Category: Articles

The year was 1992 and it was early in the year. Remember I often wrote the article months and months in advance of publication. The editor and writing mentor in Steve of Marketing Option fame was always one to have the articles ready to go well in advance and sometimes so “well in advance” he could go three without asking for more. Early in 1992 the talk in Canada was of underwriting and trust. Can the producer/agent trust the underwriter? Can the underwriter trust the producer/agent.? Can the reinsurance underwriter trust the insurer’s underwriter? Lots of questions and the permutations were endless.

In an industry based on trust its definition sometimes gets confused with procedures. The complexities of the later years would be exaggerated to the point where the conspiracy theory amongst underwriters was a great “scapegoat” for something going wrong. Reinsurers since time began have been used as the “excuse” for everything from the cash values being too low (now what did the underwriter do again to build the product?) to declining a standard risk. Broad shoulders helped if you wanted to succeed in reinsurance.

Not sure why Steve insisted on this article but it gave me a chance to interject some acquired Indonesian slang into an article. By this point in my career I had been to Indonesia on business about 4 times and quite liked the experiences. I am not sure I could say that for the last few years.

Trust remains an integral part of the reinsurer-insurer relationship. If either side abuses it the seamless flow of risk between the two can be lost forever.

Note the spelling mistake that escaped the keen eye of the editor and me. Steve was so frustrated with my verbiage at times he even bought me the dictionary of American slang and if there had of been one he would by the Canadian equivalent!

Ross

2004-04-12

Marketing Options

Sept/Oct 1992

Pilfering from the pioneering scribe of all home office underwriters, the title says it all. Or is it still relevant to ask ourselves this question? For those of you born in the fertile fifties, the author in fact is none other than Charlie Will and his words of wisdom from long ago translate from Malay into “Does it make sense?”

Simple words coined to guide the home office underwriter. Charlie was trying to say that if the home office underwriter thought the agent was a goofball and presented poor information, just decline. On the other hand, if the agent was trustworthy and if the idea behind the application sort of made sense, go ahead and accept the risk. The whole premises of North American underwriting seemed to focus then more on the artistry than the cool reasoning behind the decision. (Some critics stated in those early days of yesteryear that head office underwriting was merely a facile excuse to hide the lack of science in the underwriter’s tool kit.)

Unfortunately, the element of trust seems to have vanished without explanation. Other than the rare instances of agent misrepresentation, there is a dirth of explanations for this prevailing attitude. I cannot pinpoint the date it began to invade our industry nor the incident that triggered the defensive mechanisms that took control of the underwriters’ psyche. There is strong evidence that underwriters were taught to trust on one and the list of paper requirements grew larger. But a hidden underwriting element worried that too much paper was feckless in the fight against real agent deviousness.

Consequently, three underwriting rules evolved. Underwriting Rule #1 states that if there were only a few pieces of paper (the underwriting evidence), then something was not being admitted and it was best to ask for more paper or decline. Underwriting Rule #2 proclaimed that if there was close to one inch of paper (2.54 cm. For the purists) to support the application, it must be standard. Then the surprise of all surprises, Underwriting Rule #3 decreed that if the paper pile approached 2 inches (5.08 cm.), it was a decline. So a succinct set of papers, regardless of how well representative of the facts, had to hide some devious plot to over-insure (Rule #1). Excess paper became synonymous with standard issue (Rule #2) but reams of paper which could include the agent’s own poignant words incurred the underwriter’s ire and a wrathful decline (Rule#3).

If one contrasts the North American reality that blatantly hypes mistrust to the European laissez-faire attitude between agent and underwriter, it is remarkable to witness that both are in the same business. Companies in Europe regularly accept large amount cases with half the financial requirements of their Canadian or American counterparts! I have witnesses in my lengthy career the miracle of multi-million dollar applications (in original currencies francs, marks, lira, or kroners) being issued on the simple poignant prose of the hallowed agent plus perhaps an accountant’s or banker’s letter of reference as to the value of the proposed insured. In fact, it is not a rarity to see cases on young adults or old kids being insured for megabucks on the testimony of just the agent! Not only is the unadulterated trust in the agent paramount, nothing has occurred to shake the underlying trust the agent feels for the underwriter.

Quite frequently the North American underwriter is privileged to partake of a cross –the –Atlantic case for reinsurance reasons. The ensuing stretch for the Tylenol bottle is as rapid as a Guzman fastball (for Expo fans, this is Blue Jay simile). The root cause of these rattled nerves and tormenting migraines is the lack of financial justification beyond, at times, nothing more than the well-written and concise letter from the agent reciting the man’s value in life. On occasion there may be two or three testimonials from the likes of a banker, bringing credence of the agent to the 100% level. As oft as not, the North American underwriter collapses over his desk and in that prostrate position exclaims, “What the heck, if the Düsseldorf underwriter believes the sum applied for is okay, then that’s fine by me.”

The foregoing comment on the approach to risk selection is not meant to incriminate anyone or be so bold as to decipher who is correct. I am merely, and with due lack of diplomacy, trying to understand why. Why would a niece or nephew of a rich (make that really rich) person residing in Düsseldorf qualify to be insured for a mega policy simply because “she is the youngest and healthiest member of the family and is charged the lowest mortality rate and thus should be the insured under a humongous policy bought for estate planning purposes of an older uncle, aunt or father”?

If this occurred in North America, the underwriter would not only decline the application but said application would become the talk of the next underwriter’s golf tournament. The underwriter would also have the agent sent for a CAT scan of his most northerly protrusion.

Why in one instance is there so much trust in the appropriateness of the action while in the other there is absolute disbelief in the insurable interest and motives of agent and applicant? How did two similar industries like life insurance in North America and life insurance in Europe develop such differing standards of agent credibility? Have North American companies been bamboozled more frequently? (“Probably!”, come the catcalls from the more cynical.) Can Europeans afford to be paying more in benefits than the North American company?

We, the big we that includes all us in the insurance industry (whether active, inactive or on redundancy leave), probably cannot completely answer any of these questions. On this side of the pond, we sell complex plans that minimize the dollar the customer spends on protection and tax planning. Although not as tax driven, the European too has complex needs covered by unique plans. I would like to think that it is not plans that lead to the North American paranoia around antiselection. Something, somewhere deep in the bowels of our past ahs made the agent’s word almost valueless and that millstone has been passed from neck to neck without appeal of its consequence. Pity. The trust appears to still exist in other jurisdictions that perhaps rightly or wrongly (naively?) have not incurred any financial consequences from that trust.

As I travel between these two venues, I almost become a dithering nincompoop (there are some who say the “almost” could be dropped) over which hat to wear since both logics could fit the circumstances. Or so it seems. When pricing a product in a typical Euro community, the Merlin-like actuary uses assumptions based on a mortality table that is far more conservative and safe than a North American table. To complicate matters we have a propensity in North America to assume significant mortality improvements over an indefinite duration. By using a higher Mortality assumption and ignoring aggressive improvements, Europeans acquired a significant mortality gain, possibly in the magnitude of 10% to 20%. My colleagues in Europe harp in, with remarkable disdain for North American mortality results, that their revered agents are under sever pressure to tell the truth not oversell applicants, thus enhancing their safety factor. Indeed, there are indications that the agent and underwriter over there will not allow themselves to be mortified by early, big and embarrassing claims.

In places like Indonesia (a very representative member of the emerging Asia Pacific market) both North American and European insurance management, especially home office underwriters, are trying to shape underwriting patterns. As larger cases are being written by agents coincident with the economic growth, the average face amount has escalated from the mere thousands of dollars to tens of thousands and hundreds of thousands will soon be common. Enter the outsiders or foreigners who want to sell their advice to this new market. One expects and can actually witness a total frustration with these outsiders’ views. One set of ‘teachers’ from the opposite side of the Atlantic who imply there is a better way to handle agents and large cases.

The role of underwriters and their interaction with agents is so critical in these formative years of jumbo Indonesian cases that we, the outsiders, are probably causing more confusion than order. The remarkable and admirable trait that is visible, however, is the Indonesian ability to cut through our foreign prejudices. There seems to be a very real desire by their underwriters to help the agents get the case through the maze while exercising the skills of a prudent company’s risk selection. It helps to have the field force so in tune with helping the companies succeed – it’s called ‘company loyalty’.

“Apakah itu keputusan yan benar?” For the unilingual audience that loosely means “Will the underwriter learn to ask the correct question first?” The question which he must ask himself first is Charlie Will’s question, “Does it make sense?” When he’s done that he is able to work intelligently with the agent because he can structure his own questions to the agent accordingly. The responsibility is then placed with the agent to truly listen and help expedite the issue of the policy to everybody’s benefit. Perhaps the penchant for underwriters to ask improperly structured questions and agents to impatiently listen to questions, even when they are the right ones, will not infect Asia Pacific.

As larger and larger cases are becoming the norm in places like Indonesia, there is the opportunity to learn from all of the older, but often not wiser, markets how not to make the same mistakes. They are in the enviable position of having all the modern technology and education without the hang-ups of Western ways. The rapport between agent and underwriter and underwriter and agent (just to show I can see the issue from both sides) could forge a common bond in this part of the world that rejects the worst of our own prejudices whose roots are already lost in the archives.

Agent and underwriter working together in Indonesia to fashion sensible guidelines for insurance interest and risk selection for the benefit of the life insured and insurer may be the greatest contribution these two contingents can muster in their life time. Now, that does make sense!

1. A large producer of life reinsurance in Canada had a very knowledgeable president who was very cognizant of how reinsurance pricing and mortality curve could benefit his company. As such he was one of the most astute reinsurance purchasers ever seen and he in turn passed this skill to his pricing and underwriting teams.

One year when they were introducing a new product they tendered the quote to all active reinsurers in Canada as well as one based in the UK but a dominant player globally (the insurer had a subsidiary in the UK). In that era, not so long ago, reinsurers were actually coinsuring generously with first allowances beyond 200% of original premium and no chargeback in the event of lapse.

After weeks of bids going back and forth, as the wily President and his team played one reinsurer against another, the final sprint to the winners circle was between two reinsurers — a major Canadian subsidiary of a European global reinsurer and the aforementioned UK subsidiary of a global reinsurer. As pricing escalate to the 285% allowance level the victor emerged as the Canadian subsidiary of a global reinsurer. Congratulations flowed in the victor.

The vanquished UK subsidiary of a global reinsurer was so perplexed at the loss and finding it hard to fathom anyone having a sharper pen they asked whom they lost too. A fair question as reinsurers appreciate knowing who is the competition.

The answer came back that the winner was the “sister” subsidiary! Both finalists in the bidding war, which pushed the price 70% passed all other competitors, were in fact one and the same company.

2. Communication between departments in a company can often leave a lot to be desired. In one company’s eagerness to close a reinsurance deal with a winning reinsurer whose rates and allowances were extremely great the communication between the person canceling the old treaty and the person accepting terms on the new treaty was nonexistent.

The person agreeing to treaty terms of the new reinsurer asked for and got the treaty to commence on all policies issued with policy dates of for example July 1st, 1999. The person wrapping up closure of the old treaty terminated the existing treaty for all applications received after June 1st, 1999.

Yes you guessed right. A claim arrived on a case received after June 1st and issued prior to July 1st. The simple car accident fatality became a claim that both reinsurers said was not clearly theirs. When all three parties were in a room it was only then that the ceding company President heard how his staff did not work in unison on something as vital as protection of their retention and no gapping holes in the reinsurance. As always the result was a compromise struck after much embarrassment where all three parties contributed to the significant claim payment.

3. How does your reinsurer feel about fraudulent producers? What is the reinsurers’ stance on claims where the quality of producer selection and monitoring are directly correlated to early and uncontestable claims?

A $500,000 claim occurred and upon investigation the incidence of fraudulent misrepresentation leap off the documentation from the time of underwriting. Gross nondisclosure had occurred and had the full medical history been known no insurer or reinsurer in their right mind would have accepted to application let alone issue a policy. To make a long story short the file ended up in court where the insurer was ordered to pay since the evidence that was missing from the application regarding the deceased’s health history was indeed told in front to the deceased’s son and wife to the producer/agent. The fact the agent knew the story both as friend of the deceased and agent lead the judge to order the payment.

