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.