News Article : Hazardous activities
|Category:|| Insurance : Actuarial|
|Posted:||30 Sep 2007|
Actuarial exercises - Part 1
A two-part discussion about the various insurance needs of those partaking in sport, recreational pursuits and hazardous activities
When he skated down the snowy slope in just his shoes he was having a ball. “It is such fun,” he told a passer by, “why not try it?”
The place was Matroosberg’ Conical Peak in Ceres and it was mid-August. Setting off in normal walking gear he did not think twice of the dangers of mountain climbing. A combination of heavy snowfalls and perhaps unstable ground beneath conspired to make his impromptu skating escapade his last.
A witness saw his body somersault and tumble wildly before disappearing over the edge. Three weeks later, due to the treacherous terrain and continuing bad weather, rescuers had still to reach his body trapped 350 metres below the southern, lea side of the peak, in a narrow gully at the foot of an overhang.
It was a terrible tragic mistake, literally a slip in common sense that expunged a young breadwinner and deprived a family of a father.
According to statistics in just the first eight months of this year there have been 12 fatalities in Western Cape mountains alone and there were 20 reported for the whole of last year. But these are just from hiking and climbing activities.
The range of sporting pursuits and hazardous activities, be they occupational, professional or casual, is as varied as life itself.
A construction labourer falls to his death; yet another mining accident takes the lives of a group of workers; a helicopter pilot spins out of control; a young rugby player suffers a serious spine injury at school; and a marathon runner dies of a heart attack.
Then there is damage or loss of expensive belongings. For example a pack of muggers leech watches, cellphones and sporting equipment from a team of joggers. A school boy loses his bicycle, or a competitor’s canoe cracks up in the Duzi.
Accidents resulting in injuries and fatalities can and do happen all the time. By their nature they are unexpected, and yet people need to anticipate the worst and make certain they have insurance and protection against the financial burden of unforeseen medical bills, repatriation costs, or the costs for repairs or replacement of stolen or damaged equipment.
Underwriters need to anticipate these risks both to ensure the necessary cover is offered and that such dangers are properly rated in terms of accident, theft, death and lifestyle.
Is an obese person who does no sport a better or worse risk than a fit and healthy person who goes abseiling every week? Or does a week-end hang glider present a greater risk of injury than, say, a Boeing 747 pilot who flies every day of the week?
The risk, of course, needs to be assessed in context. It depends on the skills of the insured, certain lifestyle factors, and the mortality or general claims experience in the category of risk concerned.
Increasing numbers of people are getting involved in sports activities: just watch the annual Comrades Marathon, or the Argus Cycle Race, for instance. Climbing Clubs are mushrooming; everyone seems to be ‘walking for life’; to say nothing of the burgeoning gym and fitness clubs.
The vast majority of occupations, sports and hobbies can be accepted at standard rates, although there are a few where the health and accident risk is sufficiently increased to involve a rating or refusal. The number will be greater where paralysis is an additional dread disease.
Typically, asbestos workers, mining, diving and motor racing are activities that warrant further investigation.
A far greater percentage of motorists suffer fatal accidents in comparison with sport scuba divers. This, together with the fact that those indulging in leisure diving are required to undergo a medical examination (which is a lot more thorough than a standard life assurance medical), means there is little reason for loading the premiums on a sport diver’s life policy.
The range of risks
Insurable risks in hazardous activities require life, non-life and medical insurances of various types, rated according to occupation, health, general life style and level of involvement in the particular sport or pursuit:
Nature of activity: is it part of one’s occupation, a professional sport, amateur pursuit, or a casual activity?
Nature of risk: is it a common, well understood activity; a typical occupational hazard; or an extreme sport? What does actuarial research indicate?
Level of skill: is the person an amateur or professional; does he or she have qualifications; what is the experience of the insured?
Type of cover required: it is not always possible to ‘pigeon-hole’ hazardous activities. Some may enjoy cover under various types of insurance, either as standard practice or special riders.
Consideration would be given under
- Short term insurance: in respect of Personal Accident*, Disability, Medical Costs, Travel Insurance, and Indemnity and Liability covers;
- Long term assurance: in respect of Death; Injury Compensation; Dread Disease, possibly; and Hospital Plans;
- Medical insurance: in respect of Medical Aid, and Healthcare Policies; and,
- Retirement Provision: in respect of early maturity, loss of earnings and so on.
* Personal accident can be found in both life policies and short term insurance policies such as motor and householders’, so the client needs to consider avoiding where possible duplication, and therefore costs, of cover.
In life assurance parlance, due to variable degrees of hazardous activi¬ties, there cannot be a clear definition - although the principle may be straightforward enough.
Life actuaries set premium rates for standard lives, and then apply ‘loadings’, or additional rates for non-standard lives. These would include persons with a poor medical condition, for instance. But a hazardous activity is also one that materially increases the basic risk to the extent the actuary will have to load an additional rate.
The activity will range from slightly hazardous or dangerous occupations through to ‘hazardous pursuits’, which are hobbies or leisure activities pursued in addition to one’s basic occupation.
The actuary needs to know sufficient about your life style to make a reasonable premium rate assessment. He may apply a loading, exclude a specific risk from the cover, or confirm your particular activities are covered at the standard rates.
