Is There Life After Underwriting? ( A History Lesson Perhaps?)

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I wrote the following article as it was part of a presentation I did with the great Don Frost at the January 1983 Cholua Seminar. In a recent search of my archives for background material for a book I came across the article. After reading it I felt that today’s underwriters should read it as a history lesson. Today’s leadership should read it to show that some things change for the worse — the lack of meaningful industry statistics on what is issued standard, substandard or declined. The CLHIA to my knowledge has dropped the industry stats for some years leaving an underwriting leader wondering “is my company rating and or declining more than the industry average?” Or then again who cares. 

For the past three years I have heard from many large advisors (large by size of the clientele not their waistline) and MGAs that rated cases are few and declines are many. I have even had a senior underwriting leader say it is irrelevant as the key to today’s underwriting leadership is to get the standard through as quickly as possible. There seems to be less competition be it from insurers or reinsurers for the case that is not quite standard. The last time that complacency was around there were challenges to our right to underwrite! 

In various places in the article I have in italics added a word, phrase or sentence to highlight a point from today’s perspective.

In 1982 the Canadian Life Insurance industry saw an estimated $53,000,000,000 of life insurance purchased (in 2010 the amount was $215 million), up approximately 20% from 1981. In spite of such a significant increase in sum assured the number of individual policies issued was less than 7% up from 1981. The number of cases has been estimated at 1,140,000 (in 2010 the number was 734,000). Industry sources are assuming that 1983, with its projected economic outlook for hard times, will not increase either of those figures significantly. In fact, by number of cases this year should be rather flat for growth.

The latest edition of the CHOLUA membership list indicates there are some 433 underwriters working in Canada who are managed by 128 individuals with a title ranging from Manager to Vice President (with the dramatic disappearance of Canadian Life companies in past 30 years I would like to think it no longer takes 128 titled staff to  lead the number of underwriters). Looking at the positive side of these numbers we realize each underwriter approved for issue an average of $122,000,000 of life insurance. The Managers had a responsibility for some $414,000,000 of new .insurance purchases . Viewing the previous numbers, a negative feature is the fact that the average size case only $46,500 (it was $41,500 in 1981) (in 2010 the average size was $292,600 and unless it simplified issue or its ilk or a juvenile policy an underwriter never sees anything under $100,000).

Of the 2,633 cases, on average, per year an underwriter processes the average size case is only $46,500 – a very uninspiring and unflattering number. In most offices today the $46,500 case is handled on the total of just an application, both part I and II.

It is not that long ago that to give non-medical insurance above $50,000 at any age was too risky, especially for the establishment company. In1983 almost all companies’ amounts of $100,000 to $150,000 are becoming commonplace – especially in the larger companies. The majority of cases are well within today’s maximums and, as $500,000 non-medically to age 40 becomes a late 1983 reality, the number of cases requiring medical underwriting will decrease further.

Amount of Non-Medical Insurance (,000’s Omitted)

Company Age 30-35 Age 36-40 Age 41-45 age 46 +
National Life 1970 20 10 Nil Nil
National Life 1982 150 75 25 Nil
Maritime Life 1972 30 10 5 Nil
Maritime Life 1981 100 50 25 Nil
Excelsior Life 1982 250 100 25 Nil
Mutual Life 1970 15 7.5 Nil Nil
Mutual Life 1983 300 150 75 Nil
Sun Life 2012 1,000 1,000 500 500 (to 50)
  Note: blood at $250,000

For those weak in Canadian insurance history National Life was bought by Industrial Alliance, Maritime Life by Manulife, and Mutual Life by Sun Life. The great mortality results of today’s companies experience on these old portfolios is the result of great underwriting in the period 1969 to 1989. Imagine how underwriting would be today if on the 40 year old you had a medical by a doctor, an urinalysis, an ECG, an x-ray and a full inspection. But on the other hand it wold take to long and since we seem to want business to lapse why spend the money?

