By Gary Bundock and Tom McCarthy
It is interesting (well, we think so) to reflect on how evidence requirements differ from market to market. In some places – and the UK is a good example – one can buy what might seem a huge amount of cover on the basis of an application form only. Yet elsewhere virtually every application, certainly for pure life cover, needs a medical exam of some kind. And often, lab tests and maybe an ECG as well.
The considerable differences between markets in terms of underwriting practice are due to a variety of factors, such as regulation, the products available (including preferred pricing in the US), the availability of external data from third parties, and the existence of non-contestability periods. But maybe there are also cultural issues in play.
Those cultural issues apply just as much to consumers as to insurers. Today’s consumers expect to be able to get stuff now: no delay and with the minimum of fuss. A lengthy application process involving exams and blood and urine samples is a long way from that. Is a lengthy list of routine requirements really necessary? “Come on guys, I’m only trying to buy some insurance,” some people might say.
The cone of uncertainty
There is a concept called the ‘cone of uncertainty’, which is used in project management in the context of estimating costs, resources, timescales, etc. At the start of a project, these estimates are often based on a lot of unknowns, and the wide variations are represented by the bottom of that figurative cone. As the project progresses and more is learned about the factors influencing delivery, the uncertainty reduces, estimates can be refined with more confidence and project risks can be minimised, resulting in the progressive narrowing of the cone.
The principle could easily be applied to underwriting, in which there is often a temptation to get more and more information on the applicant, check every last detail and leave no stone unturned, just to ‘make sure’ that the risk is sufficiently understood. Is the underwriter trying too hard to remove all uncertainty when, actually, some of this detail may have little impact on the final decision? The tendency to ‘over-order’ is perhaps greatest where discretionary evidence is concerned, but sometimes it is worth challenging the thinking on routine requirements.
The North American market, and the US in particular, unquestionably seeks to obtain a higher degree of ‘evidence of insurability’ than some other markets. Driven by contestability periods, the avoidance of anti-selection, preferred classifications and, of course, the desire to provide the most competitive rates, there is extensive lab testing and heavy use of medical records.
But that classic picture of US underwriting is changing. The last ten to 15 years have unquestionably seen a natural evolution, if you will, in the North American market to a more consumer-friendly model. Many factors have contributed:
- One huge factor has been the concurrent growth and understanding of policy purchasers’ frustration with complex traditional, and invasive, underwriting requirements. Most carriers have moved away from exams by doctors as just one example. There are many others.
- Consumers these days are much less tolerant of long time-lags in underwriting and issue. It simply does not correlate with today’s need for immediacy that they have grown used to in so many areas.
- At the same time, the development and reliance on various types of accelerated underwriting have allowed carriers to move away from the two points noted above. Accelerated underwriting, of course, has moved the risk selection bar from invasive to non-invasive significantly, and greatly reduced the time taken in processing and decisioning. So much data plays a part in underwriting now, and it moves the needle both ways: identifying adverse risk but also helping classify preferred risk.
- Most carriers and reinsurers have trumpeted that need to ‘close the protection gap’ and attempt to help underinsured individuals that need insurance but never obtained it. Yes, of course there are profit goals, but the altruistic aspects remain nonetheless, and have not been lost on consumers who see insurers as caring about their needs. The gap is not just about protection. It also is about education about insurance, and it is a primary goal these days of most insurers (and even reinsurers).
- A big factor is the science of behavioural economics (BE) which has grown by leaps and bounds. BE helps in many ways. The development of improved application questions that are more understandable and less threating than their predecessors is just one example. Perfection of honesty pledges helps make the purchase experience more transparent and less onerous. Buying insurance should ultimately not be more confusing than buying other consumer goods or services.
- The traditional ‘gold standard’, the attending physician statement (APS) is gradually morphing from tens or hundreds of pages of readable content to electronic health record (EHR) data formats which can be moved and processed more quickly, thereby greatly reducing a traditional ‘pain point’ in underwriting.
- Advancements in ‘instant identification’ of applicants have helped reduce outward fraud, ultimately benefiting both carriers and true proposed insureds.
