Another look at the future from the present. A major software vendor and manufacturer asked Ross to paint a picture of the world of underwriting and risk selection and where it has to go in terms of the bigger new business environment and the (in)tolerances of senior management. The presentation fit into a new release of CGI’s future and tried to highlight they were indeed at the front of the line in realizing what the insurers needed going forward.
Financial Underwriting 2002
The easiest underwriting in the world but the hardest to do right. The textbooks are vague on how to assimilate the myriads of numbers and decide not just if the amount is right for life insurance but is the insurable interest there for now and the future. From Ross’ hard earned rules there is hope that the tough underwriting can be made simple and yet be prudent enough to keep the company off the front page of the press!
Resisting Change Is Futile
This presentation or a derivative of it has been given to several groups of CEO’s and COOs in various countries and deals with the changes that are inevitable in every countries life industry. It handles the issues in people and software, underwriter and distributor, niche market versus mega market, independence versus convergence. It is a presentation that provokes discussion amongst the leaders and has been also given as follow up to boards of directors so they have an appreciation of where their company fits not only nationally but internationally.
Smart(er) Underwriting Needed 2002
With all the pressures on “the front end” of the life insurance industry are risk selection staff and leaders acting responsibly and with vision to improve the efficiency and the thus the image of underwriting. From financial underwriting complexities unravelled to medical underwriting shortcuts the presentation takes the audience regardless of experience into a world where speed and cost are dominant and thus prepares some tactics for successful underwriting.
Underwriting in the Future China
Ross’ classic spin on the future based on the reality of today. Thought provoking and controversial, the presentation tries to get people understanding where they fit in the overall scheme of the financial services business and how the comparative work is against other institutions not just insurers. Helpful scenarios in people, reinsurance, software and marketing are contained in the talk.
Adapting to Army Boots
I delighted my precious daughter a unique way when she was an infant and toddler. At six foot four inches, I would swing her through an arch, initiating well above my up-stretched arms down to safely above the floor. Emily would become a profusion of howls, giggles and smiles and always asked for more. Children grow, gain length and acquire accoutrements that befit a toddler. The accoutrement one day were shoes which were more akin to army issue boots.
On that ill-fated day as I arced my Emily from near ceiling height to the intended near floor position, my life was about to change both temporarily and permanently. Emily curved her body inwards by bring up her legs. The ensuing collision of Emily’s army boots to my most vulnerable parts was akin to watching neutering back on the farm (my grandfather did it then with two bricks).
I had a speaking role to play at an industry function and I had to adapt. Baggy pants, a stool to lean on and an MC who allowed me to remain upright and not moving made the day bearable and the audience none the wiser. Circumstance change and thus we adapt.
Has our industry adapted? It is a question that would draw many to both sides in a debate. “Yes” is obvious since times have changed and thus we must have changed. “No” is just as obvious since as life insurers we still struggle with paper, distribution, communication, blood and urine, and reliance on archaic rules that some would argue are totally counterproductive. As for me, I sit in the middle and which way I lean depends on my mood or how repetitive the day has been. Good mood equals adaptation. Bad mood or just more of the same equals status quo.
Banks outsource the loan function. Yes, there are hundreds of banks in the U.S. who use one company as their loan approver and call answer service. Here you have a third party outsourcer who is given the key to the vault to distribute a bank’s cash. How trusting and practical. Handling the telemarketing and loan approval is a skill set steeped in technology and training that many a small bank can ill afford to do internally but tasks that can be handled with awesome success using outsourcing.
Banks outsource back office cheque processing, credit card processing, computer networks and only “The Maker” (and perhaps Paul Martin) knows what else. For years, banks have realized that the real back office function is a noncompetitive area and one that excels with volume. The global sharing of ATM networks is another example of “let’s work together to make the world a better place” (violins and harpsichord, please).
Not a year goes by that we do not hear or read about a new cooperative venture within the banking community. I read somewhere that even the proposed mergers were initiated by such altruistic motivation. (Insert Hallelujah chorus here.)
Have we as life insurers really adapted to our environment? We lowered the price to make agents and brokers sell more. Some, and I emphasize some in order to retain my honorary sales diploma, brokers adapted by re-writing the inforce to take advantage of lower prices and have enough sales to survive. Could a conscientious broker knowingly not offer a lower price to the valued customer as it arrives on his doorstep?
We each lowered our price to make sure none of us was overcharging whereas the banks’ direction with service charges was just the opposite. How come we always do the opposite and receive the downsides for our efforts? If we always draw the short straw, maybe it’s time to change who is picking our straw.
Each of us has our own forms for everything because it is to each of our company’s competitive advantage to retain these unique marketing tools. Why? I need to be convinced that this is a good thing, and not by Martha Stewart. Soon the trees in my yard will be sacrificed so the paper from them can reside in the trunk of some broker’s Sportute or recycled into an egg carton.
The generic application, like all standard forms, is a good idea. Unfortunately the nuances of our legal staffs and marketing departments or some other power greater than I, created a revenue stream for BC’s paper industry until the Asia Pacific economy picks up. Did it fail because it was not the brainchild of some company president or because we do not need the cost savings and uniformity within our industry?
Does the known HIV positive consumer antiselect more than the cancer riddled or the chest pain sufferer? Should we in 1999 remain so strongly mired in the antiselective label on HIV, yet assume every other walking impairment is less risky and also more prone to having carriers be so forthright? Yes, when the HIV epidemic hit the consciousness of the world’s population, it was labelled the potential “bankrupter” of the life insurance industry.
