Notes on Underwriting in Life vs. Non-Life Insurance
in Ghana and Africa
Introduction
Underwriting plays a pivotal role in the
insurance industry by evaluating risks and determining appropriate premiums.
The underwriting process, however, differs significantly between life and
non-life (general) insurance due to the nature of the risks involved, the
methods of assessing those risks, and the financial products offered. In Ghana
and across Africa, understanding the distinctions between life and non-life
underwriting is crucial for insurers, regulators, and policyholders. These
differences shape the way insurance companies operate and manage their risk
portfolios in these regions. This paper explores the key differences in
underwriting between life and non-life insurance, with a focus on Ghana and
Africa.
1.
Life Insurance Underwriting:
Life insurance is a type of insurance that
provides financial protection against the risk of death or long-term
disability. The underwriting process in life insurance is more focused on
evaluating the health, lifestyle, and longevity of the policyholder.
Key
Factors in Life Insurance Underwriting:
1.Health
and Medical History:
In
life insurance underwriting, a significant emphasis is placed on the
applicant’s medical history and current health. This includes reviewing
past medical conditions, such as heart disease, diabetes, or cancer,
which may increase the risk of premature death or disability.
Medical Exams:
Applicants may be required to undergo medical exams, including blood
tests, urine tests, and physical exams, to determine their overall health
and identify any conditions that may influence their life expectancy.
Pre-existing
Conditions: Common conditions like hypertension or
HIV/AIDS can significantly impact the premium charged, especially in
Africa where certain diseases are prevalent and affect life expectancy.
Underwriters will adjust premiums to reflect the increased risk posed by
such conditions.
2.Age:
Age
is one of the most significant factors in life insurance underwriting.
Older individuals are perceived to have a higher risk of death, and thus,
premiums tend to be higher for them. In Ghana and other African
countries, age is assessed at the time of application, and older
applicants may face restrictions on the amount of coverage available to
them or higher premiums.
The
younger a policyholder is at the time of purchase, the lower their
premium, as they are expected to live longer, making the risk more
predictable for the insurer.
3.Occupation
and Lifestyle:
Life
insurers in Ghana and Africa consider the applicant's occupation and
lifestyle habits. Those with high-risk occupations (e.g., miners,
construction workers, pilots) are more likely to face higher premiums or
even exclusions.
Smoking,
drinking, and other high-risk behaviors will also be factored into the
underwriting process. Individuals who smoke or engage in hazardous
activities, such as extreme sports, will generally face higher premiums.
4.Family
Medical History:
A
family history of chronic diseases such as cancer, diabetes, or heart
disease may indicate an increased risk of these conditions in the
applicant. Underwriters assess this risk factor when determining the
premium to charge.
5.Policyholder’s
Financial Situation:
Insurers
in Ghana and Africa also look at the applicant’s financial background, as
this can indicate the ability to pay premiums. Financially stable
applicants may be offered more favorable terms. However, applicants with
poor financial histories or unpaid debts might face higher premiums due
to the risk of non-payment.
6. Mortality Tables and Actuarial Data:
Life
insurers rely heavily on mortality tables and actuarial science to
calculate the expected risk for policyholders based on their age, gender,
and other factors. In Ghana and Africa, insurers may face challenges in
obtaining accurate data due to lower data availability in certain
regions, which can influence premium rates.
Challenges
in Life Insurance Underwriting in Ghana and Africa:
Limited Data:
In many African countries, there is insufficient data regarding mortality
and morbidity rates. This lack of actuarial data makes underwriting more
challenging and increases the potential for underpricing or overpricing of
premiums.
Prevalence of
Infectious Diseases: In countries like Ghana, diseases
such as malaria, tuberculosis, and HIV/AIDS significantly impact
underwriting decisions, as they increase the likelihood of mortality and
disability.
Lack of Awareness:
In many parts of Africa, people still have low awareness of the benefits
of life insurance, and there is resistance due to cultural beliefs and
practices. This leads to fewer people undergoing life insurance
assessments, reducing the volume of potential policyholders for insurers.
