Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together. As noted earlier, one such opportunity involves the area of underwriting reporting.

The Medical Information Bureau is one of the best and most cost-effective underwriting tools available to life insurance companies. Member companies code impairments that they uncover in the underwriting process to the MIB’s database. This information then becomes available to other member companies who might underwrite the same applicant. So, if someone is turned down for life insurance by Company A because he has advanced lung cancer and then forgets about this condition when he applies to Company B, a simple MIB check will reveal this condition and thereby give Company B the opportunity to further question the applicant about this condition.

What if there was a way to allow life settlement underwriters to input to the MIB significant medical information uncovered in the review of a proposed life settlement transaction?

The mechanics of doing this would not be simple. Current MIB rules, which do not allow for non-member underwriting input, would have to be changed. Safeguards would need to be put in place to protect the insured’s privacy and to assure that he or she had given informed consent. But the benefits would be worth the effort.

When someone applies for life insurance, the person has every incentive to conceal or forget about impairments that might result in a rated or declined policy. On the other hand, when the same person tries to sell a policy, the person has every incentive to disclose all possible health impairments.

The underwriting value of input from secondary market transactions would therefore be priceless for the primary carriers and would help reduce the amount of insurance fraud.

Furthermore, input from life settlement underwriters could help cut back on some of the abusive practices in the life and life settlement industries.

For example, my office once reviewed a portfolio of premium financed policies that had been recently issued at standard or preferred rates, but for which our average mortality rating was 150% of standard, with one policy rated at 300% of standard. This kind of disparity can happen due to sloppy underwriting at the issuing company, “business judgments” to accommodate big life producers, or selective memory on the part of the applicant.

Still, if a legitimate way could be found to get this information back to the issuing company, it just might reduce the amount of “underwriting arbitrage” in these deals. This would be of great benefit to the life industry. It might cut the amount of premium financed life settlement transactions a little bit, but in the long run it would be good for the life settlement industry, too–particularly if it helped to get the life settlement industry on the same side of the table as the life insurance industry.