Category: Articles

It is said many times in our life and health insurance industry as in most industries or for that matter life that everything is cyclical. Sometimes we alter the cycle and sometimes it just goes away. Or so we think. Insurable interest and financial justification of an amount are subjects that keep coming back like a bad penny. Not sure where that saying comes from so I will have to research its roots.

This article was timely in 1994 and as the article read it was timely in 1930, 40,50, etc. It is an easy read for those who have any interest in our history. It should make you think that maybe, just maybe, some of our long held beliefs are not as strong as we would like. Truly most were mere suggestion that for lack of anything better they became larger than any urban legend.

The article also reminds me of the many people in the industry who gave me copies of treaties, humorous and often embarrassing letters or internal notes or historical books and notes on reinsurance and underwriting. Don Hickson, who had a voice so loud and clear the telephone was not needed, gave me the mother load of all such gifts. He gave me about 30 ancient Proceedings of HOLUA which have given me inspiration and examples on numerous occasions over my 35 years since he gave them to me. Many an article from the 1930’s or 40’s could easily pass for a current piece with only a change in the decimal point in the figures.

Thanks Don wherever you are.

Ross

2004-04-14

Marketing Options

May 1994

One of life’s great mysteries has been the struggle to find one’s roots and thus perhaps the meaning of life. Now that is a pretty heavy opening sentence and before you readers scurry off to a more enlightening piece of prose give me a chance to explain.

It’s true very few of us really give a country damn about how certain rules of underwriting and risk selection came to be. Fortunately I am both a pack rat of history and a human of considerable curiosity. I need to know if the first Great Home Office Underwriter, in the modern sense of risk selection, went to the mountain and brought back the tablets (first manual) or did the rules, guidelines and regulations of our very existence just ooze our of the ground like the oil on Jed Clampet’s farm (owned in conjunction with Granny and due justification for a joint first to die).

Although I am curious, I am also quick to be bored and like to know the road I am marching merrily along is going to bear fruit. If doubt sets in, I cut bait and start the motor for home. Many a false starts I have had but nothing has discouraged me from randomly pecking away at the notes, books and memorabilia that clutter my basement. What inspired me recently was finding a speech from years gone by, given to the Home Office Life Underwriters Association by Dr. Edmond Harding. He was, in his time decades ago, referred to as the “Tarheel Humorist”.

This inspiration came from his opening remarks to an audience of underwriters on the subject of being up to date and the redundancy of some of our actions. He said, “I saw a horse fly on the radiator of my tractor the other day. How out of date can we get?” How out of date, indeed! Time for personal digging into one’s roots and to see if underwriting folk were toppling on the edge of obsolescence. In my search I uncovered several stories or anecdotal tales that do not necessarily answer my question nor give me solace the rules are correct. However, at least it was a beginning.

In the Precambrian days of risk selection up to the 1940s, much of the time spent at Holua meetings was on occupations. It was a heavy duty concern as they wrestled with blacksmith, cobbler, bartenders (still do!), and lumberjacks and, of course, military risks (very real in the 1940s). I never knew such in-depth attempts were made at getting occupational extra premiums so accurate. Today it hardly gets a mention as very few occupations get any of a life underwriter’s attention.

An analysis of the minutes of the HOLUA meetings between 1956 and 1967 reveals that reinsurance got one trivial part on the agendas and that just shows how young the preponderance of reinsurance issues is for us young folks. Papers or discussions on heart disease made the programs eight times in the same period. Now guess what? – no jumping and reading ahead – topics near and dear to the agent made the program 25 times! Fifteen times the underwriters listened and subsequently read about speculation and over insurance and ten times the same group listened to agents lecture them on what they needed from risk selectors! Hello, read my lips. That is an unbelievable imbalance!

Comprehending how heart disease works and the intricacies of medicine are quite complex (either that or people spend too much time in medical school before they are allowed to treat hypertension). On twenty-five occasions, hundreds of underwriters listened to agents spell out what they want from the home office underwriter but obviously it never sunk in. Based on the number of times heart disease was addressed, one could surmise that building solid agent/underwriter relations is 300% harder than learning how the old ticker ticks.

The minutes of these meetings also record what is said so that distribution of words of wisdom and counsel can eventually reach even a greater audience. In 1933, the great Alton P. Morton, and employee of Manufactures Life at that moment, (yes, there was another Morton who was much more influence than I in the world of insurance), opened discussion on the subject of financial underwriting. One of the day’s big questions was, “How much insurance is to be allowed when there is no earned income?” This was in reference to people who were very wealthy (survived the depression with money to spare) and yet had not earned income. They were merely managing a large estate or counting coupons. Discussion was inconclusive. However, there was on minutia of detail buried in his part of the agenda that at times still lingers on in underwriting circles, namely, “… the further we depart from an indemnity basis in justifying the life insurance granted, the more pronounced will be the anti-selection.” That little gem of wisdom has been passed on from generation to generation (sometimes quietly).

Should we, the liberated reader of the 1990s, be astonished to learn that part of the 1933 agenda included J. Elliot hall, and agent of renown from Penn Mutual, whose speech was not recorded. It was titled, “How the General Agent and the Agent can Aid in the Selection and Assist the Company in Maintaining a Favourable Mortality.” I can only speculate that either the title used up all available space or the fact that the title mentioned agent twice and underwriter not at all meant it was of little value to future readers. Pity, I would love to read that article. (Hope some one says that about me some day!)

Today I am often asked where the five times rule for “keyman”, or more recently dubbed “keyperson”, came from since it sounds so arbitrary and is indeed used in all too arbitrary fashion. I found the answer buried deep in the moldy copies of old minutes. In 1930, the rule was laid down as a suggestion by one mere mortal in what is often referred to as The Laird Paper of 1930. Mr. Laird explained that the “keyman” (this is pre-enlightenment) should be valued at five times their earned income for insurance purposes. This simple statement became a law that has survived numerous wars, presidents, prime ministers and CLU grads. At least we can now honour or blame a named person! To show you how powerful Mr. Laird’s paper was, it was used as justification in Doug Weir’s (a foremost underwriter of North American Life in Toronto) comments at the 1959 HOLUA meeting. After that, it appears Mr. Laird drifted into obscurity but the ‘five times’ rule lives on.

In 1939 Morton (elder, not pup) was on the HOLUA executive and, as a fan of agent and underwriter getting into the same groove, we can only assume he was a part of bringing the following topic to the fore for underwriters. The title of the HOLUA session was “Establishing and Maintenance of Good Relations By The Underwriting Department and the Field”. Malcolm Adam of Penn Mutual (Penn Mutual must have been a leader in field relations) gave a great paper which could be given to any gathering of underwriters today. He tried to make four major points. I leave you with the brevity of Mr. Adam’s headings which leave little if anything to the imagination of any reader and presumed listener of the day:

1) The agency force has a right to expect that we [underwriters] know how to select risks.

