Simplified Issue Requires A Different Mindset
Simplified issue life insurance products always have been sold in the U.S. and always have aroused the keen interest of the industry. Because of their ease of issue and speed of sale, they form an important part of the industrys efforts to reach out to the middle class market.
Furthermore, many marketing situations (e.g., many types of group sales) exist where full underwriting is simply not an option. Thus, it is generally recognized that simplified issue products will remain a salient part of the life insurance environment.
Companies wishing to succeed in this marketplace, their marketing staffs, and their agents as well, need to understand the significant impact of this revised “delivery mechanism” on the entire product cycle. The extent to which the relative lack of underwriting transforms the entire product cycle is not adequately recognized.
From new types of pricing assumptions to retraining of the claims staff, from new mathematical models to fraud detection units, qualitatively different approaches are required for a properly managed simplified issue line of business.
That this fact is not always appreciated is proved by the revolving door nature of many simplified issue markets. Companies enter hopefully, lose lots of money and then exitsadder, but unfortunately, often not much wiser.
Frequently, the cause of the debacle is a failure to employ fundamental risk management tools customized to the simplified issue market. With that in mind, here is a high-level outline of various considerations with simplified issue, with an emphasis on process building.
Marketing Channels: Simplified issue products are sold through direct markets (mail or Internet), through a group market situation, or through agents at institutions, at a work site or at the prospective clients home.
The venue can have important consequences. For instance, the involvement of a well trained and dedicated agency force can be a significant help in the underwritinghelp reflected in the actual mortality margins used. On the other hand, a poorly controlled agency force can be worse than useless, and provide clients with guidance on avoiding appropriate underwriting classification.
The marketing situation needs to be well understood in advance.
Direct market channels: If the scale is sufficient, the direct market channels may be suited to analysis by modeling techniques such as multi-linear regression, neural networks, or mathematical programming. While these procedures could be useful even with fully underwritten products, it is most likely that simplified issue products will provide the scale necessary for these techniques to be employed successfully.
Applications: In the simplified issue market, the importance of the policy application is enormous. There will be a desired balance point between conciseness and thoroughness, but it must be remembered that there is no medical backup when pressures come to tradeoff the latter for the former.
The same type of considerations governs the need for clarity in the application. Thus, it is frequently inappropriate to use the application employed on fully underwritten products for simplified issue products. Subtle design issues can arise in inquiries about disease. For example, a client is more likely to be able to supply accurate information about cancer than heart problems, and this can influence the ultimate structure of the questions. The application also should be reviewed in light of emerging experience.
Underwriting: A whole host of issues surround the underwriting of a simplified issue product. The box indicates, at a high level, the types of questions an underwriter needs to ask as the product is being designed.
Whole articles could be written concerning answers to any one of these questions. For now, let me emphasize the extent to which the nature of the answers will differ from equivalent answers for a medically underwritten product.
Consider the question about production quotas. Naturally, any product has certain time frames within which it is expected to operate. But the standard deviation in issue time for medical underwriting is such that a certain tolerance tends to creep into the process, especially when average face amounts are larger. Not so with simplified issue, where a fast turnaround time is one of the cardinal selling points of the product. Swift underwriting decisions are expected and demanded.
Thus, the extent to which the underwriter is subjected to assembly line pressures is a whole order of magnitude higher than for medically underwritten products. There are numerous repercussions stemming from this fact.
Actuarial: The fact that a life insurance product is simplified issue will change dramatically almost every actuarial assumption used in pricing, including mortality, persistency and expenses. Again, let me focus on those matters that are qualitatively different in the simplified issue environment. Consider the riders or ancillary benefits that should be attached to a policy. Accidental death benefit or return of premium riders become ideal products to sell through simplified issue channels, since they do not involve underwriting for ordinary mortality. Thus, the pricing can be more nearly comparable to the same products sold in medically underwritten channels.
Consider also the design and handling of experience reports. Both persistency and mortality experience should be reported early and often. Extensive drill downs on the data by production channel, age, gender and many other classifications should be possible. Databases need to be designed to make this sort of routine production possible.
Back Office: The claims department must be alerted and trained in the nature of handling contestable claims. There will be many of them, and a claims department without experience in simplified issue will be unprepared to deal with the issues involved. The legal department also will be involved, and suitable expertise will need to be acquired. Indeed, senior management may need to be consulted in order to develop a consistent corporate policy toward contestable claims.
Fraud: This is a major problem that should be addressed. To some extent, random misrepresentations on an application can be dealt with in pricing, though allowing much of it may harm a products competitive position. But systematic fraud will destroy the statistical basis of the actuarial analysis. Simplified issue is especially susceptible to fraud. This matter can be handled through various mechanisms: special underwriting tools, special claims investigations, database follow-ups, a special fraud unit, even the use of outside vendors. However it is done, fraud as an issue ought to be studied and an action plan developed.
By no means do the above represent all of the special topics related to simplified issue. For example, the list does not even mention reinsurance. However, in touching only on some of the key points, it should demonstrate that a successful simplified issue offering is not merely a matter of changing some assumptions. It is a matter of changing the whole machine.
The attitude must be different as well. The company should not ask whether problems will arise but how to detect quickly and manage correctly the problems that are certain to arise. Only with an educated and proactive approach toward simplified issue products will a company have any hope of meeting the financial requirements of policyholders, agents and itself.
, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. You can e-mail him at [email protected]
Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 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.