Ross Morton

Sometimes the use of humour is perfect to get a message across and if people have fun while expressing opinion and reaching conclusions what can be the harm? Years ago (2000 is indeed now in the category of years ago) just as the shift in risk from insurer to reinsurer was going through the radical change and reinsurers were rubbing their hands in glee over the volumes of risk they were assuming three of us representing insurer and reinsurer gave a presentation to be remembered (at least by me). It was a presentation that was fun to build and fun to deliver which in and of itself is a rarity these days. In looking at it today it is a presentation worth doing again and since it is one that can be done via self turning of pages please go there and proceed. I will let you, today’s reader, decide if it was worth the minutes out of the committee rooms. Thanks again to Bill Hazlewood and Ed Swerhone for sharing the moment.

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The interaction between the “field underwriter” (today’s distributor, advisor, agent or broker) and the “home office life underwriter” has never been tested more. This speech has been given to distributors and their leader plus a few select underwriters and covers the relationship and where it has to go. There is a lot here on the professional modification of action needed by the distributor to enhance their reputation and work with not against the underwriter. It tries to instil a paradigm shift in thin king and action in the distributor which should pay off in relationship with the life underwriter and the growth of their business.

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Another look at the future from the present. A major software vendor and manufacturer asked Ross to paint a picture of the world of underwriting and risk selection and where it has to go in terms of the bigger new business environment and the (in)tolerances of senior management. The presentation fit into a new release of CGI’s future and tried to highlight they were indeed at the front of the line in realizing what the insurers needed going forward.

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The easiest underwriting in the world but the hardest to do right. The textbooks are vague on how to assimilate the myriads of numbers and decide not just if the amount is right for life insurance but is the insurable interest there for now and the future. From Ross’ hard earned rules there is hope that the tough underwriting can be made simple and yet be prudent enough to keep the company off the front page of the press!

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This presentation or a derivative of it has been given to several groups of CEO’s and COOs in various countries and deals with the changes that are inevitable in every countries life industry. It handles the issues in people and software, underwriter and distributor, niche market versus mega market, independence versus convergence. It is a presentation that provokes discussion amongst the leaders and has been also given as follow up to boards of directors so they have an appreciation of where their company fits not only nationally but internationally.

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With all the pressures on “the front end” of the life insurance industry are risk selection staff and leaders acting responsibly and with vision to improve the efficiency and the thus the image of underwriting. From financial underwriting complexities unravelled to medical underwriting shortcuts the presentation takes the audience regardless of experience into a world where speed and cost are dominant and thus prepares some tactics for successful underwriting.

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Ross’ classic spin on the future based on the reality of today. Thought provoking and controversial, the presentation tries to get people understanding where they fit in the overall scheme of the financial services business and how the comparative work is against other institutions not just insurers. Helpful scenarios in people, reinsurance, software and marketing are contained in the talk.

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I delighted my precious daughter a unique way when she was an infant and toddler. At six foot four inches, I would swing her through an arch, initiating well above my up-stretched arms down to safely above the floor. Emily would become a profusion of howls, giggles and smiles and always asked for more. Children grow, gain length and acquire accoutrements that befit a toddler. The accoutrement one day were shoes which were more akin to army issue boots.

On that ill-fated day as I arced my Emily from near ceiling height to the intended near floor position, my life was about to change both temporarily and permanently. Emily curved her body inwards by bring up her legs. The ensuing collision of Emily’s army boots to my most vulnerable parts was akin to watching neutering back on the farm (my grandfather did it then with two bricks).

I had a speaking role to play at an industry function and I had to adapt. Baggy pants, a stool to lean on and an MC who allowed me to remain upright and not moving made the day bearable and the audience none the wiser. Circumstance change and thus we adapt.

Has our industry adapted? It is a question that would draw many to both sides in a debate. “Yes” is obvious since times have changed and thus we must have changed. “No” is just as obvious since as life insurers we still struggle with paper, distribution, communication, blood and urine, and reliance on archaic rules that some would argue are totally counterproductive. As for me, I sit in the middle and which way I lean depends on my mood or how repetitive the day has been. Good mood equals adaptation. Bad mood or just more of the same equals status quo.

Banks outsource the loan function. Yes, there are hundreds of banks in the U.S. who use one company as their loan approver and call answer service. Here you have a third party outsourcer who is given the key to the vault to distribute a bank’s cash. How trusting and practical. Handling the telemarketing and loan approval is a skill set steeped in technology and training that many a small bank can ill afford to do internally but tasks that can be handled with awesome success using outsourcing.

Banks outsource back office cheque processing, credit card processing, computer networks and only “The Maker” (and perhaps Paul Martin) knows what else. For years, banks have realized that the real back office function is a noncompetitive area and one that excels with volume. The global sharing of ATM networks is another example of “let’s work together to make the world a better place” (violins and harpsichord, please).