That did not happen! In fact, we are doing quite well, thank you. I know of no company that has had bad mortality on its 1983 through 1985 business when we were most vulnerable to antiselection. Should we now adapt to the filing cabinet full of data that says HIV has a rather predicable course and is not a precursor of instant death and a life insurance claim?
We need to manage our distribution. We need to ascertain who at the public end of our chain of command is doing us a disservice by bringing discredit to broker, company and industry. The fremescent band of brokers, MGAs and company marketing leadership see the need to have an “information bureau” that tracks our distribution and identifies the bad apples. Will our leadership adapt to the need for this and approach it in a bipartisan fashion? The alternative perhaps is to wait for the other financial service vendors (mutual funds, stocks, etc.) to build the infrastructure and then we could ask to be a member.
We have many opportunities to adapt. Quality organizations adapt early and with ingenuity. But how we adapt at the beginning of a trend versus how we do so after the horse has fled the barnyard is entirely different. Building a more innovative retaining device initially gives us an opportunity to manage change. In so doing, we become less of a victim of change and more an active, contributing participant who has some control in the matter.
Oh, by the way, the temporary change caused by my collision of the army boots was extreme swelling. Immediately after the industry meeting, I eased the discomfort and eventually returned to normal by soaking in the salty waters off Barbados. The permanent change was the suspension of further arcing of my daughter from the ceiling to floor. We both adapted successfully.
Brevity Over Prolixity
In writing I have leaned to prolixity at times to try to get a message, agreed, often my message, across since I want to convey all the nuances of a particular issue I am addressing. In conversation and in speaking before an audience I have found brevity to be the best course coupled with ample time to elaborate one on one with the questioner from the audience. When reading or listening, I tend to categorize the writer or speaker into which category they best belong. Lately while pondering the many musings of experts on underwriting and technology for the risk selection process I conclude that those who should be brief are far too extravagant in their words. Just as often those who are brief leave the audience short of detail and concrete data.
I am enthralled by the outsider’s view of underwriting as an arcane process that has remained mired in its narrow field house for decades. Why underwrite asks the banker new to risk (risk taking being known as insurance)? Because we will not take the risk otherwise says the mortality outsourcer or reinsurer in yesterdays jargon. Every time I look at the process, I conclude that a large squad of underwriters is doing a small amount of underwriting and a large amount of clerical work says the COO of accounting background. Yes but if you do not have all that senior talent reading all the files you may miss something says the scribe of underwriting fame. Brief answers to complex questions? Who are we kidding? The brevity comes from refusing to spin the sporran around and call it a fanny pack!
We must reinvent the risk selection process. One does not have to write at tedious length to make the point. Our industry cannot continue on with manual underwriting labour being the tour de force in the new business department. For the 80% of cases that are clean and unfettered by medical, avocation, aviation, occupation or financial issues we need the black box to handle the case. Save the underwriters for the 20% of cases that are unique and beg for more attention. Is this revolutionary? No. There are a few selected companies who have made the break from manual tedium but well paying clerical function called underwriting to embrace real risk selection by well paid professionals. Couple the black box (my laptops black otherwise black has no relevance especially after Apple introduced apple, tangerine and plum) with inventive ways of managing the real underwriter and you have a winning company.
Lets start with technology. I wrote on this subject several years ago in MO and said in one of my visionary moments that the world of insurance would be swamped with underwriting technology by now (actually I said 1999!). Instead of it happening we have the debate over which is better, the numerical points system born of the ancient but still practical numerical rating system or the “in/out method”. The latter is not a variation of the rhythm method but rather a poor descriptive of the yes/no method to determine one’s eligibility for a product’s price. Is this debate a mere sham to delay the decision making process to automate the mundane?
The “in/out” method uses the simple decision tree that if any answer is positive you are out of the price assigned to the product class you applied for. This is a good system and accommodates rudimentary risk selection. Because an individual applicant fails one question does that mean they are indeed an inferior risk? If you price it that way then say it is so. It is a no brainer (five years ago I had to explain that two word series) and one can hire the cheapest of talent to “underwrite” all your cases. Fortunately to protect some jobs within our business exceptions were built to add a dimension of thought to the underwriting process. Now if the positive answer is on one of the questions it can be ignored (please arrange for list with actuarial prior to implementation) if all other answers are negative. Now since even that secondary process of gray area underwriting may be automated with a rudimentary rules engine underwriters developed the personal touch. On a given day for a given agent the underwriter can always “give in”, “make a value decision” or just want to feel good by ignoring the positive answer(s). What we do not know as an industry is how often is that happening. Is the twentieth underwriter in the department making far too many exceptions and how would I ever know that since I am all manual.
The points method is closer to the historic risk selection methodology. It assigns points or takes away points depending on the various positive or negative answers. It tries to weigh the total to see if a person falls within a range. Thus unlike the “in/out” system with points it is known in advance that one can have positive results but with strong negative features one can still fit into a price category. Is it better? In my opinion it is simply because it allows far more latitude in assessing the longevity of an individual but it requires far more structure at the outset. It is my favorite but that does not make it the “be all/end all”. Underwriters can still over rule the points total and still give away the shop unless the data is collated and delivered that tells me what all underwriters are doing.
What makes either of the above work well and is fundamental is the workflow manager and reporting tools that deliver regular and concise reports to management on how many exceptions are being made, the degree of those exceptions and the cost of those exceptions. If from a pricing perspective I can tolerate exceptions to the rules, be they points or “in/out”, of say on 1% of cases or amount of insurance I need to know that number. Only automation can do that for you. The system puts the risk in a category approved by underwriting, medical, marketing and actuarial. Now the system points to those who have to select risks for your company who are going too far in their exuberance to say yes. Now you have data to decide “are my rules too harsh?” or “are my underwriters too liberal?”
