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Brevity Over Prolixity

In writing I have leaned to prolixity at times to try to get a message, agreed, often my message, across since I want to convey all the nuances of a particular issue I am addressing. In conversation and in speaking before an audience I have found brevity to be the best course coupled with ample time to elaborate one on one with the questioner from the audience. When reading or listening, I tend to categorize the writer or speaker into which category they best belong. Lately while pondering the many musings of experts on underwriting and technology for the risk selection process I conclude that those who should be brief are far too extravagant in their words. Just as often those who are brief leave the audience short of detail and concrete data.

I am enthralled by the outsider’s view of underwriting as an arcane process that has remained mired in its narrow field house for decades. Why underwrite asks the banker new to risk (risk taking being known as insurance)? Because we will not take the risk otherwise says the mortality outsourcer or reinsurer in yesterdays jargon. Every time I look at the process, I conclude that a large squad of underwriters is doing a small amount of underwriting and a large amount of clerical work says the COO of accounting background. Yes but if you do not have all that senior talent reading all the files you may miss something says the scribe of underwriting fame. Brief answers to complex questions? Who are we kidding? The brevity comes from refusing to spin the sporran around and call it a fanny pack!

We must reinvent the risk selection process. One does not have to write at tedious length to make the point. Our industry cannot continue on with manual underwriting labour being the tour de force in the new business department. For the 80% of cases that are clean and unfettered by medical, avocation, aviation, occupation or financial issues we need the black box to handle the case. Save the underwriters for the 20% of cases that are unique and beg for more attention. Is this revolutionary? No. There are a few selected companies who have made the break from manual tedium but well paying clerical function called underwriting to embrace real risk selection by well paid professionals. Couple the black box (my laptops black otherwise black has no relevance especially after Apple introduced apple, tangerine and plum) with inventive ways of managing the real underwriter and you have a winning company.

Lets start with technology. I wrote on this subject several years ago in MO and said in one of my visionary moments that the world of insurance would be swamped with underwriting technology by now (actually I said 1999!). Instead of it happening we have the debate over which is better, the numerical points system born of the ancient but still practical numerical rating system or the “in/out method”. The latter is not a variation of the rhythm method but rather a poor descriptive of the yes/no method to determine one’s eligibility for a product’s price. Is this debate a mere sham to delay the decision making process to automate the mundane?

The “in/out” method uses the simple decision tree that if any answer is positive you are out of the price assigned to the product class you applied for. This is a good system and accommodates rudimentary risk selection. Because an individual applicant fails one question does that mean they are indeed an inferior risk? If you price it that way then say it is so. It is a no brainer (five years ago I had to explain that two word series) and one can hire the cheapest of talent to “underwrite” all your cases. Fortunately to protect some jobs within our business exceptions were built to add a dimension of thought to the underwriting process. Now if the positive answer is on one of the questions it can be ignored (please arrange for list with actuarial prior to implementation) if all other answers are negative. Now since even that secondary process of gray area underwriting may be automated with a rudimentary rules engine underwriters developed the personal touch. On a given day for a given agent the underwriter can always “give in”, “make a value decision” or just want to feel good by ignoring the positive answer(s). What we do not know as an industry is how often is that happening. Is the twentieth underwriter in the department making far too many exceptions and how would I ever know that since I am all manual.

The points method is closer to the historic risk selection methodology. It assigns points or takes away points depending on the various positive or negative answers. It tries to weigh the total to see if a person falls within a range. Thus unlike the “in/out” system with points it is known in advance that one can have positive results but with strong negative features one can still fit into a price category. Is it better? In my opinion it is simply because it allows far more latitude in assessing the longevity of an individual but it requires far more structure at the outset. It is my favorite but that does not make it the “be all/end all”. Underwriters can still over rule the points total and still give away the shop unless the data is collated and delivered that tells me what all underwriters are doing.