Not a year goes by that we do not hear or read about a new cooperative venture within the banking community. I read somewhere that even the proposed mergers were initiated by such altruistic motivation. (Insert Hallelujah chorus here.)

Have we as life insurers really adapted to our environment? We lowered the price to make agents and brokers sell more. Some, and I emphasize some in order to retain my honorary sales diploma, brokers adapted by re-writing the inforce to take advantage of lower prices and have enough sales to survive. Could a conscientious broker knowingly not offer a lower price to the valued customer as it arrives on his doorstep?

We each lowered our price to make sure none of us was overcharging whereas the banks’ direction with service charges was just the opposite. How come we always do the opposite and receive the downsides for our efforts? If we always draw the short straw, maybe it’s time to change who is picking our straw.

Each of us has our own forms for everything because it is to each of our company’s competitive advantage to retain these unique marketing tools. Why? I need to be convinced that this is a good thing, and not by Martha Stewart. Soon the trees in my yard will be sacrificed so the paper from them can reside in the trunk of some broker’s Sportute or recycled into an egg carton.

The generic application, like all standard forms, is a good idea. Unfortunately the nuances of our legal staffs and marketing departments or some other power greater than I, created a revenue stream for BC’s paper industry until the Asia Pacific economy picks up. Did it fail because it was not the brainchild of some company president or because we do not need the cost savings and uniformity within our industry?

Does the known HIV positive consumer antiselect more than the cancer riddled or the chest pain sufferer? Should we in 1999 remain so strongly mired in the antiselective label on HIV, yet assume every other walking impairment is less risky and also more prone to having carriers be so forthright? Yes, when the HIV epidemic hit the consciousness of the world’s population, it was labelled the potential “bankrupter” of the life insurance industry.

That did not happen! In fact, we are doing quite well, thank you. I know of no company that has had bad mortality on its 1983 through 1985 business when we were most vulnerable to antiselection. Should we now adapt to the filing cabinet full of data that says HIV has a rather predicable course and is not a precursor of instant death and a life insurance claim?

We need to manage our distribution. We need to ascertain who at the public end of our chain of command is doing us a disservice by bringing discredit to broker, company and industry. The fremescent band of brokers, MGAs and company marketing leadership see the need to have an “information bureau” that tracks our distribution and identifies the bad apples. Will our leadership adapt to the need for this and approach it in a bipartisan fashion? The alternative perhaps is to wait for the other financial service vendors (mutual funds, stocks, etc.) to build the infrastructure and then we could ask to be a member.

We have many opportunities to adapt. Quality organizations adapt early and with ingenuity. But how we adapt at the beginning of a trend versus how we do so after the horse has fled the barnyard is entirely different. Building a more innovative retaining device initially gives us an opportunity to manage change. In so doing, we become less of a victim of change and more an active, contributing participant who has some control in the matter.

Oh, by the way, the temporary change caused by my collision of the army boots was extreme swelling. Immediately after the industry meeting, I eased the discomfort and eventually returned to normal by soaking in the salty waters off Barbados. The permanent change was the suspension of further arcing of my daughter from the ceiling to floor. We both adapted successfully.

Zymurgy is the act of fermenting with respect to the making of good wine or beer. Well for that matter zymurgy can also produce bad wine and beer! I had to stretch to use the word but it is so apropos given that the fermenting going on in the insurance business is far from spring waters (Evian spelt backwards is naïve!). We are part of the great cauldron of fermenting financial services. We in Canada are not alone. We are mere followers of a global trend. We may even at times, heaven forbid said the American, be leaders. In an industry shrinking in terms of participants and at the same time short of leaders emerging in sufficient numbers, we are fermenting into unknown ale unless the ingredients are modified to meet the needs of future stakeholders

We are all too well aware of the mergers and acquisitions that abound and have been slowly occurring for the past decade. They do mount up and on reflection we have lost many but few of us would resurrect any of them. The leaders of each disappeared into retirement, bigger insurers or became consultants given their credentials. The consolidation of our industry which has escalated in pace is the foundation of our brew.

Gone are the stand-alone life insurers of British Columbia having succumbed to acquisition mania. Who remembers Seaboard, Glazier, British Pacific, Fidelity or even the old quaint North West Life? Gone from Alberta are the flamboyant and often controversial Life of Alberta, Sovereign cum Family Life, Rocky Mountain Life (does anyone have in their garage a purple Cougar, the Cougar car that is?), Paramount Life and the early Financial Life, or even the agent’s friend Substandard International (the near insurer). Saskatchewan said goodbye to Pioneer Life but hangs on to Cooperators and gained Crown. Gone from Manitoba are Monarch and the original Citadel. Solid and bland but gone. Ontario has a list too long for the editor yet they include previously strong names and even reinsurers. There were many and each had its quirks and unique attributes even in their demise. Gone from Quebec are just as many one-time regional life giants like L’Unique and Cooperants. My lack of fluency shortchanged my intimate knowledge of their stories. I love the Maritimes but I am hard pressed to find something to follow after “gone are ….”