2) There should be absolute fair treatment of all agents

3) There should be consistently prompt treatment.

4) Underwriters should be reasonably educated on the subject of selection of risks.

Postscript: I had the honour of meeting Al Morton in the 1970s and he flattered me by introducing me as his son on several occasions. (I doubled checked with Mom on this to make sure it was just a joke – he left Canada and Manufactures Life in 1947, the year I was born.) He was President of HOLUA 1948 and became a full Vice President of Prudential of America in 1963 after 16 years with them. Al is now gone in body from our midst but remains forever part of our heritage and I was honoured to have encountered him, if ever so briefly.

I give many lectures and speeches during the year often tailoring the talk to the audience as I go along. Writing the speech out in advance cramps my style and flexibility. Therefore few of my boisterous moments are caught in print format. My PowerPoints are available but they hardly ever attest to what I really said at the spur of the moment in front of an audience. Many ask for copies of what I said afterwards (hopefully not to find a reason to chastise me but rather because I said something worthwhile. My family says to me “Just tape record all your speeches!”

At the annual meeting of the Association of Home Office Underwriters in October Vera Dolan Associate Editor, On The Risk – The Journal of the Academy of Life Underwriting was in the audience and took copious notes on what all speakers on the main stage said. I was truly amazed at how well she could capture the essence of what I said or tried to say. If only Vera had been with me as I gave almost 6 dozen speeches in 2007 and recorded what I said. I could fill my web site with lots of new material — some boring insurance stuff and some controversial and hopefully thought provoking. None of what came out of my mouth would be considered opprobrious but perhaps once captured by Vera would be considered somewhat profound at times.

I followed on stage the world renown Dr. Phil Smalley who gave his customary insight into the world of medical advances and how wonderful they are and will be thus supporting the actuaries vision of cheap mortality rates for all. I was not as kind to the world of insurance as I tried to steer the minds of the audience to the point of challenging the common believe that all is well when in reality the onus on all risk selectors to be faster, cheaper and easier is contra indicative of reality.

The following is reproduced with the very kind permission of the AHOU, On The Risk magazine and most importantly Vera Dolan who without her trained ear and fast penmanship I would not have this summary of what I said to post on my site.

“Mr. Morton said that the myth or reality every underwriter hears from advisor to marketing team to pricing actuary includes:

• Everybody is living longer – just look at all the centenarians (over 4,000 currently worldwide).
• Cancer detection is better and earlier.
• Heart disease is noted earlier and treated.
• There are many more tests and drugs for a variety of impairments.

With the squaring of the life expectancy curve, more “older people” will become applicants for insurance. Insurance product designers will need to consider how risk factor burden and disease prevalence will influence the percent qualifying for preferred. This raises the question of whether we should be focusing on older or younger individuals, a consideration that touches every market.

Pricing for claims has already dropped from a charge of $4 per $1,000 face amount to $0.37 per $1,000. There is no room for mistakes in this kind of pricing. Actuaries are guessing where mortality improvements will be made, and have already accounted for their estimated improvements by lowered prices. However, underwriters have to make this happen.

Many of the gains in life expectancy may be negated by the growing prevalence of obesity and diabetes. It is questionable if underwriters are handling this properly – should we raise premium rates to let the obese/diabetics remain standard, or should we rate them to keep them out of the standard pool? There are also many variables in obesity and diabetes that produce gray areas of risk that underwriters identify daily when underwriting individual cases – such gray areas can kill actuarial assumptions applied to the overall obese/diabetes segment of business. As preferred pricing has been typically set by product actuaries without the input of underwriters or medical directors, the mismatch in knowledge may cause trouble down the road.

Trends in staffing and operations have produced our current underwriting environment:

• We exist in an era of “faster and cheaper;” underwriters have less time and far fewer tools to make quality decisions.
• Underwriters are more expensive than ever, while being far more transient and demanding. However, automation is heavily used currently and is gaining ground, and over 50% of small cases are being handled by remote underwriters.
• Protective value studies are harder to find than a good book; they are not being done due to sales demands and distribution woes.
• Speed pressures have forced underwriters from making around 20 decisions per day to 40 decisions per day. The greater the speed, the more likely that errors will happen.

Fast tools such as prescription history are not always a good substitute for the more valuable (but costly in time and money) attending physician’s statement (APS). Mr. Morton wondered if the underwriter can be fooled by a prescription history, which may lead to more questions and/or APSs. A 2004 study of U.S. automated prescription histories showed the drug history provider had 2.4% hits by case count, but less than 1.2% hits of significance. However, 41.3% of all U.S. residents age 18 to 44 are on at least 1 prescription drug, and 85.4% of those aged 65 and older are on at least 1 prescription drug.

Moreover, knowing what drug was taken does not necessarily indicate why the drug is being taken. Often drugs with multiple uses will require an APS to define what the real impairment at risk is, so the prescription history may cost more in time and effort for those cases. Examples of common drugs used for multiple impairments include:

• Klonopin, used for treating epilepsy OR severe panic attacks.
• Lamictal, used for treating partial seizures OR bipolar 1 disorder.
• Prednisone, used for treating skin disorders OR endocrine disorders OR rheumatic disorders OR collagen diseases OR allergies OR hundreds of different disorders.

Improved knowledge and availability of medical tests will increase the risk of antiselection. People know more about health risks, and therefore will look after themselves better and thus live longer. That is fine, but when people know more, they will also seek definitive diagnoses in ways that make records unavailable to underwriters and buy insurance. They may also buy insurance first and then get the diagnosis. There are medical services in Asia that now offer state-of-the-art medical screening and treatment at far lower prices than available in Western countries – more people are taking advantage of the information to engage in antiselection.

Other sources of antiselection come from legislative mandates to protect privacy and cover certain impairments. In the U.K. there are 13 genetic impairments that cannot be declined for life insurance. This may be an unwelcome message to brokers in the U.S. who might consider having similar legislation passed in the U.S.

In summary, current concerns of underwriters include:

• Legislation as a promoter of antiselection, not as protector of insurance from the unscrupulous.
• Time and expense pressure on underwriting.
• Ongoing smoking, obesity, diabetes and untreated hypertension decreasing gains from mortality improvement.
• Stranger-owned, consortium-owned life policies.
• Assumptions by pricing actuaries that underwriters are so good that the effects of underwriting will last 25 years.

