By Peter Maynard
I always remember being told, early in my underwriting career (I’ll leave you to guess when that might have been), that it was the duty of the underwriter to accept as many cases as possible at the ordinary (standard) rate of premium – while maintaining equity between policyholders, of course. This was in the interests of inclusivity: making affordable insurance available to as wide a group as possible.
And in many markets, certainly the UK, that goal was faithfully achieved: 95% (or even more) of applicants accepted at standard, 1% or less declined or postponed, and the rest offered terms with a rating. How that differs from today, certainly in well developed life insurance markets.
Back then, savings products with a life insurance element were common, and the investment return was based on sharing the profits of the insurer. So making a mortality profit did not have the importance it has today: the company actuary could shave a little off the profit-sharing bonuses that were added to the policy annually if the mortality experience was not quite as expected.
And of course, interest rates were high and so were stock market yields, providing a nice big, comfortable buffer against the odd adversity that might affect profitability. Thus the corporate actuary, working in a favourable investment climate, had a few things he or she could juggle around to produce an attractive outcome for the policyholder. Premium rate competitiveness wasn’t as important as it is today because insurers could maybe point to superior bonus performance. (These savings plans were of course arcane in the way they worked, and the need for greater transparency has seen them fall out of favour.)
It is true that term/risk plans also existed, and therefore the mortality experience in respect of those was more important, but there were still those buoyant investment markets and, anyway, the with-profit funds could cross-subsidise the risk policies if need be. And don’t forget, mortality rates were showing healthy improvements, so actual to expected should be better than was priced for. OK, maybe a bit more underwriting caution was exercised on term policies, but arguably the biggest threat to profitability was anti-selection. (Maybe it still is, but that’s a discussion for another time.)
Another factor was the relationship that people had with their own health and with the healthcare services available. People were not that health-conscious, not least because health was rather a mystery compared with today. Physicians recognised that smoking and excessive drinking were deleterious to health, and there was increasing awareness of cardiovascular risk factors. But people saw their personal physicians only if they were ill, and the physician was the main source of health information and advice. Plus, healthcare systems were designed to deal with illness as it arose rather than preventing it in the first place. Some folks never saw their physician for years, let alone have their BMI, BP, lipids, blood glucose, eGFR – the list goes on – checked from time to time.
How all this contrasts with today. Low interest rates, volatile investment returns, savings-based life insurance largely phased out, focus on risk products, tougher competition, squeezed margins.
But maybe the most important change is in the way the world – governments, physicians, people in general – view health and healthcare services. As I hinted earlier, there is a strong trend towards health maintenance and illness prevention; health and risk factor monitoring is the norm. What constitutes good health and contributes to it is so much better understood by everyone as the volume of research accumulates, and the results and a plethora of related information are widely available via the Internet. OK, more information does not mean invariably that people are better informed, but there is much greater health-awareness today.
This health-consciousness means more frequent physician visits. Expectations are higher: patients want diagnosis and treatment. And there is a greater willingness to seek help for mental problems – to heal the psyche as well as the soma; as a result, prescriptions to address mild/moderate depression or anxiety disorders are common. Add to that the tightening of diagnostic thresholds for conditions like hypertension, diabetes and hyperlipidaemia… It seems as though the majority of people, especially those in their fifties and beyond, are being treated for something.
In the modern world, life insurance applicants have more to disclose and thus, overall, insurers get to know much more about them, especially given the way that application forms have lengthened. Insurers are now far less likely to be accepting applicants with a clear history but with an undiagnosed condition like hypertension or diabetes. These days the physician is usually the first to find these, not the insurer.
The result is that applicants have rather more to interest underwriters – or, more likely these days, underwriting engines. That big, standard group of the past – which must have contained a range of risks, although we didn’t know what they were and who was affected – is now demonstrably diverse, and fairness demands that such diversity be recognised.
Evidence of diversity is, of course, not restricted to medical history: in North America, medical exams and lab testing, often supplemented with database interrogation, provide the basis for a similar stratification of risk, including the better-than-average ‘preferred’ lives – and even ‘super-preferred’ ones too.
So, these have been the influences that have driven the re-defining of ‘standard’, the slimming down of the standard-rates group and the growth in the proportion of rated lives. What has happened gives pause for thought though.
With margins squeezed and premium rate competition rife, underwriting philosophy needs to be a bit more considered. For a start, those borderline +50/table 2 risks can’t go at standard any more. Is +25/table 1 worth charging now? The actuary may end up happy but the customer disappointed. In the world of preferred, a minor debit feature could mean relegation to preferred from super-preferred or just to standard depending on how the benchmarks are set; possibly not what the customer was expecting nevertheless.
Keen rates and tighter underwriting criteria should also prompt underwriters to think about minor conditions. For example, are well controlled hypertensives truly the same risks as normotensives? (The evidence for and against is not clear.) Modern medicine has improved the outlook for many conditions over the years, such that what was rateable at +50 or +75 is now pretty much standard. Is the risk really that low? Especially bearing in mind that if the implied risk for the reference population is lower, even if observed deaths are lower, mortality ratios can end up higher.
And, as a final thought, that original goal years ago of inclusivity is still a good one. While it is right to stratify risk, maybe the principle can be carried too far, for example by denying deserving people coverage. Insurers need to balance choosing which risks it accepts on what terms with providing an affordable service for the greater good of society. Regulators need to oversee that, but also to recognise that insurers need to protect themselves against anti-selection.
First published by Hank George Inc at https://www.insureintell.com/hot-notes.