What makes either of the above work well and is fundamental is the workflow manager and reporting tools that deliver regular and concise reports to management on how many exceptions are being made, the degree of those exceptions and the cost of those exceptions. If from a pricing perspective I can tolerate exceptions to the rules, be they points or “in/out”, of say on 1% of cases or amount of insurance I need to know that number. Only automation can do that for you. The system puts the risk in a category approved by underwriting, medical, marketing and actuarial. Now the system points to those who have to select risks for your company who are going too far in their exuberance to say yes. Now you have data to decide “are my rules too harsh?” or “are my underwriters too liberal?”

Give me the consistency that comes from the likes of Cprompt’s AUS software or any of its competitors and I am an ecstatic executive. Load the software with the rules that all agree to and can see, and voila consistent equitable underwriting. I know that the portfolio of risks that I am assuming is well within my tolerance for long term financial rewards and not long term surprises. Tell me regularly where I am intolerant of my rule base. Tell which underwriter needs cajoling or platitudes. Let the underwriting executive meet the glares from the upper most echelons with confidence as they can reel off statistical proof that the company’s risk selectors are earning their meager salaries.

The following is how one progressive life insurer (STEVE I HOPE TO GIVE CREDIT TO ZURICH IF THEY APPROVE IF NOT IT GOES WITHOUT CREDIT) and their underwriting leadership views the technology question and why they are moving to reconstruct their underwriting area to meet the challenges. I thank them for allowing me to share the high level summation of their creative thinking.

“The principal benefits which we want to obtain through the use of an expert underwriting System (Ross’ note: it is not so much an expert system as a system that monitors the work flow, does automatically the cases that are routine and thus standard, assists the underwriter to a decision, monitors underwriting consistency and helps create a portfolio tat fits the pricing mortality assumptions) (now that I think about it maybe that is a smart system that is as expert as the average underwriter) are:

1. More consistent decisions. System-driven assessment processes ensure that all salient features are taken into consideration, and weighted appropriately. This applies to standard and substandard business.

2. Elimination of errors on quantifiable preferred underwriting criteria. The evaluation of preferred cases, with multiple risk factors, creates room for human error. Basic preferred underwriting criteria are based on quantifiable information, such as height and weight or blood pressure. Machine screening eliminates these types of errors.

3. Reduction of inappropriate preferred exceptions. Underwriters may be under considerable pressure to grant exceptions to allow preferred rates on cases, which do not fit within our rules. In some audits of non-system underwritten business, exception rates of up to 20% have been identified, with serious preferred mortality implications. Automated underwriting reduces these situations. Rules for allowable exceptions are built into the system. Other, underwriter based exceptions, are limited, and the system produces reports listing exceptions which can be used for quality control purposes.

4. Strengthened audit control. Expert systems provide a clear audit trail for identifying numbers and types of exceptions, as well as evidence and substandard/decline ordering rates on each underwriter. These enable both insurer and reinsurer enhanced ability to review underwriting activities. This ensures that company and reinsurer underwriting standards are adhered to, and that risk to both is reduced.

A second important objective will be to optimize the use of our tele-underwriting system. We intend to realize the following benefits, which will impact us financially (Aside from soft benefits such as increased agent and customer satisfaction):

1. Better quality underwriting information. By replacing the agent with an objective and trained professional interviewer, and the use of effective drill-down questioning, we believe that there is less undisclosed or understated client information, and that the quality of information obtained is superior to agent collected information. We believe that this will result in more accurate risk assessment and improved long-term mortality experience.

2. Reduction in discretionary underwriting requirements. Due to the more detailed information obtained via our interviewers, we can reduce the percentage of cases with discretionary underwriting evidence, which will reduce our other product costs.

3. Reduced discretionary requirements also reduce administrative costs. Significant administrative costs are incurred whenever we order and have to subsequently follow for requirements. Reduction in ordering results in product cost reductions on the administrative side also.”

