Changes in the life assurance market have prompted the sector to rethink its underwriting processes. Mike Jennings explains
Twenty years ago, if life underwriting had been referred to as part of a company's processing operation, it might have caused offence to some of the industry's leading technicians.
Up until this time, underwriting had been portrayed for many years as something of a mystic art. Many of its proponents didn't feel the need to explain what it entailed because underwriting was seen as a profession in its own right.
Twenty years ago however, a relatively small amount of protection business was actually written. Nigel Lawson's 1984 Budget, which removed Life Assurance Premium Relief (LAPR), went some way towards making the industry refocus its core skills. But in reality, it took many years for a vibrant protection market to emerge. Nevertheless, there is now no doubt that a very important protection market has been established.
Renewed focus
The competitiveness of this market puts significant pressure on premium margins and this has encouraged a renewed focus on why underwriting is done, how it is done and how it can be carried out as cost-effectively as possible.
It is important for every industry to take stock of the way it operates on a regular basis. Often markets are cyclical, but the UK protection market has undergone a significant revolution. This revolution continues and is being driven by a number of factors which are having a profound effect on the way protection business is developed and processed.
The first is consumer dissatisfaction. It is hard to imagine any industry with greater differences between itself and its customer base. The insurance industry has not been good at turning clients into advocates and it certainly hasn't made them enthusiasts. At best, customers tolerate the experience of taking out life assurance, but it seems that very few derive any pleasure from it.
As a direct result of increased consumer pressure, the industry has seen a whole raft of regulation. And 2005 promises to bring us more, as regulators seek to balance consumer protection with the rules required by the EU and the desire of the authorities in the UK to promote fair competition.
Perhaps the biggest driver for change is the availability of new technology. While in some senses the industry has been slow to embrace e-commerce, it is now transforming the potential that the industry has to interact with its customers. One significant question currently being asked is whether the existing market players will be radical enough to embrace the full power of interactive technology, or whether it will fall to a new company to transform the way the industry operates. History shows that innovation is not the prerogative of the incumbent and is usually driven by the well positioned new entrant.
The interesting new offering, Progress from Royal Liver, is a good example of this. It would have been strategically less inviting to build a new low cost business model if Royal Liver had occupied a middle-of-the-road position in the existing market. Progress is the result of different thinking from an office that is far enough removed from the mainstream to look at developing something innovative.
Different thinking
As the new regulatory environment brings together life and general insurance under one umbrella, it will be interesting to know just how much process innovation the industry can stand.
Certainly, the underwriting process is ripe for innovation and we have seen, for instance, the emergence of a technique called tele-underwriting. This method of underwriting refers to the range of approaches companies can use to talk to applicants about their medical history. Done well, and done interestingly, tele-underwriting is a very cost-effective way of getting a better understanding of an applicant's medical condition, and it can be done for a fraction of the cost of a GPR.
It has long been observed that the underwriting process can be a major turn-off, and that once the process becomes protracted the chances of effective cover reduce. However, cover is usually most valuable to the person who requires the most detailed assessment.
Perhaps the most interesting innovation in underwriting is the use of portals to supply terms. Previously, the need for an underwriting assessment may have ended the applicant's interest. Now however, there is the possibility that the scope of underwriting can be advanced beyond the basic assessment of which cases are clear and which require more detailed assessment.
An underwriting portal can function very effectively if an underwriting rules engine allows certain questions to be asked when medical information is revealed. Dynamically generated questionnaires can produce drill-down questions which are activated as the proposer reveals his or her medical history.
This process owes much to the techniques generated in the general insurance market, where 'what-if' modelling in the private motor and household markets has been developed. Both these are classic 'pull' markets because of the compulsory or semi-compulsory nature of the cover. Protection business has so far been regarded as a 'push' market where sales require the input of an intermediary and underwriting is a potential disincentive to the sale.
In general insurance, the industry has seen a form of individual pricing. This existed prior to the internet and was facilitated by a number of intermediary software vendors who provided quotation engines that were updated by disk once a month.
As competition grew, one company decided to change rates on an ongoing basis to target specific types of business. It used its emerging experience as a very up-to-date guide to the focus and direction of its pricing.
To model a business, good management information is vitally important, so that the business can accurately discover emerging experience.
Rates can be altered using a modelling database and live business can be run through this database. This creates a significant competitive advantage because targeted rates could be applied to the areas which were most attractive.
But can this be done in the life and health insurance markets? Obviously there are more risk factors to be considered, but these are merely items contained within a database. Perhaps the biggest issue is the interaction between different risk factors and whether they create a higher or lower risk? In essence, however, these interactions are just another risk factor to be modelled.
With a sophisticated rules base it is possible to carry out not only the initial underwriting, but other processes beyond that. By using all the data, a complete breakdown of every case can be created, which enables the user to determine where it sits in pricing terms.
Catalyst
The move to one regulatory environment seems to be the catalyst for provoking a new approach in underwriting. It would seem inappropriate that one regulated entity should have within it, products that are assessed in totally different ways.
In the same way, it seems nonsensical that the industry will not see intermediaries using a portal to assess a risk and place it with the company offering the most competitive terms for that risk. If the industry can integrate a sound underwriting process using rules-based technology, it may have found a method of sweeping away the reluctance of people in this country to buy life assurance. Even if the life assurance sector is some way from being a 'pull' market, it is less likely to 'push' away its prospective customers.
There may be underwriters who consider this type of thinking to be heresy, and this may explain why progress in rethinking underwriting has been so painfully slow and introspective. The industry now has the methodology to be really radical, but does it have the will?
Mike Jennings is Medirisk insight solution manager at Sapiens International
COVER notes
• The competitive nature of the life market has prompted a renewed focus on the way underwriting is carried out.
• Tele-underwriting is a cost-effective way of getting a better understanding of an applicant's medical condition and can be done for a fraction of the cost of a GPR.
• An underwriting portal can function very effectively if an underwriting rules engine permits certain questions to be asked when medical information is revealed.
