There used to be a story told at direct-sales conventions comparing a life office with a car. In the driver's seat, with a maniacal grin on his face, sat the sales director, his foot hard down on the accelerator. In the passenger seat, the finance director was frantically stretching over to put his foot on the brake. In the back seat, the actuary was looking out of the rear window and shouting instructions about the way forward. One passenger usually missing from this scenario was the underwriter, who would probably have been trussed up in the boot.
It remains a sad fact that the importance of underwriters has declined over the last 20 years. However, this situation is changing with the renewed emphasis on protection. High volumes of term and critical-illness business mean that underwriting is growing in importance. The thin margins in term business leave no room for errors in selection.
Furthermore, with large quota shares going to reinsurers – often up to 90 per cent – they understandably expect the job to be done properly.
One problem is that the costs of underwriting have increased along with the price of assembling medical evidence. It now costs over £60 to obtain a general practitioner's report. This has encouraged some life offices to try tele-underwriting, which involves a trained underwriter interviewing applicants over the phone to collect necessary further details relating to their medical history. This is one intelligent technique for speeding up the process without sacrificing accuracy.
Most current systems – many of them pioneered by reinsurers – focus on the initial underwriting stage to allow “clean” cases to pass through more quickly than in the days when everything had to be underwritten manually. This was an admirable development at the time which improved service to IFAs. But the speed of service to IFAs on bigger or more complex cases is often slower than it was 30 years ago.
There is now the opportunity for a step-change in automated underwriting. New technology is emerging that can allow IFAs to assemble all the evidence necessary for underwriting to be completed online. Questionnaires can be generated dynamically, capturing the optimum amount of relevant information at the point of sale without complicating the proposal process with unnecessary questions.
Information gathering is much more targeted and effective this way, allowing the system to process a greater range of information without human intervention.
These systems can apply decisions that are in line with the life office's underwriting philosophy and which follow the ratings suggested by the reinsurer. This ensures that the reinsurer has full confidence in the underwriting decisions, since it is taking the bulk of the risk in a large protection portfolio.
The most advanced solution today is based on concepts used in areas such as motor insurance. It allocates points to a case, depending on the risk factors involved.
Using this scoring methodology, different risks can be separated more effectively and underwriters can assess every single risk individually using a much wider range of criteria, including factors such as demographic or lifestyle data. Different risk profiles can be created for different policy types and a greater degree of subtlety can be brought to risk selection – way beyond what could have been achieved through a computerised system in the past.
This is turning the art of underwriting into the science of assessment and is changing the job of senior underwriters. They now stipulate underwriting philosophy in concert with their reinsurer, decide on the evidence necessary to underwrite a case and review final decisions.
Perhaps most excitingly, they can carry out statistical modelling of their database of lives by tweaking the premium loadings and observing the effect on the mortality results in a portfolio. This enables them to change their underwriting stance with confidence, knowing that they are reflecting accurate trends in their mortality experience.
It is understandable that underwriters can become defensive about what they may see as a system eroding their traditional job but we have moved on a generation. A new underwriting solution takes much of the routine out of the job, enabling underwriters to carry out a much sounder statistical overview of the cases they are underwriting and helping to find new ways to rate and accept cases.
This must be good news for IFAs for several reasons. First, it should speed up the process, with benefits for all concerned. Second, it should make underwriting a more consistent process in which everyone can have confidence.
In a world where there is such a strong focus on costs and in a product area where competition is squeezing margins, it is vital that risk selection is carried out as thoroughly as possible. There are solutions out there to do just that.