A summary of the “good news” for the underwriter:

• More tests, education, understanding in preventing disease.
• More and better tests to detect disease.
• More options and less invasive organ and body repair and reconstruction.
• The highest number of quality underwriters ever
• Improvement in the timing, frequency and quality of audits
• Improved segmentation (“fine tuning”) of risks
• More automation to bring consistency and speed to underwriting turnaround”

AHOU brings together the people who are responsible directly and indirectly for the mortality results of the insurance industry. Without the prudent categorization of risk according to, at times, the hazy vision of the marketing actuary, the life insurance industry would not have the great mortality and thus profit results it has experienced for decades. At times like any organization AHOU can lose sight of its need to be controversial and an instigator of stability but overall it works and is leading many more individuals to a truly professional approach to the risk selection domain. I am always proud to be asked to present at their meetings and a big supporter of their mandate.

Once again thanks Vera, On The Risk and AHOU for allowing me to post the transcript.

Every insurance market in the world has witnessed periods when scrutiny of the financial integrity of application forms has been found wanting. Unlike medical underwriting, financial underwriting is not dependent on sound medical experience and reams of statistics. The fact that several companies in South Africa are expressing a concern about financial underwriting when there is increasing pressure to get applications converted to insurance contracts, is just one of the examples of the underwriting cycle for things like insurable interest, over-insurance and anti-selection by dubious consumers.

Have there been early deaths that spur one to talk about financial underwriting at this juncture? No, not that we have heard about, but there is a mounting concern, because if one looks outside SA’s borders there is evidence of mortality skewed by early claims, where at death the wisdom of the underwriter’s financial judgement or lack thereof is called into question. Underwriters in SA need to ensure they are seen to be more proactive and in control of change.

Poor financial underwriting has had many recurrences in the ultra- competitive North American market. The late 1960’s and early 1970’s saw a few early claims that made underwriters look rather foolish and gullible. Subsequent rounds of papers and articles emerged following poor results with what became known as ‘jumbo cases’ in the mid 1980’s and again in the late 1980’s. When all the rhetoric is stripped away, the basic message to underwriters was ‘make sure the case makes sense’.

Underwriting standards lowered

When I review old claims I see a pattern emerging of underwriting standards being lowered under pressure from producers or zealous marketing departments. Even though the financial justification, insurable interest and/or dubious nature of the business is in question, it is easier to say ‘yes’ and move on, than stick to the premise that the producer has not made it ‘make sense’, so you are going to continue to decline until justified.

The pressure then pushes underwriters to turn to those bastions of aggressive risk taking, the reinsurers. The ‘willing reinsurer’ rationale is quite often based on doing a favour to win a friend over and hopefully get some good business. I have seen so many large early claims where only one reinsurer took the case and this is a sad reflection on the professionalism of reinsurers world wide. When insureds die early the insurer takes some solace in the fact the reinsurer took all the mortality risk, and then takes action against its own underwriter for getting it publicity on the front page along the lines of ‘Company X supplies motive for murder through unjustified amount of life insurance.’ If the case is not justified in the eyes of the insurers’ own underwriting experts, why, when one of ‘x’ reinsurers’ underwriters says they will take it on the same evidence (really lack of evidence), does he or she approve issuance?

Every company has their rules of underwriting and I am the first to concede they should be challenged when justified. Let us take the magical keyman rule. That rule states that a key person can have five times income and the beneficiary is his or her employer. It was not born of mounds of research nor statistical analysis of the key people’s worth to their company. It was meant as an educated guess as to a multiple to start from. I believe there are some people running operations who are key only to perhaps a multiple of one times remuneration. At other times the multiple need climb as high as twenty times to reflect the very unique key contribution of some talent. Each has to make sense for the circumstances and thus the rule goes by the wayside.

Medical underwriting

Underwriters the world over are so extremely proficient at medical underwriting they are like machines at directing applicants into their risk classification slot. They are aware of the intricacies of the most obscure medical impairment thanks to the teachings of mentors, manuals and group meetings, and are able to assess the most complex details of the applicant’s medical past and present. If a reinsurer takes the case so rightly in need of a rating, they are the first to challenge the sanity of the reinsurer. We have medical underwriting pegged so well it is almost boring.

Financial underwriting and the ‘common sense’ approach to the subject preached in the past decades needs to resurface and become part of today’s curriculum. All the medical testing and lab works makes for a great industry. Teaching and mentoring how to ask the simple ‘does it make sense?’ question just seems to lack pizzazz. It sometimes takes, as history all over the underwriting world has shown, a few bad claims of a magnitude to raise the eyebrows of executives, to reinstate the rallying call of prudent financial underwriting once again.

The rules of financial underwriting as I see them, can be summarized in the following fashion:

1. Large and early claims will test the best of underwriters and

management regardless of how well you select risks.

2. Does it all make sense?

3. In partnership insurance who are all the partners and are they all insured equitably?

4. Never, never allow a person to be worth more dead than alive to family or business!

5. Multiples of salaries for keypersons or personal insurance are strictly guides and must reflect in summation the true financial loss in terms of the time value of money.

6. Banks make great beneficiaries but they are not necessarily without bias — they always win with or without the insurance.

7. Are you guaranteed that the in-force to be replaced will indeed be replaced? Do you follow up? Do you have legal remedial solutions?

8. Make use of your own companies accounting and investment experts to see if the finances are right on.

9. Use the Internet as your personal search engine for finding both personal and industry information.

10. You can never reinsure the notoriety from a bad claim.

11. If, with your advice and counsel, the agent cannot make it make

sense, decline.

These are not the only rules and I would encourage senior officials to support the study of financial underwriting and its offspring — underwriting for persistency. Support means they too have to ask and make the point to the pressure of distribution: ‘does it make sense?’

This year I have traveled for business to a few countries — South Africa, India, Malaysia, Singapore, Thailand, Hong Kong, Taiwan, China, Germany, Tobago and the United Kingdom. Many an underwriter would say just a few months ago that I was rateable for some of that travel. Today I finally escape the dreaded rated or decline category. What has changed? Is the world a safer place? Have I avoided the mythical “hot spots”? Do I travel with protection (two legged kind that carry a weapon and not the one in a hermetically sealed envelop)? Was the whole travel issue, so bewildering to advisor and underwriter, some cockamamie, self inflicted punishment for nothing?

Nothing. No. No. No. Yes. The answers to the above mini quiz.

Years ago the industry had a standard travel question buried amongst many questions we ask the applicant for life or living benefit insurance. The question was close in words or implication to the following: “Do you plan on traveling outside of Canada or USA?” The rare modern types in legal preferred “North America” to “Canada or USA” but many countered that we then would accept Mexico as a legitimate destination free of extra risk. It was probably a function of which legal counsel had experienced Montezuma’s revenge. There was also the broader question “Have you or do you plan to travel outside of Canada or USA?”

