Author: Ross Morton

The Canadian life insurance industry for decades has been subject to the allure of “shopping” their more difficult risks to various reinsurers to obtain a lower underwriting assessment. “Shopping” is the art of taking all the known information available on a life and sending it to 1,2,3,4, or more reinsurers who say they are experts at finding a more optimistic appraisal of the persons health, occupation, avocation, aviation and/or travel plans. Inevitably insurers have found that one or more reinsurers’ optimism to be strong enough to accept the case without an extra premium or only a trivial extra. As this columnist has stated in previous articles, everybody wins — consumer gets policy at low price, broker gets commission, company gets gross premium, reinsurer gets thin premium, and retrocessionaire gets thinner premium.

A dependence has been cemented binding the insurer to the reinsurers that is unwavering. Every reinsurer supports this marriage and has no inclination to change the status quo. To withdraw competitive facilities of substandard specialists known as reinsurers is almost like withdrawing automatic bank machines. A better analogy is saying that this would be like taking the child who has mastered the two wheeler with training wheels and say you must now go straight to the unicycle!

Legends of reinsurance would cringe at the thought their efforts over decades were about to be erased by those reinsurers experiencing from a tight money policy and/or a misunderstanding of the consequences. After all, facultative underwriting is a labour intensive business requiring skilled personnel (see MO #— “Pusillanimous Underwriters”). A reinsurer could quickly reduce overhead by jettisoning the facultative underwriting service and thus improve the bottom line or reinvest it in more pricing actuaries. Lord knows we could also use more compliance staff to keep up with the sound business practices paper work.

I do not profess to understand what lurks in the minds of some reinsurance management in this insurance business of 1999. Perhaps they have found some revolutionary secret road to success. When I look at the facts of what the sacrifice would be I have to step back and somewhat stoically stand by the insurers who, to the best of my knowledge, want full facultative service from the reinsurers.

How big a market is the substandard, borderline standard and decline group of applicants for insurance? Big enough to sit up and notice the premiums attached are more than enough to fuel the salivary glands of marketing/sales officers. Buried in the CLHIA statistical issues are the numbers that are often overlooked or worse still end up on the wrong desk or filing cabinet. The following chart is a synopsis of the CLHIA report on issued policies.

The number of cases in the survey can be somewhat misleading given the participant companies in the survey can vary and the number of companies is shrinking (merging,, acquisitions, departures, etc.). If we ignore some of the subtle changes and concentrate on the trends I can draw better conclusions. The “face amount” is the amount of risk or coverage in millions (add six zeros or 000,000 for the mathematically challenged).

The numbers when viewed in terms of case count and sums assured over the seven years made me realize I had been preaching an untruth. The fallacy that the business declined and or rated had not changed for years becomes clear. Yes, by number of cases the old adage that about 4% are rated and 3% are declined but look at the other line of numbers. As an industry 6.2% of sum assured is charged an extra premium which is up from 5.1%. In the decline row the increase from 2.6% to 4.9% of business being turned away is quite remarkable. Combining these two categories of risk we are looking at $9.7 billion dollar of sum assured at even $3 per thousand translates to annualized premium of nearly $30 million dollars. The numerical significance is magnified by the perhaps 60,000 policyholders that may feel they were not treated fairly (equitably) by the insurance industry.

If those companies not in the survey magnify the above chart and my numbers the number of disgruntled consumers may be 70,000 and the premium impact rises to $36 million. I am old enough to remember when new premium income of $36 million was significant. I am sure there are many an MGA who would dearly love to control that premium!

For those readers who see the substandard, borderline standard (you know reinsurer likes standard and insurer likes 50 to 100% extra) and decline as “of no significance” can cease reading. For the enlightened few who are still with me, this is a large and potentially controversial group of consumers. To date in Canada we have been free of significant legal battles with individuals who are not acceptable at standard rates. I would like to believe that a relevant factor in avoidance of such a tumultuous path is the predominant use of all availability facilities to keep the price as close to standard as possible if in fact standard is out of the question.

Using a shopped or facultative program where three or four reinsurers try aggressively to outbid (lower price wins) the insurer as well as the other reinsurers keeps the standard group large, the substandard premium minimum and the declines to a minority. No where but in North America do we see such a large number of shopped cases (perhaps close to 200,000 in NA). South Africa is another country with this phenomenon but not having been there to give a speech yet I cannot speak from a first hand basis. We have a free market for sales in insurance and have kept legal encumbrances out of the pricing. In more and more countries companies are forced to accept all risks and only now are some of those countries saying maybe we should avail ourselves of the facultative opportunists.

The seller of our product be it agent or broker has benefited from shopping program. Cases that would disappear into the not taken bucket are in force, commissions paid, company has premium to cover already incurred costs of underwriting and requirements ad reinsurer is tickled pink (Steve is pink politically correct?). Telling the broker their cases will no longer be shopped if they are ratable or decline conjures up visions of veins popping and guns (figuratively only) being drawn. Thirty years of saying “we have sought the best quote from all the reinsurers to get your customer insurance at the lowest price” has warmed the hearts and pocket books of many brokers.

Can you make a lot of money from facultative underwriting. Some skilled reinsurers have specialized in this market for decades and at last glance they are all alive and well with stock values climbing as fast as potentially demutualizing companies only dream. IT is also a fact that most reinsurers started their existence through the facultative channel and grew into rich automatic reinsurers. So when I here through the grapevine that some reinsurers are about to abandon this segment and even throw cold water at it I say to myself “You’re gonna what?”. I cannot believe it is so.

To stretch a premise I see underwriters left without a major tool in their arsenal to get cases issued at low prices. I see brokers and agents left with lost sales and angry consumers who have a fair price one-day and perhaps a decline the next. I see consumer activist groups demanding equally (far different than equitably priced) priced products regardless of medical history. I see a fundamental change in Canada’s life insurance pattern. I also see reinsurers with lower cost, fewer staff and plain vanilla automatic regimes.

I won’t be the first down this new road that is being ploughed through our environment. I can’t condone what I feel is an abandonment of my friends who happen to be my customer. If the industry follows the new road I would have to follow and I would benefit financially from lower costs and fewer staff training and retention issues. I hope to be there to the end helping the last holdout to the shopping program. This is one time I will let someone else lead. And in the end who really cares if their reinsurer decides to get out of facultative underwriting.

I am still left scratching my head asking my peer reinsurers “You’re gonna what?”

I may be opinionated but I am not one to have long drawn out debates on issues where the outcome could go either way. Debating with my parents over the “bed time” or use of the car were rarely won by yours truly. I learned the fine art of trying to set up a win while fighting a losing battle. Loving parents would remember my conceding to their wisdom as to when to sleep and when to drive, thus giving in to my next request strategically structured to look like a major concession compared to previous loss. Ever since my days in school on the debate team I have steered clear of taking a side artificially. I cannot fake my emotions. I like my emotions and passions to shine through whenever I speak and as a wise mentor once told me that implies arguing for only what you believe in strongly.

To get to where life reinsurance is today in Canada and to a degree in the world was there an evolution or a revolution. This was the question to be debated in the wisdom of the executive of the Canadian Reinsurance Conference (April 8th, 1999 Royal York Hotel). The CRC executive called on Bill Tyler of Lincoln Re (Fort Wayne, Indiana) and yours truly to be the combatants. Hugh Haney, ex President of Financial Life and sage consumer of reinsurance for decades, was to serve as referee. The two of us combatants were equally matched with 30 years insurance service although Bill’s was all under the brand of Lincoln and mine was via a myriad of wily tutors.

At the outset I took the stand that the only difference between evolution and revolution was the letter “R” at the start, so how could we have a debate. When you are as old as me you have seen the cycle repeat itself and from numerous decades of exposure the changes all become evolutionary at first glance. At second glance I thought there were spikes of revolution. The participants were to decide which side they sat on given a strict definition of each word Hugh dug out of his historical pleadings to MGA’s. This should be like debating which side of the anatomy the sporran is worn.

Bill and I quickly decided we were going to keep our beliefs to ourselves. We built our presentations not really knowing the opponents stand. All we knew was that the subject was to be segmented into four sub classes of reinsurance issues namely, “financial reinsurance”, “mortality”, “mergers and acquisitions”, and “technology”. From that early point on I knew I could be me, unencumbered by rules that stymied creativity. There was no prize for winning but I mentally saw myself as David against Goliath, Canada versus the USA, tradition versus “Off the Wall”, etc.

First on the agenda of topics was the financial reinsurance topic. Humour has a disarming impact on any audience. I started my dissertation with a picture from the 1800’s depicting a circle of the era’s business elite pointing fingers at each other with no clear indication where to start or finish. The caption read “Who has the people’s money?”. In a reinsurance context the question would be who has the capital (holds the reserves, puts the money away for the future, etc.)? The expertise in both ceded and assumed reinsurance have been fantastic at the art and science of maximizing limited capital for the benefit of all and for the most part in a fashion that has proved very prudent.

