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Is this the dawning of the age of &#39star&#39 underwriters?

Protection policies allow clients to indemnify themselves and/or their beneficiaries against some, if not all, of the financial implications of death, illness and/or serious illness. At the same time, it is critical for product providers to ensure that premiums are set commensurate to the risk that individual customers present.

Underwriting is the tool used by product providers to ensure that, as far as possible, the company&#39s experience reflects the assumptions used by actuaries to set risk prices. For example, if an assumption for a given risk price is that the policyholder may not participate in a particularly dangerous activity, then it is the underwriter&#39s role to ask questions of the applicant and investigate as necessary to ensure that the assumptions are adhered to.

The extent of and approach to underwriting varies from country to country. In some countries, product providers deploy their approach to underwriting as a key differentiator in their overall proposition to the market.

The US provides an excellent example of underwriting being deployed for competitive advantage. The US underwriting process is significantly different and is able to be so in some ways because the expectations of advisers and customers are very different. For example, Americans tend to have a better understanding of their health. US underwriters are not seen simply as gatekeepers. Indeed, some underwriters are as important to protection advisers as fund managers are to wealth advisers.

They even have medical underwriting equivalents to UK fund manager Nicola Horlick who are just as well known and admired for their performance.

Could that happen over here? For that to be possible, a few things would need to change. For a start, in the UK, underwriting decisions fall into four main categories:

Accept at ordinary rates.

Accept with conditions at ordinary rates.

Accept with a loading to ordinary rates to reflect the additional risk.

Decline.

In the US, they have all these categories and more, including customer classifications such as super-preferred and preferred plus at one end of the scale all the way through to what they describe as special risks at the other end.

To gain an understanding of the level of complexity, check out some of the US protection websites, for example, www.quotesmith.com. You will see from these sites that potential customers are expected to know their blood pressure and their cholesterol levels off the top of their head – and many do.

What is more, super-preferred customers are known to wear their rating category on their sleeve and are even prepared to discuss in public the amount of cover they have in place and their category.

In the US, product providers segment their markets to a greater extent than we do in the UK by using chemical underwriting – taking a blood sample from all their customers to test for such things as liver function, kidney function, sugar and proteins.

Will we in the UK ever go that far for all applicants? Are we prepared to delay all applications by the time that is needed to do the laboratory analysis on every customer as they do in the US? Would our customers put up with it? Would you?

These are the questions that need answering before the UK imports the US innovation. For now, though, some UK companies are differentiating themselves by using an entirely different innovation based around online auto-underwriting at point of sale. This process is possible in the UK because we do not segment our market to the extent they do in the US.

Using appropriate questioning, around 80 per cent of online applicants can be accepted through this process without the need for additional medical underwriting, putting life insurance policies on risk in around 20 minutes. This caters to the concern by some that traditional underwriting processes are a necessary yet sometimes painful interruption of the otherwise relatively smooth process of putting policies on the books.

It means that many customers can get what they want from product providers with as little effort as possible on their behalf, with many being “never knowingly underwritten” – surely the best type of underwriting for now.

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