The impaired risk life insurance business continues to evolve from its early days, to the point that many carriers today actually seek out applicants with certain impairments.
How this occurred, and how the business looks today is the subject here.
A few decades ago, there were no smoker/nonsmoker rate distinctions in life insurance underwriting, and females didn’t have their own rates but were rather “age rated down” from male rates. Producers, mostly career agents, went to brokerage agencies for cheap term or to underwrite a case that their primary company heavily rated or declined.
Clearly, impaired risk was focused on, and meant to imply, the health of the insured. Impaired risk brokerage wasn’t looked at as a tremendous growth opportunity but rather a necessary evil.
Since the mid-1970s, insurance carriers started to change their products. Not only did their pricing include smoker/nonsmoker distinctions but their nonsmoking underwriting classes expanded to the three, if not four, that are common today. A few years back, one carrier even had six different nonsmoker risk classifications.
As companies focused on best class pricing, the industry witnessed a race to the top of the underwriting class. After all, when computers began to become widespread, spread-sheeting companies became all the rage and insurance companies wanted to show the lowest premiums and be at the top of the spreadsheet.
The rates certainly looked good, but as the number of nonsmoker classes increased, how many individuals actually qualified for best class underwriting? How many producers became frustrated with quoting best class because it wasn’t as attainable as once thought?
Some industry experts are saying that the underwriting risk class of the average American is table D (or a rating of 200%) nonsmoker. That is surprising, to say the least.
Granted, the industry needs to understand that this refers to the health of the general population, not those who seek insurance and agree to be underwritten. But, one has to ask, can average Americans actually be that unhealthy? Spend an hour people-watching at the local mall, and you just might agree with that Table D assessment.
Add to this the fact that the United States economy is now an international economy. Americans not only conduct business internationally–effortlessly over the Internet in nanoseconds–but many Americans work or play overseas, thanks in part to the fact that foreign travel is relatively inexpensive.
This has even sparked a new category of “impaired” underwriting: Travel to various foreign countries. Insurance carriers may rate countries according to their political and economic stability. So it is that today, a perfectly healthy individual who happens to spend significant time outside the U.S., in a less stable country, may receive a lower (more expensive) risk classification on their life insurance policy than otherwise might be the case.
When the reinsurance marketplace changed a few years ago, more insurance carriers felt it was financially better to increase their internal retention limits and keep more of the risk in-house. This has allowed carriers to seek out competitive advantages by having the freedom to develop in-house expertise in certain impaired risk lines. The result is, rather than focusing on best class nonsmoker rates, companies now tout impaired risk pricing as their competitive advantage.
This has created an opportunity for life insurance prospects. They, along with their advisors, can shop their impairment and try to find one that looks more favorable (and charges less premium) than the others.
In the past, some producers may have shopped a case to a few carriers, hoping one would “make a mistake” that resulted in a better premium for the customer. Now, companies actively promote and seek out certain impairments.
For instance, while some carriers may not even want to consider foreign national business, others seek it. Likewise, some carriers feel they have an underwriting advantage for certain cancer risks. Others even tout competitive offers for table X (near death) customers. Others advertise flexible death benefit limits such as “up to 30 times income.”
Impaired risk underwriting has certainly evolved over the past few decades with companies now aggressively underwriting certain risks. Given the overall health of the U.S. population, that’s a good move for companies to make.
Michael S. Pinkans, CFA, is senior vice president-marketing for Zenith Marketing Group with headquarters in Freehold, N.H., and a registered representative and investment adviser representative for ING Financial Partners, Inc. His e-mail address is [email protected]