Another major milestone in underwriting was the final realization by management that the inspection report was not a mandatory requirement. At the beginning of the decade of the 1970’s everybody ordered an inspection on every individual applying for insurance. It was only as the 1980’S commenced that, in some progressive large companies, the inspection is not a routine requirement for small amounts (read as under $300,000) and blasphemy of blasphemy one company never asks for a consumer investigation. Unfortunately I can’ t say this occurred because of a realization that one’ S agents could be trusted to tell you the truth or do their own appraisal of the risk. It was done more out of economic reality – the dollar spent on inspections was returning far less than one dollar of original protective information. Looking to the future- not the distant future but the new future- a $500,000 limit for inspection cases is very foreseeable.

Amount of Risk Without An Inspection

Company Amount
National Life 1967 All Cases
National Life 1982 $200,000
Crown Life 1982 $500,000
Mutual Life 1970 All Cases
Mutual Life 1980 Unlimited!
Sun Life 2012 $2,500,000

 

Step right up in 1984 and buy a $500,000 policy strictly on the basis of a part I and part II application and if you’re purchasing it from as shopping mall franchise, you can take it home with you after a fifteen minute wait for the computer terminal to print your policy. Good-bye home office underwriting as we know it today! Ah, but you ask, what about all those substandard cases that need expert underwriting to prevent antiselection!

Let us look at all those cases that are substandard or declinable on the basis of the underwriting requirements and standards of the year. In1960 Manulife only approved for issue on a standard basis 80% of it’s business.(Anecdotally speaking there are some advisors and MGAs who in 2012 might say that number is appropriate today!) A rather extraordinary figure, in comparison with the 1960’s number of cases that were declined – 5%. The remaining 15% were rated. Today, Manulife has 95% of its business issued standard and only rates or declines a total of 5%. In a shorter span of time the CLHIA studies reflect a continued improvement in the number of cases issued standard.In 1977 they compiled industry statistics revealing 93.8% of the business was standard, 4.3% was rated and 1.9% was declined. Four years later in the study of 1981 results these figures had changed to 95.9%, 3% and 1.1% respectively. The declines are now only 58% of the 1977 figure and substandards 70% of their former self.

 

Risk Classification (by number of cases)

Source Year Standard Substandard Decline
Manulife 1960 80% 15% 5%
CLHIA 1977 93.8% 4.3% 1.9%
CLHIA 1979 94.5% 4% 1.5%
CLHIA 1981 95.9% 3% 1.1%
Manulife 1980 95% 3.5% 1.5%

 

Risk Classification 1981 (by sum assured and by case count)

  Standard Substandard Decline Total
  Issued NTU’d Issued NTU’d    
Number of Policies 753,301 36,712 19,570 5,285 9,262 824,130
% 91.4% 4.5% 2.4% 0.6% 1.1% 100%
Sum Assured (millions) 30,614 1,803 928 284 294 33,904
% of Total 90.3% 5.3% 2.7% 0.8% 0.9% 100%

By volume, the percentages do not alter that much, although one can be surprised by the fact that the percentage of declines decreases. This, in spite of the last couple of years being full of discussion on financial underwriting and how we should have been declining more speculative large term policies. More and more business is being issued at standard rates due to underwriters trying harder on cases now that more statistical information combined with experimental underwriting of the 1960’s and70’s helps to justify a broader standard categorization. However, the ever increasing limits on non-medical and medical requirements plus fewer inspections because of cost/benefit studies equates to more cases being squeezed through, standard. If one adds to this the fact that the average size case is growing slower than requirement limits, can we continue to justify individuals labelled as underwriters sitting perusing cases in the same fashion as today?

Oh, but you ask, “how come underwriters’ salaries have escalated so rapidly during the last three or four years?” I will concede that some underwriters have done very well for themselves in recent times – junior underwriters have changed companies to become instant senior  underwriters and seniors became consultants and supervisors or better. As we settle into the harsh realities of 1983, the facts as tabulated  by L.O. M.A . in their annual salary surveys for Canadian Life companies indicate a rather unexpected salary change between 1978 and 1982. What would you guess underwriters and advanced underwriters salaries increased by 1982 over 1978?