The visionaries after a good smoke had predicted that the workers in our industry would run out of places to work by this new century we have entered. Why is it then that I constantly hear the wailing of presidents and senior executives as they face the truism “there are not enough good people to go around these days”. I never heard that when I was a young man just yesterday. We don’t say too loudly yet “I’m looking for a good man” since today the good man could be and often is a woman. Thank the heavens for the passage of time and the death of “only men will be tested for their potential leadership in our company.” The later being a very true statement by an early “boss” (now there is an antiquated word) who felt it was wrong to invest in females in the company since they would not be around for the duration nor could they be company leaders. So today where are all the good people?

The Globe & Mail of 00-09-22 had two articles on employees and it adds to the mixture of issues within our industry even though they were general comments. Barrie McKenna’s article titled “Take this job and …” talks of the least loyal employees. Nothing in the article will surprise any reader and one wonders why it got so much space. Canada ranks in the middle of the 32 nations covered. Is anyone surprised company loyalty is greatest in Columbia? Hello, read the front page for a while. That company loyalty is greater in the US than Canada was the only surprise but maybe the insurance industry is just not your average industry. Hong Kong and Singapore are at the least loyal category and that is as expected given their zeal for capitalism and making money right now thanks. Buried in the article was the comment I wrote about recently and that is ethics. The story states “nearly one-third of Canadian workers have witnessed unethical behavior by their employer within the past two years.” Hopefully not in the insurance business. The other relegated to page 12 story was by Madelaine Drohan and she asserts that research shows we (Canucks) are not as insecure in our jobs as some pundits believe. I agree with her and that’s all I am going to say.

Murray Axsmith is considered a world leader in career management services and in its role it provides the marketplace with its annual survey (see highlights in Transitions Volume 12, No. 1) of what’s hot and what’s not in the recruiting or dismissal business. I’ll be positive and stick to the summary of hiring highlights while leaving the ten top dismissal issues to the David Letterman’s top ten list someday. The survey, under the auspices of a John Hamilton who I am sure would love to talk to you about the detail, compares trends from year to year and thus is a great benchmark for employers as well as employees.

If you are one of those people who can’t lead a team to the bathroom nor converse with aplomb and passion with your staff, you are in the majority. After writing that masterful sentence I realize that in my experience those of you who are in the aforementioned group most often do not realize you are in the aforementioned group. Again, after writing that second masterful sentence I realize there are many of the human species that don’t wish to lead people anywhere let alone converse with the milieu. Everyone is different and our skill sets or innate desires vary in humungous fashion. The survey is emphatic in stating that the most difficult skill sets or competencies to be found are interpersonal skills and team leadership. Thus the reason for the return of the one on one interviews with other than just the human resource staff. Reference checks on these hard to quantify skills become very important. The study talks of increased use of the interview, reference checks, testing while dropping the inquisition panels that were once popular yet s warm as Inuvik in January.

So here we have it, a shrinking home for talent and an even faster shrinking reservoir or cauldron of talented leaders and people endowed with interpersonal skills. But is that being fair to the human race as we race through our daily lives? Today the reward is for the here and now not the there and future. “Give me the quarterly results and make sure this year is 15% top line growth coupled with 15% bottom line growth,” said Ms. Y (name withheld for sake of sanity). In the age of instant gratification and rewards that must be felt, smelt and tasted immediately there is perhaps no room for saying lets wait 10 years and see if the product emerges as per the assumptions so cleverly constructed to squeeze another penny from the price. How do you inspire staff and leaders to leave a company in excellent shape, as judged 10 years from now, when stock options, bonuses, compensation and gratitude stem from the latest quarter or years results? Stand up the 3 of you who deep in your hearts have any real intention of being in the same company (or the new owners company) five years from now. All right all you 60 year olds we already discounted you in our severance calculations (early retirement whether you want it or not).

Is the fermentation creating putrid vinegar just beyond our sense of smell and vision of three-year plans and rewards or is this new twist of ingredients (short rewards, ethics, loyalty, leadership and interpersonal skills) going to produce a fine wine to be left for the connoisseur of our industry? I wish I knew. I do know what I hear and that is a lack of faith in finding the leaders with the criteria to make it work. The good news is the admonishments buried in the surveys will surely change in subsequent surveys, as the leaders appear to fill the void.

