Average policy size for life cover is expected to grow as a result of needs analysis and disability income, creating more life insurance and reinsurance business in Asia, says Warwick Young.
In a bid to eliminate poor selling practices in the life insurance markets in Singapore and Hong Kong, the industry has recently introduced mandatory needs analysis. The changes taking place in the life market are not simply confined to these regions but are spreading across Asia as an increasing number of foreign players and local companies are introducing needs analysis as part of their sales strategy.
There are a number of incentives for increased use of needs analysis, not least because it has the potential to boost sums insured and the number of products sold. In addition, it can increase the desire to have a more professional sales force and reduce potential liabilities from mis-selling.
Needs analysis and disability income products
Many insurance industries in Asia are either considering the introduction of, or are already introducing disability income products because the product is perceived to be necessary to any financial plan. Disability income is a complicated product, hence its successful introduction will require commitment to the business, well-trained underwriters, well-trained claims assessors, a constant flow of management information and claim experience analysis, a legal system that allows claims to be effectively contested, sensible product design and economies of scale.
Management often places a strong emphasis on sales with a secondary emphasis on assets under management. Profits tend to receive less attention from management until critical mass is achieved. That said, profit drivers in Asia have been expenses and investment income with mortality, morbidity and lapse experience being secondary drivers. However, disability income sales will make morbidity a primary driver.
The failure or reluctance of disability income customers in Asia to disclose their full financial position during the sales process and the large number of self- employed across the region makes for a challenging and complex environment for insurers. Many disability income customers do not reveal their full financial status for a number of reasons:
Tracking income of the self-employed is difficult and therefore a financial justification for large sums insured is hard to prove. Even when company financial information from a customer can be obtained, frequently the corresponding accounts are neither audited nor follow standard accounting practices. Some companies in Asia are now addressing this particular issue by requesting details of an applicant's expenses. In addition to this, however, reinsurance manuals need to address the realities of business in Asia. Sum insured multiples should be based on income being higher than multiples in countries with full disclosure or than multiples based on expenses rather than on income.
Avoiding the pitfalls
There are a number of other considerations that companies looking to work in Asia should also be aware in order to be successful.
Avoid mistakes made in other regions
Given that disability income is relatively new in Asia, companies should be able to avoid the disability problems that were experienced in other regions of the world. This is where the reinsurance industry can help. Reinsurers must educate companies, underwriters, claims assessors, actuaries and marketing people about the experiences in other countries and help companies achieve a sustainable product.
Typically in disability income, the benefit amount is set as a percentage of income earned by personal exertion. This should mean that the incentive for fraud is reduced. However, given the unwillingness to disclose basic financial evidence, the determination of the correct benefit amount for disability income could be an insurmountable challenge.
Even if an indemnity style of contract is used where the validation of income is typically at claim time, the problem is transferred from the underwriter to the claims assessor.
It is best to offer disability income products to salaried employees where income can be established by payslips. For self-employed it is best to have differential pricing.
Short-duration benefit periods of less than six years are likely to be easier to manage than long-duration benefit periods. Lifetime benefit periods should not be considered as these create potential for anti-selection as insured persons reach retirement age without adequate retirement savings.
Most companies in Asia have three or four occupational classes for lump-sum disability products; this has proven inadequate. In a bid to avoid this, companies should create a separate rating variable for each occupation, which should allow for the re-rating of occupations that are experiencing claims amounts different to expectations. Consideration should also be given to a separate rating variable for self-employed people.
Day one accident benefits
As these benefits have a major impact on expected incidence rates and claim durations, they should be avoided.
Incidences of fraudulent claims in the US highlight the importance of ensuring that the claimant is not able to work in another occupation while receiving claim payments. If the claimant receives income from any other source, that income should be offset against the benefit amount to avoid a situation where the claimant is financially better off from the claim.
Given the volatility of incidence rates and the duration of claims, it is imperative that premium rates are not guaranteed in order to protect the solvency of a life insurance company. Once the incidence rates and claim durations have stabilised, guarantees can be considered. In short, guarantees on disability income can be a shortcut to disaster.
Underwriting disability income requires a new skill set. Underwriting occupations is very different to underwriting most other products. Although the underwriting of minor medical impairments is basic to this product and while there has been some attention to minor medical impairments for some medical products in the past, underwriters will require significant training to be able to build a profitable portfolio of business. The same is true of training for claims assessors, who will also need to receive significant training on the detection of non-disclosure, the management of disability claims and the rehabilitation of claimants. The most important consideration is that the claims assessors will have to be proactive in the management of disability claims and management will need to be educated as about its importance.
Marketing staff will require training on product features which are likely to cause problems: disability is a complex product that requires careful management. Products in Asia tend to be continually improved in order to keep the agency force excited and interested.
Disability income terms and conditions should not be constantly altered unless the changes are necessary to restore profitability. Any relaxing of terms or conditions should be taken very seriously otherwise companies will find it necessary to continuously increase premium rates.
Role of reinsurers
Reinsurers can assist by making sure their clients have significant interest in the disability income business before selling begins, to ensure that management has enough interest to implement the required changes to restore profitability.
Reinsurers can also help by adopting a hands-on partnership approach. Traditionally, reinsurers operating in Asia have been reluctant to perform audits due to the risk of offending the client. Audits for disability income treaties, however, need to be a regular part of the new landscape; audits need to be open and honest, otherwise the reinsurer and the insurer of disability income will lose significant amounts of money.
On a positive note, both reinsurers and their clients in Asia can expect to see the average policy size grow for life cover as a result of needs analysis and disability income-creating more life insurance and reinsurance business in Asia.
By Warwick Young
Warwick Young is vice president of Business Development, Asia Pacific division, RGA Reinsurance Co.