All of these have contributed to some simplification and streamlining of the US underwriting process, the ultimate expression of which is ‘accelerated’ underwriting that enables younger lives (or those who are not too old) to buy face amounts of up to several million dollars without a medical or blood tests – but with a lot of interrogation of third-party databases.
The drivers of risk information requirements are the same as in most other markets around the world, and thus medical exams in some form or another and specialised tests are commonplace. The UK enjoys a rather privileged situation. For a start, non-contestability is a non-issue: a claim can be contested at any time regardless of the duration of the policy at point of claim. And there is that great institution, the National Health Service. As well as providing healthcare for free (OK, it’s funded by taxes, but it’s free at the point of service), it manages to maintain a comprehensive health record for an individual regardless of where he or she has been treated and of changes in general practitioner (GP, ie personal physician). True, in some circumstances gaps can occur, but almost invariably the information that interests underwriters is there and it is available from the current GP.
So the GP report (GPR) is a key item of information at both underwriting and at claim. For the underwriter it serves as a check on the veracity of application form disclosures and can amplify them with more detail as well; for the claim assessor it helps validate the claim (or otherwise) and can be a huge help in proving or disproving non-disclosure. Couple these virtues with a low propensity to insurance fraud (another cultural thing), and small wonder that the UK offers some of the lowest, if not the lowest, term insurance rates in the world.
Can applicants be trusted?
Chris Behling, when he was chief underwriter at Swiss Re, wrote an interesting article on LinkedIn a couple of years ago called A challenge to my industry: stop treating the consumer as an adversary. In it, he asked if something tantamount to an adversarial contest between applicant and underwriter, and with only one winner, has been created.
Is it a game in which insurers play ‘Gotcha’ with applicants, creating multiple obstacles to ‘catch them out’? Are so many ‘bad apples’ that we have to check this, verify that and use fraud propensity models for the other?
Maybe underwriters should ask themselves if they are connecting with consumers in the right way. Selection processes are necessarily complicated on occasion, but are the questions asked of consumers phrased in the right way? Do consumers understand why we use various tools to check up on them? After all, underwriting is about risk management and not risk elimination.
A presentation at a recent conference contained these very insightful observations:
Trust is a bridge between the known and the unknown.
Trust is all about having a confident relationship with the unknown.
Risk is the sister of trust.
Trust in governments and politicians has declined in recent years, as has confidence in institutions such as major corporations, the police and the press. When accusations of untrustworthiness are directed at life insurers, the industry, in its defensive response, points to the high rate of paying claims that total billions of dollars, pounds or whatever. But do insurers invariably play fair with applicants?
The insurance relationship is asymmetrical in more than one way. From the underwriter’s point of view the applicant knows all, or at least most of, the information needed to evaluate the risk of death or disability. So insurers need to guard against anti-selection. But it’s a two-way street. Customers pay the money but insurers are in the position of power – the power to pay or deny claims and maybe to hide behind complex policy wordings. Many customers don’t really understand exactly what the policy says but the insurer does, especially where disability or critical illness insurance are concerned.
Trust is a human feeling. Insurers should not forget that ‘humanness’ needs to be evident in the underwriting process, fostering more trust with customers. There are signs that modern and future risk selection will strengthen that ‘bridge between the known and the unknown’ and that our industry will continue to evolve to meet the interests of all stakeholders.
A critical look
But it’s worth taking a critical look from time to time at levels of risk information requested:
- What is the issue (or issues) that the evidence seeks to address?
- Is what is ordered consistent with that (or those)?
- What is the worth of what is obtained? Is it all needed? How often does a piece of information actually change the decision outcome? (We are talking about protective value here: the cost/benefit of a piece of information.)
- And at a case level, are you sure you can’t make a decision on what you have already? For some underwriters ‘more info’ has the sub-text ‘too difficult and now it’s off my desk.’
Underwrite on the least amount of information you can, consistent with the assumptions in the basic premium rates. Customers are entitled to that. And it’s what your job’s about.
A member of AHOU’s Hall of Fame and AHOU’s 2010 President, Tom McCarthy is an FALU and career underwriter with over 40 years of experience in reinsurance and direct underwriting, both traditional and accelerated.