If only the software sellers could show a leaning to prolixity in describing the real advantages to their software underwriters may buy in. I know management would. Be briefer with the technology mumbo jumbo and more verbose with the underwriting merits. Right now it appears the other is true, complicated or exaggerated by the underwriters lack of ownership of their IT solutions (a generalization but true with more than 50% of the examples I am called to comment on).

Once we have the software to garner consistency in what has never been too consistent an area, we move on to daring remuneration changes that finally reward the premier risk selectors. I journeyed into a company where the Canadian flag never flew to find one of the most creative remuneration packages for underwriters I had ever witnessed. On one of my shoulders was the pessimist saying this would doom the company. On my other shoulder was the behemoth like optimist that said this is the answer. Like earlier wanderers in the desert I took the message away with me (thank heavens it is no longer in vogue to write these messages on stone tablets).

The company in question rewards underwriters over and above the standard salary package with a true performance bonus. On a monthly basis there is a reward for exceeding the standard number of final decisions made on pending cases (potential revenue sitting in the system). Make a final decision and low and behold revenue is earned. Thus if your expected is 15 decisions a day and the underwriter is hitting 20 cases per day for the month a bonus of $X times the five times the work days in the month equals bonus. Make the underwriter realize they are a lighthouse guiding ships or cases to the shore or in force status not a lighthouse built to protect the shoreline from clumsy ships.

The second tier is even more avant garde. Yes the company in question went even further in enticing underwriters to be more revenue focused and marketing savvy. At the end of the year an underwriter earns a bonus based on a percentage on all premiums that they underwrote that went into force. This bonus makes them just as enticed as brokers at getting cases done. For about a third of the underwriters the bonuses can be very hefty equating to multiples of base salary. For some underwriters nothing has changed since they are of the old school. The company gets far more from fewer people and it wins by pocketing money it would have paid for head count increases in a traditional scheme.

From all sides comes the nay Sayers speaking ruin and integrity issues. Yes it is a stretch I would be the first to admit. With this type of inducement underwriters will accept everything and anybody. The industry would be ruined. The long winded conquer the Spartan words of those who dare to take a chance. Why would an underwriting professional put their company at risk when they are under more scrutiny than currently exists in most companies? Internal audits and regular and frequent audits by the reinsurers who actually take the risks must be within the tolerance of prudent underwriting. Failure to meet the standards means a forfeiture of the bonus and perhaps ones job should the underwriter be deemed wantonly careless. Is it any different than the pricing actuary getting a bonus based on production? Professional decent people will not do you harm. Scoundrels will be found out through scrutiny shared by all the players. The current system has minimalist differentials between the exceedingly brilliant underwriter and the mediocre and marketing challenged dirge.

The company in question is ecstatic about the positive benefits they are witnessing. The producers and marketing people feel the third of the underwriters who now have a vested interest in getting an answer out fast and as fair as possible is a breath of fresh air. The battle between the underwriters as encumbrance versus the totally commissioned producer has slipped into obscurity. I applaud the change that has been thrust upon our industry and hope to see similar revolutionary thinking enter our local market.

My prolixity on such a trivial subject as underwriters and consistency will end when true change arrives. The medical superiority of today’s underwriter now has to metamorphose into a consistent marketing sophisticate, supported by software tools and company tolerance of new reward systems. Brevity on this subject fails to convey the importance to our industry. Getting an application completed over the Internet in 8 minutes is mired in the 100 days to get it issued.

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Underwriter’s Time To Impress A Response To “Steve’s” Commentary

Steve made some very good points about the time available to make a good impression on an underwriter, which may mean the difference between standard and decline (okay so the difference may only be standard to +50 extra mortality). Any reader can tell Steve’s insight into how insurers work comes from his fundamental training as an underwriter. Unfortunately he left that profession for the more financially rewarding world of sales.

