Are you ready to purchase a policy with a fingerprint? Apply through a smart television? Walk through a check-out scanner and walk out qualified for coverage?
Insurance ideas that might have seemed absurd a few years ago are now inching closer to reality as carriers race to respond to growing demand for faster, lower-cost, and less-invasive purchasing experiences.
In light of the furious pace of change in the direct-to-consumer market, some may wonder if it is time to leave financial underwriting behind. In fact, at RGA University, an educational seminar for both new and seasoned underwriters, I was asked this very question. My answer was emphatic: Absolutely not.
Insurers need financial underwriting now more than ever, because while our processes are accelerating and our technologies are evolving, the nature of risk is not.
Does It Make Sense?
Underwriters should determine whether an applicant’s total income, net worth, and purpose of coverage fit the face amount, beneficiary, and required premium payments. Put simply, we must ask if the application makes sense. Financial underwriters are trained to weigh the content of an application against the potential for financial loss, early lapse, and misrepresentation or fraud.
How? In many ways, the underwriter can become a financial matchmaker, carefully evaluating the applicant’s financial disclosures, such as loan contracts and tax returns, as well as other data sources in the public record, from ID checks and Rx to MIB and insurance activity indices. Even a Google search can help. Is the applicant a good fit for the product, or too good to be true, inflating or otherwise misrepresenting his or her worth?
Red flags often exist:
- Financial or business records that are difficult to interpret, incomplete, inconsistent, or unreliable
- An application for benefits that exceed normal guidelines
- Reluctance to provide complete evidence
- A history of financial instability
- Multiple small policies for one risk (stacking)
- Leaving death benefits to individuals with an insurable interest that isn’t strong, such as elderly parents who are set to receive 30x the applicant’s current income
Financial underwriting empowers underwriters to effectively evaluate whether the coverage applied for makes sense within the overall context of the case including financial, medical and non-medical risk, and insurable need. The underwriter’s goal is not to determine the correct amount of coverage. The goal is to determine if the evidence provided supports the ultimate need for the life insurance coverage requested to protect the beneficiary from hardship due to measurable future economic loss upon the death of the insured.
Financial documentation has become increasingly complex as accounting standards and regulations have evolved; however, the claim that only accountants can interpret financials is not true. Uncovering evidence requires common sense, investigative skills, and a little time. Unfortunately, these days, time is in short supply.
Time to Redefine?
In an age of accelerated underwriting, with its emphasis on a faster and fluidless application process, many insurers worry that financial underwriting will slow acceptances unnecessarily. After all, some say, it could be much harder to achieve a seamless, digital insurance purchasing experience when the insurer must pause to collect tax returns.
Is it time to redefine financial underwriting for a digital world? The answer might depend on the application. Unlike labs, which provide greater protective value as an applicant ages, assessing financial fitness can present challenges regardless of age bracket, from unusual self-employment arrangements to complex business partnerships and multiple income streams. In addition, highly substandard cases will always require a different standard of financial review. The willingness of an applicant to pay a higher – and in some cases much higher – premium for cover raises the prospect of anti-selection and fraud or identifies an applicant who has simply been oversold insurance. Financial underwriters must ask the first, and most basic, question when faced with such an application: Is this person worth more dead than alive?
The difference in both the volume and content of financial disclosure and complexity should influence the underwriter’s analysis. If an applicant seems to be pursuing too much insurance based on income, underwriters can then follow up with clarifying, open-ended questions. Many times there are valid reasons for discrepancies; other times patterns will emerge that invalidate the application.
It is also important to factor-in the presence or absence of a captive agent, producer, or broker. To varying degrees, these individuals serve as sentinels. For example, an agent has a vested interest in building a long-term relationship with a carrier by writing high-quality business.
These potential advantages in reducing fraud and lapse must be weighed against the likelihood of reduced volume, particularly for products aimed at the underinsured middle-market. That’s why, even for fully-underwritten cases, carriers are increasingly waiving or reducing requirements for age and for amount of financial documentation, and relying more on producers or other data sources, including vendor solutions.
Determining Risk Tolerance
Ultimately, each insurer must evaluate these differences based on underwriting philosophy, risk tolerance, experience, and existing block of business. Financial underwriting is just one tool in an arsenal insurers can use to improve risk assessment, and it is important to wield that tool both consistently and judiciously. Product design and pricing play roles, as do expense assumptions per case. For some products at lower face amounts, other forms of review may prove sufficient, while for other products financial underwriting may add far more value.
It’s also important to remember that financial underwriting doesn’t end with issue. The same tools and techniques can be used to monitor and manage in-force business, either to identify trends or problem cases. While marketing and new business development are vital to growth, in-force management offers potential cross-sell and upsell opportunities within existing business. Financial underwriting can also be folded into new data-driven risk selection processes to better monitor policies and create a feedback loop that enables companies to apply learnings in real time.
Underwriting well requires insurers to develop a complete picture of both applicants and existing policyholders. Despite the new forms of evidence now available and on the way, this fundamental function is unlikely to change – and financial underwriting will always play a valuable role. Learn more about RGA’s underwriting expertise and RGA University here.