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.