As the case was reinsured 60% the reinsurer was asked to just throw their $300,000 into the pot for disbursement. The reinsurer said it would only pay if the insurer would launch a claim against the agent for his fraudulent misrepresentation and omission of facts he knew about deceased. Insurer did not want to irritate its reputation amongst agents by suing one. The reinsurer refused to pay its share of the claim.

Should the “follow the fortunes of the insurer” be taken to the extreme by turning a blind eye to fraudulent agents? What is the true definition of final approval of claims mean to both the reinsurer and insurer? Claims sections of treaties are often left to interpretation at time of claims, which is erroneous, as it should be clearly understood from the onset of the claim-paying obligation.

This case ended up in arbitration where the arbitrator (a reinsurance guru) sided with the reinsurer and won the agreement of the ceding company President that the honourable solution was to sue the agent for damages as the reinsurer suggested; especially since the reinsurer did not hinge its payment to a favourable court ruling merely the act of pursuing restitution through the courts.

4. Translation is not a core competency of a reinsurer. A ceding company had drafted a new suicide clause and was in the final stages of translating it into another language. A translator of meager financial status was used to save some money assuming that final sign off would come from the reinsurer. The reinsurer got the final draft and with little attention to detail gave it its blessing.

Yes an early suicide occurred. When it looked so obvious that they could fight and win in courts on the basis of the suicide exclusion the insurer sent the file to its legal counsel (outside) for preparation of the usual denial letter and strong wording about “not paying in the event of suicide”…

The lawyer, happy for lucrative work from an insurer, was quick to point out that in his judgement it was foolish to contest the claim.

All had missed the key word “not” before pay in the suicide exclusion clause. The clause then read in its key sentence “will pay in the event of suicide with the first two years “.

There are times even a reinsurer makes a mistake and thus insurers should never leave to a reinsurer critical decisions that they have not fully reviewed.

INTRODUCTION

The reinsurance of life insurance business in Canada has grown in magnitude to the point where in 1981 approximately 15% of all new sums assured landed with the reinsurers – both with companies that are exclusively reinsurers or with direct writers that actively solicit reinsurance or retrocession business. In addition to today’s size of the reinsurance industry, we have the rather open criticism of reinsurers both from the direct writing insurers and other reinsurers. It is now in vogue to blame the reinsurers for almost all adversity that befalls the life industry that cannot be allocated to the federal liberal party. From where did the reinsurance industry ascend to such notoriety?” is the question I felt needed answering.

To answer such a leading question, I started on a path, which I originally perceived as a simple collation of various direct writing companies’ experiences in reinsurance since inception of Canadian life companies. Through friendly persuasion I was able to elicit the assistance of Harry King, recently retired from North American Life and in most quarters deemed to be the most knowledgeable reinsurance historian. Harry approached several companies for historical anecdotes, early treaties, and any other relevant information that would help in the construction of a reinsurance history – hopefully void of bias and innuendo! Unfortunately for Harry and I this formal request for information proved in the majority of cases, fruitless. Excuses varied from “previous records destroyed” to “hopefully we can supply information in the near future”. As the near future dragged well past one year, I suddenly realized a complete yet concise history was beyond my grasp. I would like to acknowledge the contributions of Manufacturers Life’s reinsurance department and Mr. Gordon Beatty previously at Canada Life. Without their contributions, this project would have been infinitely more difficult.

THE EARLY YEARS

From Harry King’s former company came copies of a couple of treaties, which must be qualified as one of oldest treaties between Canadian life insurers. The first is between North American Life Assurance Company and the Ontario Mutual Life Assurance Company signed on June 15, 1883. This treaty provided automatic reinsurance from one to the other and vice-a-versa. In most respects this hand written treaty varies minimally from what would exist today between reinsurer and reinsured. The striking difference is that what was said 100 years ago on three pages now has been expanded through rather complex legal jargon to 36 pages or more. It was surprising to discover both companies agreeing to allow the same coinsurance commissions on each other’s business. The commissions used in this exchange were 60% first year and 10% thereafter regardless of whether the plan was permanent or term insurance – yes, Virginia term insurance has been around a long time (excuse the Charlie Willism!).

By 1887, the second treaty reflects a modern approach to reinsurance – it was typewritten. Fortunately for all involved, the treaty was a very concise bilateral agreement entailing a page and a half of wordings. This treaty between North American Life Assurance Company and Temperance and General Life Assurance Company of North America appears to have been on a modified yearly renewable term rate basis including a percentage of expenses in the first year. The original correspondence is still in the possession of Temperance and General, now called Manufacturers Life. (This treaty is difficult to comprehend for there appears to be a yearly charge based on the number and size of claims, but that is only a guess.)

A third representative treaty for the exchange of excess risk was between the Imperial Life Assurance Company and North American Life Assurance Company, signed on the 16th of December, 1899. This agreement, comparable to treaty of 1883 mentioned earlier, was a coinsurance contract. Both parties to the treaty agreed to commissions of 50% first year and 7% on renewals for ordinary life, limited pay life and term insurance of three years or more. On endowment policies of all durations the commission was 5% in the first year only. And to think, we in the industry believe aggressive coinsurance allowances from reinsurers are a product of the 1980’s! Simplicity still existed, as only two pages of wordings were required to cover all essential points of the agreement.

The term “gentlemen’s agreement” is often used to describe reinsurance affairs. It implies a trust on both parties’ part that each will be treated by the other in an honourable and fair fashion. After reviewing the early documents, I would conclude that a lot was left to the imagination in comparison with many of today’s long and sometimes uninterpretable treaties. In the brevity of early treaties, there was an obvious sense of security for both parties as the handshake was the bond that meant more than pages of dialogue. Has today’s desperate attempt by reinsurers to encompass all possible contingencies replaced the time honoured “gentlemen’s agreement”? The answer is obviously debatable but my guess would be that it has reached the point more words, and fewer hands. Clearly, there are circumstances today that prevail on the industry to document in treaty form our beliefs and expectations of reinsurance facilities. Frequent staff turnover in companies, frequent changes in reinsurers and more complex coverages and financing is but a few of today’s facts of reinsurance operations.

The “Model Reinsurance Agreement” was to the best of my knowledge the first example of a universally acceptable agreement to cover the transition of reinsurance in Canada. The model wording was produced by a group or committee representing the Canadian Life Insurance Officers Association (the forerunner of the C.L.I.A. and now the C.L.H.I.A.) in 1901. Like the later agreements (1938 Coinsurance Provisions and 1965 YRT Provisions) there was no official binding acceptance of this set of rules by the companies of the period. The 1901 agreement formed the foundation for the resolution of reinsurance disputes and the exchanges of reinsurance when no other formal reinsurance document existed between the disputers.

From correspondence reviewed, I would have to judge the early part of the 20th century as mundane as far as life reinsurance is concerned. The exchange of reinsurance went smoothly with very little involvement of exclusive (professional) reinsurers as we encounter today. Most, if not all, medium to large size companies were using each other’s retention or part thereof to cover large amounts of coverage on an individual case basis.

Bearing in mind the coinsurance allowances were generally equal for the exchange of excess risk, the only item left to debate was the premium per mil charged by the reinsured company. Letters written during this period imply very little fluctuation in premiums charged for various plans. When there occurred a significant difference, a written complaint was lodged with the ceding company by the reinsuring company. Probably a representative disagreement was the one between Mutual Life and Manulife in 1917: Mutual Life, the reinsurer argued that the premium per mil on a particular case should have been no less than $24.55. Manulife, the ceding company, countered with the price of $22.65 on the policy in question, which by the way was already in force. Over two months of correspondence did not seem to resolve the problem and the reader of the old files is left to wonder if Mutual Life or Manulife won or was an alternative reinsurer found who was more amenable to such a competitive premium being offered by Manulife. In comparison to the 1980’s we would find that the rate situation is resolved well before the case is even underwritten or at worst before an individual case is issued.

In 1922, the Ontario Equitable Life and Accident Insurance Company of Waterloo, Ontario entered the reinsurance field in a competitive fashion. Their letter to Manulife in February 1922 was the only true example of a company aggressively seeking reinsurance. They described their coinsurance allowances and YRT rates as “attractive and liberal”. The letter itself reflects a similarity to letters written today by a new reinsurer entering the Canadian market place. The following constitutes the heart of the letter:

“It is our practice to give very prompt service by wire and we have established satisfactory connections with quite a number of Canadian and American companies, who have been pleased with our facilities and arrangements.

We accept reinsurance without a formal treaty and in all cases where companies have given us business we have endeavoured to reciprocate.”

Reinsurance “watchers” will be startled to realize the Ontario Equitable offered carte blanche coinsurance allowances on a wholesale basis to all potential ceding companies solicited both in Canada and the United States. This certainly must confirm that there was a uniformity of premium rates within the industry that in no way exists in the later part of the 20th century.

Canadian companies expanded their horizon for more reinsurance and naturally traversed the border into the U.S.A. With the cooperation that existed in the 1920’s amongst Canadian companies, it would seem a natural progression to cooperate in a joint venture to solicit U.S. life reinsurance. The original treaty was referred to as a two party agreement providing automatic facilities for New York Life, the Mutual Life of New York, the Penn Mutual Life and the Union Central Life by the Confederation Life and Canada Life. The list of U.S. companies grew to six with the later addition of Equitable of New York and Equitable of Iowa. The Canadian contingent was expanded as well by the inclusion of Manufacturers, Imperial and Mutual.

Canada Life acted as the catalyst for the unusual treaty and in spite of the fact they had pulled out of New York State some years before they re-entered for the sole purpose of reinsurance. New York Life in turn was the figurative leader of the U.S. companies. Each respective leader in turn had agreements with its country cousins to share in the excess risk being offered. For example, at the point in time when only Canadian companies were involved, each assumed a percentage of the risk – Canada 42%, Confederation 16%, Imperial 17% and Manufacturers 25%.

The treaty in question was on a coinsurance basis with only minimal variances in allowances depending on which company was the direct writer. In fact, the range was less than 5% in the first year and zero thereafter. The automatic coverage was one times the ceding companies’ retention to a maximum of $300,000. This of course was for standard issues only and varied depending on age and mortality assessment. Interestingly, the amount was further restricted in the following ways:

a) For female lives the amount was restricted to $150,000,

b) For all term plans the schedule of automatic acceptance was limited to $150,000 (one-half the schedule),

c) For all term plans issued to females the restriction was one-third or a maximum of $100,000, and

d) The coverage automatically available was only applicable to cases written by the ceding companies’ own agent (implying no brokerage business!).

The close working relationship of the Canadian side of this unusual treaty expanded to encompass various other reinsurance requirements. First, we had a four party agreement to cover all direct written business of Canada, Confederation, Imperial and Manufacturers signed on May 12, 1924. That treaty was duplicated in April 1930 to provide reinsurance for the direct written business in U.S. dollars of the Canada, Confederation, Imperial and Mutual. The final link amongst these companies was a five-party treaty (Canada, Confederation, Imperial, Manufacturers and Mutual) covering all insurance issued outside the United States of America, by any one of the companies as well as to all business issued in the United States by the Manufacturers.

The above treaties representing a very active group of reinsurers flourished up until the outbreak of the Second World War and then faded into oblivion by the early 1950’s as the group gradually divided.

The available correspondence representing the first four decades of the 20th century leads me to surmise that most if not all companies were involved in assuming reinsurance. The list of companies included many who by the 1980’s were not involved in receiving reinsurance beyond the very rare case or not at all. Reciprocity was a large feature and the logistics of balancing reinsurance in with reinsurance out must have required a fine science of juggling accounts. With so many companies exchanging excess risk, the task of keeping abreast of each other’s plans and rates consumed a large amount of time. This is printed out in the numerous letters exchanged between London Life and Manulife during the 1920’s. These two companies were exchanging facultative coinsurance cases on similar allowances and thus went to great length to keep each other informed of new plans, wordings, etc. to ensure uniformity.

An article published in 1937 outlines the growth and magnitude of reinsurance in the early years. This same article describes the swiftness with which the reinsurance fortunes can and did change; a lesson well remembered in the 1980’s. I feel the article is a splendid dissertation on the historic early years and thus I am including the majority of the material entitled “A Survey of Reinsurance of Life Insurance in Canada” by J.G. Parker (Toronto) in the following excerpts:

“…. that this reinsurance should, in the great majority of cases, be obtained by contracts co-insuring all the terms and conditions of the original company’s contract rather than by the reinsurance of the excess risk on the renewable term plan.”