Give me the consistency that comes from the likes of Cprompt’s AUS software or any of its competitors and I am an ecstatic executive. Load the software with the rules that all agree to and can see, and voila consistent equitable underwriting. I know that the portfolio of risks that I am assuming is well within my tolerance for long term financial rewards and not long term surprises. Tell me regularly where I am intolerant of my rule base. Tell which underwriter needs cajoling or platitudes. Let the underwriting executive meet the glares from the upper most echelons with confidence as they can reel off statistical proof that the company’s risk selectors are earning their meager salaries.
The following is how one progressive life insurer (STEVE I HOPE TO GIVE CREDIT TO ZURICH IF THEY APPROVE IF NOT IT GOES WITHOUT CREDIT) and their underwriting leadership views the technology question and why they are moving to reconstruct their underwriting area to meet the challenges. I thank them for allowing me to share the high level summation of their creative thinking.
“The principal benefits which we want to obtain through the use of an expert underwriting System (Ross’ note: it is not so much an expert system as a system that monitors the work flow, does automatically the cases that are routine and thus standard, assists the underwriter to a decision, monitors underwriting consistency and helps create a portfolio tat fits the pricing mortality assumptions) (now that I think about it maybe that is a smart system that is as expert as the average underwriter) are:
1. More consistent decisions. System-driven assessment processes ensure that all salient features are taken into consideration, and weighted appropriately. This applies to standard and substandard business.
2. Elimination of errors on quantifiable preferred underwriting criteria. The evaluation of preferred cases, with multiple risk factors, creates room for human error. Basic preferred underwriting criteria are based on quantifiable information, such as height and weight or blood pressure. Machine screening eliminates these types of errors.
3. Reduction of inappropriate preferred exceptions. Underwriters may be under considerable pressure to grant exceptions to allow preferred rates on cases, which do not fit within our rules. In some audits of non-system underwritten business, exception rates of up to 20% have been identified, with serious preferred mortality implications. Automated underwriting reduces these situations. Rules for allowable exceptions are built into the system. Other, underwriter based exceptions, are limited, and the system produces reports listing exceptions which can be used for quality control purposes.
4. Strengthened audit control. Expert systems provide a clear audit trail for identifying numbers and types of exceptions, as well as evidence and substandard/decline ordering rates on each underwriter. These enable both insurer and reinsurer enhanced ability to review underwriting activities. This ensures that company and reinsurer underwriting standards are adhered to, and that risk to both is reduced.
A second important objective will be to optimize the use of our tele-underwriting system. We intend to realize the following benefits, which will impact us financially (Aside from soft benefits such as increased agent and customer satisfaction):
1. Better quality underwriting information. By replacing the agent with an objective and trained professional interviewer, and the use of effective drill-down questioning, we believe that there is less undisclosed or understated client information, and that the quality of information obtained is superior to agent collected information. We believe that this will result in more accurate risk assessment and improved long-term mortality experience.
2. Reduction in discretionary underwriting requirements. Due to the more detailed information obtained via our interviewers, we can reduce the percentage of cases with discretionary underwriting evidence, which will reduce our other product costs.
3. Reduced discretionary requirements also reduce administrative costs. Significant administrative costs are incurred whenever we order and have to subsequently follow for requirements. Reduction in ordering results in product cost reductions on the administrative side also.”
If only the software sellers could show a leaning to prolixity in describing the real advantages to their software underwriters may buy in. I know management would. Be briefer with the technology mumbo jumbo and more verbose with the underwriting merits. Right now it appears the other is true, complicated or exaggerated by the underwriters lack of ownership of their IT solutions (a generalization but true with more than 50% of the examples I am called to comment on).
Once we have the software to garner consistency in what has never been too consistent an area, we move on to daring remuneration changes that finally reward the premier risk selectors. I journeyed into a company where the Canadian flag never flew to find one of the most creative remuneration packages for underwriters I had ever witnessed. On one of my shoulders was the pessimist saying this would doom the company. On my other shoulder was the behemoth like optimist that said this is the answer. Like earlier wanderers in the desert I took the message away with me (thank heavens it is no longer in vogue to write these messages on stone tablets).
The company in question rewards underwriters over and above the standard salary package with a true performance bonus. On a monthly basis there is a reward for exceeding the standard number of final decisions made on pending cases (potential revenue sitting in the system). Make a final decision and low and behold revenue is earned. Thus if your expected is 15 decisions a day and the underwriter is hitting 20 cases per day for the month a bonus of $X times the five times the work days in the month equals bonus. Make the underwriter realize they are a lighthouse guiding ships or cases to the shore or in force status not a lighthouse built to protect the shoreline from clumsy ships.
The second tier is even more avant garde. Yes the company in question went even further in enticing underwriters to be more revenue focused and marketing savvy. At the end of the year an underwriter earns a bonus based on a percentage on all premiums that they underwrote that went into force. This bonus makes them just as enticed as brokers at getting cases done. For about a third of the underwriters the bonuses can be very hefty equating to multiples of base salary. For some underwriters nothing has changed since they are of the old school. The company gets far more from fewer people and it wins by pocketing money it would have paid for head count increases in a traditional scheme.