For my first three decades in the life insurance business neither choice of question presented itself as an issue. That does not mean there was an absence of arguments over travel since occasionally the insurer and the reinsurer were asked to quote on unusual travel. As a reinsurer you would experience maybe two to five such travel issues in a year. Rarely did the issue of the moment escalate into a frustrated diatribe of a long-lasting feud.

In those long forgotten days we had three main categories of travel concerns:

1. The “missionary” going to some far off land the underwriter could not spell or find on a map. The broker/agent was always just as cognizant of country facts as they always said the country or city therein was safe, clean and completely modern in all its facilities. Everything the underwriter read led them to believe running water was the river or the local well, sanitation was a trench you dug upon arrival and friendly environs meant no one had been lost that year. We risk takers really did not like odds of the person having normal mortality or morbidity, being able to investigate a claim or in some instances retrieving a body. The easy answer and most common was to just say no and no meant no. Amounts were small, premium trivial and commissions measly thus no real confrontation between agent/broker and underwriter.
2. The “cheap travel insurance” purchaser always came in with the note attached from broker/agent that read “Proposed insured leaving in three days for Bogata and company mine site in the Andes so please rush standard decision.” Underwriters preferred to just postpone these cases until the return (if they returned) since the anecdotal experience was most lapsed upon return since it was indeed cheap travel coverage. Agent/broker always argued that the three days before trip was not a factor as they had been working for months trying to make the sale. I do not recall any of these escalating to upper management where the plea would be the risk selector’s decision was unfair or stupid. Amounts were middle of the road, premium reasonable and commission after charge back for lapse would be small but if no factoring of lapse into it the commission would be large. Confrontation minimal and short lived.
3. The rare person of substance (wealth not girth although often they go together) who was going home, being transferred or was to be temporarily stationed abroad for a variety of legal reasons of which Canadian taxation played no role. These were always the difficult cases to ascertain how to best charge a premium tht reflected the additional risk if any existed. Rough residency tables, often years out of date, were referred to for guidance. The agent/broker was probably just as ignorant as the underwriter as to the real additional risk so in the end there was little debate over the underwriter’s decision. The underwriter was always worried about the same things — Could I validate the claim? Was there truly extra mortality? Would the premiums be paid? Amounts were larger than normal. Premiums generally high as proposed insured “loaded up” on cheap insurance. Commission great because of the latter two statements. Confrontation large but short lived.

To say underwriter and advisor lived in blissful peace would be an exaggeration. It was, by my recollection, three decades of rare and short lived skirmishes over who are travelling where and why and the ensuing trauma of finding out that certain global locations presented an extra risk be it medical, occupational or criminal. Were there facts to back up all the decisions? No. Did we make money on foreign travel and residency? I honestly do not know as I have never seen any meaningful insurance statistics (remember an insured population mortality is different than that of the general population). The numbers that any one insurer or reinsurer would amass were so trivial it would be near impossible to develop any meaningful statistical data. Anecdotes too were in scarce supply although every underwriter could relate a story of the unexplained death of an insured in a far off land where the body was quickly buried, burned or otherwise disposed of. Where there were more witnesses to the death than normally seen and the claims cheque was to be sent to the twin brother or sister we knew nothing about.

Then it all changed almost without any one event triggering the minute focus on travel. Yes the war on terrorism moved front and centre. Yes the incidents of foreign discontent seemed to grow. Yes certain countries became synonymous with extra risk, real or perceived. Yes reinsurers tightened up as they too faced tighter rules from their retrocessionaires. But in the end it was a fear of the unknown that led risk takers to take a broader and far more cautious approach to foreign travel and/or residency. Premium rates are 80% cheaper than three decades ago (if you are the super healthy non-smoking applicant). Margins are long gone in both the mortality component and expense component of the products. The target is a much smaller one and the tools to hit the target are much reduced. Compounding that is the fact that on preferred business the advisor may not even know the final price until the underwriting process is complete.

It has to be stated right from the outset that the following comments about why people are rated/declined or additional information is sought because of foreign travel has no relation to:

1. ratio of consonants to vowels in name.
2. race, creed or colour
3. ethnicity of advisor
4. where parents were born
5. where underwriter was born
6. reinsurance quota system
7. location of insurer’s home office

I have heard or read an amazing array of reasons why advisors think they were “picked on” and their proposed insured singled out for special attention and scrutiny. Most of it was pure unadulterated balderdash generally stemming from the advisors own ignorance of what the real risk was and their own lack of understanding the true risk. At the very same time the insurer and reinsurer was trying to be extra cautious while they tried to create the right answer. The industry has always taken a safe route until it finds the most prudent solution which may indeed in many cases be a relaxation of stringent temporary measures. It is why smart insurers have not gone out of business and careless ones have opted to sell while the selling is possible. On the medical impairment side we forget that 30 years ago we rated all myocardial infarctions, 12 months post episode, at +200% and $35.00 per thousand extra whereas today the rating can be +150% in best case scenarios (the rare ones).

We were too cautious on reflection but only on reflection. As we dug into what is the right thing to do there was little or no cooperation between sales and risk selection. I heard of no advisor or advisor’s group stepping forward to work with underwriters to find the equitable solution so that those truly presenting an extra risk (similar to the obese coronary artery patient/applicant) would be charged accordingly. Underwriters or pricing actuarial types never approached the major advisor associations to find a common ground of constructive risk selection. We just screamed at each other and looked absolutely reactive and unprofessional.

What seemed like three years of mass hysteria ended with little notoriety and almost as limp as a wet noodle. As 2005 ended the industry found itself accepting a new question which read along the lines of the following: “In the upcoming 24 months, do you intend to travel for holiday or vacation to a location outside of Canada or United States for more than 2 months or 8 weeks whichever is less?” If yes the details were added. If no the truck driver taking a holiday in Iraq is home free if I understand the question correctly. The variations on the question were significant but not earth shattering. The eight weeks may have been reduced to four weeks in two years. Canada and USA may have been extended to Europe Union. If anything the variables made the question broader in terms of who could now answer no. Gone in a flash were holidays or business trips to China, Israel, Indonesia, etc. Gone was any need to furnish where in Israel or Indonesia you would be staying or visiting. Gone was the need to know which the good countries are and which the bad are. Generally speaking the industry was saying that if the travel was of short term nature for vacation, and in some questions business, you are a standard risk and need tell us no details.