The reinsurance thus obtained proved to be profitable due to the comparatively favourable mortality and the relatively low expense of conducting the business. As a consequence several of the Canadian companies went beyond the borders of Canada seeking reinsurance, generally on the same terms as they had previously granted within their own group. This resulted in a marked growth in reinsurance received, particularly during the years 1920 to 1929.

The extent to which the business of reinsurance had grown is shown by the fact that during the year 1929 there had been received by the Canadian companies over 172 millions of dollars of reinsurance, an amount equal to 11% of the gross amount of business written by these companies in that year. There was in force at the 31st of December, 1929, over 774 millions of dollars of reinsurance constituting over 12% of the total amount of the business in force in Canadian companies.

The change in business conditions during the so—called depression years had a serious effect on the business of reinsurance in Canada. New reinsurance diminished to about one-third of the former amount due to the great decrease in the number of large policies being purchased. Not only did fewer large policies offer, but also the companies became decidedly stricter in their selection of large risks, and the possibility of over-insurance made companies look somewhat askance at applications for amounts of insurance, which previously would have been accepted and reinsured. Moreover, the changed business conditions seriously affected existing reinsurance by producing an excessively high rate of termination among large policies and also producing a large increase in the rate of mortality due principally to deaths arising from cardiac impairments and from suicide.

The extent to which the business of reinsurance was affected by these changes is clearly shown by the fact that during the year 1935 only 26 millions of dollars of reinsurance was received, or only 15% of the amount received in the year 1929. This was, however, a substantial amount as compared with the total new business written by the Canadian companies, being 4% of the gross business for that year. Moreover the reinsurance in force had decreased from 774 millions of dollars at the end of 1929 to 537 millions of dollars at the end of 1935.

As has been stated, while the Canadian companies originally obtained their reinsurance mainly from their own group, about the year 1920 there began to be received an increasingly large volume of new insurance from United States companies. A comparison of the amount of reinsurance ceded by the Canadian companies themselves with the amount of reinsurance actually received affords an approximation of the large amount of business, which came to Canada from sources outside of the Dominion.

Of the 774 millions of dollars of reinsurance which was in force at the end of 1929, approximately $360 millions had been ceded by the Canadian companies themselves, and of the 172 millions of dollars of new reinsurance obtained in that year, $70 millions originated from Canadian business.

It would therefore appear as if $414 millions of the reinsurance in force or over 53% of the total, had come to Canada from outside companies, and of the new reinsurance received in that year $102 millions, or 60% of the total, had been obtained from sources outside the Dominion, mainly from companies situated in the United States.

At the end of the year 1935, the figures, while reflecting the decrease in business received and in force, also showed a considerable change, particularly in the division of the reinsurance received. Of the 537 millions of dollars of reinsurance in force at the end of that year $265 millions had been ceded by the Canadian Companies but of the $26 million of reinsurance received $17 millions had been ceded from within their own group. While, therefore $272 millions, or about 50% of the reinsurance business in force originated outside of Canada, only $9 millions, or 35% of the reinsurance received came from without the Dominion. With the revival of business, applications for large amounts of insurance are again being made, but it is doubtful if the Canadian companies will be eager to accept any large amount of reinsurance, as in former years, from outside sources but will be more likely to content themselves mainly with reinsuring such risks as are undertaken by their own group.

The reinsurance transacted between the Canadian Companies has been largely co-insurance, the reinsuring company guaranteeing all of the benefits under the original company’s policy. In many cases no special reinsurance contract exists, the companies being free to offer the reinsurance where, they might see fit and possibly where there might be some opportunity of securing reinsurance in return. In all such cases the papers concerning the risk are forwarded to the reinsuring company for its acceptance or declension. Under these circumstances all matters such as commissions, expense allowances, etc., in regard to each individual case are arranged at the time that the reinsurance is submitted. On acceptance a copy of the original company’s policy is forwarded to the reinsuring company to have endorsed thereon a clause guaranteeing to the ceding company the benefits under the original policy and this document constitutes the reinsurance contract applicable to this particular case.

“The agreements further provide for certain types of risks to be submitted facultatively to the various companies in the group. Such cases are infrequent and usually involve some special hazard not encountered in the ordinary risk. Where facultative reinsurance is offered all of the papers are forwarded to the reinsuring companies for acceptance or declension, with full particulars of the action of the original company and the amount that it proposes to accept at its own risk. On acceptance the reinsurance proposal is completed in the usual way.

“In general the mortality experienced by the companies accepting reinsurance has been as good as the general mortality of the original company ceding the business. This is particularly true of the reinsurance ceded by the Canadian companies themselves, of business underwritten by their own agency staffs. Unfortunately a very heavy death rate was experienced for about three years following the year 1930 in that reinsurance which originated outside of Canada. It was composed mostly of reinsurance on lives carrying very large amounts of insurance, or what was termed “jumbo risks”. The two principal causes of death in this group of cases were, as has been stated, cardiac impairments and suicide.” (Emphasis added).

In Canada the companies in general arrange all of their reinsurance with Canadian companies, or with those, which are registered in the Dominion. In this way in preparing their annual statements of account they are allowed to deduct from their liabilities the reserves on the amount of the policies that they have reinsured. In business which originates outside of the Dominion of Canada and under which deposits of reserves or other deposits have to be maintained in the country where the business originates, reinsurance may be arranged with companies not registered in Canada and the reserves on such business may be deducted from the total liabilities of the company in making up the annual report for the Dominion.

In addition to the co-insurance contracts, of which a general description has been given above, some reinsurance in Canada has been affected by means of reinsurance agreements providing for the reinsurance of the net amount at risk in each year under a Yearly Renewable Term policy. (Emphasis added). The amount at risk in any year, is the amount first ceded by the original company, decreased each year by the reserve which the original company accumulates under a like amount of the original policy. The premium is usually a net premium, making allowances for initial expenses and for the initial favourable mortality due to selection by means of an especially low rate of premium in the first policy year, generally 50% of the ultimate rate. Under such agreements the same arrangements are usually made with respect to automatic coverage as have been described under co-insurance agreements. The reinsurance contracts are non-participating, without surrender values, providing for an amount of insurance decreasing yearly covering the risk of death.

The experience under this type of reinsurance has been favourable, especially where the reinsurance was obtained from companies with a small limit and where as a consequence the business ceded included a normal group of average lives. Where, however, a group of large insurers were included in the reinsurance the experience has been unfavourable, the same as has been the experience under co-insurance of this same class of risk. (Emphasis added).

The outstanding feature of the reinsurance business in Canada is the case and expedition with which reinsurance may be arranged among the Canadian companies. A committee of Medical Directors and Actuaries of companies associated with the Canadian Life Officers Association has met periodically over a period of many years and has done a great deal to promote uniformity of practice in the selection of risks. Laws governing policy conditions are in force throughout the various Provinces of Canada and ensure uniformity of policy contracts in their essential provisions. Agency contracts, while differing widely in maximum commissions payable to the agent, yet are in many respects similar, making it quite feasible to arrange satisfactory commission and expense scales applicable to reinsurance. A committee of those in the various offices having charge of the settlement of claims meets regularly to discuss their various problems ensuring a consistently uniform practice in this regard among the various companies. Similarly there exists a practical uniformity in the method of reinstating lapsed policies and in the rules governing changes of policy contracts. “Consequently it is only natural that reinsurance should be easily arranged amongst the Canadian companies themselves and the favourable experience of the past years would indicate no change in the practice which has been so consistently of value in the expeditions and profitable handling of excess risks in the life insurance business of Canada.”

The above article is an excellent reference on an era that was the same as today yet different. Concern with pricing and mortality was expressed yet not in an overly cautious way; similar to the early 1980’s when we have the same concerns. This was the time of no licensed, foreign domiciled, predominantly European reinsurers. The element of competition seemed to be missing in its current exaggerated form as the literature from the early days portrays more reciprocal agreements. The competitive aspect of reinsurance was secondary to the insurers primary intent to cover excess risks at a price that both the direct writer and reinsurer were comfortable with as representative of the risk. Because of the duality of numerous treaties, the reciprocity feature also allayed any concern over possible adverse pricing. The premiums and volumes that were exchanged represented approximately 7% or less of all life insurance in Canada. Of the new business issued in the latter years of the decade of the 1930’s only in the region of 5% was subject to reinsurance.

The growth of exclusive reinsurers in Canada was in an embryonic stage and a future article will try to document the growth to maturity of the exclusive reinsurers of the 1980.

Another article earlier in my career by three years was called Morton’s Meanderings … and it chronicled my feelings towards the emerging markets of Asia Pacific. AP, as its affectionately known in insurance circles, albeit small circles, took up a great deal of my time from January 1990 and through to 2002. My experiences were many and great. Farmer Ross meets the wisdom of the Orient cultivated by the harrows of local and current talent. Again Marketing Options published a version of both the earlier writings and this current one. Steve of MO wanted my up to date view especially if there were changes.

Long plane rides made for the perfect environment to write until the batteries failed. Now I am spoiled with “plug ins” to keep the electrical juices flowing.

If I write an update much more has changed. Some good. Some bad. Regardless it has changed to the point it is almost unrecognizable to anyone who has been away for the decade.

Will I go back is the often asked question. In a heart beat, for the right person and at the right time.

Ross

2004-04-12

Marketing Options

March 1994

Three years is a long time. The number of changes that have occurred in the life insurance industry in Asia Pacific, relative to North America, is phenomenal. Remember, I referred to it as Pacific Asia? Now I know that people there take offense if the continent isn’t named first – something to remember if you’re from America North.

In Issue No. 89, I wrote on the emergence of a much more aggressive market of the life insurers in various parts of Asia Pacific with particular reference to Indonesia. A lot of water has run under the airplane since then and a considerable repositioning has occurred in several of the region’s countries. The issues that were not previously evident, but common in North America, have reared their ugly or pretty little faces (depending on your perspective.) Let me explain as I take you along on a speaking tour of six countries in 10 days.

Toronto to cities such as Taipei, Hong Kong or Singapore requires patience, lots of good reading material and pilots who can fly without sign posts. Twenty hours of travel is almost a day, regardless of who is counting. Even the most comfortable seat and pleasant on –board amenities cannot lessen the mental fatigue. Depending on my mood, conversation with the individual sitting next to me is either encouraged or discouraged. Mentioning that I am in the insurance business often abruptly ends dialogue. On this trip my language shortcomings prevented any depth to conversation and so I communed with my laptop.

After surviving the loss of my precious luggage (it wanted extra time in Vancouver) by buying the only size 17” neck shirt in Taipei that had a body long enough to cover my upper torso [Ross is six foot four – editor], I proceeded to visit local insurance officials. Traveling from the hotel to the speaking engagement in this capital of Taiwan involved one of the most harrowing taxi rides of my life.

My presentation was about large case underwriting and once I hit question period I felt right at home. The most prominent questions being thrown at me (politely, of course) were the same as I would have had to field in the U.S. Or Canada. This is a mature market with mature issues that pointed out that communication deficiencies between underwriter and agent knows no geographical boundaries. No, I did not instigate the issues to prove a point!

Sharing of information and trust were high on the agenda as we wrestled with how to bring peace and prosperity to the insurance world. I was looking for an answer more than contributing a solution. The definition of large case was the same as in North America, just the number comes up smaller. Most purchased of life insurance are for under 100,000 (local currency) and a large case is a million (local currency again for those not keeping up). Perhaps here the influence of North America has been too great – the minority of agents there who know how to beat the system are matched by a number of home office underwriters who know how to shackle the seller when necessary.

One question addressed lifestyle underwriting because of the number of accidental and unusual deaths in the initial policy years here. Early mortality in North America has often been attributed to lackadaisical underwriting of occupation, avocation, aviation, driving and lifestyle options. Combining any or all of these, even when anyone looks borderline standard, with mild or greater abnormalities of blood or medical findings warrants extreme caution before agreeing to issue. Early deaths, of which recent large case studies show and abnormal number, can be prevented if risk selection is stringent where adverse lifestyle issues are evident. There is no substitute for agents working closely with underwriters to ascertain the degree of any lifestyle issue for proper risk selection. I speculated with the audience that extreme price competition in the market plus poor liaison between pricing and underwriting realities also contributed to early claims.

