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Self-assment may be the future of underwriting

The underwriting of applicants for life or general insurance products is,

at a high level, a simple process.

The product provider simply has to decide which applicants to accept and

which to decline. If only life was so straightforward.

The detailed processes which underlie the high-level aim of underwriting

are complicated. Before considering these, however, we need to look at the

drivers behind the approach adopted.

The drivers are principally associated with the business that the product provider ultimately wishes to write and the level at which it has set its premiums.

For example, a general insurer wishing to offer very low rates for car

insurance may adopt a very strict underwriting policy to contain its costs

at a very low level. This may well have the consequence of keeping costs

down but at the expense of restricting the amount of business accepted.

In another example, a life insurer may wish to be in a position to offer

just about anyone ordinary rates, that is, basic premium levels without

additions to cover higher risks. A way of achieving this might well be to

simplify the underwriting process, granting cover on ordinary rates so long

as the applicant can answer a few basic health and financial questions. The

outcome may be lots of business but with worse average experience than if a

more detailed underwriting approach had been adopted. The provider has to

make a judgement on this trade-off.

We see this simplified approach being used widely in the mortgage life

cover market. Currently, products in this market have a few health

questions but this has not always been the case.

In the 1980s, life offices experimented with guaranteed acceptance options

for such business. The rationale was that individuals buying houses and

taking on major financial liabilities would not generally do so if they

were aware of health problems. There was some truth in this rationale but,

unfortunately, some life offices have incurred adverse mortality experience

as a result.

An area of underwriting practice which has exercised many brains recently

is the use or availability of results of genetic tests.

Enough column inches have been written on this important topic to fill

several books so I will not cover it here. It is proof, however, that

underwriting practice is a constantly evolving science.

Underwriting is not solely about evaluating information. It is also about

assessing what information is required as a matter of routine and when

additional data must be collected. Rules are laid down by the underwriters

in each life office to ensure that the underwriting approach is consistent

with the drivers we discussed earlier.

They will also be set in conjunction with reassurers and will reflect the

level of experience that the office has of the market.

For example, long-term care underwriting requires the collection of much

more detailed information, with lower trigger levels for medical reports

and medical examinations than apply for mortgage life cover.

The role of the medical profession has always been key to life office

underwriting. Although much of the work is done by life office staff, they

rely heavily on standards developed by reassurers in conjunction with


Life offices also retain experienced doctors who can assist them in

reaching underwriting decisions in complicated cases.

An area where GPs have a close association with life offices is in

completing private medical reports. The ABI and British Medical Association

have been debating the level of standard fees payable to doctors for such


An interesting parallel development is the increasing use by life offices

of medical condition questionnaires. These questionnaires ask the

applicant rather than the applicant&#39s GP for additional medical information.

This approach is proving very successful – with some interesting side

effects. These include both lower costs and a speedier response from

applicants than previously obtained from GPs.

Perhaps underwriting self-assessment is the way forward for the industry?


Berkeley Alexander – MortgageSafe

Monday, 4 June 2001.Type: Accident, sickness and unemployment insurance.Maximum benefit: £1,500 a month or 65 per cent of monthly income, whichever is lower.Benefit payment term: One or two years.Deferred period: 30 or 60 days.Premium: £4.25 per £100 of cover.Commission: Initial 25 per cent, renewal 25 per cent.Tel: 01273 477784.

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