What a remarkable turn around as most scrambled to get with the new definition of worrisome travel or really the reverse; what was bad travel. I am still in awe of how generous the new question is and wonder how rare it will be to see a positive answer and wonder what the details will look like. Will I ever see a positive answer?

Was it all a “tempest in a tea pot?” Perhaps but the industry needed to look at facts and fiction and then judge what is the right answer to be equitable to all applicants and at the same time prudent for owners.

I am still close to a decline or a decline depending on the mood of the underwriter and company I try and buy from the day before getting on a plane. I cannot answer truthfully that my travels will be less than twenty weeks let alone four. I am also a klutz and seem to attract war, insurrection, epidemics and poor restaurant staff hygiene. That reminds me to refill my extra strength Imodium container.

By 1991 the distributors’ questions about reinsurance and how it worked were front and centre. One mystery was the method of paying the reinsurer for taking the risk. How were premiums transferred? What did it cost? Was it done case by case or en masse? Marketing Options editor gave me the push and the space to try and answer as best I could in terms easily understood by a mass audience (Steve’s MO was probably the most sought after life insurance publication of it’s time and its worshippers still abound and mourn its demise).

I am still at Manulife Re at the time of writing this article and thus I was deemed neutral and tried to remain so as to give none of Manulife Re’s clients cause for concern.

Reading the article today I find it still makes sense. It could be more sophisticated but to this Ontario farm boy it says what it says and brevity rules since it is time to milk the cows again. Okay I lie, Grandma and Grandpa insisted I never milk because it was too harmful to the precious teats.

Ross

2004-04-07

Marketing Options

March 1991

There are many mysteries attached to the term reinsurance. Most mysteries are exaggerated to keep the allure of the marriage between insurer and reinsurer attractive to all concerned. Whether your favorite insurer is practicing polygamy (the use or abuse of many reinsurers) or monogamy (exclusive hanging in there with one familiar face), the methods of reinsurance and terms are rather tried and true.

The terms involved are mundane compared to the awesome terminology with which you’re familiar. One popular reinsurance term is ‘treaty’ which simply refers to the formal and, in this day and age, usually written arrangement between insurer and reinsurer. Working with a reinsurer, and insurer can either make use of a yearly renewable term (YRT) treaty or coinsurance (CO) treaty but in exotic lands the modified coinsurance (MODCO) agreement is still a practice that has maintained a role in insurance just like the rhythm method in society. The treaty can accommodate the insurer by accepting the ‘risk’ on an automatic basis (99.99% safe), a facultative basis (99.97%) safe, or the more adventurous facultative/obligatory (99.96% safe). Each could be value rated at 100% if the chance of human error is nil but as you and I know in a head office environment that is as likely as 150% first year commission on an annual renewable term plan.

Occasionally agents boasts that their favorite company makes use of only coinsurance and thus their policies are handled faster, better, and with more security that if YRT were used as a method of reinsurance. The agents making this out of character exaggeration are wrong in their perception of the relative merits of this method of reinsurance.

Coinsurance is the ‘co’insuring of the policy in a predetermined proportion that basically shares the costs of issuing the policy, the face amount, the agents commission, and all ancillary benefits attached to the policy. In the end the sharing of the claim or the cash surrender value consummates the agreement. The benevolent reinsurer pays the insurer a yearly commission that should reimburse the insurer for its costs of operation and, in most cases, a shade more- thus rewarding the insurer for having such good agents producing such sterling business. These payments are guaranteed to the insurer as long as the insurer continues to pay the reinsurer its portion of the basic premium, an event that the author recalls never witnessing otherwise.

The simplicity of the insurer and reinsurer being in synch with the premium flow allows for both to be in a profit mode at the same time. Should each of the parties assume different patterns of cash flow, one could be in a loss position while the other is in a profit position. This reflect one of two realities – one wants to have loss carry forwards while the other wants to take profits early or, one of the participants is making a mistake. In the case of the latter, and it has occurred, there is only one thing to do and that is to chalk it up to the experience. Other attractive options include readjusting mortality, expense and profit assumptions or praying that the product doesn’t sell well!

As all of us realize, mortality increases with age except for that anomaly of mortality between age 16 and 25 when brains are lagging far behind fast cars, peer pressure and cash for exotic experiences in life besides those curing acne. The humble yearly renewable term method of reinsurance simply charges the insurer for the expected mortality that should occur in the year currently being lived. The premium here is the rudimentary mortality table, an actuarial work of art that evolves from numerous statistics raised to the nth power where n is very big, plus a tiny amount for expenses and less for profit.

If an actuary were available at this juncture, we would have an elaborate and unfathomable explanation for the premiums but if one looks at an annual renewable term plan one can see at a glance what reinsurance YRT premiums resemble. The logic is the same and there is nothing wrong with the insurer paying for its risk coverage as needed provided the insurer is saving a portion of today’s premium to pay for the increasing cost of reinsurance in the future.

The agent should be safe in making the assumption that the insurer has done its homework and can accommodate all eventualities. After all, haven’t the companies’ auditors spent hours investigating the in the insurer’s and reinsurer’s practices and haven’t the provincial and federal government insurance inspectors made absolutely sure everything is safe for the consumer?

Bottom line! Whether your favorite insurer reinsures on an YRT or CO basis, the impact is, for all significant reasons, negligible to the agent.

Incidentally, MODCO is coinsurance except the reinsurer gives the investment portion of the premium or the reserves back to the insurer to invest on the premise that the insurer is a smarter investor than the reinsurer. This obviously maximizes the chances of the reinsurer’s investment yield matching the insurer’s! Enough said since the employment of MODCO in Canada is a neglected art form that is about as common as a Toronto Maple Leaf winning streak.

Trust between a reinsurer and insurer is truly evident in the automatic treaty. What this form of trust shows is how much the reinsurer is willing to allow the insurer to bind it without the necessity of the reinsurer reviewing (re-underwriting) the complete file of the proposed insured. Quite often the senior underwriting talent in the ceding company, the life company, can accept a case for millions of dollars while retaining (keeping for themselves) only a $100,000 or more. What this says is that the underwriter is acting on behalf of both the insurer and reinsurer.

The automatic treaty guarantees the case in proportion to the risk sharing and both parties have combined to the risk sharing and both parties have combined strengths to support the consumer via the agent. Wise use of the reinsurer through automatic facilities enable the ceding company to complete with other institutions who opt to retain far more of the mortality risk for themselves which is often a function of their size. The basic premise of the automatic treaty is that the insurer must cede a portion of a policy to a reinsurer and the reinsurer must accept said portion. Two musts make fro a marriage of tranquility since there are no options.