Hong Kong raised the specter of blood, urine and guts. Participants asked why so much blood is being drawn. Was it true that it was being used to fertilize corn fields in Kansas? Blood testing has been growing in stature here with the increasing concern over AIDS. At the same time, North American companies perceive and escalating need to screen for Hepatitis B. For the latter there is growing concern that premiums shrinking to levels only half justified in North America are going to be unjustified when the Hepatitis B starts playing havoc with insured mortality. In truth, “havoc” is a term unused by local experts but referred to frequently by many visiting insurance practitioners. The other side of the coin (there are coins here however don’t let them encumber your pockets when you come home – currency traders in Toronto refuse to accept them) is that the rates of mortality in the pricing will always reflect the total mortality of this colony. It is only three more years until this place of my wife’s birth reverts back as the lease is nonrenewable. Perhaps it is this truth that is dogging the actuaries.

Is urine HIV testing a substitute for blood HIV testing? This question was posed by both home office underwriters and agents. The answer, of course, rested in the world’s experience that alternatives to blood testing are available and in use to make everyone’s life easier.

During a session with underwriters and claims personnel, a heavy discussion on what is truth and what is a lie on applications developed over an actual case. This is a world wide issue. If an applicant states they saw a doctor yesterday for the infamous “checkup”, what are the repercussions if the underwriter waives the attending physician’s report only to learn that the checkup was for pain or symptomatology that eventually led to death? Ws the underwriter wrong for waiving a perceived routine APS? Was the applicant wrong for failing to declare the real prompting for the checkup? The answer was a simple, yet complex, “yes”. Underwriters get paid for making value decisions based on information garnered from agent, medical examiner, attending physician, etc. The information trail is a delicate one and if trust is involved most underwriters start by believing the applicant. Regardless of country and product description the issues are the same!

I left with the comforting thought that not only are pampered palates of Canadians susceptible to occasional and distressful turmoil in the guts (stomach, upper and lower intestinal tract or acute and painful assault on the duodenal area for Larry of The Underwriting Edge fame). When one of the doctors in attendance from Indonesia told me he was under the weather (my translation) due to the food adjustments he had to make in Hong Kong, I felt I was not singled out for tummy upset and subsequent eructations. Must be common to all us worldly travelers as a genetic shortcoming for which insurance companies will soon be testing as part of their zillion-part laboratory protocol.

First time for Ross’ big adventures to enter into China’s mainland, if only for a 30 hour visit. The time of my visit was chiseled out of my speaking tour and thus its hallmark was brevity. Exciting thoughts of exotic pushcarts, sameness of dress (gray, turned collar, militaristic jackets) and true Chinese foods had filled my bedtime moments the night before. All my delusions, shaped by countless hours of ancient stereotypical movies, however, were squashed forever in the first few hours.

As the train rapidly took us to the border crossing, I steeled myself for all forms of potential episodes I would hopefully live to convey to my great-grandchildren. Like in Calvin and Hobbes, my imagination was running wild and then the bell rang and I faced the tedious reality of an uneventful border crossing.

Stepping into a Mercedes taxi to take me from the train station to the hotel was also a lunch bag letdown. It was to become one more of many. Exotica was nowhere to be found as the trip was spent counting BMWs and Mercedes while seeing a town of 10,000,000 – hustling and bustling, not unlike Hong Kong. As I entered the charm of the local Hilton, I wondered if this was all a ruse and my erstwhile Manulife colleagues (plug for the company that pays for my worldly ways) was playing a practical joke on a grand scale.

Bottom line, after 30 hours I came to understand that modern China in the areas where there is encouragement of classic growth is like boomtown Canada of the 70s. The biggest exotica was adding sea slugs to my list of lest favourite objects to that are put on my dinner plate. Right up there at the top with ducks feet, pickled, steamed or fried! For those unaccustomed to any delights of foreign cuisine, neither the feet nor the slug fit McDonald’s idea of crowd-pleasing fast food. I must add, however, that there are times when I do thank my dear wife’s passion for Chinese food and the use of her culinary skills to entice me to explore this new cuisine after growing up on potatoes, cabbage and red meat (never really red by the time my Mom was through with it).

The visit was too brief with the local insurance experts and leaders of a company that is doing quite well in a market that has more potential than anyone can imagine. The topics were, of course, reinsurance related and as such I was in my domain. I hope that as policy size grows because of stock-redemption policies, key-man insurance and estate protection, so can the role of the reinsurer, especially this Canadian reinsurer. In the interim my ‘Special Risk’ colleagues can provide immediate reinsurance capacity and council as the market for personal accident coverage is here and growing.

After two days of recovery (recovery is a recurrent theme of my Asia Pacific trips), I entered the vibrant economy of Malaysia and its extremely well organized insurance industry. The host was the Malaysian Insurance Institute and one could not help but be impressed with the dedication to improvement that the Institute portrayed. I got to lecture on hold people and large cases with a smattering of both mixed, when appropriate. In such an immense economy, the number of large cases is increasing and the education provided is from one source. Both agent and underwriter get their education from the same body – the Institute. The knowledge for both is combined. Their text books the same. Their goals the same – good business for agent, customer and company.

The Malaysian Insurance Institute is an impressive operation and one that has a good thing going in my opinion. Questions were brief but they were able to convey the depth of understanding the Malaysian insurance staff have of the issues. They know how to avoid agent and underwriter discourse from the outset. Lance Secretan, author of The Way of the Tiger and Managerial Moxy, has written about it and Jim Burton of PPI renown has lectured about it and its called mastery, chemistry and delivery of the subject, regardless of industry. I left Malaysia with the strong belief that the insurance industry is united in its conquest of these three disciplines.

Singapore is Singapore. There is no country like it. Everything went without a hitch a the sophistication shows all the earmarks of British formality and Singaporean efficiency. The subject matter here was again the oldies (not rock and roll nostalgia but mature applicants and rich people). With an audience of pure unadulterated home office life underwriters I was safe from the harsher slings and arrows. There were a few barbs as one Singaporean expert wondered how we North American underwriters could have allowed poor large case early mortality to happen. The old adage, “to err is human”, brought very little solace from this audience.

Last stop and the on where my two hour dialogue is rewarded with 16 hours of lectures from experts flown in from around the world. The seminar was sponsored by a local reinsurer, MAREIN, who spared no expense in putting on a top-notch educational affair. Issues were training at all levels, lack of capacity and price wars. A review of the program gave no hint that I was in Jakarta since the topics were universal – people, productivity and competition. A review of software for insurers added to the seminar’s international appeal (and not just because I was speaking on underwriting by computer).

The time at this conference just flew by because the content and attendees’ input was thorough and one never seemed to have enough time to digest every new point or opinion. Excellent dialogue from every perspective made me realize how much more there is to learn about a business that can be so very simple yet appear to be so complex. As always, Indonesia and the friends I have made there never cease to amaze me with the intensity they exert towards this business of life insurance.

Quickly home (if 24 hours traveling could ever be considered quick) was the last leg. Uneventful other than convincing customs that I don’t smoke (thus no cigs), don’t drink much (thus no booze), faint at sight of needles, bought a T-shirt for my daughter and the horse was a gift from a benevolent host in Indonesia.

Why a horse you ask in closing? It’s a beautiful gesture that means Good Luck to both the receiver and the giver and that summarizes the trip. Can’t wait to go back for Trip Nine.

It is so very hard to imagine that this article from Marketing Options was written 7 years ago. It is so relevant today. The world may have changed but the search for trust amongst the reinsurer insurer relationship continues. Reinsurance has become a commodity and culminates in far more extensive treaty arrangements. Yet each party must fundamentally trust the other for success long term.

Adding to the comments of 1997 must include the rip offs of trust by large corporations who are now before the courts where judgment is sought for what I like to call a misuse of trust. Liability insurance has sky rocketed to help bail out the poor insurers who dominate that market. The more prices go up the more the average consumer seems inclined to get the money back! The dubious claim becomes a game for some. An expensive game for all who end up paying. That is you and I.

Happily I am glad to report that as the number of people I have met grows so does the number I trust for their honesty and especially their forthrightness. In the day s of the dealmaker the pressure to forego forthrightness mounds and many succumb. In the end there are still fewer people than the number of digits that I possess who I no longer completely trust and it is usually the lack of forthrightness that does it.

Ross A. Morton

2004-06-02

Marketing Options

April 1997

Looking back at 27 years in the insurance business, I feel fortunate that it has been predominantly packed with lessons in trust. Trust extended. Trust rewarded. Trust rarely abused. If the latter did occur the person was often banished to some menial tasks or even another trade.

As a paper boy, I was entrusted numerous times to “come back later” with the change for a significantly large denomination like a $5 bill. I was so worried about this responsibility; it often seemed I was back on their doorstep with the correct changed before they closed the door.

When I entered the world of insurance, I quickly realized that customers put this faith, and even more, in the trust they showed their broker. The largess of the insurance proceeds, whether life or disability, depends on the intermediary who understands the customer and culminates that understanding in contracts for future performance of considerable financial proportions. Having been involved with numerous family deaths over the past three years, it has been heartening to work in an industry that has expediently delivered on contracts bought 35 years ago.

Six months out of university, I found myself working in reinsurance where the gentlemen who led the industry taught trust before all else. The handshake meant more than the written word and a commitment verbally conveyed was sacrosanct. An early claim that needed paying even before full treaty wording could be etched unto paper was all this neophyte needed to witness to appreciate the trust in a handshake. I saw trust further demonstrated by reinsurers who frequently accepted the rules of a ceding company’s underwriting department – rules often not written, for if the rules were not written, an agent could not challenge them, nor management manage them.

Reinsurers put a lot of faith in the company to sell the product to the agreed upon market, to obtain the assumed spread of risk, to manage the underwriting process to achieve mortality assumptions, to do everything possible to insure persistency (although term 100 brought out new meanings to managing persistency!) and to pay only the legitimate claims.

I only recollect one company who abused all of the foregoing. That California company of the 1970’s made better use of the telephone book to gather lists of names for the reinsurer than any other company on record. (This west coast company was the inventor of telemarketing without the expense of any telephone charges or commissions paid.)

This abuse of numerous reinsurers’ trust ran rampant until excessive greed caused the failure of one of the insurance industry’s greatest scams. I always felt blessed that the M&G Re, my company of origin, was not licensed in California at the time or I, and the band of M&G Re leaders, may have shared the other’s fate – massive reinsurance allowances paid on bogus business, which produced no corresponding premiums! In addition the claims for fictitious deaths swelled the transfer of cash from reinsurer to insurer.

This scam had nothing to do with the agent or broker. Quite the contrary, it was conceived, gesticulated and brought to fruition by the back room boys who succumbed to the greed of rapid growth. The closest comparison in Canada that did involve agent and broker was Project Lion, one of the more paltry scams some ill-begotten con artists dreamt up to take advantage of the industry’s front-end commission structure.

Is there less trust today? Yes, I believe we have moved towards a state that is far more litigious and unencumbered by historical rhetoric concerning the value of the handshake. Brokers find themselves in need of ever increasing errors and omission insurance as companies are not willing to blindly support the producer who may have erred. Companies seek to distance themselves from the actions that are taken by the broker who today represents numerous companies. With choice comes pain and extra costs. With choice come more perplexing contracts that can never hope to cover the unexpected or new conundrum.

Can trust be restored to the industry? “Never, “says my brain! If the goals or aspirations of so many are rooted in short term gain and not long term integrity, can the conclusion be any other? From a personal and speaking from the heart (a recent standard issue, I will have you note) perspective, I will not throw in the towel. That ever shrinking band of zealots that nurtured me will console me that I am not alone. We must just accept that there are truth sayers and then, there are others.

There seems to be a trend that moves even the staunchest of integrity’s supporters to throw in the towel. Mind you, I still assume the majority would gladly just wave the towel if they thought there was a chance of winning the trust game. Just like Toronto Maple Leaf fans, the majority painfully endure failure hoping for a second coming of the teams of the mid 1960s. Those who can remember working in our business, I believe, carry the same hope and optimism for a return to the trust that nurtured us.