I would like to bring Steve’s numbers up to date since the cozy environment of underwriting as perceived by the hard working financial planner/broker has changed somewhat. As we enter the year 2000 underwriters work about 200 days in a year (the balance go to training, bathroom breaks, exotic seminars and conferences, holidays, weekends occasionally, long lunch hours, and psychic leave of absences, etc). Being less than generous they toil for about 8 solid hours per day and each of those hours has 60 minutes. That culminates in 96000 minutes of extreme pressure filled minutes to handle the proverbial “X” number of new applications. In Steve’s days of underwriting the net number was the same but the conspicuous consumption was more impeding to work day frustration.

Companies today have different expectations for number of cases per underwriter per year or per day. The higher the premium and/or sum assured the lower the expectation. Complex joint lives written for estate protection require more time than the mortgage protection policy for a small townhouse. Therefore in Canada we have underwriters who have a yearly case load of 1000 and some who have a caseload of 4000. Lots of the former but no examples of the latter comes to mine (more reassurance on former than latter).

In the case of the 1000 new cases per underwriter a case gets 96 minutes on average in the focus of the underwriter. That is lots of time to read financial statements for the past five years, six attending physicians statements, two medicals, one treadmill ECG, two laboratory test results, and the occasional well written descriptive letter from the broker. A little over an hour and one half to pass judgement on what could be the culmination of 12 months of effort by the broker. Less than one sixth of a working day to say yea or nee to the brokers best customer and many mortgage payments. That’s $60.94 plus burden rate to be forever classed as an obstructionist or a real team player.

In the other extreme of 4000 cases per year we have 24 minutes per case, less than one half hour, less than $20.32 per case or not much time at all.

Automation is helping move many cases through the system. If the broker/agent has properly and completely filled in the application and the person reviewing or inputting to a machine makes no error the decision is made in nanoseconds.

Steve the 7 and ½ has to be updated unless you count the cases screened by machine or simplified issue. The point however remains the same regardless of perspective. The very first impression can make or break a potential policy application. Just think how complicated and outrageously convoluted it gets when that same underwriter has to use some of their 96 minutes to arrange for many reinsurance underwriters to grasp what the sale is for and agree that the case is a standard risk!

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Blasé

“It sure is a boring summer with nothing exciting happening in our business”, said the old timer who likes to feel the vibes of change. He of course was talking about the sleepy life insurance industry. He also has become so accustomed to rapid and exaggerated change plus unwelcome headlines that he no longer labels the now routine noteworthy.

Lets start with the KPMG Ethics Survey 2000 that I have read snippets of but since I am too frugal with my time I have not read every word. For those interested in the survey it is available at www.kpmg.ca .It is full of all the great statistics of how ethics are not being nurtured and few companies give this a priority. My first reaction was to resurrect the “semper ubi, sub ubi” article from MO’s archives. Then I said to myself that that windmill has already been challenged. On questioning a friend of mine who is close to the MBA circuit and continuing education for executives I learn that ethics courses are in such great demand people are being turned away. I thought the ethics of an organization were instilled in new employees by the old guard and the leader. Has this become so specialized that it is now outsourced?

If one (the proverbial employee of nondescript features) has not learnt enviable ethics before entering the workforce can one ever learn? If one has not learnt ethical values from one’s first leaders can one ever learn? If the actions and verbal utterances of one’s current leader are not reflective and definitive of true ethical behavior can one ever learn?

Can a daylong course on ethics and a certificate hung on the wall equate to an insurers integrity being of high ethical standards? Something like two thirds of companies said they are implementing practices but there is some concern for the amount of time to fulfill those practices. Of the responding companies some 42% have a senior level manager that has the ethics conundrum under their list of to do’s. Training in ethics is provided by about 39% of the companies in KPMG’s survey. I am sure no company is spending more time than the Royal Bank conglomerate who just had the bad fortune of being at the very public end of intense scrutiny over in my opinion ethical behavior! Just imagine what has not been uncovered in our financial services industry. I take heart in the KPMG survey that included about 1.5% life insurers and I will imagine they are all on the higher ground.