The original term for financial reinsurance was “surplus relief”. This term fell into disfavour in the 1980’s because of the abuse of the concept and the question of real transfer of risk for reward. Today’s financial reinsurance skill evolved slowly as the technology improved to analyze risk, personnel broke out of the traditional thinking and confidence emerged in the new concepts. The concepts included new terminology that only the most brilliant and abstract could dream up. Amongst the terms of today are securitization, counter party risk, Seg fund exposure, hedge fund and safe derivatives, CATePUTS, evergreen clauses and some deciduous trees, financial restructuring, regulatory arbitrage (=offshore), and of course the phrase “Do it through Barbados, Bermuda, Turks or Ross’ backyard”. Standing firmly behind these financially engineered marvels is the security of “class A-! Floating rate defeasance notes, paying a coupon rate of LIBOR 1.75% and rated AAA…” Certainly looks like the banks have had their input already on the world of reinsurance.

If the foregoing paragraph left you confused you now understand the position of 00% of the people who supposedly work in the assumption or ceding of insurance under the umbrella of “financial reinsurance”. Like most of us by the time you grasped the full intricacies of words and statements within the confines of “financial reinsurance” new words and statements would have emerged to keep you eternally perplexed like some of Joseph Conrad’s deeper novels.

Financial reinsurance has evolved from a simplistic usage of regulatory differences or oversights to one of complex legal, accounting and actuarial smarts. Someone once said that reinsurance from a financial perspective could be defined as anything where there is a 10% chance of a 10% loss. I would hasten to add that in life reinsurance that is a good definition but in the reality of health reinsurance results indicate a 90% chance of a 110% loss. A true revolution in the business would be recognized when health reinsurance is always profitable at least from a risk selection process.

The use of judicious financial reinsurance today has emerged as one of the main building blocks of many companies’ demutualization schemes or the rise and consistency of bottom line numbers. As capital management continues to be front and centre we are probably going to witness a further evolution of financial reinsurance albeit it may have a revolutionary new name.

After the vagueness of financial razzmatazz (I warned you the words would change) the debate or friendly sparring moved to the cornerstone a reinsurer’s success, mortality. Often presented as the core competency, mortality is nothing more than the educated wagering on how soon how many will lapse, replace, alter, amend, going on long term waiver of premium or, heaven forbid, die. No one in the insurance or reinsurance business has yet to open a Chinese fortune cookie to read “The mortality table you used today is too optimistic!” but we do stand the chance that the message could read “That wasn’t chicken.”

For decades and centuries our mortality continued and continues to improve. Every time we project the insured population death rate we do it with the comfort that every previous prediction was realized and in fact overly pessimistic. I gave thanks of course to the actuarial brethren gathered therein for their ability to frighten as they repeatedly throughout my career warned that this table is the lowest we will ever be able to go. The further praise for their reversal of opinion mere hours yet sometimes days later saying they have found a new and lower table. I have always wished I could go to the bush like that and bring back so many miracles.

I assured the by now encouraging with applause and laughter audience that regardless of point of view at the realities of today there was a multitude of silver linings in mortality. Actuaries for all their timidity have harkened a perpetual 1-% improvement in mortality per year. Morticians who I had just met returning from their equivalent to the Canadian Reinsurance Conference told me in strict confidence that their business is growing at 1% per year and will continue at that rate or more for years to come. I felt good that everyone could win.

For all the bleeding hearts in the audience I gave them solace with the pearl of wisdom that reinsurance pricing and subsequently insurance pricing were not the only prices to fall so far so fast in the 20th century. The cost of a transatlantic telephone call has fallen from $250 US in the 1930’s to less than 36 cents in 1998! And actuaries and management think we have seen competition to drive prices down. The evolution of the price and revolutionary pressures on our price are surely not new!

Mortality assessment by underwriters has been, as underwriters usually are, able to go both ways (focus on standard to decline folks). Some impairments or sub impairments have shown remarkable improvement to reflect the even more remarkable improvements in medicine. The myocardial infarction (big heart attack) in the 1970’s was rated at 300% mortality plus an additional $20.00 per $1000 of risk. That was on a 50-year-old male 3 years post infarction. Today some 25 years later the same risk is assessed at 200% mortality plus $10.00 per $1000. Medicine is so good today we can lower our ratings and give the best-impaired lives the better rates.

However all is not a downward spiral, as some would have you believe. The 30-year-old insulin dependent diabetic is now rated 300% mortality, up from 225% mortality 25 years ago. This is because we tend to define the various degrees of diabetes today and in doing so some are rated higher but many are rated lower. I just chose a good example to make my point and show the lower revolution was just an evolution of classification of risk.

At the same time as underwriters were for the most part slashing intelligently the extra premiums for various and sundry impairments to life the actuarial gurus were, as always, vying to get to zero faster. Reinsurance prices have fallen for the standard risk about the same as telephone calls over long distances. In 1976 the total cost of yearly renewable term premiums payable to a reinsurer were just under $100.00. By 1996 that same male 50 if they did not smoke (or could lie well) would pay just under $25.00. Our core cost of reinsurance was approaching 25 to 30% of the 1976 costs.

Combining the base standard rate with the myocardial infarction rating alluded to above and we fall off our comfortable pew in shock. In 1976 we would have collected (no interest factor) almost $450 per $1000 of risk over a ten year period. In 1996 the premium collected totals about $80! The number in 1999 is even lower but I refrain from using that price with deference to all those myocardial infarctions who may relapse in the stampede to buy at today’s tiny premium.

To put an exclamation point on my evolution point I enlightened the audience and reminded some of the older crew that the table they perhaps studied from was inappropriate for today. The Halley mortality or life expectancy table of 1687-91 said that a male age 50 could expect to live 16.8 years. For all recorded time actuaries have said mortality will improve by 1% per year. How is it that the 1980 British table only gives a 28-year life expectancy to the same 50-year-old male? That improvement of 11.2 years does not quite hit the mark if there truly was a 1-% improvement per year. Only 17 people, assumed to all be number crunchers, left the room at this point. Obviously they were rushing out to get my honorary FSA wallpaper revoked. Oh ye of little humour.

Quickly turning the audience’s attention to a new focus was blatantly foreseeable at this juncture. Mergers and acquisitions were next on the hit parade that sunny day in Toronto as the audience glamoured for more, more, more of the opinionated insight. I had no picture to visualize for the unimaginative that size matters so I merely stated that size matters today. Reinsurance was a $124 billion dollar industry in 1998 of which 75% was North American and Western Europe and 83% was nonlife. I would speak only of the remaining 17%, which seem to make the listening audience thankful because it would probably mean 83% less verbiage from yours truly.

All industries are going through the big is better phase be it automotive or banks or financial conglomerates. Why would anyone insist that this should not happen in insurance. We already have insurance leaders whose appetite for power is far greater than their current empowerment. As my Mother wisely said at times “their eyes are bigger than their bellies.” This M & A thing is not new even though we currently reflect on the loss of the following through one take over or another:

Those are the names of companies that went through merger, acquisition or sale of blocks. Everyone things that is all so new it is revolutionary. I pointed out to the audience that they collectively must be suffering from Alzheimer’s since that list was predated by the ongoing saga of company ownership consolidation for decades. Others led the way to extinction in one graveyard in Canada or another repository for old insurers, namely:

Each of those is a story undo itself, from purple Cougars (the car not the feline) to perverted offenders in leadership. As the audience was already morose I quickly moved on to at least say that many a reinsurance operation had also departed the Canadian scene in the same period. Cheers of applause from the cedants in the room were not heartening to me.

Reinsurers are endangered as the tree frog and harp whale. The following are amongst the dearly departed although some are basking in the warmer climates (the analogy is to more lucrative ROE countries):

Most were here in Canada for brief histories while others were so good like Storebrand the competition just had to buy them out of the market. I noticed not one tear from the audience from either the reinsurance brethren or the cedants. I do think I made the point that anything so insidious over 30 years cannot be labeled as a revolution.

Just to cheer the audience up since most made a lucrative living from the mortality trade I graphically showed how reinsurance has grown over the years tat I have been in it (not that I take full credit for reinsurance popularity today). In 1939 reinsurance accounted for .02% of all new sums assured (as well as about .02% of new premium). By 1969 (my first year in insurance) the new business going to reinsurers was under 4%. In 1999 it is predicted that new sums assured reinsured will hit the 50% mark. There are many that believe that the premium percentage is still mired at .02%! How long will it take for 50% of all in force sums assured are resident with the reinsurers and the dynamics within our business take a radical turn. Is this mortality outsourcing taken to its highest level?

Last topic to debate, although I thought I had won via humour 3 out of 3 so far was technology. I wanted to keep my options open to go both sides of the revolution or evolution debate so I continued to be vague to confuse the audience (something like writing for MO). A reinsurance opinion of technology is like the road sign I came across in Australia. In the middle of nowhere the road sign said “Emergency telephone 174 kms Ahead”. The message is correct but how much good does it do you if you are having an emergency. Reinsurance technology is similar in that the reinsurers views on technology are often insightful, well constructed, interesting to listen to but of now immediate use to the insurer who lacks money, people and inclination to implement.

The communication and transportation of paper with data or data without paper has gone through the phases of mail, express mail, courier, facsimile, compatible facsimile, back to couriers, bicycles, Internet and back to bicycles. In the end we still manhandle tons of paper between insurer and reinsurer. The reinsurer is somewhat narrowly focused on the paper and data they need and miss the point that reinsurance historically is a low priority item for most cedants.