From all sides comes the nay Sayers speaking ruin and integrity issues. Yes it is a stretch I would be the first to admit. With this type of inducement underwriters will accept everything and anybody. The industry would be ruined. The long winded conquer the Spartan words of those who dare to take a chance. Why would an underwriting professional put their company at risk when they are under more scrutiny than currently exists in most companies? Internal audits and regular and frequent audits by the reinsurers who actually take the risks must be within the tolerance of prudent underwriting. Failure to meet the standards means a forfeiture of the bonus and perhaps ones job should the underwriter be deemed wantonly careless. Is it any different than the pricing actuary getting a bonus based on production? Professional decent people will not do you harm. Scoundrels will be found out through scrutiny shared by all the players. The current system has minimalist differentials between the exceedingly brilliant underwriter and the mediocre and marketing challenged dirge.
The company in question is ecstatic about the positive benefits they are witnessing. The producers and marketing people feel the third of the underwriters who now have a vested interest in getting an answer out fast and as fair as possible is a breath of fresh air. The battle between the underwriters as encumbrance versus the totally commissioned producer has slipped into obscurity. I applaud the change that has been thrust upon our industry and hope to see similar revolutionary thinking enter our local market.
My prolixity on such a trivial subject as underwriters and consistency will end when true change arrives. The medical superiority of today’s underwriter now has to metamorphose into a consistent marketing sophisticate, supported by software tools and company tolerance of new reward systems. Brevity on this subject fails to convey the importance to our industry. Getting an application completed over the Internet in 8 minutes is mired in the 100 days to get it issued.
I Thought Glenn Was More of A Right Winger An Australian Adventure
Great West Life was magnanimous in renting out Glenn Chudley to help RGA Life Reinsurance Company assess the claims processes and procedures of one of Australia’s largest financial institutions. Getting Glenn to say yes to 3 weeks in the sun and fun of Australia was easy. Getting Great West to say yes was slightly harder but they saw the inherent benefit in Glenn learning the intricacies of a mature critical illness market and a claims market not unlike Canada. It was going to be a win for all parties to have Glenn on the team since he is recognized as one of the best at his trade in North America.
I was to understand later that he should adhere to claims since driving for a living is not a viable option.
Left I Say, Left!
The first week of the assignment went exceedingly well as Glenn’s depth and scope of claims expertise was more than we had imagined (we did have limited imaginations). The team quickly delved into the intricacies of a very large organization and uncovered many an aspect that could be changed or at least amended. Glenn worked diligently at the task putting in long hours and avoiding the attractions of nearby Bondi Beach. We made sure he was too exhausted at days end to want to attend the midnight Fringe Festival which featured nude surf boarders.
At the end of week one, in recognition of his days of toil and suffering through sunny 32 Degrees Celsius we decided he could have Saturday off and Ross would take Glenn and his dear wife Carol off to see the Hinter Valley and it’s hundreds of vineyards. Renting a car was the logical choice at the time although on hindsight a bus ride may have been more relaxing. If only Ross had not conceded to let Glenn drive! You could sense an excitement in Glenn as he spoke more passionately about driving in a country that has right hand steering and uses the left side of the road. We picked up the car and without much investigation or prescreening allowed Glenn to take the wheel out of the parking lot.
Glenn’s immediate right turn into the right lane (wrong lane) was a precursor of things to come. For the first 3 kilometers through city streets with turns and stops Glenn practiced corrective measure after corrective measure as he perpetually was recovering from right turns into right lanes (wrong) or left turns into right lanes (wrong again). Glenn would get better I assured myself sitting immobile and strapped in the front passenger seat. I later realized why Carol preferred the safety and the oblivion of the rear passenger seat. What you cannot see cannot hurt you mentally.
Next we were on the rather major city street with its four lanes — two of which I assured Glenn were for cars coming in the other direction. Was it I or was Glenn really able to drive that close to cars on his left without losing his left side mirror. Wow I thought, Glenn is a great driver since he can come as close as a millimeter without harm to either car. Yes I checked and seat belt was done up and I was sitting ready for any eventuality.
Fifteen kilometers of Glenn playing chicken with cars on our left going in the same direction was about all I could stand and thus I was thankful to see the freeway entrance. Surely Glenn will drive differently at 110 Kms per hour there than his left leanings on city streets.
Wrong! I have never been on a freeway for 70 minutes where the driver could for 90% of the time drive on the corrugated warning strip and not move the car back into the center of the lane. I guess I should be thankful that he at least chose the left lane of the two and spared scrapping cars. We were so far from cars on the right we created new tracks on the soft shoulder. Did Glenn not feel the clicking of the warning corrugation or the pot holes that occasionally sprang out of nowhere in the dirt? Carol, bless her, remained silent in the rear of the vehicle probably deep in prayer. The M4 freeway running out from Sydney now has a third lane thanks to Glenn’s driving.
Off the freeway and into a parking lot where I grabbed as politically and diplomatically as possible the car keys. It was my turn to take the wheel. While we visited the tourist information office not a word was said other than “Gee Glenn you drive a little too far left.” Uneventful visits to a couple of vineyards and I continued to drive in a proper fashion but I have done this before many times. The question was would Glenn ask to drive again?
It happened sooner than expected. Like a kid in a candy store Glenn wanted the adrenalin rush of being behind the wheel again. Thankfully Carol spoke up in her soft manner and said “Glenn do you realize how much you drive too far to the left?” This was my cue to reinforce the remark by adding “Glenn you are really driving dangerously close to the side of the road and didn’t the clicking of the corrugation or the pot holes tell you anything?” Glenn acknowledged our concerns, said he would correct his error and got behind the wheel.
No more than 2 kms late the adventuresome Glenn was at it again. I swear he hit every pot hole possible on the soft shoulder (left side) and oh we came so close to wiping out the poor cyclist that I can still see the look of sheer terror in her eyes at a car so close! DO I say something or wait for Carol to break the silence once more? Into the laneway and a chance to relax from the tension of being Glenn’s passenger. The serenity lasted mere seconds as Glenn decided to trim the tree that was well over on the left side of the laneway with the rental car. I rarely drink but it was getting close to finding a distillery and a tall glass for nerve soothing.
