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's 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?