As reinsurance gains in magnitude (remember the numbers a few paragraphs ago) will we experience a revolution in technology to shrink the tons to trickles.

I conclude with a picture of the evolution of man from ape to upright model citizen. Within the picture’s six forms of man (it was a man not a woman) I asked the audience to look around and realize the evolution continues with a few revolutionary mistakes.

Bill went back to Fort Wayne wondering aloud as to how he ever agreed to part of the non debate but happy that he was well received by hundreds of Canadians. Hugh went on to further consultancy, thankful that the debate was so mild mannered he could spend his time deep in thought about the evenings wine selection. Me, I went home to write the article while I still remembered the topic. I never did see the votes the audience submitted on our performance. Ah well, no news is good news.

Another in the series of articles encouraged by Steve Carlson of Marketing Options. The industry was full of concern for whom and what were reinsurers. I was doing several speeches across Canada on the subject of reinsurance and retrocession. Steve pushed me to give an overview of the industry seldom seen by the distributor. I tried to write an article that outlined how it worked and also strived to be neutral as to which reisnurer was best (there was no best at that time, but there was mediocrity).

If you have been in the life insurance business long enough you can probably remember when you did not know the word reinsurance existed. In those days, if you were employed by a reinsurer, you told the person next to you on the plane that you were an insurance agent or that you were calculating random but known theories of mortality. The first was to ward of unwanted conversation, the second to attract their probing dialogue. Here we are in 1990 with the reinsurers so far out of the closet they almost refuse to go back in even when encourage by insurers. Every agent has heard the word ‘reinsurer’ or those infamous words ‘the reinsurer has declined’.

The life reinsurance industry environment has been one of the unprecedented growth and change that was not predicted in the 1970s. The number of competitors grew as the exclusive reinsurers with head offices or ownership outside of Canada came to dominate those local companies who historically touched on reinsurance via reciprocity (the gentlemanly exchange of business between companies). At the same time, local but smaller Canadian exclusive reinsurers aligned themselves with European or American reinsurers to provide a capacity equivalent to the larger international participants.

Now the reinsurance business in Canada is comprised of about 20% of the sums insured written in a year or the astronomical amount in 1989 of over $15 billion. The reward, or reinsurance premium involved, however does not do justice to the amount of risk since it hovers around the 4% figure. The insurance industry is intelligent in that it reinsures as much risk as possible but is stingy with its premiums.

Mergers and acquisitions that are transpiring in Europe as well as the contraction of the Canadian industry makes for some interesting scenarios that are purely speculative. For example, will the reinsurance industry decrease from over 100 players internationally to a dozen or so reinsurance conglomerates? Will the Canadian insurance industry shrink to 40 companies, or twelve, if you listen to the real pessimists?

The issue of AIDS pricing was truly a means of increasing the charge for reinsurance risk taking – a direction that was surely needed. There was no margin in the reinsurer’s price to cover the additional mortality due to the virus. A healthy market requires a competitive price from the company to the consumer and a competitive price from the reinsurer to the company.

When the final tally comes in the industry has many competitors for the reinsured volumes available. The competitors are one thing above all else, competitive. (The market is only marginally increasing while reinsurers need large volumes to sustain them through the 1990s) A ceding company can coerce a lucrative deal with the reinsurer it can in turn choose one of several alternatives: give the agent higher commissions; lower the price to the potential policyholder; or pocket the margin as profit for its owners. Which is most often chosen is as easy for the novice to pick as it is for the most seasoned veteran of the insurance industry.

The price the reinsurer charges are, in a net sense, much thinner than the price in the rate book. The reinsurer can be charging simply mortality (approaching zero in the early years for some models) with modest additions for expenses (usually zero – the loss leader theory) and profit (try for bank interest rates, if you dare). What the reinsurer is alluding to is the theoretical decree that only the original ceding company has higher expenses and high profit assumptions.

The second most important element in marrying a reinsurer is price… The third most important element is, you’ve guessed it, price.

As a company moves down the list, which does become repetitive, you do reach other elements that go into the decision making process that ends with choosing a reinsurer for the next twelve months. No where on the list is there an item called ‘client relations’. About the closest is the tried and true category of head office underwriting support. This is ranked number one when there is a problem but falls to eighteenth place when all is quiet on the difficult case front.

The support that an agent needs from the underwriter on the difficult case is beyond price because it often has a value that does not equate to dollars but only to peace of mind and confidence. If the agents are well serviced they are less likely to get the unpleasant surprise that a competitor has found a better price. The agent, who is at the forefront, needs to know that the offer he is presenting to the client is the best given the myriad of factors influencing an applicant’s insurability. The reinsurer provides support to that head office underwriter by ensuring the availability of the latest risk classification material. If the case is outside of the normal, then quick, concise assistance should be available to that underwriter.

Traditionally, the support of the reinsurer’s underwriting department was closeted away well beyond the agent’s group. It was possibly considered wrong to have the reinsurance underwriter know anything about the world of the agent. The ivory tower of the reinsurer’s underwriter even had a moat around it. Today we have witnessed these underwriters boldly leaving the tower to venture into the camps of the producers to actually see and hear the realities of today’s jumbo cases and somewhat rated lives. All of a sudden there is an understanding, not total yet, but growing. Agents have even been known to now befriend a reinsurer and vice versa.

Support for the unusual case, be it on a complex financial issue or a specific medical problem, is of utmost importance when choosing the reinsurer. If it is ignored the agent is left with not 95% of cases being issued standard but maybe 85%. That extra one in ten could be costly. To balance the accolades that a great reinsurance underwriter brings to the agent/ceding company relationship is the worry by some head office underwriters that it occasionally goes too far. The reference, of course, is to the reinsurance underwriter who may overstep his role and both jeopardize the integrity of the ceding company underwriter or make and unfulfillable promise to an agent of group of agents.

Does every other element pale in comparison to the foregoing? Yes, says the underwriter. Putting the big picture together, the price and underwriter factors are probably the most important issues between company, reinsurer and agent. The fact that the reinsurer has terrific administrative systems and people is important to the company but a non issue to the agent. If the flow of risk and premium between reinsurer and company is fouled up rarely could it impact the customer or agent.

The unfettered commitment of the reinsurer to the life reinsurance business and to the particular company is an element to consider but of only trivial consequence to the agent. The agent should have the confidence to the reinsurer is involved for the long term and takes time to stay abreast of agent issues, but that’s it.

There are two remaining elements a life company considers when selecting a reinsurer and both could be at the top of the list but both could be deemed so fundamental that they are present without being listed. The two elements are related since very rarely do you have the one without the other. Top performing people work in an environment that knows the financial stability is behind them since it is they who risk personal reputation by implying something that is not there. Financially stable reinsurance companies can attract the best people to protect that stability and enhance it. You simply can’t have on without the other. The marriage of the best reinsurance people with the mightiest of reinsurance giants, either stand alone companies or networks of diverse interest, gives peace of mind to the ceding company.

There has been much said about the financial weakness of the life reinsurers. Unfortunately most of the rumor is make believe or wishful thinking by in secure individuals or dubious competitors. No life reinsurer was involved in the reinsurance difficulties of the non life industry. As a rough guess, less than 4% of Canadian reinsurance volume is with unlicensed or unaccredited reinsurers. The last two or three million of $30 million case must be covered somewhere. To the best of my knowledge, the primary reinsurers operating in Canada are all federally licensed or accredited, thus meeting the financial requirements and scrutiny of the Department of Insurance and it’s army of auditors.

Go with a reinsurer to lunch and draw your own conclusions about their value to the industry. It would be hard to imagine anyone concluding anything other than they are great people doing an exemplary job in a confusing industry. Remember to base your judgment on price (who pays the bill?), price (who offers to pay the bill?), price (the restaurant chosen), the underwriting support (the number of times the word ‘standard’ is used), administration (did the reinsurer eat lunch using utensils in the proper order?), commitment ( the number of times he/she fell asleep), financial stability (did the maitre’d politely return the reinsurer’s credit card and ask for cash?) and people (was it a real smile or was it painted on?).

When I wrote this in very early 1973 I was three years out of university where I studied Canadian history and abstract mathematics after deciding actuarial science and law were too boring for my warped mind. My greatest “boss” ever, Bob Spittel, and the president at the time of Mercantile and General Reinsurance Canada, Ian Michie, pushed, encouraged, corralled or cajoled me into writing a paper for presentation at the Pacific Insurance Conference (a very prestigious event in the early days). If they liked my paper, if those in Canada who felt it was worthy of representing Canada at the conference and if I would deliver my first real big audience of elders (20 plus years my senior in age and experience) presentation M&G would send my dear wife and I to Japan for the actual conference.

The Canadian Life insurance industry has relatively stabilized itself in the realm of new product development in the last couple of years. There are, however, various “old products” which have been revamped to exploit current market potential arising from government tax changes or economics inflation.

At the present time, over fifty life insurance companies operating in Canada are offering a form of variable contract in which the policyholder’s benefit is variable according to the performance of a special investment fund. Basically, there are five forms the variable contract takes: a decreasing term combined with and “increasing” investment fund: guaranteed level insurance plus accumulated fund values; minimum death benefit plus investment fund value; increasing minimum death benefit due to investment fund appreciation; and yearly adjusted death benefit either increased or decreased value. Sales results of all forms have been mediocre but one Canadian company has experienced sales far and above the Canadian Life Insurance Association’s most liberal predictions.

