Underwriting Life Insurance: No Sweat

Anyone who has ever applied for a large life insurance policy knows what its like to literally “sweat out” the underwriting process during a stress test on a treadmill. Insurers for years have relied on treadmill tests as part of their evaluation of applicants health and insurability.

Increasingly, though, applying for life insurance is becoming a “no sweat” proposition as more life insurers liberalize underwriting criteria.

Many insurers have drastically reduced their reliance on treadmill tests. Some have even eliminated the need for treadmill tests–and the sweating that comes with them–for certain age groups.

Stepping away from treadmill testing is only part of the recent changes were seeing in underwriting life policies. Insurers across the industry are liberalizing criteria for assessing risks and expanding the number of applicants who qualify for their best underwriting categories.

For example, applicants being treated for hypertension and cholesterol, and minor skin cancers, can now qualify as preferred risks with some insurance companies as long as their conditions are under control. Previously, applicants with such medical conditions might be considered standard risks or even rated as impaired risks.

Whats more, applicants who previously were considered “impaired risks” because of health problems and therefore were underwritten using rating tables are now being considered standard risks. Some insurers have even reduced the number of tables used for underwriting clients who have health problems, are overweight, or have poor health histories. For these companies, more than half of their clients who were previously rated now fall into this “expanded standard” class.

The liberalization of underwriting standards for both permanent and term life insurance is due to the confluence of several factors.

For one, life insurers are looking at new ways to become easier to do business with in order to encourage more financial professionals to meet the life insurance needs of clients.

In addition, life insurers are becoming increasingly sophisticated in assessing risk as new tools become available and underwriting expertise grows.

Also, mortality has steadily improved industrywide in the past several years, as people live longer due to healthier lifestyles.

Perhaps the biggest driver in liberalized underwriting is a growing trend to simplify the process of buying and selling life insurance, especially when a stockbroker, financial planner or bank representative is involved in the process.

Insurers are increasingly looking for ways to streamline the underwriting process. They are reducing the number of tests that applicants must take to qualify for coverage, cutting back on the amount of paperwork, relying on tele-interviewers to ask clients about their medical histories, and automating administrative processes such as completing applications and ordering necessary tests.

Further, they have worked to limit their use of inconvenient medical requirements. Instead, they are relying on getting much of the same health information via other means.

For instance, an attending physician statement ordinarily uncovers existing health problems. Often times, the applicant may have already undertaken a stress test as part of a regular physical exam and the results are therefore available from his or her family doctor.

Also, blood profiles can warn of many health problems such as coronary artery disease, liver or kidney disorders, and HIV, and urine testing picks up problems from diabetes, kidney diseases and drug use.

Tele-interviews help, too. They allow for much more detailed information, directly from the proposed insured, and are often sufficient to assess the risk.

Some insurers have simply become highly adept at assessing mortality risks, especially in older applicants. Thats important, because, as the population ages and lives longer, people are applying for life insurance at older ages. Its no longer uncommon to see applicants in their 60s and 70s applying for large life insurance policies with face amounts of well above $1 million. Often, the purpose is to meet needs such as estate planning or business continuation.

The growth in these kinds of cases builds a reservoir of expertise and experience that ultimately leads to greater confidence in managing the associated risks. And sharper underwriting skills inevitably lead to improved mortality experience.

But liberalizing underwriting requirements must be balanced with a companys ability to profitably assess and manage mortality risks. To have instituted changes in underwriting without assessing their impact on pricing and profitability is a recipe for disaster.

It is not uncommon for an underwriting department to change its medical requirements under budgeting pressures, modify its preferred risk selection approach based on competitive information and forego its traditional underwriting philosophy to go toe-to-toe with “this weeks” aggressive underwriting offers.

Being reactive to ebbs and flows in the market is a good thing, but doing so without consulting those accountable for pricing and profits is dangerous for the company, its policyholders and, where applicable, its stockholders.

To be successful, insurers must continue to carefully weigh each applicants risk profile against their companies mortality experience. Those insurers that continue to stress the importance of making good risk selections will be able to relax their underwriting standards without having to “sweat it” over future profitability.

Chris Graham is vice president and chief underwriter for the individual life division at Hartford Life. E-mail him at: chris.graham@hartfordlife.com.

Many

insurers have

drastically

reduced their

reliance on

treadmill tests


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 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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