Black Box Technology Could Improve ‘Sub-Standard’ Approaches
Insurance industry expectations regarding “other-than-standard” underwriting classifications seem to be evolving continuously.
But to whom must these labels be acceptable? In particular, what are the real expectations of our customers and agents?
From both an actuarial and underwriting perspective, the question has become, “how wide must the bell curve be around the 100% mortality (i.e., “standard” risk) point on a basic mortality distribution graph?” (See chart.)
Or, for those in marketing (where anything that impedes a sale is anathema), the facetious question is, “how accepting should we be of an underwriters decision to label an otherwise extraordinarily healthy applicant as sub-standard or even standard?”
Of course, widening the “band-width” of “standard” is analogous to squeezing a balloon, i.e., we can only rearrange a fixed amount of air. Improving the price of one classification, by segregating it from a previously larger, inclusive classification, increases the price for the residual classification.
Some insurers have avoided this trend, preferring to offer the best “standard” rates by deliberately not diluting the classification. This only proves that, when it comes to underwriting and differentiation, there are no egalitarian means.
The cost of one group is always supported by another.
The problem confronting insurance companies today is the reality that underwriting decisions have become a primary basis for competition, much like product innovation and price.
And, this competition is not focused on relative underwriting prowess because underwriting is still knowledge-based. That knowledge must be widely and uniformly held, if for no other reason than the involvement of the same reinsurance companies.
Instead, underwriting competition now is around the non-compensated risk a company is willing to endure, and the profit margin it is willing to shave, in order to get the business.