The consumers trust their financial advisor to massage their financial picture, current and future, into a mosaic that is easily understood. The meaning being that the results of certain current actions will produce the consumers’ desired level of peace of mind. The broker, agent or purveyor of financial advice trusts the consumer to be honest and forthright (my interpretation of forthright is someone who volunteers all the salient facts versus the one who only volunteers the bare minimum and never elaborates on the facts). The poor agent in the Mullendore case who placed a huge case on an Oklahoma man in the 1970s must have wished there was more openness from his client. If he only knew the whole truth, he would be alive; poor, but happy. (before the second premium was paid, the client was shot dead. The agent was subsequently murdered in Alliston, Ontario and his assassin was eventually found dead in Montreal.)

As an underwriter at the time, I was just happy that my head office made a faster decision to commit its full retention to this case than I did. I was one of only a few underwriters who did not take a piece of that action and can so boast of it today. (However, when questioned I do volunteer the whole story and my underwriting prowess is less revered.)

Time has penetrated my very being, for when I started in this proud historical business of insurance I never looked over my shoulder. Rightly or wrongly, I trusted everyone I worked with. Today, as I slowly recover from the knives embedded in the back of psyche, I realize one either walks backward (the choice of many in the industry) or embraces the weight of a flak jacket. The flak jacket’s construction is one of legal paraphernalia and a strong caution in weighing the integrity of your partner, employer, customer or competitor.

Yet, I have learned that my trust that remains today is trust for an individual, maybe not so much a company. Cultures in companies change. One individual can do that and all others working for him are driven to follow. On the other hand, by actual count of business cards collected over the last three years of international travel, I have met 1,500 people. Of those, I would trust 1,499.

As my father said after World War II, “Only losers have to look over their shoulder 100% of the time.”

There continues to be times in my life that I snuggle down and feel secure that I have seen it all and nothing startling can happen. But, just like the time I sat down on a red-hot cooking iron hiding on the fringe of a warm campfire, I am jolted to reality and put into hyperactive mode. No my travels have not put me (or rather my dernier) in contact with a hot poker. However, I have just been presented with the results of a small survey of facultative underwriting as practiced today in my favorite market for insurance, Canada.

We are all too aware that everything is measured today; be it your legs for a suit or the number of life insurance applications that fall into measurable categories. For a reinsurer the measurables are time service and decisions — how many standards, how many +50%, how many +100%, etc. through to declines. The latter were always in the minority. There was a time when a reinsurer would concur with the prowess in a direct company and agree that the particular impairment or combination of impairments was such that decline sufficed. Did that happen often? No. The reinsurers declined about 20 to 30% of what was sent facultatively to life reinsurers. There was as always free enterprise at work and great disagreement abounded over which cases were indeed decline, thus keeping the incidence rate for all declining to low 20% level.

With “hot” competition that number was perceived to be lower today; but, given that risk selection still meant discarding the really poor cases, it should not have changed more than 5%. There was something comforting in believing that reinsurers still were predictably declining to accept those applications for insurance where the proposal’s health history, occupation, avocation, aviation or combination of all. After all, the laws of antiselection, deteriorating health and the shear cost of mortality were, I thought naively, still barriers to accepting certain risks.

Did mistakes ever happen? That is like asking if my stomach or more southerly regions of my digestive pit have ever known the ravages of food poisoning or overly spiced dishes in some exotic land (Bombay to Richmond Hill). Blunders happen. In a rush to get a decision out to a customer (the insurer) mistakes happen in transcribing the quote at the reinsurer’s communication centre (fancy monogram for fax or telephone). Wrong message attached to wrong file. Missing page in a reinsurance file having disappeared on the photocopier or fax machine. Young Turk (not sure if this is a politically correct term today?) underwriter who does not hear the medical consultant’s opinion or did not ask the right question has put the reinsurer in jeopardy many a time. Any or all have happened on cases and the reinsurance underwriter goes from Turk to turkey in a matter of minutes.

Now to the true-life adventure or at least a paltry few words of comments on today. A noteworthy Canadian insurance company’s underwriting department, in its zeal (zeal is good) to get the best for its brokers, shops the file. This is when a ceding company, the insurer, decides that it may not want the case or feels the assuming company (reinsurers) might like it better the file to 2 or more reinsurers. The reinsurer first back with the lowest price wins in most cases. There are some companies with complex reinsurance rules as to who wins what, when and how. Knowing the readership, I will stick to the simple explanation that the first low price quote for the case is awarded the honour of providing risk coverage for the ceding company. More succinctly put, the first in with cheapest price wins!

Since reinsurers see so many non-standard cases, their expertise can often save the day and find a price for most cases it sees. Experience has varied from reinsurer to reinsurer. The odd reinsurer (please peers do not take that as a direct criticism) may win cases in greater numbers than its competitors. The other competitors complain, throw mud and stomp their feet. The next month or quarter, the stomper becomes the stompee and the stompee becomes the stomper. In 28 years I have witnessed and sought help every time the tables turn and the oppressed become the oppressors. Stompers can be oppressors as can they be oppressed and stompees can be oppressed or oppressor?

The fine company in question or more correctly its service oriented underwriting management, followed 19 cases that it wanted no part off since by all normal underwriting rules of protocol and risk selection these cases were “really, really bad”. Immediate death claims all. Straight to the mortality heap for these 19 unquotable cases. The brokers who found these lives (just) should be ostracized for at least an hour. The first step in the travels of these 19 cases was to the copier or fax, where, with the push of a couple of buttons, reproductions of the file ended up in five reinsurance abodes.

With a craving like you could never imagine, diligent and well-trained reinsurance underwriters attack the files. Given that cases reinsurers see are all bad or tough the reinsurance underwriter is charged with finding the good and thus putting a price (winning) on the file. With the latest in medical know how beating on the computer screens as the medical networks get searched, the underwriter is frantically trying to find ways to quote as low as possible for that marginal edge over “reinsurer x”. I have never met “reinsurer x” and have often wondered, aloud at times, if I will ever meet anyone who has worked in “reinsurer x”.

Constantly nagging in the left ear is the conscience saying go lower and faster. In the right is the corporate actuary saying, “don’t do anything to risk our financial future”. This statement is being made when they themselves do not have a clue what the financial future will bring. Ha, “the devil made me do it” becomes the plea of the often banished underwriter. Regrettable the role of devil can be played by either the marketing conscience or the corporate actuary.

Sleepless nights abound as the reinsurance underwriter relives over and over again the combinations of CAD, IDDM, MS, CVA, BP, PP, SGOT, SGPT, AP, etc. Or was it just their partners snoring? Every decision that went to the edge of reasonableness will haunt the reinsurance underwriter for days or at least until the next beer. The rookie reinsurance underwriter has far more sleepless nights than the seasoned veteran. Until you realize no one really cares the next day, you worry. Thus experience has its rewards.

Where was I before I diverged somewhat? Right, the 19 cases and earth shattering decisions. I guessed that perhaps a third of the 19 cases would get a quote of some kind from perhaps one reinsurer. To my befuddlement every one of the 19 cases received in bold print a quote! That in and of itself was shock enough but it was not the story.

Every single case of the 19 received a table 2 (+50 mortality points for the ununderwriters)! I still, months later, shake my head or at least it is being shock at the knowledge that being good with the thin pointy pencil on a third of the cases is no longer sufficient. The “bar has been raised”, “benchmark heightened” or the competition’s tougher in plain utilitarian English. Then I grab myself (figuratively not physically) and rationalize that perhaps the younger student of underwriting cannot count beyond 50 (a binary system involving no more than 5 sets of fingers). Has the word decline ceased to be necessary. To most readers of this magazine the answer is yes. To a select few the answer is no. There are indeed cases that should be declined as potentially immediate risks and if over a couple of years you get enough of these you are in big “do do”.

So much for my years of accumulated expertise and funny stories helping me predict the world of facultative underwriting. I am in a world of unpredictable events. The next thing I will hear is that Sun and Manulife have merged and their CEO’s are coexisting in the same seat of power! The next thing I will hear is an actuary building in a percentage for deteriorating mortality. The next thing I will hear is that my pending book is a best seller! The next thing I will hear is that none of the cases I underwrote ever became a claim! So much for the reliability of predictability. Our industry is changing and yet there remains the same competitive beehive of activity it has always been.

I thank the company for giving me a new insight into today’s reality, the lack of predictability and the answer to my question. The question of course was who was the winningest reinsurer on these 19 decline cases. I honestly will be eternally thankful for the news that it was one of the other reinsurers who won 11 of the 19. There are times it feels good to come in 4th! I have always wanted to win the right ones and lose the bad ones to my competitors (bad as likely as not being in the eye of the underwriter). Taking risk with such immediacy attached to their imminent mortality is not what I want to win.

We are very fortunate to be operating in an environment that is very unpredictable and thus challenging. Soon the norm like testing for HIV will reach new thresholds. Soon those that are HIV positive will not be declines as s already the case with at least one US company. Remember that just prior to the HIV testing our industry was very, very comfortable with accepting applicants for insurance amounts up to $1,000,000 with only a nonmedical. May those days return? Given the rush to liberalize our underwriting process it can only be around the corner.

As for the broker or agent of record your every dream is coming true. Well not quite, since having met a lot of you your dreams are sometimes beyond the realm of being fulfilled by any underwriter.

Underwriters as a profession were under fire as they became more and more in the forefront of broker complaints. Brokers were everywhere and their demands were seen as reasonable by marketing types and unreasonable by underwriters and their leaders. I got into a bit of a controversy (not my first time) by suggesting that education and medical knowledge did not represent 100% of what constitutes a great underwriter. Delivering a message and being flexible were attributes most needed to the medically competent. Underwriting has never been an exact science and with pricing becoming less of an exact science (preferred and the guesses surrounding what price for what preferred criteria were growing) as well as the need to comprehend the complete proposed insured and sell a decision was foremost in skill set demands.

Steve the editor of MO said put it in writing thee thought s of yours and he would see to it that someone would read it. Response was mixed. The academic underwriter said medical knowledge was still the be all and end all with communication skill an unnecessary asset. The practical well respected guru of risk selection said I was right on and asked if I had a test to determine which underwriter had the moxie to make it to great.

Ross A. Morton

2004-05-10

Marketing Options

May 1993

Isn’t it strange that now that higher employment in the life insurance business is escaping the stranglehold of actuaries, the banks are hiring big company actuaries to start their life operations? Just as perplexing is the new trend to hire those endowed with banking experience to run life companies. But I will not critically analyze more informed decisions than mine; rather let’s look at hiring the senior home office underwriter – a subject upon which I can speak with more authority.

Hiring a home office underwriter may first appear to be a tough task. In my business (no, not the banking business), the delicate egos in the field must be catered to by meek minions in head office. Thus, the astute discharge of the demanding task of hiring a home office underwriter suggests that need for Solomonic Skills.

Ask a life broker who to hire and he responds, “The most liberal, of course”. By definition, this is the underwriter who has a strong bias to the word “yes” and needs trifocals. Ask the same questions to the pricing actuary who sets those ungodly low prices for the product and this chameleon of the numbers world screams for the most conservative and restrained of persons.

As a means of placating their desire to be part of the recruiting process, I once asked some field types to suggest what they deemed the most cherished qualities of a senior underwriter. This was not an act of condescending chicanery, but rather a sincere attempt to let those who depend on good underwriters have concrete input. They told me.

After I overcame the palpitations and nausea, I asked for a list of candidates, this time ones that they had actually encountered over the years that would make solid contributions to building teamwork between field and home office. Their responses didn’t have me exactly bouncing in bliss, but at least the nausea stopped. Unfortunately, it turned out that those on this list shared a universal willingness to deal and they all had demeanors who knew how to treat a god – sorry, I mean a broker.

From my own point of view, the two qualities that I would look for in selecting a senior underwriter are expertise in risk evaluation and communication skills.

My critics may well challenge me on the first. With the growing use of computers in the underwriting process, why is expertise in risk evaluation still so important? It’s true that the new expert systems now being offered have superb capabilities to transfer data and eliminate the underwriting drudgery of running your finder down a check list. Indeed, jet issue has become computer issue.

Underwriting logic is now being transferred to computers so a broker in the field can follow the underwriting instructions on the screen and key in the underwriting information. If the client indicates that he is diabetic, the computer program can adapt to this information and pop up additional questions on the screen for the broker to ask. All the broker has to do now is return to the office with his electronic application on disk where it can be loaded into the mainframe for evaluation. (Note: Here we are in 2004 and all that software that contains the rules of the best and most accommodating underwriters still sits idly by. I grossly underestimated the tardiness with which insurers would embrace technology in underwriting and how insurance leadership would continue the drudgery of simple case underwriting. No wonder underwriters are lulled into a trance and then make mistakes on the case that really did need their attention.)