Before the ink had dried on the above paragraphs I am stunned by the news my industry has taken a body blow to the kidneys with the Transamerica immediate and complete disclosure of their problems with a few staff. Could anything have been done in the midst of the burdensome acquisition of one company by another that would have at all costs maintained the sanctity of Transamerica’s reputation? Possibly not. The compliment goes to the leadership who immediately went public, took remedial action, avoided the pitfalls of mendacity and limited damage as best they could in the circumstances.

Dull summer? Not a chance. Our financial services industry has had a wake up call and the onus is on all participants to elevate ethical behavior to a priority. Training courses may keep the issue alive and actually instill the no nonsense importance of ethical conduct but if you have in your midst someone(s) whose ethical instructions in early life training leave a lot to be desired “you gotta problem mista”. Finding the rotten apple in a barrel of red Delicious only happens when you hand wash each apple.

In sharp contradictory contrast to the ethics survey is the Queen’s University School of Business survey of participating CEOs in Ontario. Of the top 12 challenges facing CEOs on the Queen’s list the only one that can be stretched to include ethics is the challenge of finding staff that possess the right personal qualities in addition to their technical skill.

This study would have warranted days if not weeks of public and private scrutiny had it been in the “old days”. Today it is just another study of our accepted practices that lean heavily on performance judged by numbers here and now, versus long-term implications of ethical versus unethical behavior. This should not be taken as ho hum! Rudimentary ethics emerges like zymurgy. Over decades and even centuries our “norm” has been forged like the fermentation of wine. Is being forthright always the same as never telling a lie? Is exaggeration in the same leak as abuse of information? Is a conflict of interest always a conflict of interest or does it depend on the consequences? I remain a student of the ethics debacle and hope that in time any doubt about the definition ebbs, which would mean I have found the holy grail (or at least someone let me glance it while there was still time). With age and an ever increasing scope of acquaintances I learn that the definition is now more elusive than ever since there remains no one definition of business ethical behavior. If there were would there be any employees in the tobacco business?

The prize awaits the person who can guarantee a test to weed out the ethical behavior that is not in compliance with the leaders which one hopes is in harmony with the Board and its traditions. The problem is whose ethical behavior is the model since it is on may occasions so subjective. We certainly do not want to leave it to the press to decide.

Next we have the more mundane within the insurance vill. The merger first here in our Canadian community of CU and NU (sort a sounds like canoe), which then transformed into parents saying sell the whole thing. Add to that the potential but soon stop of the sale of C.N.A. life operations globally, ING continuing to acquire NA companies especially Aetna’s financial services side and you have lots of excitement. Talk heats up that Canada and Clarica will be devoured by the likes of any number of large European mega companies in less than 30 months. Banks can come into the US life market. Royal Bank buys into the US life industry. Underwriters are being given signing bonuses of considerable sums plus salaries that finally distinguish them from senior clerks. Pricing actuaries who can make a product price plummet and a reinsurer pay dearly for the privilege of acquiring the risk are in demand that exceeds the demand for a Stanley Cup team in Toronto. Reinsurers are happy that so much risk is being transferred to them since it is their specialty.

News has come out that some of the insurance Web site sites are still not making money. Enormous losses abound but optimism runs rampant. The expectations are that everybody will be enthusiastically searching out sites to buy life insurance. The summer is full of growing e-commerce optimism for the public consumption but finally from under the terrible income statements comes the first glimmer of concern that life insurance is sold not bought.

A small string of words in The Poisonwood Bible on page 309 sort of sums up our life industry as we head towards the end of summer. In fact not even I could have written and been edited into such a distinctive combination of words.

“I am telling you what I’m telling you. Don’t try to make life a mathematics problem with yourself in the centre and everything coming out equal. When you are good, bad things can still happen. And if you are bad, you can still be lucky.”

We certainly have become numb to change and so blasé that even the pundits are bored. Guess we need to make some greater bad happen.