As a result of recent Canadian federal government tax legislation changes, life insurance companies are experiencing and all too needed influx of individual savings dollars back into the registered retirement savings plans. The market for these plans has grown considerably and there is every expectation that is trend will continue.

The tax legislation changes also provided an incentive for the sales of the income-averaging annuity. The annuity was not a new product but an old product adapted to entice the resultant sales from a market predicted to produce $12,000,000 of premium income per year.

Initial sales results of an inflation-linked family income plan have not be exactly encouraging, but rather discouraging. This plan, linked as it is to a cost-of-living index, could prove to be more marked in the future should inflation continue to devalue the dollar’s purchasing power.

The paper makes short mention of the deposit term type policy and its generally good sales results. The persistency problem is very negligible with this plan and companies are able to almost ignore the problems of the early lapse.

The almost totally revised federal Unemployment Insurance Act necessitated a revision of privately offered accident and sickness insurance coverage. With the exception of the self -employed, the federal unemployment scheme provided mandatory accident and sickness benefits to all employed Canadians. Three approaches (an integration provision, and elimination period and a split benefit) were instituted to offset duplication by private accident and sickness insurers. The new plans were really “old plans” with changed indemnification schedules.

The recent trends in new Canadian products have been toward cheaper term insurance, which could lead to super selective risk appraisal. The consumerist movement may shortly take a very critical appraisal of the life insurance industry, just as it has delved into the automobile insurance industry resulting in government intervention.

WHAT NEW CANADIAN INSURANCE PROCUDTS

Introduction

1. In the fall of 1972, the Excelsior Life Insurance Company published the results of its survey of Agents concerning their attitudes of the insurance industry. A mere 1% of those surveyed replied that “lack of products” was a major cause of their agency not doing more life insurance business. Other than the occasional agent requesting a mutation of an existing policy form, it would appear that the Canadian insurance industry has stabilized itself in the area of new product development.

2. By defining new product, one must not include the confusing method of renaming old products so the name coincides with an advertiser’s extravagant plans to “con” the public into spending money on insurance. New products in the past have included family policies, guaranteed insurability benefits, fifth dividend options, variable annuities, variable life and deposit. There have been no such innovations in Canadian products during the past two years, other than the introduction, by companies, of policies which have been available to the public through competition insurance companies previously.

3. This paper, therefore, will not delve into the introduction of so-called “new products” but will concentrate on the old products which are generating the greatest amount of publicity in the insurance industry today in Canada. The first two policy types which come to mind are the variable contracts and the registered retirement savings plans; however, one must also include the mention of deposit tremor modified term, economy linked family income plan and the income averaging annuity contracts.

4. The latter part of this paper will delve into the implications of the revised Unemployment Insurance Act on the Canadian accident and sickness insurance products. The products involved in this area are not “new products” but are old products with new indemnification schedules and rules.

VARIABLE CONTRACT

5. Approximately fifty life insurance companies operating in Canada are now offering the variable contract to the public. The majority of these contracts are sold on the promise that they will fight inflation; i.e., the variable contract combines previously known insurance features and certain required guarantees with the publicly appealing opportunity for an inflation offset and growth factor. Generally, the policyholder’s benefits vary according to the performance of a special investment fund, usually consisting of common stocks, but there are those funds that include bonds and mortgages. Prior to variable contracts, the ordinary life participating policy, with its value depending mainly on the life insurance company performance regarding expenses, mortality and investment returns, was the closest plan available to combat the inflationary trend of the Canadian economy.

6. In connection with life insurance, there are five mutations of the variable contract available in Canada. First, there is the form which combines a decreasing term life insurance contract with and investment fund that is predicated to increase in value to exactly counter balance the decrease in life coverage. At maturity, which is frequently age 65, the guaranteed amount of insurance has been reduced to zero and the amount accumulated in the special investment fund becomes payable.

7. A second similar form of contract provides a guaranteed level amount of insurance, payable on death, in addition to the amount accumulated in the special investment fund. As some specified age, again typically age 65, the policy is changed to one providing a guaranteed level amount of insurance for the balance of the policyholder’s lifetime. This new amount of insurance is determined by multiplying the amount in the special investment fund at the age by a factor guaranteed when the contract was originally issued.

8. Under a third and somewhat different form of contract, a minimum death benefit is guaranteed from the inception of the contract. Included in this death benefits is the amount accumulated in the special investment fund; thus, if the latter amount exceeds the amount of the guarantee, the amount in the fund will be paid; whereas, if he amount in the fund is less than the guarantee, the guaranteed amount will be disbursed to the beneficiary.

9. A variation of this third type of contract provides that the guaranteed minimum death benefit will be increased by and appreciation in the special investment fund over the premiums paid into the fund. Both the latter tow types of contracts more often than not provide for a maturity at a specified age, frequently age 65, and for the payment of the amount in the fund or a guaranteed amount if greater at that time.

10. By searching further, one finds another form of contract in this broad category of variable contracts, which provides an initial amount of insurance which is adjusted annually through the application of any growth or decline in the special investment fund over the past year to provide additional or possibly reduced amounts of insurance. This latter form of contract generally provides that some part of the insurance is fully guaranteed and that only the balance will reflect the performance of the special investment fund.

11. Almost all variable contracts have three basic features: benefits on maturity or death may not fall below a pre-determined floor; cash surrender values are provided through out the term of the contract; the amount of cash surrender values is not guaranteed and reflects the fund’s performance; and a policyholder can convert at any time to a fully guaranteed life insurance policy. Purchasing power of the conventional insurance surrender or maturity dollar has eroded to a point where this form of long-term guarantee investment was regarded with skepticism by much of the buying public. Therefore, the public in the past couple of years has been conditioned to expect more from its hard-earned savings dollar. The variable contract has found a ready-made market as well as a generally willing sales force. However, the life insurance companies offering variable contracts have met with variable sales results.

12. On rather large Canadian company, following the agents’ request for an equity linked policy to meet competition, introduced such a policy in the 1972 calendar year. One would have expected to an overwhelming number of applications to be processed by this well known and respected company, especially since various members of the Canadian Life Insurance Association predicted the variable contract would account for over fifty per cent of sales volume in the early seventies. However, the company mentioned has only experienced a sales result of two per cent of its total number of policies sold. The one encouraging item is that the average size ($15,000) of the equity linked plan is greater than its overall average size policy ($12,000).

13. The variable life contract has not exclusively met with such an unenthusiastic response as a sales result. One Canadian company has increased its volume by more than double its 1970 volume and became the fastest growing life insurance company in Canada. The bulk of their sales – ninety per cent – has been in the form of an equity linked policy utilizing a common stock based fund. A fifty per cent increase in sales force has been experienced and the company is truly based on the variable contract. Their plans for the future include selling life insurance and annuity policies whose values are tied to and fluctuate with a fund of real estate investments. Presently, there are problems existing with government authorities concerning the liquidity problem of such a fund, but these may soon be resolved. Real estate is the one commodity that we cannot artificially manufacture and as its scarcity increases its value increases. A property-linked fund should prove to be popular, since most Canadians are constantly aware of the rapidly increasing value of real estate and realize it is the safest investment, barring a general depression.

14. Other sales results from Canadian companies show results which are almost invariably below the Canadian Life Insurance Association members’ predictions, and the agency demand for the variable contract has currently stagnated. Companies who are actively soliciting sales of the variable contracts are obtaining reasonable sales results. On the other hand, the companies that merely added the contract to placate agency demands are not truly encouraging abundant ales results. This possibly reflects back to my opening remark that only one per cent of the agents surveyed felt that the lack of new products was a reason for fewer life sales.

REGISTERED RETIREMENT SAVINGS PLANS

15. Life insurance as a form of savings has stagnated during the period 1962 to 1972. A decade ago, almost one-half of a Canadian’s personal savings went into life insurance policies; whereas, today the figure is approximately one-fifth of his savings. In fact, government issued Canadian Savings Bonds have overtaken life insurance savings. Thanks to recent tax legislation changes, which allow the Canadian taxpayer to deduct up to $4,000 if self-employed (or $2,500 if not self-employed) from his taxable income if the money is used for retirement savings, there has been an influx of savings dollars back into life insurance. The taxpayer is always looking for ways and means to pay fewer dollars to the Taxation Department. Insurance companies, as well as trust companies and the like, are now advertising the availability of their own registered retirement savings plans. These plans are tax shelters which allow the purchaser to invest gross interest and gross capital gains before taxation. The buyer may even borrow money to buy the plan, with the added bonus that the interest on the borrowed funds is also tax deductible.

16. In 1972 the dollar value of the registered retirement savings plan deductions was $320,000,000, which represents an increase of forty-two per cent over the 1971 dollar in those taking advantage of the deductions – representing 248,719 Canadians. As an example of the tax savings, a self-employed taxpayer earning $20,000 per year could save $1,698 in taxes by diverting $4,000 of his income into a registered retirement savings plan.

17. It must be stressed that this is not a new product, but it is a new incentive to the buying public to purchase old life insurance products (provided the product matures by the owner’s seventy-first birthday) such as endowments, annuities, and some of the variable life contracts. The outlook for an ever-increasing volume of business is this area is very good, provided the Canadian government does not reduce this tax deduction.

