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In part, life insurance has to be sold because it cant be bought like any other product. It is one of the very few products available that a consumer has to qualify for after it has been sold. There is a way to streamline the life insurance sales process so that buying a fully underwritten life insurance policy is not such a hassle.

Heres how life insurance sales happen now: (1) the agent makes the sale; (2) he submits the application to the insurance company; and (3) then the underwriting process is begun. While underwriting is necessary for effective risk classification and fairly priced products, the frustrating friction it creates does not need to be part of the sales process.

The most time-consuming part of the sale should be the time it takes the consumer to make a decision–not the time it takes the insurance company to decide.

The solution is simple: Change the order of the elements in the traditional approach to selling life insurance. Underwrite first. Then sell. This could be done by “unbundling” the risk evaluation and selection, or underwriting, process from the life insurance sales process.

The unbundled risk assessment service would be provided by a new type of company: a Risk Assessment Company (RAC). An RAC would provide an independent risk assessment on individual lives for a fee. This risk assessment would be done entirely separate from, and early, in the sales process. An RAC would provide a personal service to individuals who could authorize any insurance company to access their risk profile data.

Insurers could use the risk profile within an expert underwriting system to provide binding insurance illustrations or quotes. These illustrations would be based on a fully underwritten mortality classification system and would reflect the best rate available from that company with respect to an applicant with the provided risk profile. An applicant would, then, merely need to accept the offer in order to put insurance immediately and unconditionally into effect on his or her life.

In addition to moving the time-consuming risk selection activity to a point in the process when there is time to do it, insurers using an RAC would realize significant expense savings. These savings, which could be used to reduce premiums, would come from several sources:

–Insurers would not incur risk assessment costs directly. They would be “fronted” by the applicant.

–While the expense savings would be offset by lower premiums, insurers would incur no selection costs with respect to Not Taken policies.

–Underwriters in life insurance companies would be more efficient since they would spend less time dealing with agents explaining their decisions.

–The underwriters working for the RAC would be more focused on their risk classification work and, therefore, more efficient.

–In general, marketing and distribution would be simplified and made more efficient.

Additional expense savings would be available by the elimination of the redundancies created by the traditional life insurance risk selection activity. For example, the traditional cost of the medical portion of the risk assessment process would be reduced by piggybacking it onto periodic medical/physical exams. Periodic exams are typically provided for a small encounter fee or co-pay as part of most insured health care plans (HMOs, PPOs, etc.). For a small additional fee, the periodic exam would include additional tests required for insurance risk selection, which might not be part of the standard exam.

The RAC would collect nonmedical risk data directly using standardized application-questionnaires. The best available tools or procedures would be used to verify this data to minimize applicant error and create a reliable risk profile.

An RAC might also be able to piggyback onto existing or developing medical record-keeping and reporting technologies to reduce its costs of maintaining a risk profile database. Efficiencies realized by the elimination of redundancies would result in reduced consumer costs throughout these systems.

In addition to all of the above, the Risk Assessment Company services would be designed to have a stand-alone value–even to consumers not contemplating the immediate purchase of life insurance. For example, an RAC could utilize the medical and nonmedical risk assessment data it collected to provide the consumer with an individualized risk assessment report. Initially the report would evaluate life and health risk, but it could, ultimately, expand its analysis into financial and credit areas.

The report provided by the RAC to its clients could place dollar values on risks, which would allow the consumer to make educated decisions with respect to lifestyle or insurance/self-insurance choices with respect to (for example) life, health, auto, homeowners, and credit/debt issues.

As medical technology develops, additional services could be added as they became economical to provide. For example, a clients genome analysis could be matched against known drug- genome interactions. It is becoming evident that, in order for some prescription medication to be effective in an individual, a gene-enabled process must exist in order for the body to properly breakdown and use the drug. An RAC could alert its customers to personally ineffective or potentially dangerous drug interactions. A customer could restrict the use of his genome data for reporting only to him or her on controllable outputs and could choose to remain uninformed with respect to conditions for which there is no known treatment or avoidance mechanism. Therefore, consumer use of this data for adverse selection could be avoided.

An RAC-assisted life insurance sales process would have universal application in the insurance industry. As discussed already, for sales in which insurance agents or financial advisors are involved, underwriting delays would be removed as an obstacle to the sale. An advisors advice could be applied immediately.

For brokerage agencies, accurate, exact, and binding multi-company product comparisons could be made using insurance illustrations based on the pre-underwriting done by an RAC. Most certainly, the use of the Internet for the sale and distribution of fully underwritten, reasonably priced life insurance products would be enabled.

And there is still more. The streamlining of the life insurance sales process created by an RAC approach would put life insurance on an equal footing with other financial products. New markets would be opened.

A critical question is: How would consumers adapt to unbundled risk assessment provided by an RAC? Well, the only consumer adaptation required is a willingness to change the order in which the traditional risk selection elements are applied. Consumers would be expected to do nothing exceptional and nothing that they would not, otherwise, readily consent to do if they were applying for life insurance under the current, traditional approach.

Although it is not readily apparent to them, consumers pay for the risk selection activity now. In fact, they overpay to offset the cost of those (the Not Takens) who pay nothing at all.

In using an RAC, consumers could receive an almost immediate payback of their fronted expense, benefit from the additional expense savings which would be reflected in their life insurance premium and in the cost of their other health-related services, receive a valuable additional personalized risk assessment report, control the distribution of their risk profile data, and have greater flexibility in how and from whom they acquire life insurance. It sounds like a pretty good deal to me.

, FSA, MAAA, is principal of Consulting Inc., Harrisburg, Pa. He can be reached via e-mail at tbakos@blazenet.net.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 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.


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