But, and it’s a big but, here’s where the problems begin for the foreseeable future. Unfortunately, the penmanship of most doctors is o bad that no computer scans can hope to load information directly from an Attending Physician’s Statement. Therefore, a senior underwriter or a medical doctor is required to key in the results of an APS into the computer. At this time, it’s faster for a good senior underwriter to make the decisions than it is to key the information and wait for the computer to provide the answers.

So much for competence in risk evaluation. As for communication skills, the reader must surely concede that there are times a question must be asked or a “no” delivered. There actually are recorded cases where the broker impeded and confused the underwriter. I recall a true situation that happened just west of Regina. An application arrived unannounced one day to the desk of an underwriter who had a reputation of being as brazen as any broker. The case was large. The financial history was non-existent.

The underwriter asked in a routine fashion for more detail. The broker being well-trained and versed in the art of diplomacy and tact said to the underwriter, “Cjwhdg lkjkd kd lkjfldk dswq,” or in English, “You’re stupid – there’s a very valid reason for insurance.”

It is best now that I move this story past a few choice pieces of dramatic prose and conclude with the broker’s enlightening statement, “Don’t you know who the applicant is and where the money is coming from?” Not to be outdone by the broker, the underwriter used her barroom verbiage to state, “KlKll ioe iopp laes iitmvc,” or in polite broker English, “I have no idea and would cherish the moment you told me.”

After senior representatives from both camps endangered there well-being by interceding the case reached conclusion. A happy conclusion in fact arrived three months later when the broker educated the underwriter with the tidbit that the applicant was the son of one of the wealthiest men in Alberta and the sole heir to all the money. The broker’s argument was that the underwriter should know all the rich people in Canada (and their heirs) by name.

With the demise of some life insurance providers as predicted by the life industry (always first with the news), there should be more than sufficient talent around in the next few years to fill all remaining senior underwriting positions. With further computer automation of the risk selection process, only the exceptional skilled and verbally competent senior underwriter will survive. Hiring a good one will be easy; they’ll be the only kind left.

Reinsurance looked like it was emerging as a significant part of the insurance landscape in Canada and for that matter in North America. Everyone wanted to be either a reinsurer or retrocessionaire. It looked like fun and a way to get relatively low cost premium income. There was no new expansion after 1990 and the best reisnurer had been bought by Swiss Re in 1988 so it was gone already. Look at the list of active reinsurers in 2003 and the volumes of risk they were paid to accept. The number is beyond the most optimistic of visionaries. Cheap prices by reinsurers and low risk tolerance by insurers plus the advent of the slogan “use of capital” all fueled the growth of reinsurers who then found themselves with almost too much business. Consolidation was fast and clean. Zap and you are down to less than half the active reinsurers. Even ERC who was a dynamo in Canada for 5 years ended its run for the gold in 2003 (officially in 2004).

I know of no person in the reinsurance business who would l have predicted in 1990 that such an astronomical percentage of life risk would be concentrated in so few companies by 2003. I now know looking back I should have had a bonus based on production with no cap!

Steve the editor again wanted to give his readers insight into reinsurance and how much the reinsurer played in the insurance sandbox. Today Steve and MO would probably have a monthly graph of reinsurance production and accompanying S&P ratings of the survivors.

Time to write the history of reinsurance from 1990 to 2005 (publishing in 2005 is closer to my timeline than 2004 for a variety of reasons). Now to find that publisher and first an editor. Steve how’s your time?

Ross

2004-04-14

Marketing Options

December 1991

I cannot fathom why such small amounts of reinsurance on so few policies can raise so many questions from some agents and home office employees. Believe me; reinsurance should never be intimidating or enigmatic. One big advantage in Canada is that eh players are few. So few, in fact, that I hope to introduce them all to you in this single article today.

Every year the Munich Re office in Atlanta, Georgia, compiles new business statistics from reinsurers and retrocessionaires throughout North America. In the U.S.A., the list for 1990 shows 26 active reinsurers chasing a ceding company’s excess insurance (over the individual company’s retention). That same market place produced $20 billion less reinsurance sums assured in 1990 than in 1988, ending at $152 billion. There were only 5 fewer active reinsurers in 1991 and the inactive dropouts could be viewed as casualties of a very aggressive market that could not continue to sustain so many corporate entities.

The Canadian numbers pale in comparison but who north of the border ever found comparison flattering? Please tolerate the fact that the Canadian industry numbers will be in U.S. Dollars and, for the lack of a calculator, this poor author is taking the easy way-out. In 1988 the Canuck insurance industry sent nearly $13 billion of new sums assured to reinsurers and the number tumbled in 1990 to just over $10 billion (out of $92 billion for the whole industry). By whatever measure the reinsurance industry in both countries took a beating in market potential. Fortunately it is still ticking and cooperative as ever in trying to help life companies of all sizes manage the mortality risk. (It does other things but I’m a uni-dimensional visionary on a roll)

There are many and sundry excuses for the demise of the market growth but suffice to say the time had come. Cheap, cheaper and cheapest term had taken its toll on in-force blocks. Smoker and non-smoker discrimination extended the feeding frenzy for new products at even lower pricing, culminating in sums assured escalating at a pace that outstripped retention. Along comes the ‘A’ word and fear halts some retention changes. Now we top the early nifty nineties nirvana with financial scrutiny of direct writers until it almost becomes wiser to reduce retention and spread the volatility of risk.

Enough pontification on the unsolvable and back to the hard facts of numbers, the root of our rewarding enterprises. The Canadian reinsurance numbers are split among 11 active reinsurers and pseudo-reinsurers (those with split or multiple functional personas operating as reinsurer, retrocessionaires and/or direct writers.) In reality, the number of players hasn’t altered significantly over the years but it has in actual key players. Many (at lease two) key reinsurers have left the active market and there exists a strong groundswell of opinion they were legends in their own time but I would not want to solicit a quorum on that issue.

Fig. 4 reflects the composition of the Canadian reinsurance world and highlights the diversity of reinsurers who are still active according to the Munich Re study. During the five year study, three reinsurers have shared the honour of being the host with the most new business and, if the study were to be extended backward, they remain the “Big Three” – the loving nickname created over a decade ago by a significant, yet perennial, “Number Four”.

In alphabetical order the Big Three are the Canadian Re, the Mercantile & General Re an the Munich Re. These three companies are all related to large head offices or parents in Europe who have zillions of years of history behind them. The parentage is obvious for two of them and more obtuse for the third. Reversing the order to protect my income, as a retrocessionaire should, the Munich Re is part of the world’s largest reinsurer out of Munich Germany. The M&G (an affectionate acronym coined and perpetuated by the industry) is of English/Scottish lineage with a well known owner in the international sphere – Prudential of England. The third player comes from the clocklike precision of Swiss workmanship under the more global nomenclature of Swiss Re, a leading reinsurer in the markets of the world.

The habitual holders of positions four through eight inclusive are there both by design or the sheer magnitude of the final step to turn the Big Three into the “Big Four” (or five or six). There one must stop or all you have is a cluster of the “Nondescript Eight”. With due respect to the future, I remain fixed on the alphabetic listing of General American, Life Re, Lincoln National, National Re, and St. Lawrence Re. This is a diverse group of companies that refuse to fit a homogeneous description and each has distinct roles to play in prodding and, in time, shaping the reinsurance dimensions in Canada. St. Lawrence grew slowly at first with modest beginnings soon overshadowed buy aggressive and novel marketing innovations that catapulted it into the limelight. Its roots are in Montreal where it retains its license base and corporate head office. Likewise, National Re has its origins in Quebec, yet has played an influential role in both facultative and automatic reinsurance from sea to sea. Both of the foregoing reinsurers are talented users of retrocessionaires throughout the world, spreading the mortality and financial risk.

Lincoln National is one of the earliest licensed reinsurers in the Canadian market. It is part and parcel of the large U.S. Reinsurer out of Fort Wayne, Indiana. The definitive nature of its marketing efforts and positioning has remained ever constant. Life Re (formerly General Re) has had a sporadic involvement in the Canadian market seeking particular market niches that reflects its particular strategy. Their head office is in New York. General American, operating out of St. Louis, Missouri, is both a reinsurer and a retrocessionaire in the Canadian market. In the U.S., it is the second largest writer of new reinsurance volumes. In both its Canadian roles it has been extremely influential in the setting of pricing standards.

The remaining contingent of also–rans is best described as peripheral players who neither set market price nor support the aggressive nuances of the leaders and aspiring leaders of reinsurance.

As the reader’s eye moves to the chart of retrocessionaires (Fig.5), it becomes noticeable that the names become better known while the new sums assured drop quite considerably. Ignoring one mother of all reinsurance deals in 1988, the early noted pattern of the reinsurers is replicated in the retrocessionaires – the market size has dwindled. The real deal makers in this group number only five with volumes dancing through the years without pattern. Three large direct writing companies play an exclusive role as retrocessionaires, while General American actively and directly supports the niche reinsurers. Sun is a big company with a definite professional approach to retro business that some say it learnt from Manulife. In reality, the two were active as reinsurers in old traditional reciprocity deals for a hundred years. The sheer size of these fortresses of financial integrity (it’s annual review time) make them both natural retrocessionaires. Manulife was the first truly active solicitor of retro business on a whole sale basis and leapt to the forefront in the 1980s. Equitable has been somewhat more modest in its overtures to the Canadian reinsurers and, at times, people mistakenly think they are the Canadian Equitable to Kitchener/Waterloo when in reality they are the Equitable Society of America.

Other players come and go in this arena of big cases which is a function of capacity wishes that fluctuate wildly. There are not that many jumbo cases to go around every year and reinsurers are increasingly looking at the financial credibility of the retrocessionaires to ensure the long term support for behemoth policies that require retro.

All the players are front and centre with nothing to hide. Each, I am sure, would give details of their operations should you make a polite request. They are an innovative and gregarious group who only bear close control when food and drink entices unbridled articulation. I am not saying that all of their stories are candidates for a Pulitzer Prize but each is an interesting piece of literature.

I wrote this paper to clarify what I said in numerous speeches at the time. As is often the case when I open my mouth and present a topic to an audience, be it large or small, I get asked to put my opinions or views in writing. Sometimes I forget what I said in the speech and thus the written word comes across as different, Perhaps I should write what I am going to say first but that would take the element of surprise (for both the audience and myself) out of the equation making it all boring.

1990 was not any more notable a year than any other but it was the year I entered the giant company environment where I was to last 4 years and 5 months trying to conform. I was far from a conformist (read politically savvy aspirant) and despite numerous attempts by many senior executives (some who quit while they told me it was good if I stayed!) and psychologists I never did adapt. I did learn though about privacy and the need for it in a company,

Since 1990 the insurance world has built far more stringent privacy guidelines after taking the initiative or being legislated and regulated into change. Information continues to be protected and it is not taken for granted. After 14 years since the article I cannot recall any lawsuits over a breach of privacy in regards to the HIV test result. If there have been one or more actions I am unaware and can only assume that lack of public ridicule and press means we did and are doing a good job.

The HIV tests and the masks around it have shrunk in number but the testing amount remains at about $200,000 and the sentinel effect is credited with being the main reason for keeping the routine test. There is a chart showing the costs of AIDS related deaths by type of insurance from the late 1980’s and it would be interesting to see a current chart. Only then could we see what impact all the effort produced.

Ross A. Morton

2004-06-01

Written during period with

Manufactures Life Insurance Company

March 28, 1990

In the early 1970’s when I was a mere novice to the world of life reinsurance, I was in awe at the purported depth of expertise and business acumen of my superiors. That quickly became a shattered dream when a humungous claim presented itself to several of the more significant reinsurance companies. One day prior to the anniversary of the policy the insured was found murdered in his home in Oklahoma. The spectre of a premature death claim for $15,000,000 (U.S.) was too much of a shock for the executives of the reinsurers.

A hastily called meeting at the Chicago airport resulted in a hastily concocted statement based on incomplete data about the claim. The message implied to the lay reader that the likely cause of death was suicide and thus under the contract no payment was forthcoming. End of story.

