With the need for quicker turnaround time and swifter issue of policies, the life insurance industry was faced with a dilemma. How could the industry achieve this target to satisfy its customers’ needs without compromising its strict underwriting practices and its risk profile? The answer was simplified underwriting.
Unlike traditional underwriting, simplified underwriting does not require the carrier to have a full understanding of the insured risk. As a result, simplified underwriting policies are priced slightly higher than fully underwritten policies to cover the unidentified risks. The message to the market is that by answering only a few simple health questions, getting life insurance does not need to involve passing medical examinations or completing multi-paged application forms. However, it is important to note that simplified underwriting policies are not intended to allow applicants in poor health to bypass underwriting.
Simplified underwriting policies generally have a number of distinct characteristics including:
o Lower coverage amounts.
o Maximum issue ages of 65 to 70.
o Fewer applications questions, generally just covering key medical risks (policies are declined or manually underwritten if key medical risks are disclosed).
o No paramedical exams.
o Immediate issue of clean cases.
The following factors have driven the evolution to simplified underwriting:
o The advent of selling life insurance on the Internet made it necessary to simplify and speed up underwriting for busy consumers who want to buy life insurance within a few minutes.
o Insurers are taking advantage of automated underwriting solutions to approve and sell simple, lower-cost policies in real time.
o Simplified underwriting eliminates some of the new business paperwork and associated costs for relatively simple policies.
Asking a limited number of medical questions increases the predictability of the underwriting outcome; hence, the possibility of anti-selection increases. The best protection against anti-selection is for insurers to understand the population of applicants, and to identify any trends or changes to their applicant base. However, even with this insight, if the product strategy is to ask only a few questions, there may be limited scope to elicit better information.
What if the initial questions are developed in such a manner that the insurance company is exposed to unidentified risks? To counteract this, insurers can ask for permission to access the applicant’s Medical Information Bureau (MIB) record, or similar medical, financial, or personal records. However, unless the insurer’s automated underwriting system has rules for evaluating this additional data, all the system can do is decline the case or refer it for manual underwriting. Even integration with multiple information providers may not provide a full picture of the risk.
As a result of targeting specific demographics (e.g., healthy young lives), insurers are automatically declining a higher percentage of applications, which could lead to a negative reaction from customers. This targeting also means that the insurer will be operating in a limited market by excluding certain ages and coverage amounts.
The simplified underwriting process uses a low number of key medical questions to get a general understanding of the risk, and enable a speedier application process. However, the downside is that the risk is not fully understood, and the customer must pay a higher price. In addition, target markets are limited to only those “clean” applicants within the targeted age and coverage parameters.
The enhanced simplified underwriting process aims to increase the level of understanding of the risk while minimizing the additional process time. This process could also widen an insurer’s target market to include applicants who would answer “yes” to the initial medical questions, but whose history would not represent a significant risk. To do this, the underwriting system must ask additional questions only when necessary, as a client will be more willing to spend additional time answering questions where they can see that this is specifically relevant to their situation.
If you were told that you could include an applicant with a history of diabetes in the simplified underwriting process, would you think it was possible? Usually, depending on the particular philosophy, under a normal simplified underwriting process this would immediately mean denial of cover or requests for further evidence, and the case transferred to a manual underwriting process.
Using an enhanced simplified underwriting process, asking a few targeted and select questions can produce a clean policy for issue in a matter of a few minutes, while not exposing your company to an unacceptable level of additional risk.
The applicant is a female, age 35, non-smoker, looking for simple life coverage of $250,000 over a term of 15 years, who has disclosed a history of diabetes.
If the automated underwriting system can ask drill-down or reflexive questions that incorporate known information about the applicant, in this case age and gender, you can then ask, “Are you taking or have you ever taken treatment for diabetes?” and by answering “no” and knowing that the applicant is a female the rule then asks “Was this associated with pregnancy?” By using the answer to this question and the applicant’s body mass index (BMI), the rule prompts two further questions until you are satisfied that the applicant has been told that she does not need any routine checkups, and consequently is a normal risk.
This ability to use the automated underwriting tool to build the rules as presented below means that the true difference between a medical application and a simplified application, from an underwriting perspective, is smaller than originally anticipated.
We have already noted that the underwriting system must ask additional questions only when absolutely necessary. However, this does not mean that more initial questions cannot be asked in certain circumstances.
The applicant’s information can be filtered by certain characteristics to enable additional questions. For example, for males between the ages of 18 and 30, you can ask if they have been involved in any traffic accidents in the last 5 years. This specific targeting ensures that only relevant questions are asked.
We have shown how a “yes” answer to an initial question does not necessarily mean that the case cannot be included in the simplified process, and that you can drill down for specific conditions as necessary. However, this initial “yes” answer does not necessarily mean that you have to ask a whole set of reflexive questions. Rather, additional questions could be asked based on the initial answer.
