Amid increasing competition in the impaired insurance market, an innovative product emerged in 2022 that categorizes an applicant’s impaired status in detail and offers a customized rate corresponding to each risk. In other words, for customers who have experienced hospitalization or surgery for the purpose of treatment within the previous five years, the elapsed period after treatment is divided into five different risk groups, from one year to five years. The product then applies a different risk premium to each group. The apparent inspiration for the product came from a customer who challenged the reasonableness of applying the same risk profile to a person with a two-year history and a person who has been healthy for five years after hospitalization or surgery.
Another innovative feature of the product is that if even a customer initially enrolls in the most expensive category (i.e., less than one year has passed since the last treatment), the insurer will automatically switch the insured person to the next, less expensive category if they file no claims for one year.
Just as insurers have developed customized rates for substandard customers by considering different degrees of pre-existing conditions, they are actively carrying out risk segmentation for standard customers as well. This has been enabled mainly by advances in digital technologies and the active use of data promoted by government policy.
Benefits of predictive models and algorithms
In another case of product innovation, a domestic Korean insurer launched a product in 2022 that determines a customer’s health status according to an algorithm that uses medical checkup results, medication information, and insurance claims data obtained through API. The algorithm processes information in real time and proposes a corresponding rate. Customers are classified into nine risk groups based on their risk score, and those in the top group can enroll with a nearly 40% discount compared to the lowest group. In addition, the application contains only one underwriting question (“Have you ever received a recommendation from your doctor for hospitalization/surgery or re-examination within the last three months?”). The rest of the underwriting is completed using digitally based data. With this product, the insurer drastically reduced its omitted disclosures, which result in policy cancellations and associated customer complaints.
As it becomes increasingly difficult to differentiate products in the Korean market, large companies are making efforts to improve the customer experience.
Normally, a customer who wants to buy life insurance needs to go through at least two steps. In the first meeting, an agent provides a quote, processes the application, requests disclosures, and accepts an initial premium payment. Next, final enrollment is determined through the underwriting process. However, if applicants spend time filling out the application and waiting for the underwriting result only to be declined, that experience diminishes their perception of the insurer and of insurance in general. Customers may also rescind their application if they must wait longer on underwriting decisions.
To solve that pain point, Korean insurers have accelerated standard underwriting processes based on disclosures and available data. By implementing a smart pre-underwriting system using sophisticated predictive models, some large players have achieved a 70% automatic approval ratio at the point of sale.
Advanced pre-underwriting developments
Recently in the Korean market, insurers have attempted to introduce pre-underwriting to reduce the higher rejection rate associated with SI products.
With the typical SI product, if applicants answered “yes” to any of the shortened list of underwriting questions, the application is declined or routed to human underwriters for a separate review. Under the advanced pre-underwriting system, however, previously rejected insureds who disclose a mild illness can be approved for coverage without significantly affecting future loss ratios. Here's how it works: Customer disclosures are fed into a predefined expected loss rate prediction algorithm and then automatically screened to determine whether the risk is acceptable. This approach converts conventional underwriting practices solely focused on medical perspective to a method based on loss ratio predictions.
This kind of advanced pre-underwriting based on loss ratio predictions is expected to improve the customer experience by not only making insurance more accessible for impaired or elderly customers, but also allowing standard insureds to immediately learn about the possibility of enrollment and the need to submit any supplementary documents.
Innovations around the insurance application and enrollment process – and the achievement of more reasonable rates through sophisticated risk segmentation – is a win-win for customers, agents, and insurers. From Korea’s evolution in products and services, we see a shift in underwriting approaches focused on using the same standards regardless of the insured's health status, allowing for identical onboarding experiences for both standard insureds and impaired/preferred. This will be enabled by more advanced pre-underwriting techniques based on sophisticated data analytics and digital technologies.
If trends continue in the Korean market, industry insiders see the possibility of some life insurance companies shifting their operating model to provide coverage and rates commensurate with individual risk and possibly eliminating rejections altogether. Regardless, Korea’s long journey with SI will certainly lead to once unachievable destinations. Insurers would be well advised to keep their eyes on the road ahead.
RGA has served as a leading innovator in the SI space in Japan and Korea for years, partnering with insurers to develop products that successfully speed the customer journey and expand coverage to underserved populations. Contact us to learn how RGA can help your team to create new offerings to meet the needs of customers in your market.