The problem was that someone forgot to await all the information and a subsequent note indicated there were two bullets through the man’s head. This case was eventually settled for one half the amount and ahs become a classic case of overreacting in too urgent a fashion. It also showed that reinsurance executives are human and thus prone to at least one error per decade. I hope I do not commit the ‘90’s only error.

Today, as a human being, I want to convey the message that over the past five years the insurance industry has struggled to find the most acceptable method of risk classification, especially for HIV positives. Beyond the actuarial numbers and the increased payment of claims, (Chart 1), I have witnessed the frustrations of applicant, agent, insurer and reinsurers in trying to cope with the issue of testing and confidentiality. The solutions have emerged as the wisdom of the industry discovered fair and equitable alternatives to just declining to insure certain “profile” individuals. “Wisdom is the ability to discover alternatives; there are many ways to reach solutions.” (From a fortune cookie by Far Eastern Cookie Co. Ltd.)

The past decades have been full of many instances of reducing the price of life insurances for the majority of purchasers. Pure life insurance in the form of term coverage has fallen to nearly 30% of the 1970 price, especially for those in their thirties who are non-smokers. The AIDS issue is almost the only example of a medical impairment that reverses the current trend. In the early days of applicants applying for insurance with a history of auto immune disorders the risks were quite often accepted due to the oversight and ignorance of the lay and medical underwriters. As evidence of rather early and thus unexpected claims emerged the industry found itself in a corner surrounded by the realization of mounting claims that surpassed the expected. How to correctly perform the needed risk classification process became everyone’s quest in all parts of the world that had a life insurance industry.

Insurers are able to provide protection because they can predict, with reasonable accuracy, how many individuals in large, fairly homogeneous group die from year to year. On the basis of this predictability, they assign to a given group those people with similar characteristics….mainly age, sex and health. The information provided by the applicant enables the insurance company to decide the level of risk that person represents and thus the group to which he or she belongs.

Like severe coronary artery disease or recurrent metastatic cancers, AIDS and HIV positive individuals presented the industry with a risk that is could not adequately classify and price for at this time. How to fairly perform the risk classification process, with what tools and at what cost became evolving challenge.

In Britain the industry adopted a series of new questions to be answered by the applicant as well as the use of HIV test. An excerpt from the typical application for insurance is as follows:

“1a) Do you belong to any of the following groups:

i) Homosexual men

ii) Bisexual men

iii) Intravenous drug users

iv) Hemophiliacs (although in the UK it was spelt with an “ae”)”

The representative questions were targeted at those groups of individuals who were deemed to be most at risk. A positive answer to any of the questions was considered as enough reason to refuse to provide a contract of insurance. Failure to answer the question ended any change of insurance coverage and failure to disclose the truth invalidated the policy. The questionnaire was required for all policies where the applicant was a “single/divorced/separated male” but only mid size policies on “married/widowed males” and for extremely large amounts on “females”. Coincident with the questions, HIV testing was mandatory in the aforementioned categories for similar varying amounts.

The following is the form of questioning adopted by the Australian Life insurance industry again in tandem with HIV testing similar to the British example. Should a proposed insured fail to answer yes to all of these type questions the insurance company proceeds to question deeper into the individuals lifestyle or just refuses to proceed with the file. As you can read, the question is extensive and is in addition to questions one would judge are similar in context to those included in the North American style of medical history questions. However, this question goes well beyond what is deemed reasonable in North America.

“6 Since 1980, I have not:

i) Worked as, or engaged in sexual activity with a prostitute

ii) Engaged in male-to-male anal sexual intercourse.

Iii) Injected myself, nor been injected, with a drug which was prescribed for myself by a registered medical practitioner.”

All those involved in underwriting in our market have helped construct a fair method of evaluating the risk presented to the industry. Our standard questions have been tested and refined but are all very similar in context and intend. The “AIDS” questions are included in all applications for all ages, sexes, marital status, etc. The questions reflect a universal need to screen all applicants as we would for other medical impairments, hazardous avocation and occupations. In addition the majority of Canadian life insurance companies now use the HIV test in all applicants for an amount of $100,000 or more.

On reflection, it is only five years ago or less that we did explore a more selective method of testing. Trying to categorize people into classes as the British and Australians do was found to be unacceptable to the industry, the agents and the applicants. As the accuracy of the insurance laboratories improved, their prices fell and the methods of collection expanded, thus the universal testing approach gained acceptance.

The chart you would see from any laboratory represents the flow of an HIV antibody test as the industry, with the assistance of the numerous independent laboratories, strive to ensure only the truly positive are faced with a rejection of life insurance due to the test. As an aside, in some U.S. States the serum antibody testing was not allowed and the so-called “surrogate aids testing” became the test of last resort. The poor predictive accuracy of these test (mainly the T Cell test) of around 10% meant that some U.S insurance companies found themselves declining to issue 9 out of 10 positives unjustifiably. To discriminate and try to pick out the true test on the basis of age, sex, marital status, etc. Might have created a field day for lawyers. Repetitive testing had a predictive accuracy of only 33%, so the industry was still faced with inappropriately declining 66% wrongly.

You all know the final chapter. In 1989 states like California allowed antibody testing for life insurance!

In 1989 one could estimate that 300,000 + blood profiles were completed on Canadians applying for life insurance. The blood profiles all included the HIV antibody test as well as the test for up to eighteen additional blood chemistries. The industry was witnessing about 0.05% positive as you could see from any labs monthly reports. In a representative mid size company, they had four positive HIV antibody tests discovered in the latest calendar year. A quick synopsis of each follows:

Case 1

Male, married, age 48

Earned income $200,000+ per year

Excellent medical history

Excellent finances

Applying for $1,000,000 of permanent insurance

Case 2

Male, single, age 38

Earned income $100,000+ per year

Excellent medical history

Excellent finances

Applying for $1,000,000 of Business insurance with 4 partners

Case 3

Male, single, age 33

Earned income $25,000+ per year

Admitted homosexual with history of numerous S.T.D.

Admitted to having HIV antibody test several times

Applying for $50,000

Case 4

Female, married, age 30

New arrival to Canada

Spousal rider $25,000

The last example also points out a practice of a growing number of companies. Individuals of all ages, sex and martial status who have not been a resident of Canada for one year or more are being tested.

The chain of custody for the blood sample, the pre-notification and authorization of the individual and the confidentiality of the record has improved ten fold in the past five years. The applicant now knows they are being tested. The sealed sample follows prescribed handling that strives to avoid loss, replacement and error. The test results, if positive, is communicated directly and under the strictest of control to either the chief underwriting officer or medical director of the life insurance company. That individual then takes on the responsibility of communicating the information that the case has been rejected by the company. This communiqué is forwarded to the applicant in the form of a letter that states that the application for insurance will not be proceeded with do to abnormal findings on one of the tests performed on the applicant. The company offers to send the complete results of all tests to the attending physician for review and discussion with the applicant. If permission is granted the information is sent to the doctor of choice with a recommendation to the doctor that they themselves have the tests corroborated.

In actual practice I have heard that in only 50% of the cases do the insurers receive permission to release the file to a doctor.

Complete new procedures have been developed within the paper storage or file administration areas of life insurance companies. A concentrated effort has been put to the task of ensuring even stricter enforcement of the confidential natures of the declaration regarding health and laboratory results. In some instance all medical evidence from any source has been purged from the financial contract synopsis. This set of confidential information is then restricted to the viewing by medical director or senior underwriting personnel. The professional insurance doctor and underwriter are cognizant of the need for confidentiality. Even in the instance of internal studies and statistics gathering, these prudent professionals use only a numerical reference as opposed to anything that could publicize the individuals identity.

Currently the chain of custody for blood sample and results is closely monitored and controlled. With the recent advent of urine HIV antibody testing the industry is faced with re-evaluating the handling urine samples. Historically the industry pre AIDS allowed agent and branch employees to collect, label and ship the urine sample. The ease and simplicity of the urine collection and the subsequent testing for sugar and albumin was comfortable. Not so for HIV urine test which has left the industry with three yet to be resolved issues:

(1) Only the Elisa will be done on urine. Thus who will do a follow up Western Blot for samples that are positive? Will the follow up request for a blood sample expose the potential of a positive test to the agent and thus fall outside of our controlled confidentiality?

(2) Tampering with urine samples has been evident for some time especially when drugs of abuse are being sought. By involving the agent in the collection of urine samples will we become counterproductive when more than drugs of abuse are being sought?

(3) The urine test will produce more false positives than the blood test. Is the industry prepared to acknowledge that almost all positive tests in an insurance population will be false positives?

The foregoing will be resolved because the industry will accept only what is reasonable as it searches for cost effective testing that is equitable to the insured and does not jeopardize confidentiality.

Stepping away from the HIV testing and returning to the eighteen other tests plus the test done now on urine, the life underwriter is faced with trying to discern the meaning of all the other tests. Unlike HIV testing there currently is no built in confirmatory test in the typical blood profile. In fact the underwriter sees fewer than 50% of the profiles falling within normal.

The following chart, taken from the Journal of Insurance Medicine gives one company’s opinion of the economics of certain actions prompted by a positive test. In the example we are faced with an abnormal GGT. In summary the chart shows a loss of $1,000 + if the company accepts the risk at standard; $50 if the company declines; and $119 if the company charges an extra premium. With those kinds of odds, no wonder the easy way out is to go on vacation and let someone else make the decision.

When the laboratories offered to throw in a test for cocaine on the standard urine test the industry was skeptical. People who are sold life insurance are not likely to be cocaine users. When the laboratories offered a three-month money back guarantee if not satisfied, the life insurance industry said all right, since we have nothing to lose. For only 80 cents per urine test we now are finding a surprising number of individuals who show evidence of cocaine residuals in their urine test positive for the substance cocaine. In fact most statistics reveal a rate of positive that is five times that of HIV infection. A positive cocaine test brings about the same insurance consequence as HIV positive…decline!

The confidential nature of this test like all others is protected with the same vigor. One difference in approach is that some companies will often write a registered letter to the proposed insured stating that a positive test for cocaine was why they were declined.

Billy Martin once said as skipper of the New York Yankees (a USA baseball team) once declared “I feel strongly both ways” when asked to take a position on something that had more than one side. Extending the immortal words of Billy Martin, I feel strongly all ways. The industry is not perfect as no industry is perfect. The public trust that rests in the confidential nature of the files within the insurance industry is well founded today in spite of ever more sensitive data being stored. The industry must protect its financial integrity as mandated by the share holder or par policy holder. On the other hand, while fulfilling that objective, we must continue to protect the individuals privacy and employ only the fairest of testing available. Assessing the risk is paramount to the private voluntary life insurance underwriting process. Risk classification allows the life insurance company to provide individual policies at the fairest prices to the greatest number of people. Fairness by definition means equal treatment for equal risks.

As a professional underwriter I can only hope that the various impairments that reduce our life expectancy or encumber our ability to enjoy our lives become as extinct as the following from three centuries ago:

1. Apoplex and Meagrom 17

2. Bloody flux, scowring and flux 348

3. Consumption 1797

4. Convulsions 241

5. Dropsie and swelling 267

6. Flocks and small pox 531

7. Rising of the lights 98

8. Teeth 470

Taken from Natural and Political Observations by John Graunt a citizen of London in his book on actuarial statistics 1632. Total buried that year was 9535.

The following article was written for the Canadian Journal of Life Insurance (a publication that was probably the best forum for information, debate and learning in the Canadian life insurance industry) at almost the midpoint of my tenure with Storebrand. It was a great company that did not survive the 1980’s in Canada. Swiss Re acquired its operations here in 1988. The history in Norway continues but a mere shadow of it glory days. My memories are mostly of a tremendous team of people who made Storebrand work in Canada and built a first class reputation far in excess of its size.

Ross

2004-04-07

Canadian Journal of Life Insurance

September – October 1981

On May 4, 1981, the company which today is known as Storebrand could look back on 134 years of active life. The company was founded in Norway, and domiciled in Oslo, or rather Christiania, which was the name of the Norwegian capital at that time.

Christiania General Fire Insurance Company for Goods and Household effects has undergone several changes in the past 134 years to become what is known internationally as Storebrand International Reinsurance Company Limited. In 1971, the combined Storebrand group experienced a single year’s result which surpassed the growth of all years up until 1947, its centenary year. To appreciate the company’s present status, one must reflect on history.