Okay he can have one more turn behind the wheel but I will drive the majority of the afternoon. After all Carol and I can outvote Glenn 2 to 1. His last session behind the wheel and he still struggled with getting out of the parking lot after consuming an Australian hamburger (lots of pickled beats please). Stay left Glenn but not the soft shoulder please. Paved roads over pleasant countryside with little or no traffic to scare out of their minds. If anything happened I was going to revoke Glenn’s Canadian citizenship. For about 10 kms Glenn actually steered the car correctly about 50% of the time. He was improving I foolishly thought to myself.
That is a bend in the road up there I said to myself. A slow easy bend to the left over a modest bridge spanning a small gorge was all Glenn had to face. Sitting in the front left passenger seat gave me a first hand picture of the curb that also accompanied the bridgework. “Glenn surely sees the curb”, I thought. “He must see it now!” kept entering my thoughts as we sped towards collision with an immovable object. The only remaining question was would he mound the sidewalk or hit the abatement straight on?
With a thunderous clatter hubcaps went flying, tire exploded and steering became even more erratic than Glenn’s usual driving. As we coasted to a stop some 100 metres along Glenn’s favorite place, the soft shoulder, I asked Glenn if he saw the curb or did it jump out of nowhere. Friend or no friend Glenn you drive too far to the left. I left most of the superlatives to Carol who said she had never thought hubcaps could fly so far.
It was 2:05 PM on a Saturday outside of Wilton Australia where all we had to turn to for help was a church (to late to pray) and a variety store turned movie rental shop. No there was no service station near by to fix the two tires. No there was no near by rental agency and all rental shops close at noon. To make a long story shorter Glenn put the spare tire on and basked in the 35-degree temperatures. When help was impossible we agreed to chance the drive back to Sydney on the spare plus the other tire whose rim was distorted but tire held air. I drove.
It was a slow drive back as every kilometer was full of the expectation our other tire would explode. Silence ruled after all the “Didn’t you see the curb Glenn?” statements by Carol and I. It was an adventure not to be forgotten. For the rest of the period in Australia Glenn was banned by all from driving, sitting in the drivers seat even for practice, or talking about the curb that attacked him in the Hunter Valley. The rental agency was glad to see us back and they immediately revoked Glenn’s
preferred status and took sufficient cash to pay for two rims, two tires and a major front-end alignment.
Glenn remains a friend but I will not ever lend him my car. Glenn still has my appreciation for his claims leadership but I do not want to be in a car in Winnipeg when he is on the road. Glenn contributed greatly to the review and benchmarking of the major financial institution but I will never refer to his driving as being the benchmark for anyone to achieve. Glenn is fortunate to have an understanding wife for mine would have clobbered me for such a harrowing experience.
In the end I have another story for my book. Without the fun and excitement created by Glenn it would have been a ho hum day. The remaining question is “Does Glenn vote left as well?”
Winning the Debate Be Sure to Argue Both Sides
I may be opinionated but I am not one to have long drawn out debates on issues where the outcome could go either way. Debating with my parents over the “bed time” or use of the car were rarely won by yours truly. I learned the fine art of trying to set up a win while fighting a losing battle. Loving parents would remember my conceding to their wisdom as to when to sleep and when to drive, thus giving in to my next request strategically structured to look like a major concession compared to previous loss. Ever since my days in school on the debate team I have steered clear of taking a side artificially. I cannot fake my emotions. I like my emotions and passions to shine through whenever I speak and as a wise mentor once told me that implies arguing for only what you believe in strongly.
To get to where life reinsurance is today in Canada and to a degree in the world was there an evolution or a revolution. This was the question to be debated in the wisdom of the executive of the Canadian Reinsurance Conference (April 8th, 1999 Royal York Hotel). The CRC executive called on Bill Tyler of Lincoln Re (Fort Wayne, Indiana) and yours truly to be the combatants. Hugh Haney, ex President of Financial Life and sage consumer of reinsurance for decades, was to serve as referee. The two of us combatants were equally matched with 30 years insurance service although Bill’s was all under the brand of Lincoln and mine was via a myriad of wily tutors.
At the outset I took the stand that the only difference between evolution and revolution was the letter “R” at the start, so how could we have a debate. When you are as old as me you have seen the cycle repeat itself and from numerous decades of exposure the changes all become evolutionary at first glance. At second glance I thought there were spikes of revolution. The participants were to decide which side they sat on given a strict definition of each word Hugh dug out of his historical pleadings to MGA’s. This should be like debating which side of the anatomy the sporran is worn.
Bill and I quickly decided we were going to keep our beliefs to ourselves. We built our presentations not really knowing the opponents stand. All we knew was that the subject was to be segmented into four sub classes of reinsurance issues namely, “financial reinsurance”, “mortality”, “mergers and acquisitions”, and “technology”. From that early point on I knew I could be me, unencumbered by rules that stymied creativity. There was no prize for winning but I mentally saw myself as David against Goliath, Canada versus the USA, tradition versus “Off the Wall”, etc.
First on the agenda of topics was the financial reinsurance topic. Humour has a disarming impact on any audience. I started my dissertation with a picture from the 1800’s depicting a circle of the era’s business elite pointing fingers at each other with no clear indication where to start or finish. The caption read “Who has the people’s money?”. In a reinsurance context the question would be who has the capital (holds the reserves, puts the money away for the future, etc.)? The expertise in both ceded and assumed reinsurance have been fantastic at the art and science of maximizing limited capital for the benefit of all and for the most part in a fashion that has proved very prudent.
