Maria Thomson sees evidence of technology speeding up processing and cutting costs, as well as opening up new markets.
Streamlined underwriting is crucial for any insurer looking to increase its market share, particularly in the mid-market, where average-sized policies can't be competitive or profitable when underwriting time and expense is excessive. But are life and health insurers today well prepared to underwrite and issue policies fast and efficiently? To answer this question, Thomson Management Solutions has recently introduced the TMS Mid-Market Report Card to provide `grades' for a company in policy issue, underwriting, sales and products. While all the results aren't in yet, experience suggests that most insurers are still hampered by extremely inefficient, slow, expensive underwriting and issue processes.
However, the underwriting revolution has begun, and insurers are seriously considering ways to shortcut the process while still maintaining good risk selection. A few pioneering companies in North America are already implementing streamlined systems and new underwriting techniques.
Reinsurers wonder whether rapidly underwritten policies will result in more claims. Only time and experience will answer that question definitively, but I believe that fast underwriting does not equal slapdash underwriting. There are many good reasons to believe that rapidly underwritten policies will produce about the same mortality and morbidity as traditionally underwritten policies. In fact, the new methods may actually outperform the old methods for some classes of business, for example, where applicants are under age 40.
The traditional underwriting and issue process is designed to identify any serious health problems and ensure that all applicants pay the rate that reflects their risk. It has done this fairly well, but at great cost in terms of time and money.
There are several inherent problems that make the process slow and inefficient. First, a paper application is usually mailed to the insurer. Normally the applicant must obtain a paramedical examination, which includes taking a blood or urine sample. Scheduling the examination and doing the testing adds a few weeks to the process, and the associated costs of this process aren't insignificant for an insurer.
Finally, the insurer often must get an attending physician statement (APS) from every doctor the applicant has consulted with over the last few years. Physicians are often slow to return requests for APSs, and often the agent or someone from the company has to remind them. If the applicant has seen many doctors, it's almost certain that at least one will be very slow to respond. All the information is captured on paper, often on handwritten forms. Much of this has to be re-entered manually in the insurer's home office computer system. As a result, it typically takes about six weeks from the date of the application to the time the customer receives the policy. During this time, about 20% of applicants drop out: 14% withdraw their applications or are rejected by the insurer because their applications are incomplete, while another 6% change their minds and don't take the policy when it's delivered. Many in the latter group are rated and don't want to pay the higher price, while others have simply reconsidered after their six-week wait.
Besides being slow, this process is expensive because of all the handling and the cost of obtaining medical tests and APSs. In a recent case history, we assumed that it would cost $283 to acquire each policy. With a $1m cash-value policy, this cost can be justified. But the cost is much harder to bear in the mid-market, where you're more likely to be issuing a $150,000 term policy or a $50,000 whole life policy.
Inefficiency and application `fallout' are also problems. Agents have less incentive to go after mid-market business when they have to wait a long time to receive their commissions, which they'll never get on 20% of `successful' sales anyway.
As a result of the expense of the new business process, the leading American insurers have abandoned the mid-market to concentrate on the affluent market. They believe that they can make a profit only by serving the upper-middle class and the rich. Just 20 major life insurance conglomerates write more than 80% of the US industry's new life premia, according to LIMRA International, the industry's market-research organisation. These big players, which concentrate on upscale customers, appear to be doing reasonably well angling in these over-fished waters. But how can the remaining 1,300-plus US insurers survive fighting over the 20% of the market left for them?
Ironically, despite rising levels of income, fewer American consumers own life insurance. From 1989 to 1999 the number of individual policies in the US declined from 180 million to 162 million, according to the American Council of Life Insurance and the federal government. Most working people have too little life insurance and in some cases none at all. Millions of middle-class workers need more insurance and would gladly buy it if someone simply approached them with reasonably priced products that can be bought easily.
Fortunately, new technologies and methods can streamline underwriting and issuance, producing dramatic savings in expense and time that will make it cost-effective for insurers to recapture the middle market they have turned their backs on. The story involves advances in automation and medical testing which let companies safely dispense with APSs and blood and urine tests for a large percentage of cases.
Newly-released pharmaceutical databases, which capture an individual's use of prescription drugs, are powerful tools for insurers. These databases can be accessed online by insurers for a small per-use fee. The pharmacological treatment should clearly indicate the diagnosis, and learning the applicant's prescription history lets the insurer obtain medically significant information inexpensively and quickly. For example, a mildly depressed individual may be prescribed a small dose of Prozac while another applicant receives a large dose of a drug to treat psychosis. The insurer can issue a policy for the Prozac patient, but reject the other applicant or postpone the decision until receiving complete medical records.
