In the Indian market, agents play a role in declaring mis-information in application forms.
In my career in insurance industry, I have met hundreds of customers. I can safely say that 90 per cent of them did not read product brochures properly; neither did they fill the insurance application form themselves. I will talk about the latter in this article.
An Insurance policy fundamentally is for protection against an “adverse event” occurring to the insured person. In life insurance, the adverse event could be death. It could be hospitalisation, surgery, etc. in a health policy. It could be a fire or accident in the case of property and motor vehicles insurance policies, respectively.
Contract based on faith
It is a principle of the Insurance Industry that an Insurance contract is a contract based on good faith. That is, the insurer has faith that the customer is not lying about material information that could affect his/her risk coverage promised in the insurance policy. The insurer will keep its promise of making good the benefits owed to the customer in case of an adverse event. For that promise to be kept at the time of a claim, the customer must ensure at the very beginning that he/she does not lie about facts.
This is a critical responsibility of the customer for insurance to work. The insurance industry essentially aggregates the risks faced by thousands of individuals and by creating a portfolio of such individual risks; the overall risk is better managed in the portfolio. This means an insurance company is dealing with thousands, if not millions, of individuals. Each individual applies to the insurance company for a risk cover. Each application is scrutinised by the insurance company by experts for risks. This critical job is done by a special unit of insurance companies – under-writers. The under-writer scrutinises the application form and assesses whether the risk is worth under-writing. If yes, a policy is issued, else, the application is rejected. There is a third option – the under-writer may approve the application, but at a higher rate of premium. This is called charging up the premium. Today, there are sophisticated automated systems being built, but they are merely computer algorithms that do a human under-writer’s job. The nature of underwriting does not change.
Once you understand this process, you will appreciate why, if you lie while filling the application form, the insurance company may deny you the claim. For example, if the customer states he/she is not a smoker and at time of his/her death, even if say the death was caused by heart failure, the insurance company has the right to reject the claim because smoking affects a person’s health in multiple ways.
Being forthright while filling forms
What data is important in your application form? In general, it is a good policy to be honest and straight-forward in replying to the questions asked in the application form. Age, common habits such as smoking, drinking alcohol etc. are common ones. Other health-related questions such as personal health history or surgery or illness, family health history etc. should be declared properly. If one has occupational hazards – people working in dangerous factories or in mining jobs – those must be disclosed. There is no penalty to doing this. The insurance company may query (sometimes) you regarding the nature of your prior illness but that does not necessarily mean it will reject your case.
In the Indian market, agents play a role in declaring mis-information in application forms. Many of us are lazy to fill the form and we leave it to the agent. This is not a good idea. The agent may not know everything about you or your family and may take a short-cut in filling “blank” or “not applicable” answers to many important questions. This is wrong and you will suffer in the end, not the agent.
You are buying insurance to have peace of mind, for securing your family. If you hide crucial data/information or declare what is untrue in your form, the chances of the claim getting approved are threatened. What is the point of taking insurance if after your death or accident, you or your family does not get the claim amount? The purpose itself is defeated. At worst, the may company charge you more premium due to the data you provided in the form. This is welcome, because then you know the benefit of claim cannot be denied to you or your family. Even if the policy is rejected, it is fine, as at least now, you as a customer have clarity. There is no false hope or security. For example, an applicant with severe diabetes or previous heart attack history may be rejected for fresh insurance. This may be disappointing, but still acceptable because in that case the customer will make alternative arrangements for his/her family.
Honesty is indeed the best policy when it comes to filling an Insurance form!(The author is founder and managing director of Serengeti Ventures Pvt. Ltd.)Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.