The original term for financial reinsurance was “surplus relief”. This term fell into disfavour in the 1980’s because of the abuse of the concept and the question of real transfer of risk for reward. Today’s financial reinsurance skill evolved slowly as the technology improved to analyze risk, personnel broke out of the traditional thinking and confidence emerged in the new concepts. The concepts included new terminology that only the most brilliant and abstract could dream up. Amongst the terms of today are securitization, counter party risk, Seg fund exposure, hedge fund and safe derivatives, CATePUTS, evergreen clauses and some deciduous trees, financial restructuring, regulatory arbitrage (=offshore), and of course the phrase “Do it through Barbados, Bermuda, Turks or Ross’ backyard”. Standing firmly behind these financially engineered marvels is the security of “class A-! Floating rate defeasance notes, paying a coupon rate of LIBOR 1.75% and rated AAA…” Certainly looks like the banks have had their input already on the world of reinsurance.
If the foregoing paragraph left you confused you now understand the position of 00% of the people who supposedly work in the assumption or ceding of insurance under the umbrella of “financial reinsurance”. Like most of us by the time you grasped the full intricacies of words and statements within the confines of “financial reinsurance” new words and statements would have emerged to keep you eternally perplexed like some of Joseph Conrad’s deeper novels.
Financial reinsurance has evolved from a simplistic usage of regulatory differences or oversights to one of complex legal, accounting and actuarial smarts. Someone once said that reinsurance from a financial perspective could be defined as anything where there is a 10% chance of a 10% loss. I would hasten to add that in life reinsurance that is a good definition but in the reality of health reinsurance results indicate a 90% chance of a 110% loss. A true revolution in the business would be recognized when health reinsurance is always profitable at least from a risk selection process.
The use of judicious financial reinsurance today has emerged as one of the main building blocks of many companies’ demutualization schemes or the rise and consistency of bottom line numbers. As capital management continues to be front and centre we are probably going to witness a further evolution of financial reinsurance albeit it may have a revolutionary new name.
After the vagueness of financial razzmatazz (I warned you the words would change) the debate or friendly sparring moved to the cornerstone a reinsurer’s success, mortality. Often presented as the core competency, mortality is nothing more than the educated wagering on how soon how many will lapse, replace, alter, amend, going on long term waiver of premium or, heaven forbid, die. No one in the insurance or reinsurance business has yet to open a Chinese fortune cookie to read “The mortality table you used today is too optimistic!” but we do stand the chance that the message could read “That wasn’t chicken.”
For decades and centuries our mortality continued and continues to improve. Every time we project the insured population death rate we do it with the comfort that every previous prediction was realized and in fact overly pessimistic. I gave thanks of course to the actuarial brethren gathered therein for their ability to frighten as they repeatedly throughout my career warned that this table is the lowest we will ever be able to go. The further praise for their reversal of opinion mere hours yet sometimes days later saying they have found a new and lower table. I have always wished I could go to the bush like that and bring back so many miracles.
I assured the by now encouraging with applause and laughter audience that regardless of point of view at the realities of today there was a multitude of silver linings in mortality. Actuaries for all their timidity have harkened a perpetual 1-% improvement in mortality per year. Morticians who I had just met returning from their equivalent to the Canadian Reinsurance Conference told me in strict confidence that their business is growing at 1% per year and will continue at that rate or more for years to come. I felt good that everyone could win.
For all the bleeding hearts in the audience I gave them solace with the pearl of wisdom that reinsurance pricing and subsequently insurance pricing were not the only prices to fall so far so fast in the 20th century. The cost of a transatlantic telephone call has fallen from $250 US in the 1930’s to less than 36 cents in 1998! And actuaries and management think we have seen competition to drive prices down. The evolution of the price and revolutionary pressures on our price are surely not new!
Mortality assessment by underwriters has been, as underwriters usually are, able to go both ways (focus on standard to decline folks). Some impairments or sub impairments have shown remarkable improvement to reflect the even more remarkable improvements in medicine. The myocardial infarction (big heart attack) in the 1970’s was rated at 300% mortality plus an additional $20.00 per $1000 of risk. That was on a 50-year-old male 3 years post infarction. Today some 25 years later the same risk is assessed at 200% mortality plus $10.00 per $1000. Medicine is so good today we can lower our ratings and give the best-impaired lives the better rates.
However all is not a downward spiral, as some would have you believe. The 30-year-old insulin dependent diabetic is now rated 300% mortality, up from 225% mortality 25 years ago. This is because we tend to define the various degrees of diabetes today and in doing so some are rated higher but many are rated lower. I just chose a good example to make my point and show the lower revolution was just an evolution of classification of risk.
At the same time as underwriters were for the most part slashing intelligently the extra premiums for various and sundry impairments to life the actuarial gurus were, as always, vying to get to zero faster. Reinsurance prices have fallen for the standard risk about the same as telephone calls over long distances. In 1976 the total cost of yearly renewable term premiums payable to a reinsurer were just under $100.00. By 1996 that same male 50 if they did not smoke (or could lie well) would pay just under $25.00. Our core cost of reinsurance was approaching 25 to 30% of the 1976 costs.
Combining the base standard rate with the myocardial infarction rating alluded to above and we fall off our comfortable pew in shock. In 1976 we would have collected (no interest factor) almost $450 per $1000 of risk over a ten year period. In 1996 the premium collected totals about $80! The number in 1999 is even lower but I refrain from using that price with deference to all those myocardial infarctions who may relapse in the stampede to buy at today’s tiny premium.
