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The Dangers Of 'Over Underwriting'

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Although not the norm, some underwriters do “over underwrite.” One of the meanings of “over underwriting” is to place undue emphasis on a risk. It usually translates into asking for more than the necessary requirements to evaluate a risk in proportion to the amount of insurance requested for the proposed insureds age and medical history.

Here’s an example: A 65-year-old man, retired from the army for years of service (not medical reasons) who only suffers from treated hypertension. The underwriter has blood and urine results, the paramedical exam with blood pressure readings within normal limits for age and gender, and no family history of cardiac disease. Lets say this client wants $50,000 of life coverage. For this amount all the information at hand should be enough to make a decision, yet some underwriters would ask for an attending physicians statement (APS).

It would be unprofitable to ask for an APS on every small case when we can get a questionnaire to obtain the main medical information regarding diabetes, high blood pressure, hypothyroidism, and asthma among other impairments. Costs need to be contained.

There are cases where due to medical history or lab results, additional tests or even an APS will be required, but if the age and amount requirements are in hand, and are all normal, why go for more?

To be most effective an underwriter must be able to adapt to quick changes in his environment. Too many clients with a history of “coronary bypass” from one agent should raise a flag to consider asking for more information: APS, stress EKG, inspection. Non-medical applications from clients, who were charged an extra premium on prior policies due to medical history, call for a more detailed investigation.

Good judgment makes the difference.

Underwriting manuals are guides, not laws to be followed to a “T.” Some information in these manuals hasnt been updated for ages, and some of the rates suggested may be too extreme. Junior underwriters tend to apply ratings straight from the manual without taking into consideration other favorable factors. Thats why junior underwriters must refer all rated cases to a senior underwriter for review.

Sometimes its not the underwriters fault because he may just be following company guidelines and these differ from company to company.

While many use the same reinsurance manuals, its their internal experience, volume of business, target market and corporate culture that dictate the fine-tuning of their underwriting. One life insurer alone has 8 different classifications for life insurance on one of its products.

Some insurers are too conservative. Too many claims in a relatively short period of time will affect underwriting overnight. Underwriting meetings become frequent and sudden; poorly thought-out changes are made.

Sometimes it just generates a “heads up” call to be more careful when evaluating certain risks, other times it creates a tsunami of modifications (here’s where confusion sets in). Requirement tables get redone, older age applicants are considered more conservatively, and new sets of rules are added.

At some companies panic sets in “saw doctor five years ago for a cold” “GET AN APS!” “Client is ALIVE!” “GET AN APS!” This is the equivalent of posting a police officer on every corner every time there is a bank robbery. Its expensive, time consuming, hurts sales, and at the end, the insured pays the bill.

Over underwriting starts a domino effect–the agent gets impatient; the client has more time to change his or her mind about getting the policy; sales plummet; profits decrease; people start pointing fingers at each other; managers are replaced; departments get restructured. You get the picture.

One way to avoid over underwriting is by establishing and maintaining good communication between the underwriting department and higher management.

Management needs to discuss specific cases with the underwriters to find out if underwriting needs to be modified, if details were ignored, or if a new questionnaire needs to be developed or current ones modified. There are many courses of action that can be taken to improve the underwriting of applications that are cost effective, and underwriters can provide valuable input.

Medical advances in the treatment of many conditions have improved the life expectancy of the American population. Although there arent enough statistics yet on the rate of improvement these advances have caused on mortality (because of the short time theyve been used), theres one group of people (outside the medical profession) that has seen the impact–the underwriters.

Why? Because underwriters have access to medical information that reports on the old treatments, the new treatments and which worked best. Some medical reports include first date of diagnosis, the history and results of all treatments, up to last week.

My position is that over underwriting can be avoided, and companies must keep in pace with changes on the outside, or become a brick in a wall.

Underwriting must be flexible, open minded, and one step ahead of the competition. Otherwise, brokers will take their business elsewhere. A company should not wait for its competitors to anticipate changes on which theyll capitalize, before deciding to go the same way. All the information needed is out there, all you have to do is look for it. The Journal of American Medicine Association, Scientific American, Nature, and other publications report on new medical technological advances.

If a company fears failure, it will run at half speed, but if it aims for success, it will be unstoppable.

Dan Vel?zquez is a senior underwriter with Great American Life of Puerto Rico. He can be reached at [email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 18, 2002. Copyright 2002 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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