His starting point is the basic application form. Obviously, you have to answer this honestly. But even that may not be enough because one underwriter’s definition of a hazardous activity may not be another’s. Difficulties and disagreement in definition means that even completion of the policy application form itself can be hazardous!
Underwriters and reassurers have built up statistics over the years which provide an indication of the probability of death in respect of sports, occupational hazards and dangerous pursuits. Ratings exist for the more common risks.
Although, as for new age sports like bungi jumping, existing statistics are a bit thin. People who try that out for a week-end dare will have to complete the organiser’s indemnity form. That should alert them to the dangers sufficiently to question whether their existing life polices cover such chances.
Policyholders indulging in what the life assurance industry terms “a hazardous activity” may find their premiums are as much as double those rates that are applied to their less adventurous counterparts.
Underwriters consider sports like mountain climbing, hang gliding, scuba diving, aviation and motor racing as dangerous. Such sports materially increase the basic risk to the extent that the actuary feels justified in loading an additional rate. However, the extent to which the policyholder’s premium is increased will depend on a number of other specific factors.
Divers, for example, will be asked where, how often and how deep they dive, if they dive alone and whether they have been involved in any accidents. Depending on the answers to these questions the company may impose an extra premium. It may not.
For example, if the insured does not go below a certain depth and always dives with someone else, it’s quite possible there will be no loading of the premium.
Also pertinent in assessing the rate to be charged is whether the insured is a member of a relevant sporting club, and whether it offers training and applies safety standards. This kind of information would be especially appropriate in the case of sky-divers and scuba divers.
Determining life assurance rates for people involved in dangerous sports is sometimes more of an art than a science and is reflected in the fact that rugby players, for example, are generally not faced with any additional premium. This, despite the fact that, as a result of the sheer number of players if nothing else, the game of rugby experiences far more fatalities than other sports such as mountain climbing or scuba diving.
But the issue of loaded premiums is cause for complaint from some. Private pilots, for example, argue that statistics show they have more chance of being killed crossing the street than they have in the air.
Of course, an insured faced with a loaded premium can always opt to have an exclusion clause inserted in his policy document. Obviously this means his beneficiaries would not receive compensation in the event he died while partaking in the given sport. But if he thinks his risk is far less than as considered by the actuary then he can chose take that chance.
Life assurers also provide medical related covers such as hospital benefits and for major medical expenses. They are usually sold as addi¬tional benefits to the basic life cover.
The hospital benefit pays out a daily amount if you are hospitalised as a result of an accident or illness. It pays out regardless of occupation. For major medical expenses you might have to buy a separate benefit.
There are special exclusions as far as hazardous pursuits are concerned. For example, injuries through aviation, other than as a fare-paying passenger, and participation in any speed contest other than by foot, are excluded.
By inference, mountaineering and rugby would be covered. But here again it is important to get a ruling from the underwriter when in doubt.
Dread disease is a form of life cover which pays out the sum assured, not on death, but in the event of a dread disease, as defined in the policy. The list is quite long and might run to 35 items, say, including coronary heart disease, kidney failure, paraplegia, cancer and stroke, as examples. Kidney failure is one of several dread diseases that could arise from a strenuous or hazardous sport: dehydration can cause kidney failure.
Occupational disability benefits (lump sum and premium waiver) are subject to an assurer’s standard exclusions and, unless stated otherwise, are permanently exclusion-free in respect of all pursuits, but not in respect of change of occupation.
Life assurance rates are based on mortality tables and vary with: age at next birthday after the inception of the policy; medical reports; the precise nature of the policy conditions; and, the scope of cover. A typical whole life policy might cost, say, R1,50 per R1 000 of cover per month.
Personal accident can usually be added as a rider benefit to include accidental death and injury. It might cost another R1,50 and will compensate according to a schedule listing the loss of limbs, feet, eyes, etc. Another add on is disability benefit at R0,80 a month, which will provide a monthly income in the event the insured is unable to pursue his or her normal occupation.
These are basic rates and they exclude certain occupations or hazardous pursuits for which additional premiums would be loaded by the actuary. Some assurers might call them ‘category II’ risks: for example, a barman, big-game hunter, diver, fisherman, and security guard, those in professional sports, and aviation and mining.
Local mountaineering might be loaded up to R2 per R10 000 of cover per month depending on the specific nature of the risk. Under life cover, while there may be no loading for an amateur boxer, there could be a loading of R4,80 per month per R10 000 of cover for a professional.
For those who dive without breathing apparatus there is generally no extra charge (or loading on the basic rate). For divers who go below 20 metres the premium rate is loaded. Depending on the actual depth and the frequency of dives the additional premium could be as high as R2 per R10 000 of life cover per month.
With parachuting, explains one actuary, “a person who, for example, jumped once a year would face a much higher premium loading than a professional who jumped five times a week.
“Where a policyholder participates in motor racing,” he adds, “we would also want extra premium because of the extraordinary risk. Even if he died of, say, pneumonia, he could not get a refund on the premium because he had already been classed as a higher risk.”
In part 2 we will consider disability, accident, travel and non-life insurances.