THE UNDERWRITING DILEMMA
Lawrence Ian Geller
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Why is it that, after we have spent so much time and effort getting our prospects to think about, then decide on a solution to their insurance needs, we then have to spend even more time and effort on working with insurance company underwriters to get a policy contract issued?
Why is it that we so often find that, no matter what evidence we provide, insurers still will rate or decline to issue a policy?
Is this problem increasing, or has it always been there?
These same questions frequently go through most of our minds. And, I suspect that we will be faced with them more and more often in the future.
It seems to me that, like so many other industries, insurance may be suffering from the excesses of the eighties. We learned to identify larger needs for coverage and our clients' needs grew because of the great inflation rate. Competition caused an improvement in the definitions available within contacts, and a decrease in the premiums payable. Corporate margins shrank and the courts forced insurers to pay out in cases where they otherwise might not have. Lapse subsidization became routine in policy pricing.
We have all heard much about these and, I believe that, in aggregate, they are responsible for our problems today.
Insurers require an increasing client base to survive. But they cannot obtain this growth at the expense of their overall claims ratio.
The result seems to be a general tightening of underwriting for coverage. A while back I heard a presentation in which a very senior underwriter warned about increased claims ratios for larger amounts of coverage, defined as more than $1,000,000 of risk. So much of what we now sell approaches or exceeds that number that this alone might account for increased underwriting scrutiny.
There is, however, more to it than that. As premiums decreased and the quality and definitions of benefits improved many clients obtained appropriate amounts of coverage. It would no longer be to their advantage, in most cases, to replace that coverage. This reduces the number of lapsed policy contracts below projections. Liberal underwriting of those policies means that insurers are exposed to claims rates which are also beyond their projections. Tough economic times have also caused an increase in claims rates.
To get their overall numbers in line insurers must tighten policy underwriting (so as to determine a realistic premium for each risk), tighten claims underwriting (so as to reduce their exposure) and decrease their projections for things such as lapse rates. This increases premiums for many of the borderline and substandard cases which, only a short time ago, would have slipped through. It also means that more cases are declined for one reason or another.
The effect on us, as life underwriters is substantial. Because of these problems we find that, in many cases, we are working on cases for which we will never be paid. Often several cases are sold together. A declined application or rated policy may, in some cases, jeopardize the sale. Clients become aggravated when ratings and declines occur, and when these clients were obtained by referral, the person who referred us in will hear about it. This may, in turn, jeopardize future referrals.
So what can we do?
We will have to sell with an eye to underwriting difficulties. We will have to stop relying on premium quotations to make sales for us. We may, in future, have to start the sales process by warning prospects that the price that they have to pay may be well above that quoted. We may, in fact, have to start warning clients that coverage may not be available in many cases.
In the seventies new business underwriting was much tougher than it was in the eighties. Most of us had forgotten that underwriting was a difficult part of the process. Now we are beginning to remember what it was like.
We used to do much more field underwriting. Now we have to go back to doing it. We have to ask our clients many more questions about their health than we have in past. We have to know more about their finances. We have to describe their occupation better than we have been. Yet even after all of this it will be the surprises which cause us problems.
Surprises can appear in Attending Physician's Statements. Doctors may report conditions which they have advised their patients are unimportant, but which underwriters pay attention to because of their long term implications. Particularly in tough economic time, problems may appear in credit checks and inspections. We can do little about these and cannot even anticipate when they may occur.
But we can deal with them as they come up and try to implement loss control programmes which prepare us for dealing with such losses.
Times have changed and so has our industry. We now have to deal with problems which we have not seen in some time. These problems may become more widespread and greater in degree as the decade progresses. They will certainly have to be calculated as part of the cost of doing business.