2.
Non-Life Insurance Underwriting:
Non-life insurance, also referred to as general
insurance, includes policies like property, motor, liability, and health
insurance. Underwriting in non-life insurance is more focused on assessing
risks associated with property, assets, and liabilities rather than the life
expectancy of the individual.
Key
Factors in Non-Life Insurance Underwriting:
1.Nature
of the Risk:
In life insurance, the nature of the risk associated with the asset or
property being insured is the main focus. For example, when underwriting
motor insurance, underwriters assess the value of the vehicle, the
driver’s history, and the risk of accidents in the area.
Property Insurance:
The condition of the property, its location, and exposure to natural
disasters (such as flooding, wildfires, or earthquakes) will affect the
underwriting process. In Ghana and parts of Africa, areas prone to
flooding or poor infrastructure may result in higher premiums for
property insurance.
2. Claims History:
A
policyholder’s previous claims history is a significant factor in
non-life underwriting. If an individual or business has a history of
making frequent claims, they will be considered higher risk, and the
insurer will adjust the premium accordingly.
Business and
Commercial Insurance: In commercial or business-related
insurance, underwriting focuses on the claims history of the business,
its industry, and its risk profile. High-risk industries such as
construction or mining may face higher premiums.
3.Environmental
Risks:
Natural Disasters:
In non-life insurance, environmental factors such as the likelihood of
natural disasters are crucial in determining premiums. For example, areas
with a history of flooding, droughts, or pest infestations may lead to
higher premiums for property or crop insurance in Ghana or African
nations.
Geographical
Location: Insurers take into account the region where the
insured asset is located. In Ghana, for instance, coastal properties may
face higher premiums due to the risk of flooding or sea erosion, whereas
properties in rural areas may have a different risk profile based on
local threats like bushfires or theft.
4.Vehicle
Risks (Motor Insurance):
Underwriting
in motor insurance involves assessing the type and value of the vehicle,
the driver’s history, and their location. Young drivers and those with a
history of traffic violations may face higher premiums, as the risk of
accidents is perceived to be higher.
Location and
Infrastructure: In Ghana, the quality of road
infrastructure and traffic congestion in cities like Accra influences the
risk of accidents, affecting the premium charged to vehicle owners.
5. Policyholder's Habits and Business Operations:
Non-life
insurers also look at the habits or operations of individuals or businesses
seeking coverage. Businesses that engage in high-risk activities, such as
chemical manufacturing, are considered to be at higher risk. These businesses
would need to pay higher premiums to cover potential liabilities and
accidents.
Individuals
with a history of risky behaviors, such as reckless driving or substance
abuse, may also face higher premiums in motor or health insurance.
Challenges
in Non-Life Insurance Underwriting in Ghana and Africa:
Data Scarcity:
Similar to life insurance, underwriting in non-life insurance faces
challenges due to the lack of reliable data on risks such as accidents,
property damage, and theft. This is particularly problematic in regions
with high uninsured populations and informal economies.
Fraud and Claims
Abuse: Fraudulent claims are an issue in non-life
insurance across Africa, leading to increased premiums for all
policyholders. Insurers need to carefully assess the credibility of claims
to avoid unnecessary costs.
Conclusion
Underwriting in life and non-life insurance in
Ghana and across Africa requires a nuanced understanding of both global
principles and the region-specific risks that shape these markets. In life
insurance, underwriting primarily revolves around assessing the applicant’s health,
age, and lifestyle, while in non-life insurance, the focus is on assessing the
nature of the insured asset and its exposure to various risks, including
environmental, geographical, and human factors.
Despite similarities in the process of evaluating
risk, the challenges unique to Ghana and Africa—such as data scarcity, high
exposure to infectious diseases, and the prevalence of environmental
hazards—require insurers to develop tailored underwriting strategies. A better
understanding of these challenges and the adoption of modern risk assessment
techniques can improve the underwriting process and contribute to a more robust
and accessible insurance market in Ghana and Africa.
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