or notice of assessment from the Inland Revenue.
- Third Party Countersignatures – e.g. accountant, solicitor, bank manager, i.e. independent of the sales process
- Personal Assurance Questionnaire (PAQ)/Business Assurance Questionnaire (BAQ) – will also consider fact find (Personal Financial Review [PFR]/Business Financial Review [BFR]) if available and includes sufficient details
- Supporting evidence on business covers could include full background report detailing need for cover and explaining any unusual factors, applicant’s CV, business plan with projections, company valuation etc.
- Statement of net worth should include breakdown of assets, liabilities, net worth, Inheritance Tax (IHT) liability and details of all relief's used in the calculations
- Copy of the loan offer letter (LOL) can be replaced with latest statement of loan interest for in force loans
Types of Cover
| Type of Cover | Underwriting Consideration | Underwriting Approach |
|---|---|---|
| Personal or Family Protection | Level of Income Age Dependants |
Multiples of income based on age and circumstances This will differ between life and critical illness products |
| Residential Mortgage | Recognised lenders Term and sum assured in line with duration and amount of loan Client must be named on the Mortgage |
Amount of loan Individual consideration For Mortgages over £1million Or Cases where cover for full amount of loan is being effected on each borrower |
| Buy to Let Mortgage | Refer to Buy to Let Cover | |
| Inheritance Tax (IHT) | IHT liability | Amount of IHT liability based on value of estate taking into account available reliefs For GIFTS – date and value of gift |
| Commercial Loan Protection | Recognised lenders Does sum assured match duration and loan amount |
Amount of loan and full offer details Why is cover required in respect of this client? Profitability trading business |
| Key Person Cover | Short duration term assurances normally most appropriate | Replacement cost assessed as a multiple of income or loss of profits . Normally cover is offered on profit making companies, if not a full explanation is needed |
| Shareholder or Partnership Cover | Value of business and how it has been calculated Value of each individual’s shareholding within the company Partnership or share option agreement if drawn up |
Does the sum assured reflect a reasonable valuation of company? Is there a legal framework to ensure the arrangement works? |
Information relating to Mortgage/Loan Cover
| Type of Mortgage/Loan Cover | Life | Critical Illness Cover (CIC) |
|---|---|---|
| Capital and Interest mortgages (i.e. repayment mortgages) As the outstanding mortgage reduces throughout the term they should normally be covered by a decreasing term assurance policy |
For sums assured up to and including £1million – do not require clarification for the reasoning if level term is applied for . For sums assured above £1million – require details of reason for a level term assurance |
For sums assured above £800,000 – require details of reason for level critical illness cover
|
|
Mortgage or loan related cover
Normally only be required from drawdown of the loan, although there is a potential liability on exchange of contracts
|
Personal Mortgages / Business Loans and Buy to Let Mortgages: For applications <£5million - Do not need to have a qualifier of "cover subject to drawdown of loan" For applications of £5million and above - Require qualifier "cover subject to drawdown of loan" if requested to go on risk from exchange of contracts |
|
Types of Financial Evidence
|
Type of Evidence
|
Information Provided | When is it relevant |
|---|---|---|
|
Simple Financial Information
|
Existing Covers |
Policies up to and including £1.5million Life and £800K CIC
|
|
Financial Questionnaire completed by the applicant:
Personal Assurance Questionnaire (PAQ)
Business Assurance Questionnaire (BAQ)
|
Income details
Concurrent/existing cover
Further details relevant to business or personal needs
|
It is the most common form of evidence and is sufficient for the majority of cases if fully completed
|
|
PAQ/BAQ completed by Independent Third Party (ITP)
|
Information as above
Corroboration of details by an independent third party
|
For higher sums assured and more complex applications |
|
Copy Loan Offer Letter (LOL)
|
Demonstrates the existence of a formal loan offer and its relevant terms and conditions
|
For higher sums assured on both mortgage related and business loan cover |
| Copy P60 or evidence of earnings | Evidence of earnings | For higher sums assured or where level of income is unclear |
| Audited Company Reports and Accounts | Profit and loss account that shows how the company is trading Balance sheet that assists in understanding the value of business Reports and notes to the accounts that provide background information |