To put an exclamation point on my evolution point I enlightened the audience and reminded some of the older crew that the table they perhaps studied from was inappropriate for today. The Halley mortality or life expectancy table of 1687-91 said that a male age 50 could expect to live 16.8 years. For all recorded time actuaries have said mortality will improve by 1% per year. How is it that the 1980 British table only gives a 28-year life expectancy to the same 50-year-old male? That improvement of 11.2 years does not quite hit the mark if there truly was a 1-% improvement per year. Only 17 people, assumed to all be number crunchers, left the room at this point. Obviously they were rushing out to get my honorary FSA wallpaper revoked. Oh ye of little humour.
Quickly turning the audience’s attention to a new focus was blatantly foreseeable at this juncture. Mergers and acquisitions were next on the hit parade that sunny day in Toronto as the audience glamoured for more, more, more of the opinionated insight. I had no picture to visualize for the unimaginative that size matters so I merely stated that size matters today. Reinsurance was a $124 billion dollar industry in 1998 of which 75% was North American and Western Europe and 83% was nonlife. I would speak only of the remaining 17%, which seem to make the listening audience thankful because it would probably mean 83% less verbiage from yours truly.
All industries are going through the big is better phase be it automotive or banks or financial conglomerates. Why would anyone insist that this should not happen in insurance. We already have insurance leaders whose appetite for power is far greater than their current empowerment. As my Mother wisely said at times “their eyes are bigger than their bellies.” This M & A thing is not new even though we currently reflect on the loss of the following through one take over or another:
Those are the names of companies that went through merger, acquisition or sale of blocks. Everyone things that is all so new it is revolutionary. I pointed out to the audience that they collectively must be suffering from Alzheimer’s since that list was predated by the ongoing saga of company ownership consolidation for decades. Others led the way to extinction in one graveyard in Canada or another repository for old insurers, namely:
Each of those is a story undo itself, from purple Cougars (the car not the feline) to perverted offenders in leadership. As the audience was already morose I quickly moved on to at least say that many a reinsurance operation had also departed the Canadian scene in the same period. Cheers of applause from the cedants in the room were not heartening to me.
Reinsurers are endangered as the tree frog and harp whale. The following are amongst the dearly departed although some are basking in the warmer climates (the analogy is to more lucrative ROE countries):
Most were here in Canada for brief histories while others were so good like Storebrand the competition just had to buy them out of the market. I noticed not one tear from the audience from either the reinsurance brethren or the cedants. I do think I made the point that anything so insidious over 30 years cannot be labeled as a revolution.
Just to cheer the audience up since most made a lucrative living from the mortality trade I graphically showed how reinsurance has grown over the years tat I have been in it (not that I take full credit for reinsurance popularity today). In 1939 reinsurance accounted for .02% of all new sums assured (as well as about .02% of new premium). By 1969 (my first year in insurance) the new business going to reinsurers was under 4%. In 1999 it is predicted that new sums assured reinsured will hit the 50% mark. There are many that believe that the premium percentage is still mired at .02%! How long will it take for 50% of all in force sums assured are resident with the reinsurers and the dynamics within our business take a radical turn. Is this mortality outsourcing taken to its highest level?
Last topic to debate, although I thought I had won via humour 3 out of 3 so far was technology. I wanted to keep my options open to go both sides of the revolution or evolution debate so I continued to be vague to confuse the audience (something like writing for MO). A reinsurance opinion of technology is like the road sign I came across in Australia. In the middle of nowhere the road sign said “Emergency telephone 174 kms Ahead”. The message is correct but how much good does it do you if you are having an emergency. Reinsurance technology is similar in that the reinsurers views on technology are often insightful, well constructed, interesting to listen to but of now immediate use to the insurer who lacks money, people and inclination to implement.
The communication and transportation of paper with data or data without paper has gone through the phases of mail, express mail, courier, facsimile, compatible facsimile, back to couriers, bicycles, Internet and back to bicycles. In the end we still manhandle tons of paper between insurer and reinsurer. The reinsurer is somewhat narrowly focused on the paper and data they need and miss the point that reinsurance historically is a low priority item for most cedants.
As reinsurance gains in magnitude (remember the numbers a few paragraphs ago) will we experience a revolution in technology to shrink the tons to trickles.
I conclude with a picture of the evolution of man from ape to upright model citizen. Within the picture’s six forms of man (it was a man not a woman) I asked the audience to look around and realize the evolution continues with a few revolutionary mistakes.
Bill went back to Fort Wayne wondering aloud as to how he ever agreed to part of the non debate but happy that he was well received by hundreds of Canadians. Hugh went on to further consultancy, thankful that the debate was so mild mannered he could spend his time deep in thought about the evenings wine selection. Me, I went home to write the article while I still remembered the topic. I never did see the votes the audience submitted on our performance. Ah well, no news is good news.
You’re Gonna What?
The Canadian life insurance industry for decades has been subject to the allure of “shopping” their more difficult risks to various reinsurers to obtain a lower underwriting assessment. “Shopping” is the art of taking all the known information available on a life and sending it to 1,2,3,4, or more reinsurers who say they are experts at finding a more optimistic appraisal of the persons health, occupation, avocation, aviation and/or travel plans. Inevitably insurers have found that one or more reinsurers’ optimism to be strong enough to accept the case without an extra premium or only a trivial extra. As this columnist has stated in previous articles, everybody wins — consumer gets policy at low price, broker gets commission, company gets gross premium, reinsurer gets thin premium, and retrocessionaire gets thinner premium.