Facultative reinsurance involves the physical handling of more paper by the reinsurer since it must review (re-underwrite) all the cases. This by its very nature consumes valuable time which the agent can ill afford thus it is more often than not only employed for problem cases – those vary rare occasions when case warrants and extra premium or financial scrutiny.

An insurer can use more than one reinsurer to obtain the best possible price for the case and this ‘facultative shopping’ for the lowest price frequently involves sending copies of the underwriting evidence to several reinsurers. Once the policy is issued, regardless of ceding company’s retention on this single case, the security of the reinsurer is of the same magnitude as in the automatic treaty. The premise here in facultative land is that the insurer may seek the facilities of a reinsurer and the reinsurer may take the case or part thereof at some price.

Facultative/obligatory, or as it is affectionately called ‘fac/ob’, is simply the opportunity for an insurer to pick a case and ask the reinsurer to take it. The reinsurer is obliged to take the risk. Once again slowly – the insurer may cede the case to a reinsurer and the reinsurer must take the case. Or, as practiced by some, the insurer may cede the case but the reinsurer must take the case if it has not already filled it retention on this life with previous cases. This form of treaty can be potentially written to accommodate the most unusual of situations but in reality its purpose is diminished by the far more attractive automatic treaty.

Courageous insurers make judicious use of all forms of treaties and methods of sharing some of the meager premiums with the innovative reinsurers. The industry has been well served by the combination of talent that permeates through reinsurance treaties. Contract is never used as a term since it lacks the diplomatic and global magnetism of the word treaty which implies great powers coming together to solve the needs of the agent.

If the curious policyholder ever wanted an explanation of the world of must and mays, the industry might have to invoke a 20 day free look. Thank heaven, behind both the musts and mays is, in most instances, a formidable alliance of insurer, reinsurer and retrocessionaire (how could I forget my role?) waiting to assure the best price and best security.

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 do not think there is malice of forethought amongst advisors but rather just clumsiness when dealing with the words, written or spoken, of someone from the product manufacturing side of life insurance. In the past I have written about the “Two Hymn Books” and how insurers themselves quite frequently use one set of verbiage for the advisor and then a second set for the risk assessor (underwriter). That strategy of poor communications has created dozens of issues between marketing and risk selection to the point one would assume it is a prescribed management style.

The most recent issue, although one cannot be so firm since issues crop up faster than grass grows in spring, is the one emanating from foreign travel. A few years ago the world was changed forever as the realities of terrorism and bombs of all types seem to engulf more than just a few countries. Panic set in and the questions from the highest executive suites of insurer and reinsurer poured forth wondering what travel is safe? Where do we worry if people are traveling there? Who wants to take these risks? Is there antiselection? The list of questions and apprehension grew and landed on the shoulders of underwriters to insure the price was right — risk equalled reward.

Did we of the “inside workers’ fraternity” communicate our angst to those of the “outside workers’ fraternity”? Did we forewarn the advisor who we are so dependent on for distribution that changes are in the air and there will be some tough times ahead for anyone travelling abroad? Did we take to the advisor all the rationale for the stand risk selectors were going to apply to cases where the mere mention of a plane headed to Beirut or Jakarta caused extreme consternation? The simple answer is we underwriters in the reinsurers did little proactive work on the subject with the many insurers and in turn the insurers did little proactive work with their distribution networks.

That is water under the bridge since we cannot go back and only claims people like to think that hindsight underwriting and action can be done in a foresight manner. Going forward I hope we have learned that we have to be proactive as a group of professional underwriters but that is sometimes impossible given the expediency with which advisors and their head office marketing support people operate. If I could influence what did happen I know I would today say quickly tell the world that reinsurers and insurers will be tightening up on anyone traveling abroad until we can ascertain what is the real threat and thus what is a real fair action to take on the various permutations of travel.

Underwriters over the years have become jaundiced in their view of some material risk factors and travel is definitely one of them. Ten days before a flight leaves for a deemed troublesome country and the advisor says they need a million dollars of coverage and fast. All part of normal estate planning and the upcoming flight bears not an iota on the application for 10 year term insurance. Let us please get serious. The underwriter is probably right in postponing until the person is back from Afghanistan before proceeding with assessing the real risks if indeed the person still wants a ten year product. In the interim go buy travel accident insurance. The underwriter is dubious of the real motivation and thus his or her training is to take the prudent (not necessarily conservative) approach. Is that wrong? I would bet that 99% it is the absolute right call. Since none of us in the insurance world things we are perfect I will settle for right 99% of the time.

Can I as a risk taker trying to have my company make money afford to turn a blind eye to the extra risk and accept the case even though foreign travel to some parts of the world are seen as risky (see below under government advisory). Are these warnings foolish and frivolous? No they are precautionary based on best information. The underwriter has no better source on the safety for a Canadian in say Indonesia than the Canadian government’s own Web site information bulletins. I have personal experience with Indonesia, a country I have strong attachments to from the 1990’s numerous trips there, and thus can relate to warnings by the Canadian government. I was to leave Singapore, where the biggest risk was shopping to the maximum Visa authorization, when I was warned by a Singaporean friend that going to Indonesia right then was not wise. He said trouble is brewing and the risk is immense. Not to be deterred I called my company and they said no all is alright go for it. Now I am caught between two sets of opinion. As a deciding factor I went to the government of Canada site and found out that indeed Canadians should get out of Indonesia and one would be stupid to go in at that time. Okay common sense says 2 out of 3 wins so go back to shopping in Singapore.

Duty and friendship mean a lot to this Ontario lad from rural roots so I called a business associate in the company I was to work with for four days. His advise was “All is well so come on over to Indonesia”. Then he really threw me when I asked if he would be picking me up at the airport as he usually has done in the past. His answer was “No, sorry it is too dangerous to be out after dark.” The risk was real. The government was right to warn me. My friend was right to warn me. In the end I went but did not eat or stay in any American icon establishment and kept away from windows, doors and milling vehicles! I am still here. Dos that mean that all travel is save regardless of warnings? No. Three weeks later the front of the hotel I was staying is was blown off by a bomb!

The various government advisory Web sites are great ways for an underwriter to assess the current risk of a particular country and if you visit all three (Canada, Australia and USA) you get a composite picture that is either comforting or frightening. For now I will continue to use it as one of the locations of good information and weigh its significance along with all other information I can accumulate. The worst that has happened to me in Indonesia is a real bad case of Shigellosis — great weight loss but terrible illness but that is another story about “testing”.