18. The registered retirement savings plans, offered by Canadian insurance companies, produce a soaring premium income, excellent low lapse ratio and do not allow the applicant-owner to borrow any portion of the funds value. The direct result is an abnormally high cash flow into the life insurance industry. Thus, the larger insurance companies are evolving into the real estate development industry in order to obtain adequate returns on their large capital resources. By financially supporting a total residential, industrial or commercial venture from the land acquisition through to the leasing to tenants, larger insurance companies experience yields on their investment of 8% or higher, while taking advantage of the cash flow. The financing of existing real estate, producing less than a 7% yield, is therefore left to the European financial centers.

19. A second side effect of the registered retirement savings plans is their stabilizing effect on the Toronto Stock Exchange. The laws stipulate 90% of these registered funds be invested in Canadian securities. This, therefore, constantly provides a reliable flow of capital into the Toronto Stock Exchange moderating the periods of “bear” markets which are more evident on the New York Stock Exchange.

20. Recently, the Canadian insurance industry has seen the introduction of plans, not really new plans, which are provided to meet the current trend in the industry. One plan is meant to take advantage of the changes in income tax legislation which provides for further tax shelter. The second plan has been introduced to combat inflation. The third plan is meant to combat the persistency problem with life insurance contracts and especially term contracts.

INCOME AVERAGING ANNUITIES

21. With the introduction of the revised Income Tax in Canada in January 1972, the insurance industry found a ready-made incentive to the buying public to buy income averaging annuities. The applicant must buy the income averaging annuity within the taxation year or within sixty days of the year-end. The buyer can then deduct from his taxable income the lesser of the actual amount paid for his income averaging annuity and the amount of his income which qualifies under the Income Tax Act minus the sum equal to one year of payments. This Act is quite appropriate in areas where an individual may receive a large sum of money as income in any one taxation year which he may not anticipate receiving in future years.

22. There are various areas where the income averaging annuity would be very appropriate, and they include:

(1) Any payment out of the superannuation or pension fund can be transferred into an income averaging annuity unless there is some provision in the fund or legislation that does not permit it

(2) Payment upon retirement in recognition of long service, can be tax sheltered in an income averaging annuity.

(3) Single payment from an employee’s profit sharing plan, in satisfaction of his rights under the plan, can be transferred to an income averaging annuity.

(4) The new Income Tax Annuity provides for a number of new interesting opportunities for transferring funds such as deferred profit sharing plans which can be withdrawn to an income averaging annuity.

(5) If an employee’s pension is amended and a lump sum becomes payable to him even though he continues to be a member, he can transfer the payment to an income averaging annuity.

(6) The payment from an employer or former employer in respect of loss of employment (i.e., severance pay), if paid in the year of retirement or the following year, can also be tax sheltered.

(7) A return of premiums received from a registered retirement savings plan on the death of an annuitant can be transferred to an income averaging annuity.

(8) Net taxable gains are also transferable into an income averaging annuity. Also, incomes from production of a literary, dramatic, musical or artistic work or income from activities as an athlete, musician or public entertainer can also be “averaged” to cut taxes.

23. The annuity in question must be purchased from a “person” licensed or authorized to carry on an annuity business in Canada, which means a life insurance company. The income averaging annuity can be an annuity certain for a fixed period of up to fifteen years – it can also be a life annuity with up to fifteen years guaranteed. However, in neither case may the guarantee period go beyond age 85, nor may the benefits start later than ten months after the purchase of the annuity. The income must be level for as long as the annuity is payable.

24. Even though the individuals affected by such annuity plans are in the minority in Canada, there is indeed a market for this type of plan and it has been predicted that there will be sales of approximately ten to twelve million dollars in premium in the next couple of years from this plan. One company to date has experienced about two million dollars of sales in its first year, which is, in their opinion, a very good sales result.

INFLATION AND FAMILY PLANS

25. Inflation problems were mentioned earlier in connection with the variable contracts, and how variable contracts were aimed at fighting inflation. One Canadian company has recently introduced and inflation linked family income plan which allows for the benefit payable to be linked to the cost of living. The death benefits payable increase yearly according to the rise in the cost of living, with the provision that the increase is no more than twenty per cent in one year and a guaranteed minimum increase of four per cent in any one year. The plan is convertible at any time for the amount of the increased value, which depends again on the economic inflation factor. To date, the sales results of this plan have not been as good as expected and no real trend can be foreseen at the present time, even though the plan should appeal to those people worried about the purchasing power of their savings dollar in the future.

DEPOSIT TERM

26. Although the problem of persistency in Canada has shown a decrease in the past couple of years – decreasing from a fifteen point one per cent lapse rate in mid 1971 to a thirteen per cent lapse rate by the end of 1972 – it is still a major insurance problem. One product, aimed at eliminating the financial strain of lapses, has just recently been marketed by a couple of insurers in Canada. This is the deposit term type of policy.

27. The company that has experienced the best sales result with this plan sells a modified term plan on the basis of a ten year renewable term, with a deposit that varies by age (example, at age 20 the deposit is $5.50 per mil and age 60 the deposit is $16.96 per mil). With the deposit term, this company has experienced a very low lapse rate of two per cent and its sales are now forty per cent of its total business. Since no portion of the deposit is returnable at time of lapse, the company feels that it has more than covered its first year expenses and thus does not have to worry about early persistency problems. The commissions to agents are 100 per cent in the first year with nil commissions on renewal, and the commission is based on the regular term premium, not on the combined regular premium plus deposit.

28. We possibly will see in the future more companies selling this plan in order to combat a persistency problem on term business.

ACCIDENT AND SICKNESS INSURANCE

29. On June 23rd, 1971, the Canadian federal government passed, in parliament, a new Unemployment Insurance act which affected the insurance market by making insurers, issuing accident and sickness policies, adapt “old plans” to a “new market”. Again, we did not see a rash of new products, merely a rash of policy changes. Surprisingly enough, most insurers left the necessary changes to the last possible moment; most changes not being introduced until well into the 1972 year when the Unemployment Insurance Act was in full momentum and ready to start on July 1st, 1972.

30. Significant sections of the new Act as they affect insurers were:

(a) Universal coverage was enforced; thus employees not self employed were not included. It has brought into the scheme some one million more employees previously excluded due to their salaries (earning more that $7,800 per year.)

(b) The new act provides benefits after eight weeks of insurable employment in the past fifty-two weeks, making it closer to insurance company practices.

(c) Contributions are scaled to earnings while benefits are expressed as a percentage of earnings; benefits are more related to protecting a person’s standard of living and adjust automatically with that standard.

(d) Sickness and pregnancy were added as valid reasons to draw benefits under the Unemployment Insurance Scheme.

(e) The new Act takes the position of “second payer” only with regards to group policies and not to individual policies which are bought personally by he claimant.

31. The insurance industry countered that major changes would not be required to be introduced with the coming into effect of the Unemployment Insurance Act, and that coverage would retain the flexibility that has always been characteristic of individual policies providing income replacement benefits. One such insurer stated: “ Our underwriting practices considers the Unemployment Insurance Act benefits to be like any other existing coverage and we try to ensure that any benefits offered by our company do not allow for unnecessary or duplicate coverage.”

32. Generally, three approaches: an integration provision, and elimination period, and a split benefit were instituted to offset possible duplication and the problem of over-insurance. The integration provision approach controls the amount the insured will receive, or the insurer will pay, when the insured is concurrently entitled to receive Unemployment Insurance benefits. The provision would reduce the monthly benefit of the policy, not the government benefits. Unfortunately, the reliance on this provision alone results in poor sales results and/or policy owner dissatisfaction and heavy lapses. The insured prefers to know that he will receive the full benefits paid for and expected, regardless of what the agent told him at the time of the sale.

33. The elimination period approach, commonly a one hundred and twenty day elimination period, is a second method of combating the over insurance problem in the early stages of benefit. However, as one must qualify by twenty weeks’ contributions under the Unemployment Insurance Act for entitlement to its cash benefits, it is quite possible that a policy owner may not indeed qualify; thus, one could be left with a loss of earnings and no adequate replacement for the one hundred and twenty day elimination period. We also have the factor that Unemployment Sickness benefits can be deferred until payments under a registered group of sickness plan are exhausted, thus leaving the insured over-insured for a possible one hundred and twenty day period. Many companies have been endeavoring to sell this approach. Proposed insureds, realizing the delays encountered with dealing with a government agency and being unfamiliar with the available Unemployment Insurance Sickness benefits, have, however, been rather reluctant to purchase a plan that does not benefit them for one hundred and twenty days.

34. The third approach, split benefits, has been in use by some companies for some time. The Unemployment Insurance benefit is taxable income; this, insurers are issuing policies with modest benefits for the first seventeen weeks and then for the full qualifying amount thereafter continuing for the balance covered benefit period. Again, sales on this type of plan are hard to make, since the agent is faced with a communication problem. The buyer still prefers to know that if he is purchasing a benefit he is purchasing the full benefit and not twenty five per cent now and the balance after seventeen weeks.

35. Various combinations of these approaches (i.e., the integration approach in conjunction with the split benefit approach) are being used, but all it appears to be doing is confusing the consumer, and not encouraging good sales results.

