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In our last article we looked at the use of calculators and worksheets and the publisher of Underwriter e- Alert noted:

  • The article begs the question: How will attorneys for plaintiffs litigating against insurers treat inconsistent practices within the same insurance company relative to the use of an e-worksheet or calculators for self-retained business versus reinsured business?
  • Also, despite the free market basis of competitive underwriting and pricing, some level of professional standards (consistency) ought to exist in the application of debits, credits and pricing via the use of e- worksheets and calculators. Otherwise, courts and regulators will view underwriting as essentially subjective and whimsical – that is, prone to social bias rather than being based on sound actuarial principles and reasonably anticipated experience).
  • Documentation of a well-reasoned risk analysis is an asset to an insurer in court.
  • All underwriters should demonstrate their professionalism by assessing applicants in a fair and reasonable way. Underwriting decisions should be well considered, based on the best possible evidence and supported by underwriting guidelines in the form of a documented underwriting philosophy, of which the manual is a part. These decisions should be recorded in a way that can stand up to scrutiny if the decision is questioned. This can be done on paper but is much more efficient if done electronically, especially if the technology can add risk management controls and an opportunity to analyse the data.

Let us take a closer look at how the ratings in manuals are derived. Is it simply by carrying out an analysis of the clinical literature and insured data if available and basing ratings on the evidence base that emerges? Or is this evidence base the starting point for an underwriting philosophy which is then amended by competitive pressures? Let us say for example that the evidence convincingly shows that even modestly elevated gamma GT readings infer increased mortality from all causes. Some manuals, however, may ignore such findings and not impose a rating until the elevation is quite significant. Does this fit with an evidence-based approach to rating? The answer, of course, is that ratings do not always reflect research alone and sometimes take into account the underlying pricing, a company’s own experience, distribution and appetite for risk, as well as the competitive environment.

Using an applicant’s stated alcohol intake may be another key factor in assessing the risk but what guidelines does a carrier use? The reinsurer’s manual, their own internal guidelines? Or should it leave it to the discretion of each underwriter on each case (which surely must be asking for trouble)?
For a non-medical risk it may be possible to find statistics that suggest that, say, out of 2000 competitors who take part in a particular sport, on average ten each year; in other words engaging in a sport results in an extra death rate of five per thousand per year. A carrier can take the view that charging five per thousand per year will adequately cover the extra risk or that it has a 1 in 200 chance of picking the unlucky guy and that this represents an unacceptable level of risk. A company’s appetite for risk is a key consideration in formulating underwriting philosophy.

Many direct companies maintain their own underwriting philosophy outside of any manual provided by their reinsurer. This is especially true for non-medical risks where, in our experience, a number of reinsurer manuals have not been updated for some years.

From SelectX’s 2011 underwriting manual survey more than one third of respondents had access to some sort of ‘own company’ manual or philosophy, with over half of these being stored as on-line documents.
Some carriers may decide they want to be independent of a reinsurer and maintain their own philosophy, and others generating small volumes of reinsurance may be deemed by their reinsurer as being too small to merit being access to a manual. In these cases companies may benefit from a manual delivered on a web subscription or software-as-a-service model.

For companies operating in multiple markets it is likely that underwriting approach varies from territory to territory. This adds further complications to having an evidence-based approach. For example, gamma GT normal ranges have been shown to vary not only by laboratory methodology used but also by the population being tested, studies suggesting lower values overall in Norway than in North America. Some manuals deal more leniently with hepatitis B virus in areas where the virus is endemic on the basis that some of the extra risk is accounted for in the standard pricing.

It is important to note that, even using the same clinical evidence, one manual may interpret that evidence differently to another – which is why all manuals (or underwriting philosophies) are not the same the world over. Such differences reflect that fact that interpretation of research outcomes is subjective; but is there a risk that to a regulator or an attorney this inconsistency is unacceptable?

Whatever manual you use, be it provided by a third party or developed in-house, it is vital that case underwriting decisions and overall underwriting philosophy are properly documented for use by other underwriters, auditors both internal or external, claims assessors, regulators and even, on occasion, lawyers.

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