New Underwriting Technology Brings Both Benefits And Pitfalls
Newcomers to the underwriting profession are schooled from the start to carefully investigate an applicants medical history and financial background to determine if the application for insurance is appropriate.
Those of us who went through our initial training a number of years ago had no way of predicting the challenges facing todays underwriter, who must apply those tests within the context of a technological revolution that seems, on the surface, to favor speed over thoroughness.
At the same time, the Internet age is demanding a level of responsiveness unheard of previously; our industry has entered an era of mergers and demutualizations that is placing greater emphasis on profitability. Is it possible to continue profiling and pricing risks in a way that enables an insurer to prosper, while at the same time satisfying customer expectations for quick answers?
The future viability of the industry in these challenging times and the preservation of key relationships between direct writers and reinsurers require that the answer be an unqualified “yes.”
Regarding use of the Internet to buy insurance products, customer expectations and insurer performance are miles apart. The vast majority of those who purchase life insurance online are unhappy with the experience. Problem areas include the length of time needed to fill out an application, pricing inconsistencies and the need to still have contact with an agent.
The number of people purchasing insurance online is very small today, but it is certain this market segment will grow in coming years. Also, even if most people continue to purchase insurance the traditional way, they have been conditioned by other buying experiences to expect a quicker turnaround than insurers have provided in the past. And if your company does not provide this type of service, customers will find a competitor that can.
On the horizon are technology-based virtual insurance companies that will use the Internet to provide quoting, underwriting, policy issuance and claims services without the costly “brick and mortar” infrastructure of traditional insurers. These new companies could account for a significant percentage of the life and property-casualty retail insurance markets within the next few years. Traditional insurers that fail to respond will be left in the dust of these low-overhead newcomers.
Adding to the pressure on insurers to “ramp up” have been the agents themselves. Instead of feeling threatened by the Internets potential to “cut them out” of the buying process, many agents have embraced the Internet as a tool that frees them to do more of what they do bestsell. In fact, they rank it ahead of fax machines and e-mail for the greater flexibility it provides them on how and where to do business.
In response, underwriters are taking advantage of technology innovations to help shorten the examination time and still collect the information needed to make an informed decision. In fact, far from forcing underwriters to make decisions based on incomplete information, technology, if used properly, can expand the quantity and quality of research material.
Take financial underwriting. The Internet and electronic databases have improved an underwriters ability to answer the question, “Does it make sense?” in a way that was unimaginable just a few years ago.
Overall improvement in data has enabled the industry to create market segments unheard of in previous decades, improving the product development function and raising profitability.
There also have been remarkable advancements in medical testing that enable collection of information on an applicants health that is far less invasive than previous tests conducted in a medical facility. While a blood test will always be the most thorough way to assess an applicants health, saliva or urine profiles are easier and less expensive methods that could reveal enough information to make an informed underwriting decision.
These tests can be administered in the field by agents, significantly reducing underwriting costs and inconvenience to applicants, while increasing turnaround time.
The growth in prescription drug profiles is another example of a way to quickly build a medical history that may be nearly as complete as traditional underwriting practices. Pharmacy network databases are now revealing names of physicians that were not disclosed through traditional information gathering. When used in lieu of an attending physicians statement (APS) on fully underwritten cases, the savings per policy can reach $20, while maintaining a similar mortality level. Elimination of an APS can save more than 20 days per case in processing time.
Then there is the advent of “automated underwriting.” An agent can fill out an electronic application at the point of sale, secure an electronic signature from the applicant and send it via e-mail to the insurer. On its way, the application passes through an automated underwriting service that:
searches for Medical Information Bureau records;
checks credit reports and motor vehicle records that have been shown to be predictors of a persons truthfulness on an application;
applies underwriting and operating rules specified by the insurer, and
permits the ordering of a paramedical exam and physician statement, if required.
Such automation can cut the underwriting turnaround time from 4 to 6 weeks to a mere 7 to 10 days. This can significantly improve the success rate of insurance sales, especially if the policies are part of a financial planning package that includes products (like banking services) that have much shorter approval times.
The tricky part for underwriters and the companies they work for is to know how to apply technology for maximum benefit. If used properly they can secure, at lower cost and in less time, enough information to make prudent underwriting decisions that do not erode mortality experience.
It is important to integrate these new tools into a long-term, consistent underwriting strategy and not see them solely as a short-term way to cut expenses. Decisions driven by cost cutting can easily lead to corner cutting.
Beyond the dangers such a strategy holds for your companys long-term profitability, you may find any cost savings to be short lived due to the effect your decision will have on your reinsurance partners. With some insurance companies reinsuring 90% of their life mortality risk, a delicate balance must be struck between both partners to ensure the relationship remains mutually profitable.
In the final analysis, conducting a thorough review of an applicant is as important today as it was back when many of us started in the business. Sure, the bells and whistles surrounding the decision-making process have changed. And, if youre not careful, an over-reliance on technology can replace common sensethe bedrock of the underwriting profession. But dont let it.
When technology helps answer the question more completely and in less time, embrace it. When it tempts you to abandon good judgment, it makes no sense.
is vice president and chief underwriter for Scottish Re (U.S.) Inc., a provider of traditional and financial reinsurance for life and annuity policies, and a subsidiary of Scottish Annuity & Life, Ltd, Bermuda.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 4, 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.