Years Size of Company Underwriter Group Underwriter Advanced Underwriter Advanced Group Underwriter
1982 vs 1979 Small 39%
1982 vs 1978 Medium 39% 48% 38%
1982 vs 1978 Large 34% 46% 70%

The advanced underwriter, by L.O.M.A. definition, was being remunerated 38% more in the medium size company and 46% more in the large size company. The underwriter showed increases of 39% in small companies, 39% in medium companies and 34% in large companies.

In comparison an advanced group underwriter had a 70% change in the same period. The group underwriter had 48%.

Why have we not done as well? I don’t really know if I have the answer but I think it has something to do with our calling almost anyone an underwriter, compounded by the lack of definition of a senior underwriter. L.O .M. A. uses a $100,000 acceptance level as the dividing point. This in my opinion warps the statistics in both categories . As long as we are willing to be studied in such poor fashion our status both in monetary terms and position will continue to fall behind.

Fortunately the strong and ambitious will survive and prosper. (They did thank you very much. Today’s great underwriters earn a very respectable salary and can afford to live above the poverty line, owning homes, cottages, cars and taking vacations in the south should they so desire.)Those of you, and maybe its about one half of you, that survive this decade will be better for it since you will be better recognized and have more responsibility for the new underwriting of the future. Your tasks will be more detailed – medically, legally and consumer oriented. Only problems will reach your desk …..

 

And I continue to wait as I greatly overestimated the the speed with which our industry would automate and find ways to truly utilize the skill set of professionally designated underwriters. In 1988 in  the Journal of Insurance Medicine I again mistook signs of change for change and thus the automation I wrote of is still not here in 2012 for many a company!

Why the following was attached to the paper is anyone’s guess. Perhaps if the article failed the poem would suffice to leave lasting evidence I was there. Never did know who wrote it but I do know it was well circulated amongst underwriters. Read it to find out why!

 

Chairman of the Board

Leaps tall buildings in a single bound,

Is more powerful than a locomotive,

Is faster than a speeding bullet,

Walks on water,

Gives policy to God.

President

Leaps short buildings in a single bound,

Is more powerful than a switch engine,

Is just as fast as a speeding bullet,

Walks on water if the sea is calm,

Talks with God.

V.P. of Administration

Leaps short buildings with a running start and favourable winds,

Is almost as powerful as a switch engine,

Is faster than a speeding BB,

Walks on water in an indoor swimming pool,

Talks with God if special request is approved.

Office Manager

Barely clears a Quonset hut,

Loses tug-of-war with a locomotive,

Can fire a speeding bullet,

Swims well,

Is occasionally addressed by God.

Claims Manager

Makes high marks on the wall when trying to leap buildings,

Is run over by a locomotive,

Can sometimes handle a gun without inflicting self injury,

Dog paddles,

Talks to animals.

Sales V.P.

Runs into buildings,

Recognizes locomotives two out of three times,

Is not issued ammunition,

Can stay afloat with a life jacket,

Talks to walls.

V.P. Actuary

Falls over doorsteps when trying to enter buildings,

Says 11 Look at the choo-choo 11

,

Wets himself with a water-pistol,

Plays in mud puddles,

Mumbles to himself

Underwriter

Lifts buildings and walks under them,

Kicks locomotives off the tracks,

Catches speeding bullets in his teeth and eats them,

Freezes water with a single glance,

He is God.

Anonymous Author (definitely no an agent or in today’s lingo a financial advisor or COO)

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About the Author:

Since Ross first edited and wrote for Life Office Management Association publications and then the historic Canadian Journal of Life Insurance, his unique style of opinionated and straight to the point writing has garnered continued exposure in 38 countries. The topics ranged through management, reinsurance, underwriting, technology and general insurance insight. Each of his contributions took a unique view of the issue and formulated an article full of industry anecdotes and humorous meanderings.
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