PONTE VEDRA BEACH, FLA. – The secret to finding small business owners who are good disability insurance risks even in the middle of the Great Recession is that there is no secret, according to Ernest Smith.
“You’ve got to do the work” and study the business carefully, Smith said here Thursday at a disability insurance conference organized by JHA, Portland, Maine, a unit of General Re Life Corp., Stamford, Conn.
Smith, the leader of the special services practice at Nawrocki Smith L.L.P., Melville, N.Y., an accounting firm, helped present a breakout session on “financial underwriting” in turbulent times.
Because doctors, lawyers, accountants and dentists tend to understand how easy it is to become disabled, they account for about three-quarters of the U.S. individual disability insurance market. Corporate executives and owners of small businesses make up only about a quarter of the market.
Disability insurers look at small business owners’ finances to verify that an applicant is applying for a reasonable amount of coverage in relation to the applicant’s income; to make sure that the applicant has and will continue to have an incentive to try to continue to work; and to see whether the applicant will stay in business long enough to be a good customer.
Carriers that are protecting the incomes of executives at large corporations can focus mainly on the corporations’ finances, Smith said.
“If you get into the small group area,” he said, “you’re buying the owners…. Antiselection risk is always going to be a factor.”
Another speaker at the financial underwriting session, Chris Connor, a vice president at Illinois Mutual Life Insurance Company, Peoria, Ill., said the key to underwriting business owners during turbulent times is to remember the basics.
“We should underwrite the same way whether it’s good times or bad,” Connor said.
Insurers should always be looking for characteristics such as industry segment risk at all times, not simply when the economy is weak, Connor said.
Connor and Smith recommended that disability insurance underwriters get all of the company financial data that they can along with whatever data might be available for a company’s competitors and industry, then look closely at how indicators such as a company’s debt level, liquidity level and ability to collect payments from customers stack up when compared with the figures for competitors.
If debt levels rise or payments start to come in more slowly, that might be a sign that something is going wrong, even if a company appears to be highly profitable, Smith said.
The need to look at debt, access to cash, and receivables collections may sound elementary, but, in the real world, insurers rarely perform those kinds of analyses for customers with in-force policies, and they often skimp on analysis even for new applicants, Smith said.
But Connor warned against being too harsh when reviewing applicants’ businesses.
“We do not want to overreact,” Connor said. “We still have to write policies to make money.”