Pharmaceutical databases raise some important questions. First, what percentage of the population does the database cover? The companies that provide them say that a high percentage of the population is covered.
Additionally, how well is the database coded? It must be `underwriter-friendly' so underwriters can properly assess medical risk. Furthermore, a database must be comprehensive and cover all drugs used for all significant medical impairments. And it must always be up to date. Pharmaceutical databases are quite new, but so far they are proving promising. Undoubtedly, sponsors will continue to improve them and they'll become increasingly useful.
It's not just what drugs you've been prescribed; how you drive is equally important. Motor vehicle records (MVRs) - databases on driving violations long used by property and casualty insurers - are emerging as prime underwriting tools. Public records, are inexpensive and can be obtained within 24 hours. In the US, motor-vehicle accidents are the number one cause of death for the under 40s, so it's very important to find out if the applicant is a dangerous driver.
Obtaining blood and/or urine samples has always slowed down the traditional underwriting process since they must be collected by a paramedical person, and frequently there is a delay in making the appointment with the applicant. However, recently, oral fluids (saliva) tests have been much improved, and the sample can easily be collected by the salesperson. Today's oral fluids tests can detect almost everything that a blood or urine sample can detect, including illegal drugs, tobacco, HIV and diabetes.
Advanced software, too, is playing a major role in yielding high-quality fast underwriting. Point-of-sale (POS) software used by agents includes a personal history interview, consisting of a series of drill-down questions about the applicant's health. If the applicant answers `yes' to a question such as `Have you ever been diagnosed with a heart condition?' the software will prompt the agent to ask further questions that precisely pin down the diagnosis, treatment and symptoms. A well-constructed personal history interview can reveal just about everything that an APS would.
Expert underwriting software is an optional part of the streamlining equation. An expert system can evaluate applicants and, at least in theory, replace human underwriters.
However, it appears that no insurer today is relying entirely on such systems. Some, though, are using an expert system to make the first pass and help their underwriters process more applications faster. As insurers get more comfortable with expert systems, they will probably use them to make routine underwriting decisions, particularly in the mid-market. Only the difficult cases will then be handled by underwriters.
The final step in the streamlining process involves capturing data electronically. Re-entering information that's been mailed or faxed slows issuance and adds cost. Agents equipped with POS systems can capture all necessary information electronically and send it over the internet to the home office. When information has been, it should never need to be re-entered.
Today, a progressive insurer using streamlined underwriting and issuance tools can issue a well-underwritten policy in about two weeks.
While a two-week turnaround represents a great step forward, within about two years, we will see instant issue in the field. Agents will be able to get an immediate underwriting decision, and issue and print out a policy anywhere, whether in their own office or at the customer's home or workplace. Instant issue will save insurers enormous amount of time and money and make the agent's job much easier.
What will it take to make instant issue happen?
The next generation of POS systems for agents will feature a wireless link to motor vehicle, pharmaceutical, medical and credit-history databases. The agent taking the application will be able to access these databases, perform a search and download the results within minutes to his or her laptop or desktop computer and its expert underwriting software. For the majority of applicants who don't have any major problems, the computer will be able to make an immediate acceptance and provide a final rate. Then, the agent can print out the policy with a portable printer. A click on an icon will transfer all the information immediately to the home office.
Most likely, instant issue will be used for applicants under age 50. For at least the near future, insurers will probably remain cautious about issuing sizable policies to older people without also subjecting them to full traditional underwriting methodology.
Nevertheless the underwriting revolution has begun. It promises to bring great benefits to insurers, agents and consumers. Reinsurers too will benefit, provided they do business with primary companies that use the new streamlined processes wisely.
By Maria Thomson
Maria Thomson, FSA, MAAA is Managing Principal of Thomson Management Solutions, Inc, (www.tmsolutionsinc.com), a US consulting firm based in Brimfield, Massachusetts, that specialises in streamlining underwriting and issuance, and developing simplified life and health insurance products. Previously, she served as Chief Actuary of Monarch Life and Transamerica Assurance and in a senior actuarial management capacity at John Hancock Life.
She can be reached at 413-283-5316 or firstname.lastname@example.org .