Private life and health insurers are experiencing increasing pressure from regulators and the government to show that their risk selection process is fair and actuarially sound.

Well-intended laws seek to protect people from discrimination, and so, for example, in some countries it is unlawful to afford different treatment to people with disabilities or with characteristics indicating a propensity to disease or early death.

Unless private insurers are afforded exemptions from such laws, or can secure favorable amendments in the drafting stages, this approach may run counter to the basic principles under which the industry operates.

Private insurance is a commercial, voluntary undertaking to provide financial security for members of an insured pool of risks. This fundamental concept is at risk unless private insurers are able to enjoy the commercial freedom to price and underwrite according to the risk presented. This is the fairest way to cover the maximum number of people at an affordable cost.

That freedom is based on the ability to pool risk, which is critical to life and health insurance pricing.

To maintain the balance within the pool, life insurers use individual life underwriting.

Life underwriting:

Enables life insurers to judge whether a risk falls within a particular pool and how any extra risk might be handled.

Allows for some risks to be better–and some worse–than the average risk in the pool.

Helps to avoid large cross-subsidization between the premiums paid by one group of policyholders and those of another group with a significantly different risk profile.

Underwriting reduces the risk of ‘anti-selection’ and keeps the system in balance. Unexpected claims will result if there is deliberate or innocent non-disclosure by the applicant, and/or if insurers are legally prevented from asking for the information they need to understand the complete risk profile.

The cost of this anti-selection must be cross-subsidized by the pool, and therefore by other policyholders. Insurers’ increased exposure due to anti-selection may cause prices to go up or products to be withdrawn, leading to lower availability, affordability and consumer choice.

By reducing the anti-selection risk and keeping the system in balance, underwriting allows insurers to provide coverage at a fair and reasonable price. Because of underwriting, the vast majority of applicants can be accepted at standard rates.

In recent years, life insurers have experienced closer scrutiny of their business processes by regulators, special interest groups and consumers. Increasingly, regulators want to ensure that insurers justify any price difference between risk profiles. Through various well-intended regulations and laws focusing on discrimination, privacy and entitlement, underwriters increasingly face constraints on access to information known to consumers about their risk profile. Such information may well influence applicants’ insurance-buying habits and their propensity to claim. The HIV and genetics debates have been catalysts in turning discrimination, privacy and entitlement into key regulatory issues for insurers.

The past 3 decades have seen an evolution of laws limiting the information available to insurers. A number of regulatory trends have emerged:

The volume of legislation and other restrictions concerning the freedom to underwrite is increasing.

The legislative process is accelerating in many markets due to increased public debate on the social and healthcare impacts of medical genetics.

There is evidence of laws spreading from one country to another, particularly within federal jurisdictions-principally the United States and European Union.

In many markets, there is a trend toward the privatization of welfare provisions, but with governments aiming to ‘socialize’ private insurance instead of subjecting access to insurance to commercial dynamics. Legislation is also increasingly obliging insurers to convince regulators that the ratings used in the underwriting process are actuarially justified.

Among the various tools available to ensure actuarial fairness and a fair risk classification process are:

o Experience studies that enable private life and health insurers to translate risk-relevant information into the price of an individual life insurance product.

o Multivariable and multiple state modeling that helps insurers model and assess the often complex interaction between risk factors.

o Evidence-based rating that enables private life insurers to translate medical information into the risk classification of impaired risks and keep these risk factors up to date with advances in medicine.

Used effectively, these techniques should provide assurance to regulators that the industry undertakes the risk selection process fairly and responsibly. Insurers’ continued freedom to quantify and pool similar risks together and to underwrite these risks–based on actuarially-justifiable selection criteria–is key to establishing a homogeneous and equitable risk distribution. This guarantees that the consumer pays fair and competitive premiums based on the risk he or she brings to the pool.