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Individual life and health insurance: products and underwriting during a pandemic

By Jing Lang, FCIA, Vice-President, Product Manager, at iptiQ

Before I came to a direct insurer, I knew very little about underwriting. Sure, I’ve heard of many buzz words: accelerated, automated, simplified issue, fully underwritten, but I didn’t really know how it all worked.

Now I have been wearing a product hat for over a year, working for a direct insurer/insurtech who operates at an incredible speed. I’ve been deeply entrenched in every single product change we made – from launching brand new products to improving accelerated capabilities of existing products and more recently, adjusting our products and underwriting in response to the COVID-19 pandemic.

The ultimate test of how well I learned something is measured by my ability to explain it to others. So let’s get to it.

Guaranteed issue vs. fully underwritten policy vs. simplified issue

A general rule of thumb: the more (thorough) the underwriting, the healthier the block of insured population is, the cheaper the unit premium. In terms of thoroughness of underwriting, from least to most are guaranteed issue (GI), simplified issue (SI) and fully underwritten.

Anyone who wants insurance coverage can get a GI policy. Most GI policies are catered towards the senior population, especially those with underlying health problems who cannot get coverage through even simplified underwriting. In both the US and Canada, some whole life policies are GI. These products are typically small face amount for the purpose of covering funeral expenses.

A fully underwritten policy typically covers the whole nine yards. An applicant needs to answer very detailed medical questions on the application, get interviewed by a licensed health care professional, schedule for a paramedical exam, provide blood and urine samples, and wait for a decision by the insurance company. Each of these steps takes time. If all stars aligned, you may get a decision a few weeks after initiating the process, but more often it takes months. To compensate for the additional hoops you have to jump through and time you spent waiting, if you are offered coverage, the unit premium is likely the least expensive compared to unit premium offered from other forms of underwriting.

There are also very refined risk classes if you are offered coverage: super preferred, preferred, select, and standard. The names vary by carrier but it’s not uncommon to have 3-4 risk classes that are standard or better, with smoker-distinct rates. Products suitable for fully underwritten are the large face amount Term, Whole Life and Universal Life policies.

A simplified issue policy is somewhere in between. An application must answer some medical questions but not nearly as many as the traditional application form. The medical questions are usually “knock-outs,” as in if you answered “yes” to a question, you are not eligible for coverage. For example: In the past two years, for any condition (other than childbirth), have you been admitted to or confined in a hospital, nursing home, extended care, or special treatment facility for greater than three days?

Decision for simplified issue policies are typically made on accept or decline basis. Not often does an underwriter have to review the case before a decision is made. Risk classes for SI products are typically standard smoker and standard non-smoker, but there are carriers that also introduced substandard risk class, so that it can offer a cheaper rate for the standard non-smoker class. The decision time for SI is much shorter. Some self-starters can even do it themselves on the web. This ease of process and more lenient risk acceptance is compensated by a higher price. You will find SI product available on Term (typically less than 500K) and some supplemental health policies (such as critical illness). Everything else is the same (age, sex, face amount, smoking status), unit premium for an SI policy will be more than that from fully underwritten policy, but cheaper than a GI policy. 

Manual vs. automated vs. accelerated underwriting

Manual underwriting is where a human underwriter makes an underwriting decision. She makes that decision based on all the medical information gathered on the applicant. These include the self-disclosures on application form, lab results including blood and urine analysis, attending physical statement, among other inputs. Manual underwriting is part of the fully underwritten process.

Automated underwriting could mean different things depending on the context. Some refer to it as “no touch” underwriting where the underwriting decision is made based on pre-calibrated algorithms and does not need to be reviewed by a human underwriter. Some SI products leverage this.

Others refer to it as the data pull portion of the underwriting, such as pulling MIB, MVR, Rx, and other information on the applicant to facilitate the underwriting process. Applicant disclosure and results of the data pulls form the basis of the underwriting decision. Depending on the result, the applicant could receive an instant decision (approve or decline). If more information is warranted, the case may get referred to a human underwriter to evaluate the application in more detail.

Some commonly used data pulls in the US and Canada are:

  1. MIB (Medical Information Bureau). The MIB details are in a coded format that covers medical conditions such as diabetes and risky hobbies such as skydiving and rock climbing. An insurer cannot make an adverse decision based on MIB codes alone. It’s meant to facilitate the overall evaluation.
  2. MVR (Motor Vehicle Record). This indicates driving behavior. Someone with multiple DUIs (Driving Under the Influence) and moving violations in the last two years would warrant concern from an insurer.
  3. Rx (prescription drug history). This is where each insurer can calibrate medical conditions and drug history combination based on its own risk tolerance. For example, one carrier may be more lenient about liver conditions than others. Based on the rules established here, an insurer can decline an applicant if the combination warrants a risk beyond its threshold.

