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Blind-siding Reinsurers doesn’t always help the Agent

Looking back on this article I realize that not much has changed yet everything has changed. Canada has gone from fierce reinsurance competitors numbering 6 to maybe three and a half (but a very solid half I must say). Facultative support has become the exception rather than the rule. The insurer retains less as a percentage yet is carrying a large burden in the area of risk selection. More audits and finer margins are the rule. The underwriting leader has to be on top of their game more than ever.

The environment changes rapidly. Reinsurers today show less in terms of consistency of practice and more than ever do not “discuss” their changes with the competition in advance or even after implementation. Is the onus on the insurer’s underwriter to make sure they understand all the nuances of every reinsurer it does business with? Historically one hoped the word would get around prior to anything happening but today there is the need for proactivity for all to stay current and make sure the minutest of details is known to all. Not easy for certain practices are taken for granted and not all insurers or reinsurers want to operate the same way on every case.

I actually think that five years from today the uniformity might be such the cry is for more variance of practice to enable flexibility. But maybe that is just speculation given tomorrow’s leaders may not be today’s leaders.

If Steve Carlson was still publishing Marketing Options he would have me writing the sequel.



Marketing Options

April 1991

93.6% of all cases applied for are issued standard by the life industry. That was a statement that the industry said voluminous statistics provided unwavering over scores of years. It’s probably thru because of the pioneering efforts of the first companies into the field of substandard underwriting made it so, based on scarce information. In those years, all experimental underwriting was relegated almost exclusively to reinsurers soliciting the tough case and applying their sobering expertise to pricing almost any risk. Their familiar daring statement, often heard, was “We can accept with pleasure the risk at only + 37 extra mortality points”. (Similar risk taking can only be witnesses now in the archival film reruns of daredevils going over Niagara Falls in barrels.)

Facultative shopping of a case to numerous reinsurers for the best price, fewest additional requirements (“No, Mr. Reinsurer, a liver biopsy doe not fit into Mr. Applicant’s busy timetable!”), and financial security was hot up until the mid – 80s. It was a spirited exhibition of which reinsurers could survive the longest while trying to portray a sense of professionalism to the eagerly awaiting ceding life company. Such a ceding company would regularly send copies of a facultative file to up to 14 reinsurers. You can bet that one would make a bad call, offer coverage, and three winners emerged – the applicant now insured, the agent now paid, and the ceding company now rid of the risk of poor early mortality. All of this left the reinsurer blind- sided again, albeit with the reinsurer partially to blame.

Finally, reason prevailed. Reinsurers witnessed new claims stacking up on this business that began to shake the foundation of shopped facultative business. One by one, over the last five years the reinsurers assessed, revoked and retooled their own underwriting departments to reflect reality. Reality was that the earlier statistics were flawed and misused. Reality was that the days of ‘fat’ mortality assumptions in the premium rates was gone. Reality was that agents, head office underwriters and actuaries had forgotten to assess the depth of individual antiselection – if one person out of 100 accepted a rating of 300%, how correct was the assessment of that one individual? You could have bet that person was one of the worst of the 100 offers made!

Who loses when the reinsurer no longer provides the aggressive + 37 extra mortality points or even standard issue? Of course, it’s the applicants who will now pay the substantially higher 300%. Meanwhile, the average insured (who belongs in a standard premium category after rigid underwriting) is today’s big winner because with the more rigid definition of standard risk have come lower premiums.

In 1989 and 1990, it became evident that the head office underwriters needed to improve their mastery of the art of underwriting just as the wise agents pursued the mastery of serving their clients. The mastery of facultative underwriting combines the skill sets of agent, head office underwriter and their compatriots from the world of medicine, finance, actuarial science and reinsurance.

It was realized that ceding companies can take either a proactive role in determining the price to the proposed insured or a passive role of reacting to the quotes of the reinsurers. To their credit, more and more ceding companies are now taking a pro-active role. Their underwriters are deciding what substandard risk classifications should be offered and they are going to only a few reinsurers (those whom they know have the appropriate expertise for the substandard affliction in question) for confirmation of that assessment.

This is a radical shift for home office underwriters and, in fact, it can and is being done by only the most competent in the profession. However, the benefits to agents are becoming evident. These agents are realizing many difficult cases are now being dealt with by their own company and dealt with in a more consistent manner than shotgunning reinsurers. For the reinsurer, this new approach to shopped facultative cases eliminates blind-siding, at least until the next major upheaval in underwriting – such as AIDS and non-smoker rates presented in the past or genetic testing may offer in the future.