The underwriter has to decide if there is enough of a margin in the premiums singularly and collectively to accept a broader definition of “standard risk”. When I started in this business the margins existed for insurer and reinsurer alike. As pressure from advisors to lower the price for the many and actuaries eager to show they could sharpen a pencil better than the next actuary the price for mortality plummeted some 85% between 1974 and 2003. Only your computer hardware has seen similar reductions. Here in 2005 we have no margins. Putting it another way neither insurer or reinsurer have enough margins over a thousand cases to be extra generous on any case especially in areas where we lack statistical comfort. In the distant past there was the extra dollars of comfort that allowed underwriting latitude in decision making. It is long gone folks. We traded the broader definition and tolerance for standard for the sharper price for the healthiest and blandest of proposed insureds.

Today the battle rages around the world. Distribution wants freer rules on foreign travel and facts, lots of facts, to support the decisions of insurers and reinsurers. The underwriter wants to show some latitude but has only the press, government agencies and common sense to go on. The fighting in the trenches will only end when all parties sit a the same table and devise rules that make sense to the advisors and are seen as prudent to the risk selectors and risk takers.

Tell me again why hiding under a blanket in the boot of a taxi is not normal travel from airport to hotel. All that happened was my clothes got dirty and the reinsurer had a large cleaning bill. I still think I have been and remain a standard risk, at least for travel history and future.

Ross A. Morton

Richmond Hill, Canada

2005-06-3

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.

Ross

2004-04-13

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.

I was recently asked to do a critique of our industry’s leaders for publication. Even after I said an emphatic no the notion was put forward that I could do it anonymously. I really did not want to do anything anonymously since I take my writing seriously. Well, at least I like what I write and I have never shied away from taking any critique given. It was like taking cod liver oil. Made one cringe all over but it was good for the long cold winters. Trying to write a critique of our leaders would be suicide assisted by stupidity — I would have to go back to dairy farming at which I was utterly ill prepared!

The request, once turned asunder, made me ponder the word leadership. My nurturing parents never gave me a course in leadership and more recently most courses in leadership failed to change my ingrained style of dealing with human emotions and thus leading. Of all our industry leaders, be they good, bad or nondescript, which of these leaders were the product of genetic manipulation and environment versus some business school. If I had but the time and money it would be a fascinating exploration to get into the childhood development of these men and women who control the life insurance fortunes (perhaps fortunes is not a good choice of words given the controversy over demutualization’s benefits) in Canada.

Not aspiring to the label “industry leader”, but merely recounting my own experiences as an ancient in the business, I tried to recollect what events shaped my persona beyond the nurturing of parents and siblings. Since the subject at the front of my memory is leadership, all events must build that cornerstone of my career. I recognize the danger of digging up the past — lawsuit from someone wanting a cut of my meager pay since they put me where I am today, demands from irate friends who feel they were my mentor or frustration from my spouse who wonders who would even care.

While at a Boy Scout composite (everyone was from a different troop in Ontario and thus total strangers) camp I learned that leaders are sometimes blind and the blind are sometimes leaders. Within an hour of arrival at the camp I was picked as patrol leader probably because I had more badges than anyone else (I used to love passing tests and getting a tangible reward!) and I had matches to start a fire. Suffice to say this put an onerous responsibility on me to lead 7 other Scouts through the trials and tribulations of a two-week wilderness experience.

My first few days were full of me being full of me. Orders barked. Demands commanded. The little tyrant at his worst, striving to have the best patrol in Haliburton. The adults running the camp (not much older than my 15 years) gave me lots of rope and liberty to make life hell for 7 other 15 year olds! I was learning nothing about true leadership. Looking back it is probably at this juncture that many of the more ruthless leaders of our industry (wherever they may be; wink, nudge, wink) and other industries never recovered from that overbearing power surge.

I believe my lucky day came when, while on an island and living off the land (well sort of), I suffered an allergic reaction to the smoke of a particular pine tree (true second hand smoke). My eyes were swollen shut and without vision I felt doomed as a leader. I heretofore had used a style that meant pointing the index finger at work undone, giving the evil eye to slaggards and watching every move for fear of my patrol screwing up an assignment. Leading would be an impossible task given I lacked sight. The most important sense I possessed as a leader had been rendered temporarily out of order. I envisioned a relinquishing of power and with it my summer would be a failure.

I had a heart to heart with my adult leader who did not strip me of my responsibility of leader but instead coached me and made every effort to help me. He knew the right approach and was a true mentor on how to be a leader. He said you must trust your team to do the right thing after delegation of the action. Think through the team players and use the individual strengths therein to move forward. Listen to everything and “feel” the emotions to judge whether my direction was correct and was being carried out. Above all else you have to a team player.

Over the next 48 hours my sight returned gradually and so did my confidence at being a leader. I now understood the importance of listening to my “staff” and then delegating work in a meaningful fashion that best utilized their unique talents. My mentor probably went on to be a leader in his own right given he comprehended the role so well and was able to communicate the lesson so well. On the other hand he may be a consultant to any of today’s political or industry leaders needing the unthreatening counsel of a wise and worldly man or woman.

I did not go on to have the winningest patrol but I was part of a team that gave first place a run for their money right to the last inspection. If I could only have stopped “Bugsy” from having a nocturnal piddle behind the tent I am sure I could have won all the ribbons.

I smile when I recollect the lesson learned that summer. I should say lessons since I also learned how leeches can cover one’s body in mere minutes if you don’t take the right precautions. One of our other leaders took pleasure in putting us through a “mud portage” knowing it was full of leeches that would have made even Humphrey Bogart cringe more than in the African Queen! This is akin to the leader’s yearly change in company strategy or tactics

Every time I hear a speech or read an article where our leaders are questioned, quoted or highlighted I wonder where they got their early lessons. Did the pattern of their style emerge in youth or adulthood, home or school, club or gang?

When I ponder the leadership lessons I have assimilated over the years it is the “how not to do it” ones that immediately jump to mind. Is that because I have worked for inferior leaders? Is that because I assume every leader will be a mentor of excellence? Failing those two, then perhaps my expectations were set too high by a young in age but old in sage scout leader some 36 years ago. The following lessons are glaring and I will use the leap of faith that you can decipher the good examples from the bad.

After acquiring the necessary skill to do one job proficiently I asked to do more, regardless of what to fill my day early in my career. My boss responded by telling me to read the paper or pocket novel to “kill the time” since no one should look like they have nothing to do! On going two levels higher with my demand for more work, I was told to stay with the current regime and no one would worry about the extra time spent on superfluous reading materials.

Asking that my boss “go to the wall” for the department and make sure the recipient of certain information at a very senior level understood its importance was met with a blatant show of selfishness. The boss responded that he/she (trying to protect the anonymity) “would not go to the wall for anybody in the department nor the company if it meant in any way he/she may risk his/her job! “I would never go to the wall for you, any of you!” was not too inspiring.