36. A self-employed individual is purchasing more and more accident and sickness insurance on the conventional plans available. This market is relatively unaffected by the Unemployment Insurance Act, and thus not burdened with further confusing approaches concerning the how’s and when’s of paying benefits. Further inducement to the professional, self-employed market is the recent introduction of the return of premium on disability income policies. The policy generally provides for the return of the three-quarters of the paid in premiums with the insured paying about forty per cent extra in order to provide for this benefit. Those consumers, who had previously believed they were better off self-insuring themselves against loss of revenue, are now purchasing a plan that “always” gives them something back.

RECENT TRENDS

37. Since the Canadian life insurance industry has no new legitimate “new products”, one would find it hard to summarize the trends of “new products”. Instead, possibly the above comments on life and accident and sickness insurance shows that the recent trend has been more centered on the marketing of old products to produce greater sales results. There have also been various other forms of marketing to increase sales results, and they included sales through catalogue order forms, mass merchandising, amongst other “gimmick” type of solicitation. The products offered are not new but they do, however, fill the need for a market that has been virtually left to stagnate. Since the amount of insurance that this market is seeking generally produces a small commission, it does not attract the agent to a possible sale. Thus, by a direct mail or mass merchandising approach, this market is beginning to be solicited once again, but not by the professional sales force, rather through a mail order type business.

38. There is a definite trend, recently, to counter the increasing competition to sell “cheap” term by decreasing to the lowest, and possibly below, the rates charged to the consumer. These old plans with their new bargain basement rates cannot withstand the usual expected mortality losses that are based on the insured being given a standard premium when his individually assessed mortality falls somewhere between eighty per cent and one hundred and thirty per cent of normal. As a result, these new rates will warrant acceptance of only those lives that are assessed at one per cent mortality or better, excluding literally millions in the one hundred and one per cent to one hundred and thirty per cent category presently obtaining standard rates. This latter group must reapply on a different plan which has the conventional rate structure.

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39. If this trend for new product rates continues, it could lead to rates on certain products for those who show a more and more finite mortality; i.e., ninety-one to ninety-two percent, ninety-three to ninety-four per cent, ninety-four to ninety-five per cent, … one hundred and twenty eight to one hundred and twenty-nine per cent,… If this happens, the Canadian insurance industry will, by such a pricing structure, be offering rate classifications similar to automobile insurance rates. A super standard life risk will be paying a lower premium, just as the good driver with merit “discount” pays less for automobile coverage. The average standard life risk, if there is such an animal, will be paying the conventional rate, just as the average (one accident every couple of years) driver pays. The just substandard, or borderline standard life, will pay more in premiums, similar to the poor driver. The average driver’s rates are now going up at a phenomenal rate, coinciding with the poor driver’s experience and rates; only the good drivers are stabilizing. It seems bound to hold true for the life insurance rates if the trend continues for a “cheap” rate structure.

40. The public is now demanding that the individual provincial governments investigate the automobile insurance industry and it has resulted so far in three out of ten provinces now providing a basic automobile coverage and excluding all private enterprise for the driving public. It will not take the various consumers’ associations long to realize that the life insurance industry may require a very similar attack on its practices if the above-noted trend continues.

41. Competition is generally very susceptible in our society, but when the competition adversely affects the status quo of the purchasing public, it is unnecessary and unwarranted. Hopefully, the industry will not bow to agent demands for lower rates for much longer, but will find a better and more equitable method to supply the necessary competitive edge.

42. Mr. William MacFarlane, in his article entitled “Consumers – no longer a Non-word” in the National Underwriter of January 8, 1972, stated that “ The Life insurance industry today, unlike its counter parting the Property and Liability field, has been the happy victims of virtually complete neglect as far as a consumerism movement is concerned. The sleepy giant has been nudged on occasion, prodded on others, has rolled over and yawned, and then evidently brushed off its detractors and unspectacularly gone back to doing business in the same old way and at the same old stand.”

43. As stated at the very beginning of my talk, new products are not really what the life insurance industry needs. With the rise of consumerism and the consumerist and related groups, the life insurance industry can expect to undergo a scrutiny as never before encountered. Developing new products just to please a minority group is not what is required. The life insurance industry should take a look at the products it now sells and possibly offer even fewer policy types in the future. There should be a tendency in the future to drop all the various and overly confusing policy names as well as making the policies much simpler for the average insured.

Interpretation of those impressions by the author.

Continuing in a decades old tradition of the Canadian Institute Underwriting providing a great educational forum for underwriters from coast to coast every January they held another very successful seminar in 2007. The content was excellent. The speakers were at the top of their game. The organizers made sure every detail was in place for success. The attendees were there in force eager to learn and share their thoughts. I was fortunate enough to be asked to present on the subject of advisors/brokers relationships with underwriters. Over the last 38 months I have surveyed many advisors and MGAs on what is their perception of the industry and more particularly the underwriter and the whole new business function or process. The most recent follow up survey shows that the opinion of most if not all Canadian life insurers is that there service has deteriorated even further. The underwriter takes it on the chin even though they may not have started the perception.

But enough on that since it is the result of the survey conducted of the attendees which interests me the most right now. There were 75 attendees and they represented a true cross section of Canadian life insurers’ underwriters and indeed a representation from coast to coast. I was happy when 72 o the attendees completed the seminar’s questionnaire. Like advisors and brokers filling insurance applications not all questions were answered for various reasons. Overall the fewest answers were 64 for any one question. This would be I hoped at the time a truly valuable reflection of what underwriters were thinking on a wintry day in January just after the crunch of year end.

The first question asked each how many years they have had an underwriting authority level (the ability to accept or reject business on their sole signature, the power of the pen). I was surprised to find the range of years was from under one to over thirty three. The majority of attendees (46 of 72 respondents) had more than 5 years of underwriting authority. At the other end of the spectrum, twelve respondents had up to one year of authority and they were the ones without that glimmer in their eye from declining too much business (yet). A large benefit comes at this seminar when the neophytes challenge the establishment on the why’s and why not’s of underwriting. Open minded senior (in authority time frame) underwriters can learn to change if the neophytes push hard enough. Neophytes can pick up both good and bad habits from the more established risk taker.

Interaction with those who distribute the life insurers’’ product to me is key to successful relations between those who sell and those who stand in judgement (actually most sit at their desk). When I was a young know nothing risk taker my bosses sent me along with others like me to a course on communication and “selling” or probing. I learned to ask questions, respond sufficiently and deal with angry clients. I also as an aside learned working in reinsurance and dealing with insurers’’ presidents, actuaries and underwriters was far easier than dealing with those who sell our products. From the attendees responses it appears 45 of 70 have taken a communication or sales course. I am not convinced this high number is an accurate reflection of how many actually took a course other than a “good manners on the phone course”. I hope it is true that companies are finally seeing the merit in having risk takers learning more than what is the latest treatment for a weak left ventricle.

It was not surprising to learn only 37 of 72 respondents had any “one on one” interaction in the past two years with advisors! In fact only 11 of 72 had six or more “one on one” session with advisors over a two year period. I guess that explains why the chasm between advisor and underwriter has grown so wide. If you do not interact you do not grow in understanding and delivery. Is this isolation because underwriters just do not have the time or is it because companies want to isolate the decision maker from the advisor?

The question that I positioned as number four in the survey was the one I was most anxious to have an answer to since it was at the very foundation of our industry which is based on trust and in turn comes from forthright participants be they advisor, underwriter or reinsurer. I asked the respondents “what percentage of advisors are 100% forthright?” Starting with the young and uninitiated (one or less years of underwriting authority) we had 4 of 10 underwriters say advisors were 100% forthright 0 to 40% of the time. Not a good start for those who should still be building their own impression and opinion from experience not hearsay. But we all know how powerful gossip and hearsay along with urban myth can be. At the other end of the maturity spectrum, those with five years of underwriting battles under their belt were a little more split in opinions. 10 of 43 respondents thought advisors were 100% forthright only 20% or less of the time. 3 of 43 thought 21 to 49% of the time. Getting better were the 19 of 43 who felt it was between 50 and 80% of the time. Scoring an “A” were the 10 who believed advisors were 100% forthright 81 to 95% of the time. One lone underwriter with three years of authority answered that advisors are 1005 forthright 100% of the time. It was an anonymous survey so no I cannot pass on her/his name.

Am I an idealist when I would like to think that the target of absolute trust through full and complete disclosure should be at least 80% or better? Perhaps if our industry had more interaction and “one on ones” between the two solitudes we could improve the impression since that is all it is an impression.

The next question should have been divided in two to get a real impression of what underwriters think but as it stands it still worked. “What % of advisors do a good job of getting medical and financial information?” There were 18 of 64 respondents who thought advisors did a good job less than 50% of the time. One lone very experienced underwriter felt it was more like closer to 100% of the time. The remaining 45 of the respondents felt the advisor did a good job between 50 and 90% of the time. One added in bold letters that advisors do a better job getting medical information than financial information. Must not deal with financial advisors! This spit of respondents reflects the fact that some companies maintain that 20 to 40% of applications come in to the head office incomplete. What is missing is something from the mundane and trivial to the must have and a showstopper if left out. All would unanimously say this is a “marketing” or “distribution” department problem not an underwriting problem but it is the bad old underwriter who is blamed for asking for the complete answers. Yes we need to know if they had cancer or not and when and where. Da!