Accelerated underwriting can be synonymous with the second interpretation of the automated underwriting. It uses data pull results and applicant disclosure to make underwriting decision. The goal is to deliver a customer experience closer to simplified issue (less wait time, obtain decision in minutes to days, as opposed to weeks to months) but at a price closer to fully underwritten (cheaper per unit premium than simplified issue.)

It’s commonplace now for accelerated capabilities to be embedded in the fully underwritten products. Many carriers offer their Accelerated Underwriting (AUW) program for applicant up to 60 years of age and face amount up to one million for standard and better risk classes. Other medical information (paramedical exam, attending physical statement, etc.) is not requested unless warranted. But even with this less invasive process, many carriers still mandate a separate tele-interview, stretching the decision time to days.

Impact from COVID-19

COVID-19 brought unique challenges. We as an industry might have underestimated the perceived impact in the early months. It was seen as a disease impacting Asian countries, until it became clear that this is a global issue. Many carriers have since introduced temporary underwriting and product changes and committed to reevaluate as this pandemic continues to evolve.

The changes we see in the market can be broken down into the following functions below.

Application

As mentioned earlier, the application form is the bread and butter of underwriting. Filling out this form requires the applicant to self-disclose underlying health conditions and certain personal and lifestyle choices (i.e., hobbies, driving history). The applicant’s self-disclosure gives the carrier the ability to contest a claim within two years of a policy issuance.  

By now, most carriers have introduced COVID-19 specific questions on their existing application forms, asking about travel history, positive testing results, and any known contact with positive cases. Some carriers even introduced COVID-specific questionnaires, asking more elaborative questions such as symptoms. A signed statement of insurability is required with every app. This requires the applicant to disclose whether they had a change in health if some time has passed since they filled out the original application. This again, will protect the insurer from inaccurate information – intended or not – if a policy-holder files a claim within two years. In the event that an applicant did disclose a recent diagnosis of positive COVID-19, his application is typically postponed till he recovers and symptom free for one month.

Underwriting changes

Fully underwritten programs were detrimentally affected by COVID-19, since many in-person exams cannot be conducted. Cases where a lab result is a key input were inevitably delayed. One silver lining of COVID-19 is that it expediated the need for the carrier to explore alternative medical information to make underwriting decisions. Adoption of Electronic Health Record (EHR), Human API, WOMBA, LabPiQture, medical claims data, and prior insurance exams completed within the past 24 months all became more common place.

In contrast, accelerated underwriting programs flourished during COVID-19. Carriers who already have an AUW are expanding their program, notably increasing maximum coverage for younger ages. Carriers who not yet have an AUW were racing to launch one. Phone interview is still a norm.

Product and pricing changes

Since we are likely to have more underlying conditions we age, the over 60 population are particularly vulnerable to COVID-19 due to comorbidities. Across all product lines, almost all carriers reduced the maximum issue age to 70 or below, scaled back on maximum coverage and limited rated (substandard) table offerings.

Changes in underwriting will trickle down to changes in pricing. For products that rely on fixed crediting rate or stock market returns, many rate changes have already taken place. Many carriers offering No Lapse UL have introduced new (higher) rates. For Term products, rate changes from COVID-19 are less urgent. Much of the Term rates update in the last six months are still in response to updating to the new 2017 CSO Table. We shall see in the next few months if Term rates will increase.

Conclusion

Underwriting is a key pillar of the insurance industry. While actuaries price and evaluate risk on a law-of-large-number basis, underwriters look at risk on an individual basis. However, as underwriting technology continue to evolve and the increasing focus on customer journey, more and more underwriting decisions will be made based on rules and algorithms. The potential synergy for actuaries and underwriters to work together is greater than ever before, same goes for the opportunity cost of working in silos.

There is still a lot we don’t know about COVID-19. When will an effective vaccine be developed? Will it mutate to a different string? Can people who recovered from COVID-19 get it again? What is the impact on young people and children? What happens as we get into the flu season? This pandemic has already changed the way we live. And as it continues to evolve, we as an industry have to remain vigilant and flexible in order to actually predict any impact and price accordingly.

This article originally appeared in the CIA (e)Bulletin.

This article reflects the opinion of the author and does not represent an official statement of the CIA.

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