“His usefulness has finished so why worry about him.” “Why should I give him a piece of the action if he is not smart enough to demand it?” The speaker was one and the same. The former sentence was uttered about what I thought was a valuable contributor to the speaker’s success but immediately of no more use. The later was said after a major contract was won and monetary rewards were enormous and the “him” played a most significant role in winning the day.

At a time of critical financial need after a family tragedy the boss steps in, in absolute confidence, to share the burden between the three of us and uses his own personal money to make sure the human tragedy was not exacerbated by monetary issues. Quietly a real personal gesture from a supreme boss for a staff member he/she had always seemed to loath or chastise.

The inability to give a 10-minute dialogue on the industry they worked in to senior officers and in front of all direct reports spoke volumes on the individuals true understanding of what was going on in the world.

1. “Well, this two day meeting about team building and building understanding is over and it is now best we all get back to the real work world where the work has piled up.” A company CEO/President who inspired his/her team with that wrap up speech at a company off site session.

2. “How’s the wife?” “What are you doin’ for holidays this year?” “We have had a good year at xczvbx, right?” The foregoing is a synopsis of my job evaluation and year-end review. The monetary increases always surpassed my expectations but I never really heard words to help me improve?

3. “I have been told your speech was given in a very monotone fashion and you refused to stand for the speech. This type of behavior is unacceptable.” The foregoing was delivered by a very important person in my career but was delivered after receiving a one sided telex (prehistoric and long ago replaced by courier and then e-mail) from a politically proficient peer at the same company. No question asked as to why. Nor even a question as to why I was on crutches. I had given the speech with a broken ankle in a bucket of ice while seated. Moral — as Yoda or David would say “Martyr I was not, eh.” “Stupid if I try, not.”

4. “The Board does not need to hear bad news and therefore we stripped your report of any references to adverse mortality, reserve shortfalls or concentration of risk. Instead we edited it to read that all issues were under control.”

5. An executive vice president once said to me “My job is to help you with your transition and I am available to you at all hours should you need support, an answer or approval. If you do not make a success of this opportunity then we have both failed but I have failed greater because I let you down.” I didn’t ask him if he was ever a Boy Scout Leader in Haliburton!

Take heart all you rookies. There are true leaders in our industry and some of them will cast you a life preserver but some will beat you to the lifeboat. My history in this insurance industry is far from unique and, although each of the above brief anecdotes will be a full chapter someday, I am sure if I solicited for more management examples the bad would outnumber the good. Perhaps that is what Grandma meant when she said I would certainly learn from my mistakes and the mistakes of others in the “big city”.

Curving back to the opening, I cannot write about specific leaders for various reasons:

I would never want at this stage of my life to hurt someone with his or her own leadership/management baggage.

I would have a difficult time on a part time basis truly studying each of our dozens of leaders to insure each was given a fair assessment.

I would like to work for a few more years in the business.

My leadership/management advice is more valuable sold in Asia Pacific and Australia where, since I am this foreigner of large stature (physical bulk), it is in demand. “The grass is always greener.” Never rang truer.

I like my current relationships thank you.

I would have a hard time picking who was number one on the list given all the choices. If I put the Boy Scout leader at top it would be cheating since I do not know if he is or ever did work in our industry.

Sorry to disappoint, but no ranking today but perhaps tomorrow. In the words of Baden-Powell as published in the “Headquarters Gazette, May, 1913”:

“In the Scout Movement the Scoutmasters and Commissioners have won their position in the public estimation by their whole-hearted work in a national cause; every day they are gaining more sympathy and goodwill from parents and pastors, teachers and Statesmen, and thus it is that the boys, in their turn, accord to them a greater confidence and greater readiness to serve and be led.”

Growing up as a young healthy boy in Southern Ontario I had a passion for the finding the best knockers. They were not always easy to find and only the keen well trained eye could spot them either hanging around or lying right there at our feet. It was only as I matured into the late pre teens that I realized size was not the only criteria for winning the battle of the knockers or conkers as many a city folk called them. (Note: Conkers being derived colloquially from the word conk which means to hit on the head)

Why are they doomed? It is not for the lack of chestnut trees but rather the ever spreading morass of rules and regulations meant to keep us and our children safe from harm or these weapons of mass destruction. On a recent trip to the UK my wife’s relatives broke the sad news to me. It was now against the rules and regulations of UK society in most areas to play with knockers or conkers (you pick the word that best describes your nuts). The UK law makers believe it is unwise and thus unsafe to play with conkers for in battle pieces of the chestnut may fly off and puncture the player’s eye. Since it would be impossible to enforce the other option, making safety glasses mandatory for all youths playing with congers, we just banned congers and knockers.

Doomed like so many dangerous escapades of the youth. No longer could a youngster search for the perfect chestnut to be transformed with a simple but minimalist hole through it and a string attached into a weapon of mass destruction. Size did not really matter as the mid size, very firm, and less pulpy chestnut actually ruled over the big soft knocker. Ah, we do want to make this world a safer place. Doomed is the fun of conker versus conker in a battle to the finish. The upside is that there are more for the street chestnut vendors.

Not that I ever put HP Sauce on my chestnuts but I have used a lot of the brown liquid on everything from steaks to sausage rolls. HP Sauce to me was an icon of British taste. Once the Brits had cooked the flavour out of the meat the only thing redeeming was the fact the meat retained the ability to transport ever so effectively the HP Sauce to one’s mouth. It was and still is a great sauce. Many a savoury garnish has come and gone but the HP has never lost its favoured or should that be flavoured status. Now the Birmingham plant that produces the entire HP is closing and the sauce’s blending and bottling are moving to the European continent where Heinz feels the economies of production are better.

Everyone seems to be in a frenzy to change the decisions of learned men and women who see HP as just a food product and not as an icon of Britain. Will this mean the House of Parliament on the label will be replaced by some Dutch icon? Will the waters of Holland have the same chemistry as the waters of Birmingham? Since many see HP as synonymous with House of Parliament will the name change to EU Sauce? From my relatives to the highest ministers in Britain the uproar grows but sadly most deep down one cannot stop the mega corporations from doing their thing. Years from now, should the protests fail to garner Heinz’s reversal of policy, will we have forgotten HP as we pour EU all over our succulent steak?

After the loss of the conkers and knockers what is the mere loss of a sauce? A lot as these are all cumulative actions of the modern human and play havoc with the older generation. I can only hope the taste remains the same and the tears of 125 workers in Birmingham do not taint THE brown sauce passionately labelled HP. Sally and David please put some last bottles of Birmingham’s finest for my next visit.

Makes all the changes in the insurance industry pale in comparison. What could be more important than outlawed knockers and where a sauce is made?