How do you judge an underwriter or for that matter an underwriting department? There are two components to the job. One is the quality of the decision. Is the case a standard risk based on best judgment or is there a need for actions like declining or rating the risk? Getting that right is not easy sometimes as there is a lot of grey around the risk selection process (the variables in health are amazingly huge). Make a rare error or exception and it is built into the price but make either too large an exception or too many exceptions and errors and the company will suffer financially (the financial burden of the errors though is often so far off it is hard to rally enough support for quality now because good quality costs money to accomplish). The respondents were almost, but not quite, unanimous in their believe that speed of issue is not the best measure of the underwriters but rather it is quality of their work. Only 4 of 69 respondents thought speed was the best measure. It is also notable that it was 4 underwriters in the 5 plus years of experienced decision making that opted for speed (age does make you faster and perhaps you forget that subconsciously you are worried about quality).

There has been a debate over the last few years as products and the fanciful sales concepts spread (how to make insurance not look like insurance is an art form). Those who sell our industry’s products swear the underwriter has no idea what the product is all about and thus have no right to underwrite it. The survey results show that 45 of 68 respondents believe the underwriter knows the product better than the advisor. There is a funny comment added to one of these answers which was “but that is not saying much!” That is a reflection of the fact the products or the concept is so complex no one understands what it can do or suppose to do. Glad the consumer is smarter than all of us as they must know the product since they buy it.

Over the last five years the reinsurer has been much maligned for causing too much angst amongst underwriters and in turn the distribution networks. We are blamed for everything from poor time service and declination of policies to global warming (the hot air thing). Okay here was the opportunity to ask in a confidential setting “Do reinsurers help with insurers’ quality and time service?” Of the 65 respondents to this question 60.5 said yes! The half a respondent comes from the fact that he/she thought that reinsurers help with quality but not time service. Was that their answer because it was a reinsurer asking the question? Was that their answer because they truly believe it? I like the latter.

Was the exercise worth doing? Absolutely since it in some ways confirmed my own opinions of where the underwriters were in their thinking these days and in other ways worried me that not much has changed in perception of the trust issue. We still have a lot of work to do on the “forthright” part and if we can get that number up to well over 80% across the board I am sure the quality of information will improve making the whole process faster — everybody then wins.

Written by

Ross A. Morton

2007-02-01

Steve made some very good points about the time available to make a good impression on an underwriter, which may mean the difference between standard and decline (okay so the difference may only be standard to +50 extra mortality). Any reader can tell Steve’s insight into how insurers work comes from his fundamental training as an underwriter. Unfortunately he left that profession for the more financially rewarding world of sales.

I would like to bring Steve’s numbers up to date since the cozy environment of underwriting as perceived by the hard working financial planner/broker has changed somewhat. As we enter the year 2000 underwriters work about 200 days in a year (the balance go to training, bathroom breaks, exotic seminars and conferences, holidays, weekends occasionally, long lunch hours, and psychic leave of absences, etc). Being less than generous they toil for about 8 solid hours per day and each of those hours has 60 minutes. That culminates in 96000 minutes of extreme pressure filled minutes to handle the proverbial “X” number of new applications. In Steve’s days of underwriting the net number was the same but the conspicuous consumption was more impeding to work day frustration.

Companies today have different expectations for number of cases per underwriter per year or per day. The higher the premium and/or sum assured the lower the expectation. Complex joint lives written for estate protection require more time than the mortgage protection policy for a small townhouse. Therefore in Canada we have underwriters who have a yearly case load of 1000 and some who have a caseload of 4000. Lots of the former but no examples of the latter comes to mine (more reassurance on former than latter).

In the case of the 1000 new cases per underwriter a case gets 96 minutes on average in the focus of the underwriter. That is lots of time to read financial statements for the past five years, six attending physicians statements, two medicals, one treadmill ECG, two laboratory test results, and the occasional well written descriptive letter from the broker. A little over an hour and one half to pass judgement on what could be the culmination of 12 months of effort by the broker. Less than one sixth of a working day to say yea or nee to the brokers best customer and many mortgage payments. That’s $60.94 plus burden rate to be forever classed as an obstructionist or a real team player.

In the other extreme of 4000 cases per year we have 24 minutes per case, less than one half hour, less than $20.32 per case or not much time at all.

Automation is helping move many cases through the system. If the broker/agent has properly and completely filled in the application and the person reviewing or inputting to a machine makes no error the decision is made in nanoseconds.

Steve the 7 and ½ has to be updated unless you count the cases screened by machine or simplified issue. The point however remains the same regardless of perspective. The very first impression can make or break a potential policy application. Just think how complicated and outrageously convoluted it gets when that same underwriter has to use some of their 96 minutes to arrange for many reinsurance underwriters to grasp what the sale is for and agree that the case is a standard risk!

Being tone deaf and absolutely perplexed at the mere sight of a sheet of music I have often found myself on the wrong hymn but never in the wrong hymnbook. As I sang my heart out, those around me stared in disbelieve that anyone could be so terrible at something as simple as singing along with the old favorite hymns. “Was he being an obstinate child?” or “If he wants to desecrate the sanctity of the church he is certainly accomplishing that mission.” Were two statements heard as I moved from youth to adult.

We are all taught out of certain books. The books can be works of literature or snippets of wisdom passed from elder to youth. The wonder of our industry is that there remains today a dual set of tablets that were obviously carried down from the hill to two different audiences. The one set of commandments stated in fewer than 10 points that “Thou shalt get out there and sell for all your worth”; “Whatever the premium you can coax from the applicant justifies whatever corresponding sum assured that generates”; and “Financial justification is a euphemism for seeing how big a cheque the applicant can write without bouncing”.

The second set of commandments numbered thousands and fell under subheadings like lifestyle, occupation, aviation, avocation, medical, nonmedical and financial. The subheading financial struggled for years (since 1938 at least) for meaty rules of conduct that succinctly categorized the amount of insurance that should be in force on a person. In 1938 at a Home Office Life Underwriters Association annual meeting a speaker as an example (possibly grabbed out of the air or was it indeed inscribed on the original stone but overlooked?) used the number 5 as a multiple times salary that gives the amount of maximum insurance on a keyman. Other rules emerged in years to follow as court cases and insurable interest and financial justification questions sent underwriters back to the stones for inspiration and carved in stone rules.

The ten times salary for personal insurance, common right up to the 70’s, was replaced by multiples that varied by age ranging from 10 times at young ages to 5 times at elderly ages. In the prime earning years, which was defined differently for every company, the multiple may have been 25 times. With business insurance the keyman rule more or less survived at 5 until the advent of Internet stocks and stock options. Now we just guess at what the keyperson is worth to the budding enterprise, all the while praying it is a legitimate venture and the numbers are not grossly inflated by speculators. The decades have seen the original stone tablets edited and enlarged as underwriters have been forced into responding to demands of regulators, legislators, Boards and CEO’s to “make sure we are never as a company in the press or courts for issuing too much insurance and it becomes “the motive for murder”. See the history of insurance in Canada and USA for cases like Demeter, Mullendore, Johnson, Smith, et al.

What we have as we end the 20th century is the underwriter being told to hold the line on overinsurance and speculation by staying as close to the old axiom of “No one should be worth more dead than alive!” At the same precise time the financial adviser team is being told to sell as much as you can. Do not worry about the amount on some of the modern super plans that use creativity to effectively create wealth to the point sales now target doubling the financially well off estate with something as inevitable as death. The underwriter says the sum assured according to its company’s rules is $X while the marketing department encourages $2X+$Y. Illustration systems can paint a picture of an after death (perhaps even near death) estate that is hundreds of millions; half of which was for protection of existing real estate issues while the other half is because everyone would like their offspring to have twice as much just to remember the deceased was a magnanimous person.

Recently a small group of wise underwriters joined together via teleconferencing to listen to an even wiser brokerage owner and financial team describe today’s products and how to utilize them to protect estate and increase estate. The underwriting group was eager to find out how to understand where the amounts were coming from and how to justify changing the age-old rules. The brokerage team wanted to impress upon the underwriters the background to rid the industry of financial declines because some underwriter said no. The “no” was being portrayed as the only answer forthcoming from the reinsurers. The presentation was very well done, informal yet pointed, and had a sincerity to it that made the underwriters sympathetic.

The conclusion reached was that the insurance companies must rid their offices of two hymnbooks and replace them with a text devoid of any reference to financial underwriting. If the senior officers and their boards want to throw the financial underwriting premises out the door and remove the mandate that underwriters must purge the files that represent overinsurance (using the aforementioned tables or multiples) and “worth more dead than alive” it is their prerogative. It would make underwriting easier, improve relations between producer and underwriter and add far more premium dollars to the top line.

As it stands today to counter pressure from sales underwriters are inventing new rules or as some would say “we are being told of the new rules by senior sales officers”. One such rule recently discussed and perhaps instituted was that for personal insurance a person should be allowed up to the total of 16 times gross yearly income plus 6 times net worth plus $1,000,000. The latter amount is strictly to add a liberal sizzle to the formula! I think this latest formula has about the same impact as not doing any financial underwriting but allows the underwriter the satisfaction of reading 723 pages of financial evidence.