Conditions in Norway in the early 1800s were described as hopeless and despondent. Norwegian independence occurred in 1814, but her true economic and commercial freedom failed to materialize until the fourth decade. Even the King of Norway voiced the fact that rarely in the annals of history had there been a country to which nature had been so unkind. Yet, out of this bleak beginning there came the entrepreneurs who strove to improve the economic conditions of Norway. New commercial ventures were launched and amongst their successes were several insurance companies.

Fire insurance on goods and effects was the single objective of Christiania General, but as demand grew in public sector, extension of the company’s operations was in order. In 1856, coverage was broadened to provide insurance protection for buildings. Management at the time felt the company name was too cumbersome and not reflective of the broadening scope of coverage being offered (and this before the day of the ‘ad men’). Popular sentiment proclaimed the name “Storebrand” (meaning he “big fire” insurance company in Norwegian). This name served to show the difference between Storebrand and the other newly formed “Lillebrand” or, as translated, “little fire” insurance company.

In the 19th century, Storebrand had its own fire brigade in Christiania. The choice of name, Storebrand, was a wise choice for the particular circumstances in Norway in the 1800s, but difficulty arose in the English-speaking countries where marketing of reinsurance expanded by the late 1900s.

It was no easy task to commence writing fire insurance under the prevailing circumstances in Norway at the time of Storebrand’s foundation. The experience of British and other foreign offices, plus the acquired seasoning of the building insurance companies, was a priceless bench-mark. However, the new companies were immediately faced with many Herculean tasks which have no equal in today’s environment.

A major conflagration totally destroyed several blocks in the center of Christiania in 1858. This great calamity produced damage to the estimated cost of over 4-million kroner – an unprecedented sum for any disaster of that period in Norwegian history. The five Norwegian insurance companies suffered financial strain as a result of the devastation. Storebrand, while enduring a 345% loss ratio, was relatively in good financial standing when one recalls that three other insurers were forced into liquidation. Lessons can be erudite from such an occurrence – the imperative need for reinsurance became very evident. Up until 1858, Storebrand, like so many other insurers, had virtually carried all of its gross liability for its own account.

Storebrand’s first obligatory fire insurance treaty was signed in 1862 with eth Phoenix Assurance Company of London, England. The treaty covered Storebrand’s excess Norwegian business. The reinsurance coverage was expanded 10 years later with a second treaty with Northern Insurance Company. Both these reinsuring companies have maintained their treaty connections with Storebrand for over 100 years (interrupted only by the Second World War period).

Norway was the only county in which Storebrand operated for its first twenty years of existence. This market was, by its size, very confined and it was evident to company management that they should expand into foreign market possibilities. Through market diversification Storebrand could spread very effectively its liability at a far more rapid rate than they could ever hope to accomplish within its domestic area. In 1868, a branch office was established in Sweden and direct business was commenced in other European countries. In a short span of time, further branches were established in England, Denmark, Finland and Germany. Early underwriting and sales results as a direct writer in most of these countries failed to do anything for Storebrand’s growth, and thus the concept of expansion through this method was abandoned.

Retrenchment within Norway became the theme for the next several years and activity outside the country came to a virtual standstill. By the end of the 19th century, international reinsurance was becoming more and more an obvious route for expansion into foreign markets, avoiding some of the pitfalls or earlier attempts at direct writing in those same markets. Christiania General and Vesta Central Office for Foreign Business was constituted in 1902 as a joint venture of Storebrand and Vesta Insurance Company of Bergen, Norway. This new company was given the mandate to solicit foreign fire reinsurance, an area of expertise in which both forming companies were proficient.

Vesta was the actual managing company for the first 18 years of operation. Storebrand during this period was not content to play the role of silent partner and thus slowly increased its own knowledge of the foreign reinsurance markets. Success in this area prompted Storebrand to simultaneously increase its activities under its own name. Storebrand offices, independent of the joint venture, were started in New York and London. On January 1, 1921 Storebrand formally became manager of the foreign business of the joint venture.

As is the case today, Storebrand’s operational style has been one of slow (thus somewhat unspectacular) and deliberate growth as an international reinsurer. By 1940, when the Second World War engulfed Norway, the foreign operations of the Storebrand Group had matured into a very major portion of the total – 75% of the group’s business was now in markets beyond Norway’s borders. Needless to say, the war’s impact was tremendous on an international reinsurer who found itself in a position of being amputated from most of its premium income. Management reacted quickly by changing the New York branch office into a U.S. Corporation, under the name of Christiania General Insurance Corporation of New York. Somewhat later during the war, a similar corporation was set up in London.

At the same time, the original joint foreign reinsurance venture with Vesta was abandoned through mutual agreement of all concerned parties. After 40 years a very cordial cooperative operation was ended on December 31, 1940. Both Storebrand and Vesta pursued independently their foreign reinsurance expansion from that point on.

After the war, the new management team, under the dynamic leadership of Mr. Per M. Hansson, looked to expand Storebrand’s international portfolio. The subsidiary in New York, Chrisiania, was progressing on schedule as a professional reinsurance company in the U.S. General insurance market. Meanwhile the opposite course of events was taking place in the U.K. Market place. Storebrand’s view of the U.K. Market, through its London office, after their original marketing thrust, presented a very limited potential profit picture. After a few years of operation, the London subsidiary was sold and Storebrand withdrew from that very particular type of reinsurance business.

A very close association started in 1952, as Storebrand helped with the formation of a reinsurance company in Mexico – Reaseguradora Patria. Some 29 years later, this reinsurance company has matured into a leading and profitable reinsurer in the Latin American world. Storebrand maintains to this day a very amicable and profitable relationship with this Mexican reinsurance carrier.

Elsewhere in the world, Storebrand continued on its path of well-planned expansion through both branch offices and subsidiary companies. Storebrand International Re of Australia is today a continuation of Storebrand’s licensed reinsurance branch in Sydney, which was originally established in 1962. Although only 12 years old, Storebrand (U.K.) has today a broad and well-spread participation In the London reinsurance market. After the initial problems of the 1950s the new Storebrand (U.K.) went after a market in which they had the expertise, namely, the writing of marine insurance business.

Alpha, Compania de Reaseguros ahs its base in Panama and was formed by Storebrand and local interests in 1976. This company has taken over the Storebrand Group’s Central and South American portfolio. At the end of 1977, Storebrand Ruck with headquarters in New Hamburg, got off the ground. With paid-up capital and surplus of D.M. 20 million plus management with local expertise and leadership, it has made inroads into the growing reinsurance needs of Germany and neighboring countries. A milestone was passed in 1972, when the foreign business accounted for about 50% of the group’s total business. By the end of 1979, Storebrand’s foreign subsidiaries had increased in importance to the Storebrand group – in excess of $50,000,000 of premium income was now in the subsidiaries.

STOREBRAND IN CANADA

Storebrand in Canada began when the company commenced its second hundred years in 1948. Christiania Almondelige Forsikrings – Akliesselskap Storebrand, better know in English as Storebrand Insurance Company Limited – appointed Verner R. Willemson of Toronto, as “Chief Agent” for Canada on the 16th of November, 1948. Storebrand was one of what were to be several foreign-based reinsurers to be represented by Mr. Willemson and Sterling Offices of Canada Limited. They were here in Canada in name and finances only. Sterling’s offices handled the local administration, sales of general reinsurance services and underwriting authority. The life reinsurance operation did not commence until much later. The relationship between Sterling Offices and Storebrand was to exist until 1975 (non-life) and 1977 (life). In 1975 the general reinsurance went under the umbrella of a newly-formed reinsurance brokerage – Universal Reinsurance Intermediaries Limited. U.R.I. By the end of 1980 was ranked number 1 (net premiums written) amongst reinsurance companies in Canada (Canadian Insurance, Statistics, April 1981 Annual Review). Since 1975 (non-life) and 1977 (life) Sidney Gordon, President of U.R.I has been Chief Agent in Canada for Storebrand International.

Active pursuit of life reinsurance in Canada commenced in 1967 with the formation of a life branch of Storebrand Insurance Company Limited. Securities of $213,000 were deposited with the Minister of Finance and Receiver General of Canada under the provisions of the Foreign Insurance Company Act. These original deposits were split between Government of Canada Bonds, Manitoba Hydro-Electric Board Bonds and Province of Newfoundland Sinking Fund Debentures. A local Life Manager was hired and the marketing of life reinsurance began in Canada.

The timing was perfect since the two main “professional” reinsurers in Canada were still under the control of one parent company and the third reinsurer was just starting to become a force to be reckoned with in the market place. The conditions could not have been better for an aggressive reinsurer, but unfortunately Storebrand approached the life market in a very modest fashion (contrasted with the dynamic impact of Munich Re and Victory).

Hindsight allows one to speculate, in a biased way, on the reasons for the ten-year performance 1967-77. The head office in Oslo was cautious during this period so far as life reinsurance was concerned. Thus they could be faulted for not appreciating the needs of the Canadian market. Local management was also “spreading’ itself too thinly – expanding into the U.S. Market place before fully servicing the Canadian Market. The combination of head office and branch management decisions meant Storebrand drifted through the years 1974-1977. Production fell in relation to insurance sales and Storebrand International Reinsurance Company’s reinsurance market share fell to less that 1% (based on new reinsurance sums reinsured).

From 1973 to 1976 the branch statements showed net losses totaling $528,295. These operating results plus the relative stagnation of Storebrand International Reinsurance Company’s life portfolio in Canada prompted the Head Office in Oslo to pursue a means of turning the situation around, in keeping with the Group’s international growth and prestige. By late 1976, an actuary was added to the Toronto staff and for the first time in 10 years, local actuarial talent would provide guidance. This was the start of Storebrand International Reinsurance Company’s rejuvenation program in Canada. Robert Smith, F.S.A., provided the impetus that led to a total change in Storebrand’s approach to the Canadian reinsurance market.

The latter part of the 1970s presented an ideal scenario for Storebrand to re-establish itself within the Canadian Market. The new management team in Toronto found itself in the midst of a period of rapid growth for reinsurance premiums in Canada. A look at the figures for the reinsurers (excluding companies who are direct writers in Canada as well as reinsurers) Shows reinsurance premiums doubled between the end of 1975 and the end of 1980[see accompanying table]. In force sums reinsured rose to almost ten billion dollars – an increase of 150%. The numbers for new business sums reinsured likewise increased by almost 190%.

Storebrand International Reinsurance Company took an aggressive stance in late 1977 and thereafter in its pricing of reinsurance both for facultative underwriting and actuarial quotations. A transfer of just over $1,000,000 was made from the Head Office in Oslo (supported by the two Danish partners) to the branch in Toronto. There was now no doubt that the company was in Canada to stay and encouragement to increase Storebrand’s prestige and market share was forthcoming in tangible terms.

In spite of the fact that Storebrand International had started to provide lower reinsurance costs to direct writing companies in late 1977 and thereafter, the early results were somewhat disappointing. Life insurance companies in Canada were, in 1977 through 1979 period, reluctant to change the status quo concerning their reinsurance outlets. Storebrand International, as well as other “new” reinsurers, were often providing the better (i.e. Lower) reinsurance costs but were losing at the final decision time to the existing reinsurer who was being asked after the fact to “match” or “beat” the lower cost. In fact, some 94% of all new sums reinsured in 1975 were going to the three larger reinsurers – Canadian Reassurance, Mercantile & General, and Munich Re & Victory. Comparable dominance of premiums (83%) and in force sums reinsured (93%) also existed at December 1975.

The early frustrations soon diminished, existing only in very isolated instances, as the “new” reinsurers including Storebrand International became acceptable alternatives in Canada to the big three. By offering an alternative reinsurer that was flexible and operated on lower expense margins, Storebrand International increased its market share of reinsurance premium income from 1.6% in 1975 to 7.5% in 1980. the impact on the three major reinsurers of the new competitiveness was a reduction to 70% of total reinsurance premiums, 82% of inforce sums reinsured and 80% of new sums reinsured.

The 1,000% increase in the number of cessions to be processed per year and the increase in facultative underwriting volume of the same magnitude, has meant a 50% increase in Storebrand International’s staff size over the last four years.

Storebrand International is now firmly entrenched in the Canadian life industry and has re-established itself as a viable alternative to the three major reinsurers. The market itself has changed and the decade of the ‘80s should offer life companies a competitive and varied source of reinsurance companies from which to choose.