For higher sums assured on business related cover |
| Copy Business Plan and financial projections | Description of relevant future development plans Profile of the management team At least 3 years projections |
For business related covers, particularly management buyouts, start-up companies and loss making businesses |
| Partnership or Share Purchase Agreement | Establishes the existence of a valid partnership or share purchase agreement Highlights the conditions that creates the insurable interest |
Relevant for Shareholder protection or Partnership covers |
| Valuation of business by an accountant | Establishes the value of the business | For higher sums assured on Shareholder protection and Partnership covers |
Personal Cover
Life
| Sum Assured | Evidence |
|---|---|
| Up to £800,000 | Nil |
| £800,001 - £1.5 million | Simple Financial Information (existing covers, earnings, net worth) |
| £1,500,001 - £2million | Personal Assurance Questionnaire (PAQ) signed by life assured |
| Over £2 million | Our minimum requirements below are needed for all applications: |
| PAQ signed by applicant, plus | |
| Private Residential Loan: Copy of Loan Offer Letter (CLOL) | |
| Family Protection - evidence of earnings (i.e. P60, statement of employer etc) or alternatively PAQ countersigned by independent third party | |
| Inheritance Tax Protection (IHT) - PAQ to be countersigned by independent third party with an independent third party statement of net worth | |
| Please note that it is not common for there to be a need for this level of personal cover and additional supporting evidence may be requested as part of the underwriting assessment | |
| An independent third party = accountant, solicitor, bank manager(i.e. independent of the sales process) | |
Critical Illness Cover
| Sum Assured | Evidence |
|---|---|
| Up to £500,000 | Nil |
| £500,001 - £800,000 | Simple Financial Information (existing covers, earnings, net worth) |
| £800,000 - £3million | Personal Assurance Questionnaire (PAQ) signed by life assure |
| Private residential loan - Copy of Loan Offer Letter (CLOL) | |
| Family Protection - evidence of earnings (i.e. P60, statement from employer etc) | |
| Over £3 million | Not available |
Business Cover
Life
| Sum Assured | Evidence |
|---|---|
| Up to £800,000 | Nil |
| £800,001 - £1,500,000 | Simple Financial Information (existing covers, earnings, net worth and keyperson "last years profit") |
| £1,500,001 - £2 million | Business Assurance Questionnaire (BAQ) - signed by applicant |
| Over £2 million | Our minimum requirements below are needed for all applications: |
| BAQ signed by applicant, plus | |
| Two Years Reports and Accounts | |
| Loan Related - Copy of Loan Offer Letter | |
| Share (or Partnership) Protection - BAQ to be countersigned by independent third party | |
| Please note that additional supporting evidence may be requested as part of the underwriting assessment | |
|
An independent third party = accountant, solicitor, bank manager |
|
Critical Illness Cover
| Sum Assured | Evidence |
|---|---|
| Up to £500,000 | Nil |
| £500,001 - £800,000 | Simple Financial Information (existing covers, earnings, net worth and key person "last years profit") |
| £800,001 - £1,500,000 | Business Assurance Questionnaire (BAQ) - signed by applicant) |
| £1,500,001 - £3 million | BAQ signed by applicant plus |
| Two Years Reports and Accounts | |
| Loan Related - copy of Loan Offer Letter (LOL) | |
| Over £3 million | Not available |
Mortgage Payment Insurance (MPI)
| Benefit Level (per annum) | Evidence of Earnings | |
|---|---|---|
| Employed | Self-Employed | |
| Up to £36,000 | Application form only | |
| Over £36,000 | Last 3 month's salary slips or copy of P60 | Last 3 years Audited Reports and Accounts |
| Copy of Loan Offer Letter (LOL) | Copy of Loan Offer Letter (LOL) | |
For employed, evidence of earning includes P60 or statement from an employer or accountant.
For self employed, a copy of the latest accounts or notice of assessment from the Inland Revenue
Income Protection Benefit (IPB)
For applications submitted on or before 31 January 2010:
| Benefit Level (per month) | Evidence of Earnings | |
|---|---|---|
| Employed | Self-Employed | |
| Up to £3,000 | Application form only | |
| Over £3,000 | Last 3 month's salary slips or copy of P60 | Last 3 years Audited Reports and Accounts |
For employed, evidence of earning includes P60 or statement from an employer or accountant.
For self employed, a copy of the latest accounts or notice of assessment from the Inland Revenue
For IPB applications submitted on or after 1 February 2010, financial assessment will be completed at Claims stage and not during the Underwriting process