For example, let’s assume a question asking if the applicant has had any medical investigations, scans, or tests within the last five years is answered “yes.” It is possible to then ask another question that is framed to ascertain whether the investigations were related to a serious illness. That would allow you to confirm the reason for answering “yes,” and ultimately determine if the result is a clean risk that can allow for immediate processing.
An alternative approach to this additional questioning would be to utilize the ability of the underwriting system to have a list of specified conditions that you want to investigate upon a “yes” answer.
For example, an applicant may have answered “yes” to a question that asks whether he or she has had or currently has respiratory problems. By listing the possible reasons for the problems in a format that allows the user to select the correct ailment, you can quickly establish whether the applicant is asthmatic or had a onetime bout of bronchitis.
All these methods mean that the insurance company can still get the relevant information needed for each applicant quickly and in a simplified process without compromising its underwriting philosophy. The ability to ask additional questions also allows the company to mitigate the risk of anti-selection. The power of 3rd and 4th generation automated underwriting systems that allow underwriters to analyze the underwriting process and iteratively improve rules greatly enhances a company’s ability to successfully understand its target market and react to any anti-selection risks.
Why stop at underwriting cases that are “normal” lives? There are a number of scenarios where, by extending the enhanced simplified underwriting process as described above, you can bring a range of previously marginal or substandard lives into the process.
For example, an applicant who is a non-smoker, but who has disclosed treatment of asthma within the last three years, would traditionally be excluded. However, what if, with a series of questions, the applicant confirms that the asthma is “Continuous treatment, rarely off work, and then for not more than a day at a time, little restriction of normal activities”? An underwriter manually assessing the case would probably apply a minimal loading, but by getting the automated underwriting system to apply the loading, the case can be processed automatically.
As part of a planned schedule and an iterative process that involves constantly reviewing your rules, the enhanced simplified underwriting process can be extended over time to include sub-standard lives.
But why stop at just asking further questions? As we know, the current simplified process uses data from other sources to reach an underwriting decision, so why restrict your company to a limited set of data?
At certain ages and for certain face amounts, many companies ask for tests that include urine and sometimes blood samples. These requirements usually mean that the case is no longer simplified underwriting. What if those blood results could be assessed by the underwriting system, and based on the data already held on the application, incorporated into rules that would give an underwriting decision? You could then extend the model to include higher face amounts and older ages into the process as well, if necessary.
Empowering the customer
We stated earlier that one of the driving factors in the evolution of the simplified process was the advent of selling life insurance on the Internet, and that this made it necessary to simplify and speed up underwriting for busy consumers who want to buy life insurance within a few minutes. So why not extend that simplified process and allow consumers to choose how they want to apply for life insurance?
For example, if you know that a certain amount of life insurance cover will cost a specific premium based on the assumption that the applicant answers the initial simplified questions cleanly, you could offer an alternative of answering more detailed questions for a possible cheaper premium.
The accepted wisdom with simplified underwriting was that by not doing full underwriting with medical exams, the insurer was at greater risk, and therefore had to charge higher premiums. Until now, there was mindset that there was a group of people who were “cash rich and time poor” that would pay more in premiums for the convenience of not having to schedule a paramedical appointment.
The Internet has changed that mindset. Internet consumers expect not only the convenience of shopping for insurance without leaving their desk, but also the best price. In the UK, which is possibly the world’s most advanced life insurance market, a large number of aggregators have emerged to offer consumers a wide choice of insurance policies. These Internet consumers, in turn, make their choice largely on price. This has given rise to the need to bring premiums for simplified policies back in line with fully underwritten policies, and this cannot be achieved without better risk assessment.
Therefore it is vital that insurance companies take a more sophisticated approach to their pricing structure, rather than persevere with the traditional simplified process of higher price for an easier process.
The enhanced simplified issue process, as described above means that in reality there’s a considerable blurring of the lines between simplified-issue business and other business. As a result of asking targeted questions in a relevant and timely fashion and utilizing today’s 3rd and 4th generation automated underwriting new business processing software applications, life insurance companies can proactively measure and predict risk and constantly fine-tune their product lines and prices and ensure that the premiums being offered are competitive.
Simplified underwriting policies need safeguards. One method of achieving this protection is a scheduled underwriting audit review of the applicant’s medical records, and verification of the accuracy of the information on the application forms. This analysis can also take advantage of the insight provided by 4th generation systems to ensure no gaps exist in the rules or process.
Another method is longer moratorium periods, and the ability of the life insurance company to cancel a client’s insurance cover if the application contains a material misrepresentation about medical history within say a 2-year period from inception.
I hope this information helps you understand how the insurance industry can move beyond its current thinking about the simplified underwriting process. By taking advantage of a number of technological advantages, in particular the 3rd and 4th generation automated underwriting systems, insurance companies can improve their process, increase their straight-through processing (STP) rates, and extend the offerings to a larger market–all without hindering time to issue, and yet understanding and managing their risk.
Declan Bannon is senior industry consultant-product strategy, in Allfinanz’s product management team. He can be reached via email at declan.bannon@Allfinanz.com.