Speeding Up Underwriting Will Help Banks Penetrate Mid-Market
Banks provide a superb opportunity for insurers to penetrate the mid-market because of the huge number of built-in prospects. Just about every American has a bank account.
Most insurers are letting this opportunity slip through their fingers because theyre handcuffed by cumbersome, slow, expensive underwriting and new-business processing.
For insurers to capitalize on the huge opportunity offered by banks (and by the Internet and direct marketing, too), they must speed up policy issuance considerably. “Extreme” underwriting must give way to cost-effective, moderate underwriting geared to speed.
In the mid-market, with its smaller policies and younger issue ages, insurers can save more by trimming policy-issuance costs than they lose in excess mortality from more liberal underwriting.
Heres an example, using the 1998 Generally Recognized Expense Table for illustrations plus the 1975-80 Basic Mortality Tables. For a policy issued to a male aged 30, with a $100,000 face and a $200 premium, we have:
Acquisition cost: $283.
Present value of death claims over 20 years at 7% interest: $1,711.
So for 1,000 policies, the total acquisition cost is $283,000 and the total of claims is $1,711,000.
If speeding up issue processes cuts the cost in half, the insurer would save $141,500. To accept 4% of the applicants at an average of 100% extra mortality, the insurer would spend an additional $68,431. The result: a net savings of $73,069, or $73 per policy.
Besides reducing costs, streamlined underwriting cuts the number of not-taken policies. Taking four to eight weeks to deliver the policy gives customers too much time to change their mind. (Some of these not-takens are also due to policies being issued at premium rates higher than quoted due to substandard ratings.)
If the bank rep isnt willing to personally deliver the policy and resell it, he can lose 15% to 25% of his sales. Reducing the not-taken rate will boost sales of life, health and disability policies, cut fixed sales costs and improve sales productivity.
To continue with the example, we now have an acquisition cost for 1,000 issued and paid-for policies of $141,500. If 20% of all applications do not result in paid policies, then the insurer had to generate 1,250 applications to get those 1,000 policies.
If the insurer can lower the loss from 20% to 15% by issuing policies faster, now 1,062 policies will be issued at the same total cost of $141,500, for a cost per policy of $133 instead of $141, for an additional savings of $8 per policy. Coupled with the savings in the previous example, we now have a total savings of $81 per policy. Moreover, sales will increase by 6.2%.
The biggest time-eater in the policy-issue process is gathering the data deemed necessary to make a good underwriting decision: a paramedical exam, a body-fluid sample of some sort, the attending physicians statement and a report from the Medical Information Bureau. The most time-consuming aspects of this process are scheduling the paramedical and getting the APS.
How does the insurer speed up the underwriting process dramatically without getting whacked with huge claims?
First, replace hard-to-get data with easy-to-get data. Second, use technology to speed processing.
Some insurers have started on the path toward easy-to-get data by replacing the APS with a paramedical exam and saliva, urine or blood testing whenever possible. Generally, the paramedical exam can be scheduled within a week or two after the sale, and the insurer can get the results in three days. Since APSs can take a month or longer to come in, using paramedical exams can save a lot of time.
Even the paramedical exam can be dispensed with for many applications. One of the biggest advantages of the paramedical exam is the blood sample. While oral fluids dont provide as much information as urine or blood, the sales rep can collect them. Saliva testing does provide partial screening for drugs, tobacco and HIV. (If bank sales reps or agents can be coaxed to collect urine samples, that would be a big help.) The health history can be taken by the rep or by the insurers underwriter over the phone, either at time of sale or later. Whats lost is the blood pressure check and height/weight verification. Skipping the paramedical exam saves one to two weeks and cuts costs.
Some insurers use simplified underwriting in the mid-market, where the applicant answers about three very broadly worded medical questions, and, if no health problems are declared and the Medical Information Bureau check is OK, the policy is issued. This approach is fast, but because theres great risk to the insurer, rates are high. Taking a complete health history and getting a saliva sample provides much more reliable information than a simplified underwriting approach–and can be almost as fast.
Insurers can tap into other databases to improve their underwriting results and reduce risk. Access is automated and inexpensive.
Some insurers use motor vehicle data to determine if there is a high accidental death risk.
The biggest news in 2001 is the availability of databases that track the use of prescription medications. Potentially, this can reveal all serious medical ailments known to the applicant. Not only does this have some potential as an APS replacement, but also it can be used to corroborate and supplement the information provided in the application.
With changes in underwriting requirements and efficient new-business processing, insurers can turn around applications within a few days. A turbocharged new-business operation can produce the completed policy within seven to ten days. This might cut the not-taken rate in half.
With the help of new point-of-sale software and new databases, a fairly well-underwritten policy could even be issued at time of sale. This software has some or all of the following features:
An application that can be filled out on the computer and a personal medical history questionnaire with drill-down questions to get additional details where merited.
Expert underwriting technology.
Automatic retrieval of MIB data.
While instant field issue is possible today, it requires insurers to do business in a new way (see box).
Instant issuance has major business implications. Insurers have lots of personnel involved with new-business processing. Moreover, insurers have large underwriting staffs and large issue areas that set the policy up on the central administrative system and order the policy to be printed and mailed.
Eliminating most human underwriting and paper mail eliminates most of the new-business staff, along with their attendant computers, processing software, furniture and space, saving millions for an average-sized insurer. Policy setup staff can be reduced by software that takes information directly from the electronically submitted application and uses it to pre-fill the insurers administrative systems entry screens.
Insurers dont have to be shackled by the practices of the past. New technologies can automate much of the life/health underwriting process, saving big money while boosting sales by slashing not-takens. The enormous mid-market, readily accessed through banks and the Internet, can become profitable again for companies that break the handcuffs of habit.
is managing principal of Thomson Management Solutions Inc., a nationwide consulting firm based in Brimfield, Mass. She can be reached at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.