A dependence has been cemented binding the insurer to the reinsurers that is unwavering. Every reinsurer supports this marriage and has no inclination to change the status quo. To withdraw competitive facilities of substandard specialists known as reinsurers is almost like withdrawing automatic bank machines. A better analogy is saying that this would be like taking the child who has mastered the two wheeler with training wheels and say you must now go straight to the unicycle!
Legends of reinsurance would cringe at the thought their efforts over decades were about to be erased by those reinsurers experiencing from a tight money policy and/or a misunderstanding of the consequences. After all, facultative underwriting is a labour intensive business requiring skilled personnel (see MO #— “Pusillanimous Underwriters”). A reinsurer could quickly reduce overhead by jettisoning the facultative underwriting service and thus improve the bottom line or reinvest it in more pricing actuaries. Lord knows we could also use more compliance staff to keep up with the sound business practices paper work.
I do not profess to understand what lurks in the minds of some reinsurance management in this insurance business of 1999. Perhaps they have found some revolutionary secret road to success. When I look at the facts of what the sacrifice would be I have to step back and somewhat stoically stand by the insurers who, to the best of my knowledge, want full facultative service from the reinsurers.
How big a market is the substandard, borderline standard and decline group of applicants for insurance? Big enough to sit up and notice the premiums attached are more than enough to fuel the salivary glands of marketing/sales officers. Buried in the CLHIA statistical issues are the numbers that are often overlooked or worse still end up on the wrong desk or filing cabinet. The following chart is a synopsis of the CLHIA report on issued policies.
The number of cases in the survey can be somewhat misleading given the participant companies in the survey can vary and the number of companies is shrinking (merging,, acquisitions, departures, etc.). If we ignore some of the subtle changes and concentrate on the trends I can draw better conclusions. The “face amount” is the amount of risk or coverage in millions (add six zeros or 000,000 for the mathematically challenged).
The numbers when viewed in terms of case count and sums assured over the seven years made me realize I had been preaching an untruth. The fallacy that the business declined and or rated had not changed for years becomes clear. Yes, by number of cases the old adage that about 4% are rated and 3% are declined but look at the other line of numbers. As an industry 6.2% of sum assured is charged an extra premium which is up from 5.1%. In the decline row the increase from 2.6% to 4.9% of business being turned away is quite remarkable. Combining these two categories of risk we are looking at $9.7 billion dollar of sum assured at even $3 per thousand translates to annualized premium of nearly $30 million dollars. The numerical significance is magnified by the perhaps 60,000 policyholders that may feel they were not treated fairly (equitably) by the insurance industry.
If those companies not in the survey magnify the above chart and my numbers the number of disgruntled consumers may be 70,000 and the premium impact rises to $36 million. I am old enough to remember when new premium income of $36 million was significant. I am sure there are many an MGA who would dearly love to control that premium!
For those readers who see the substandard, borderline standard (you know reinsurer likes standard and insurer likes 50 to 100% extra) and decline as “of no significance” can cease reading. For the enlightened few who are still with me, this is a large and potentially controversial group of consumers. To date in Canada we have been free of significant legal battles with individuals who are not acceptable at standard rates. I would like to believe that a relevant factor in avoidance of such a tumultuous path is the predominant use of all availability facilities to keep the price as close to standard as possible if in fact standard is out of the question.
Using a shopped or facultative program where three or four reinsurers try aggressively to outbid (lower price wins) the insurer as well as the other reinsurers keeps the standard group large, the substandard premium minimum and the declines to a minority. No where but in North America do we see such a large number of shopped cases (perhaps close to 200,000 in NA). South Africa is another country with this phenomenon but not having been there to give a speech yet I cannot speak from a first hand basis. We have a free market for sales in insurance and have kept legal encumbrances out of the pricing. In more and more countries companies are forced to accept all risks and only now are some of those countries saying maybe we should avail ourselves of the facultative opportunists.
The seller of our product be it agent or broker has benefited from shopping program. Cases that would disappear into the not taken bucket are in force, commissions paid, company has premium to cover already incurred costs of underwriting and requirements ad reinsurer is tickled pink (Steve is pink politically correct?). Telling the broker their cases will no longer be shopped if they are ratable or decline conjures up visions of veins popping and guns (figuratively only) being drawn. Thirty years of saying “we have sought the best quote from all the reinsurers to get your customer insurance at the lowest price” has warmed the hearts and pocket books of many brokers.
Can you make a lot of money from facultative underwriting. Some skilled reinsurers have specialized in this market for decades and at last glance they are all alive and well with stock values climbing as fast as potentially demutualizing companies only dream. IT is also a fact that most reinsurers started their existence through the facultative channel and grew into rich automatic reinsurers. So when I here through the grapevine that some reinsurers are about to abandon this segment and even throw cold water at it I say to myself “You’re gonna what?”. I cannot believe it is so.
To stretch a premise I see underwriters left without a major tool in their arsenal to get cases issued at low prices. I see brokers and agents left with lost sales and angry consumers who have a fair price one-day and perhaps a decline the next. I see consumer activist groups demanding equally (far different than equitably priced) priced products regardless of medical history. I see a fundamental change in Canada’s life insurance pattern. I also see reinsurers with lower cost, fewer staff and plain vanilla automatic regimes.
I won’t be the first down this new road that is being ploughed through our environment. I can’t condone what I feel is an abandonment of my friends who happen to be my customer. If the industry follows the new road I would have to follow and I would benefit financially from lower costs and fewer staff training and retention issues. I hope to be there to the end helping the last holdout to the shopping program. This is one time I will let someone else lead. And in the end who really cares if their reinsurer decides to get out of facultative underwriting.
I am still left scratching my head asking my peer reinsurers “You’re gonna what?”