The year was 1992 and it was early in the year. Remember I often wrote the article months and months in advance of publication. The editor and writing mentor in Steve of Marketing Option fame was always one to have the articles ready to go well in advance and sometimes so “well in advance” he could go three without asking for more. Early in 1992 the talk in Canada was of underwriting and trust. Can the producer/agent trust the underwriter? Can the underwriter trust the producer/agent.? Can the reinsurance underwriter trust the insurer’s underwriter? Lots of questions and the permutations were endless.
In an industry based on trust its definition sometimes gets confused with procedures. The complexities of the later years would be exaggerated to the point where the conspiracy theory amongst underwriters was a great “scapegoat” for something going wrong. Reinsurers since time began have been used as the “excuse” for everything from the cash values being too low (now what did the underwriter do again to build the product?) to declining a standard risk. Broad shoulders helped if you wanted to succeed in reinsurance.
Not sure why Steve insisted on this article but it gave me a chance to interject some acquired Indonesian slang into an article. By this point in my career I had been to Indonesia on business about 4 times and quite liked the experiences. I am not sure I could say that for the last few years.
Trust remains an integral part of the reinsurer-insurer relationship. If either side abuses it the seamless flow of risk between the two can be lost forever.
Note the spelling mistake that escaped the keen eye of the editor and me. Steve was so frustrated with my verbiage at times he even bought me the dictionary of American slang and if there had of been one he would by the Canadian equivalent!
Pilfering from the pioneering scribe of all home office underwriters, the title says it all. Or is it still relevant to ask ourselves this question? For those of you born in the fertile fifties, the author in fact is none other than Charlie Will and his words of wisdom from long ago translate from Malay into “Does it make sense?”
Simple words coined to guide the home office underwriter. Charlie was trying to say that if the home office underwriter thought the agent was a goofball and presented poor information, just decline. On the other hand, if the agent was trustworthy and if the idea behind the application sort of made sense, go ahead and accept the risk. The whole premises of North American underwriting seemed to focus then more on the artistry than the cool reasoning behind the decision. (Some critics stated in those early days of yesteryear that head office underwriting was merely a facile excuse to hide the lack of science in the underwriter’s tool kit.)
Unfortunately, the element of trust seems to have vanished without explanation. Other than the rare instances of agent misrepresentation, there is a dirth of explanations for this prevailing attitude. I cannot pinpoint the date it began to invade our industry nor the incident that triggered the defensive mechanisms that took control of the underwriters’ psyche. There is strong evidence that underwriters were taught to trust on one and the list of paper requirements grew larger. But a hidden underwriting element worried that too much paper was feckless in the fight against real agent deviousness.
Consequently, three underwriting rules evolved. Underwriting Rule #1 states that if there were only a few pieces of paper (the underwriting evidence), then something was not being admitted and it was best to ask for more paper or decline. Underwriting Rule #2 proclaimed that if there was close to one inch of paper (2.54 cm. For the purists) to support the application, it must be standard. Then the surprise of all surprises, Underwriting Rule #3 decreed that if the paper pile approached 2 inches (5.08 cm.), it was a decline. So a succinct set of papers, regardless of how well representative of the facts, had to hide some devious plot to over-insure (Rule #1). Excess paper became synonymous with standard issue (Rule #2) but reams of paper which could include the agent’s own poignant words incurred the underwriter’s ire and a wrathful decline (Rule#3).
If one contrasts the North American reality that blatantly hypes mistrust to the European laissez-faire attitude between agent and underwriter, it is remarkable to witness that both are in the same business. Companies in Europe regularly accept large amount cases with half the financial requirements of their Canadian or American counterparts! I have witnesses in my lengthy career the miracle of multi-million dollar applications (in original currencies francs, marks, lira, or kroners) being issued on the simple poignant prose of the hallowed agent plus perhaps an accountant’s or banker’s letter of reference as to the value of the proposed insured. In fact, it is not a rarity to see cases on young adults or old kids being insured for megabucks on the testimony of just the agent! Not only is the unadulterated trust in the agent paramount, nothing has occurred to shake the underlying trust the agent feels for the underwriter.
Quite frequently the North American underwriter is privileged to partake of a cross –the –Atlantic case for reinsurance reasons. The ensuing stretch for the Tylenol bottle is as rapid as a Guzman fastball (for Expo fans, this is Blue Jay simile). The root cause of these rattled nerves and tormenting migraines is the lack of financial justification beyond, at times, nothing more than the well-written and concise letter from the agent reciting the man’s value in life. On occasion there may be two or three testimonials from the likes of a banker, bringing credence of the agent to the 100% level. As oft as not, the North American underwriter collapses over his desk and in that prostrate position exclaims, “What the heck, if the Düsseldorf underwriter believes the sum applied for is okay, then that’s fine by me.”
