PRE-EXISTING CONDITIONS IN DISABILITY INSURANCE

In much that same way as no property insurer would accept risk for an already damaged house due to a previous hailstorm, disability insurance companies will not accept pre-existing risk in the form of a previously existing medical condition or injury.

Approximately 15% of individual disability insurance applicants are potentially uninsurable. Applicants with conditions such as aggravated heart disease, cancer and arthritis and can be denied cover altogether. Between 35% to 45% of risk in the long term insurance space is accepted with modifications such as weighted premiums, exclusions, limitations and waiting period deductibles. While the risk of adverse selection is reduced and managed by medical underwriting in the individual insurance space, group plans generally do not underwrite each policy issued apart from cases where the sum insured is above the ‘free cover limit'. Therefore, it is often the case that adverse selection is detected at claim stage for group disability insurance benefits.

Upon finding clinical cause to believe that there was pre-existing illness or injury before commencement of cover within the ‘look back period’, an insurer would apply the adverse selection test. Factors considered include the extent, degree and nature of illness; whether the member sought treatment for the condition and whether the condition was accelerated and exacerbated significantly way after the commencement of cover. 

The insurer would then decide whether occupational restrictions and limitations and the disability as defined and set out in the policy arose from the pre-existing condition in whole or in part. The most important part of the insurance policy which is the definition of disability determines whether one is disabled or not. An insurance policy with a more strict definition of disability will take more exception to accepting pre-existing risk. On the other hand, a more relaxed disability definition policy such as the ‘own occupation’ definition would be likely to err on the side of caution and overlook an indeterminate pre-existing condition if the member was still performing his or her own occupation immediately before claim notification.

In cases where a pre-existing condition was exacerbated or aggravated, such as a case where someone who had minor back pain that was aggravated by an Injury on Duty (IOD), the pre-existing risk may be accepted subject to other factors explored above. Such cases are few and far between. Each case is assessed on its merits and specific circumstances and depends on specific policy wording. However, as a general rule a decline decision is expected if the condition was distinct, significant, present in the look-back period and incapacitates the claimant within the waiting period (usually 12 months) after commencement of cover. Even if the claimant did not seek treatment for the pre-existing medical condition, failed compliance to reasonable medical care standards of policies would still elicit a decline decision. Policies vary but pre-existing limitations and exclusions are mostly applicable prior to one year of the policy being in force and apply to conditions that were present in the ‘look back period’ of 3 to 6 months.

Accepting disability insurance risk from pre-existing medical conditions would be akin to selling house insurance after the fire has already started. If that was the case, one would theoretically wait until they have a potentially disabling condition and then buy disability insurance. In cases where minor pre-existing risk is accepted, such risk is assessed and accepted with premium loading, exclusions and deductibles mostly in the form of waiting periods. By using astute medical underwriting, insurance companies assess and price risk factors for those specific medical conditions fairly and objectively. This helps keep premiums low and effects a balancing act in the sustainability of the disability insurance market. Insurers who do not have mechanisms to detect pre-existing risk mostly in the form of chronic diseases risk going out of business due to high premiums, room for competitors who accurately compute the cost of providing coverage to undercut the market by pricing lower and incentive for antiselection. There would be no distinction between disability insurance and disability social welfare. However, in our African context where our insurers (morally rather than legally) form part of the social safety net fabric owing to our heartfelt social virtue of Ubuntu it is not uncommon for insurers to make business decisions to accept minor risk from pre-existing conditions - and that with good cause.