We just have to adjust to the new millennium’s prerequisites to success. That is, enjoy it while you can for a new longer-term reward packages will emerge to prevent the emaciation of our industry. Will it stymie the creative brilliance that has escalated the competitive bar? Not a chance and the brilliantly creative may even learn to talk to their staff about it in sentences of more than three words! The convergence of people skills and company needs has often been out of synch (just look at the good old days of only actuaries running the industry) so by happenchance we may have all our leaders emerge at once fitting the exact requirements of the companies’ “qualities in staff we want to hire list”.

I know I am still waiting for my personal rhythm to fall in harmony with some company’s rhythm.

I am enthralled by the outsider’s view of underwriting as an arcane process that has remained mired in its narrow hallways for decades. “Why underwrite?” asks the banker new to insurance risk. “Because we will not take the risk otherwise!” says the mortality outsourcer or reinsurer in yesterday’s jargon.

One COO has observed that every time he looks at the process, he concludes that many underwriters are performing limited underwriting but large amounts of clerical work. “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. Wise answers to complex questions? Who are we kidding? The wisdom 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. Computers should handle 80% of the cases — those that are clean and unfettered by medical, avocation, aviation, occupation or financial issues. Save the under- writers for 20% of the cases that are unique and beg for more attention.

Is this revolutionary? Hardly. A few selected companies have made the break from the manual tedium of that well-paying clerical function called underwriting to embrace real risk selection by top-paid professionals. Couple the computer with inventive ways of managing the real underwriter and you have a winning company.

Years ago in MO, I said in one of my visionary moments that the world of insurance would be swamped with underwriting technology by 1999. Instead, 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 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 priced it that way, then say it is so. Then it’s a no brainer and companies can hire the cheapest of talent to “underwrite” all their cases. Fortunately, to protect some jobs, exceptions were built to add a dimension of thought to the under- writing process. A positive answer could be ignored 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 that is happening. Is the twentieth underwriter in the department making far too many exceptions and how would I ever know that in a manual environment?

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 negative results but with strong positive features one can still fit into a favourable 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 overrule the points total and still give away the shop unless data is collated and delivered that tells me what all underwriters are doing.

What makes both of the above effective is the workflow manager and reporting tools that deliver regular and concise reports to management about how many exceptions are being made, the degree of those exceptions, and the cost of those exceptions. I can tolerate exceptions to the rules on, say, 1% of cases or amount of insurance, provided I know that number. Only automation can do that. The system can put the risk in a category approved by underwriting, medical, marketing and

actuarial. But the system must point to underwriters who are going too far in their exuberance to say “yes”. This type of data allows you to evaluate whether your rules are too harsh or your 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. The system will tell me which underwriter needs cajoling or an infusion of dogma. It allows an underwriting executive to meet the glares from the upper echelons with confidence as he reels off statistical proof that the company’s risk selectors are earning their salaries.

Here’s how one major life insurer and their underwriting leadership view the technology question and why they are moving to reconstruct their underwriting area to meet the challenges. I thank them for allowing me to quote from their executive summary. It clearly illustrates how they intend to meet their underwriting challenges.

“The principal benefits which we want to obtain through the use of an Expert Underwriting System 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.”

Software such as this company is now seeking brings consistency to the process that lets us move on to daring remuneration changes that finally reward the premier risk selectors. On a visit to another company in a foreign land, I witnessed one of the most creative remuneration packages for underwriters in action. My first reaction as a pessimist was to say it would doom the company. My second reaction as an optimist was to say that this is the answer.

This company 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 an underwriter is expected to make 15 decisions a day and he hits 20 cases per day for the month, a bonus of $X times 5 times the number of work days in the month equals the bonus.

The second tier of bonus compensation is even more avant garde. Yes, the company went even further in enticing underwriters to be more revenue and marketing focused. At the end of the year, an underwriter earns a bonus based on a percentage of all premiums that they underwrote that went into force. For about a third of the underwriters in the company, the bonuses can be hefty — equating to multiples of base salary. For other underwriters there nothing has changed — they are of the old school. End result? The company gets far more from fewer people and it wins by pocketing the money it would have paid out for the more traditional head count increases in underwriting staff.

The Nay Sayers come from all sides, speaking of ruin and integrity issues. Yes, it is a stretch I would be the first to admit. With this type of inducement, won’t underwriters accept everything and anybody? The industry would be ruined!

But consider this. 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 one’s 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 minimally differentiates between the brilliant underwriter and the mediocre.

This company is ecstatic about the positive benefits they are witnessing. The producers and marketing people feel that the underwriters are a breath of fresh air. The battle between the underwriter and commissioned producer is slipping into obscurity. I applaud the innovations and I hope we see similar revolutionary thinking enter the Canadian market. The medical superiority of today’s underwriter now has to metamorphose into a marketing sophistication, supported by software tools and company tolerance of new reward systems. Then it will begin to resolve problems, such as expediting applications that take 8 minutes to complete on the Internet and 100 days to issue.