The foregoing comment on the approach to risk selection is not meant to incriminate anyone or be so bold as to decipher who is correct. I am merely, and with due lack of diplomacy, trying to understand why. Why would a niece or nephew of a rich (make that really rich) person residing in Düsseldorf qualify to be insured for a mega policy simply because “she is the youngest and healthiest member of the family and is charged the lowest mortality rate and thus should be the insured under a humongous policy bought for estate planning purposes of an older uncle, aunt or father”?
If this occurred in North America, the underwriter would not only decline the application but said application would become the talk of the next underwriter’s golf tournament. The underwriter would also have the agent sent for a CAT scan of his most northerly protrusion.
Why in one instance is there so much trust in the appropriateness of the action while in the other there is absolute disbelief in the insurable interest and motives of agent and applicant? How did two similar industries like life insurance in North America and life insurance in Europe develop such differing standards of agent credibility? Have North American companies been bamboozled more frequently? (“Probably!”, come the catcalls from the more cynical.) Can Europeans afford to be paying more in benefits than the North American company?
We, the big we that includes all us in the insurance industry (whether active, inactive or on redundancy leave), probably cannot completely answer any of these questions. On this side of the pond, we sell complex plans that minimize the dollar the customer spends on protection and tax planning. Although not as tax driven, the European too has complex needs covered by unique plans. I would like to think that it is not plans that lead to the North American paranoia around antiselection. Something, somewhere deep in the bowels of our past ahs made the agent’s word almost valueless and that millstone has been passed from neck to neck without appeal of its consequence. Pity. The trust appears to still exist in other jurisdictions that perhaps rightly or wrongly (naively?) have not incurred any financial consequences from that trust.
As I travel between these two venues, I almost become a dithering nincompoop (there are some who say the “almost” could be dropped) over which hat to wear since both logics could fit the circumstances. Or so it seems. When pricing a product in a typical Euro community, the Merlin-like actuary uses assumptions based on a mortality table that is far more conservative and safe than a North American table. To complicate matters we have a propensity in North America to assume significant mortality improvements over an indefinite duration. By using a higher Mortality assumption and ignoring aggressive improvements, Europeans acquired a significant mortality gain, possibly in the magnitude of 10% to 20%. My colleagues in Europe harp in, with remarkable disdain for North American mortality results, that their revered agents are under sever pressure to tell the truth not oversell applicants, thus enhancing their safety factor. Indeed, there are indications that the agent and underwriter over there will not allow themselves to be mortified by early, big and embarrassing claims.
In places like Indonesia (a very representative member of the emerging Asia Pacific market) both North American and European insurance management, especially home office underwriters, are trying to shape underwriting patterns. As larger cases are being written by agents coincident with the economic growth, the average face amount has escalated from the mere thousands of dollars to tens of thousands and hundreds of thousands will soon be common. Enter the outsiders or foreigners who want to sell their advice to this new market. One expects and can actually witness a total frustration with these outsiders’ views. One set of ‘teachers’ from the opposite side of the Atlantic who imply there is a better way to handle agents and large cases.
The role of underwriters and their interaction with agents is so critical in these formative years of jumbo Indonesian cases that we, the outsiders, are probably causing more confusion than order. The remarkable and admirable trait that is visible, however, is the Indonesian ability to cut through our foreign prejudices. There seems to be a very real desire by their underwriters to help the agents get the case through the maze while exercising the skills of a prudent company’s risk selection. It helps to have the field force so in tune with helping the companies succeed – it’s called ‘company loyalty’.
“Apakah itu keputusan yan benar?” For the unilingual audience that loosely means “Will the underwriter learn to ask the correct question first?” The question which he must ask himself first is Charlie Will’s question, “Does it make sense?” When he’s done that he is able to work intelligently with the agent because he can structure his own questions to the agent accordingly. The responsibility is then placed with the agent to truly listen and help expedite the issue of the policy to everybody’s benefit. Perhaps the penchant for underwriters to ask improperly structured questions and agents to impatiently listen to questions, even when they are the right ones, will not infect Asia Pacific.
As larger and larger cases are becoming the norm in places like Indonesia, there is the opportunity to learn from all of the older, but often not wiser, markets how not to make the same mistakes. They are in the enviable position of having all the modern technology and education without the hang-ups of Western ways. The rapport between agent and underwriter and underwriter and agent (just to show I can see the issue from both sides) could forge a common bond in this part of the world that rejects the worst of our own prejudices whose roots are already lost in the archives.
Agent and underwriter working together in Indonesia to fashion sensible guidelines for insurance interest and risk selection for the benefit of the life insured and insurer may be the greatest contribution these two contingents can muster in their life time. Now, that does make sense!