Copies of this revised hymnbook are available somewhere but I am not sure if they are only available in brown bags and to be used secretly away from the eyes of the operating officers. Those officers still want to make sure they are not knowingly allowing their money to be the reward for murder — the real dollar cost pales in comparison to the adverse publicity.

I am not a fan of Stephen King’s writings but my children are avid readers and movie goers for all King’s creations. Actually they are hardly children anymore as the youngest is now 18 years and 8 months old. Thus I wrote the references to King’s writings out o respect for my children’s tastes in literature and movies. It is hard to escape the public relations when either book or movie hits the streets. I do like horror movies but not his.

The distance between the agent and the head office underwriter is probably greatest when the issue is financial underwriting. Then Lucidity fades as the sun dies. Long, deep shadows of mistrust and deception sweep over a barren landscape. It’s a setting created by the Master of Horror, Stephen King, where one can never be sure who or how many will pay the ultimate price before the tale is told.

In this morbid setting, the head office underwriter talks in terms of theory and the agent talks in terms of reality, all the makings for a macabre sequence of events. As the underwriter delves menacingly (in the eyes of the agent) into the file, the agent becomes nauseous with despair (in the eyes of the underwriter). The slithering tentacles of the underwriter entwine the case as it attacks with more and more vile questions and bone-crushing requests. The crafty, devious answers of the agent are snarled from between barred fangs as it fights to protect its position like some cornered mongrel.

Too horrible for even Stephen King, you say? Perhaps. But versions not much tamer than this abound in our industry today. Is there an answer to the needs of both these parties? In a conventional sense the answer is probably a rapid and off –hand “No!”, but in an unconventional sense the concerted efforts of both could accomplish what pages of aptly phrased words cannot.

Many, most, all underwriters have heard in their first weeks on the job that agents were troublesome creatures, loath to give enough details, all-in-all general nuisances to be scarcely tolerated. Only a select few underwriters have been privileged to have been indoctrinated or re-oriented by a truly cognizant tutor to the simple truth that without the production of the persistent agent over many a table, the job of underwriter would not exist. Rather, the horror stories that surround underwriters during their initiation would warp the rational thinking of any mortal. Every senior underwriting officer has a cache of stories to enthrall the rookie and set the record straight – it’s underwriting versus agent!

To imply this verbal persecution is a one-way street is childish at best since there is no shortage of agents in our industry that have tales of underwriting malice and misbehavior. What decent agents gathering would be complete without the tale of a malicious underwriter declining a case for absolutely no good reason. The facts relayed by the agent to the awaiting audience maybe embellished beyond reason, but to the eager and receptive audience, it is The Truth. It is a rare occasion when the ‘risk selector’ in the sedate safety of a head office is lauded for playing a complementary role in expediting a difficult policy on time and at standard rates.

For years these issues have not changed nor have the perceptions (that wonderful words so quickly called upon when the facts are somewhat thin and do not make the story as engrossing to the reader). These perceptions die hard and make dealing in reality difficult. Will there ever be harmonious agreement on all large cases of $1,000,000 or more? Richard and David and Joe and Jim would not expect this eventuality since they would be the first to acknowledge that at times an agent’s enthusiasm has gone a little overboard in using a projected income or anticipated tax problem. The delicacy arises in trying to guarantee that the underwriter will not go above and beyond the role of the risk classifier and, in effect, throw out the agent with the case or vice versa.

There is absolutely no substitute for the one-on-one relationship between the underwriter and the producer. The underwriter must honestly act as the assistant to the agent while selecting risks that meet the company’s profile of acceptability. Although this may seem trivial as a statement, in the real world of real applications for insurance, it is not.

There is no magic in getting the agent and underwriter in synchronized behavior if both have or have had wise mentors at their side. The mentors can nurture the best solution by teaching the need for prudent decision making taken with a large dollop of common sense. A good senior underwriter with many ears of worldly exposure can instill the desire in another underwriter to get the case issued on some basis that makes sense. The knowing counsel of a seasoned agent who has learned the ways around head office mine fields can assist another agent in preparing the case to assure quick issue for the right amount, the first time around.

To the underwriters who can teach and the agents who can explain, the industry should be indebted. To the self-righteous antagonists in both camps, may you see that your perceptions are wrong and that none should be condemned to dwell in the dark worlds of Stephen King. An exchange of views will always create what accusations can never accomplish – a concerted and understanding effort for the consumer that benefits us all.

There were 49 forestry-related fatalities in British Columbia in 2005. I am not sure of how many forestry people there are out there so it is hard for me to say if that death statistic warrants my concern as a risk taker. There was a time in my early days as a life insurance risk taker that I would rate “loggers” who worked west of the great divide (mainly B.C.) but take those east of the same magical line through the mountains at standard rates. My curiosity then discovered that “loggers” often migrate to where the trees to be cut are and thus our actions as risk takers were deemed foolish. Soon the life insurance industry backed away from charging anything extra and accepted all “loggers” at standard premium rates. The exception remains for those who carry dynamite and such explosives and fiddle with their wicks. Risk takers listened to the criticism and did change. Looking back and forward I am still not sure how many of those forestry related deaths were “loggers” versus “tree huggers” whose amorous enrapture with a tree was at the wrong time.

Where is Ross going with his forestry information? Yes my guidance counsellor in high school suggested I was best suited to either a job on a farm or in the woods but that is not what I am going to write about today. I use the forestry statistic as a mere example of how we as risk takers sometimes over react to numbers since we are in the numbers game — spread my risk and know my risk being the mantra of a good insurer. Today’s issue is not with “loggers” but with “travellers”.

The whole issue of what is a risk beyond the normal or average for a Canadian proposed insured when they travel beyond our borders of Canada has confused and irritated both consumer and the distributor/advisor. Tragic and unforeseen events of the past six years lead to perhaps an irrational overreaction to anyone travelling to other than Niagara Falls or Banff. Countries and cities, once seen as either great historical places of interest or idyllic places to “unwind” were thrust on to lists which insurers used to deny coverage or add an extra charge — somewhat like the overreaction to loggers on one side of a line from north to south through the picturesque Rockies. Were we reacting to reams of statistics? No. We were reacting to the need to make sure we understood the risk presented and thus protect the imbedded value of our insurance industry. Caution with risk has always been the way life insurers insure they are around to pay claims some 50, 60 or 90 years after policy issue — name another product with such a long commitment.

What fuelled the industry’s reaction was the overwhelming number of applications where the distributor/advisor would add the statement to the application either in note or letter saying roughly “The proposed insured is leaving for ________ (fill in any place of high concern) in 6 days and needs the insurance issued prior to departure”. Being cynical at times the industry thought “Sure, and this is all part of a routine estate analysis and it is mere coincidence the insurance is needed right now”. Would the policy lapse immediately upon return? Where has the application and estate analysis been all these years? Would the oil field worker going to Iran or Nigeria be buying the insurance if they were going to Alberta? If the oil field worker is making a huge difference in pay because of the danger element why not share that risk premium with the insurer? The cynical questions were many but not voiced as we had to assume that it was mere coincidence the insurance application was just before the proposed insured was getting on a jet a plane.

As time progressed the risk takers became more confident that we could assume that most travellers for holidays or business of under say eight weeks to most global sites were presenting us with no or minimal extra risk. Now, some four years after the issue percolated to the top of the chart of why insurers are not responsible, it has plummeted down on the list of annoyances. Did we get overwhelmed with statistical data that gave us such assurances we could consider these risks standard? Not that I saw. We did come to appreciate Canadians were not dying on these trips in numbers that skewed our mortality. Regrettably the industry to my knowledge never did collate all its death payments where the death occurred overseas. A simple collation of all insured deaths over the last 3 to 4 years by age, sex, country and cause of death would have been a great statistic. Who should have done this? Well I can think of many either singularly or jointly — Canadian Institute of Underwriters. Canadian Institute of Actuaries, Canadian Life and Health Insurers Association, Advocis, LIMRA, etc. Even I could have or perhaps should have pleaded for the data and done the collation but I did not (pick from excuse one through twenty).

At a recent Underwriters Association of Toronto evening I was giving a talk on the realities of underwriting today which by necessity had to include my opinions on foreign travel cases. During that talk I threw out the challenge to the group that they should get the statistics on foreign deaths and come up with a unified approach to foreign travel and residency. When I threw this challenge in the past to numerous groups over the past two years it fell on deaf ears. This time though one underwriter took up the challenge and dug up some available statistics that are enlightening even if they are not fully reliable.

Beth Gibson, an experienced senior underwriter at Desjardins Financial, took up my challenge and found some statistics. What she presented me with was the statistics from the federal government on the number of deaths per country of Canadians (Canadian citizens who may or may not have been Canadian residents nor insurance contract holders). The cause of death and the overall accuracy of the numbers could be challenged perhaps but they are numbers from which we can better surmise the risk than just going on panic’s conjecture. Was I surprised at the numbers? Absolutely. Given the cause of deaths listed (murder/suicide, natural and accident) one wonders where “killed in a suicide bombing” fits. I also wonder if a country truly investigates the cause of death to make sure it is accurate. All the scepticism aside these were telling numbers. They make me feel better as a risk taker that our current stance is justifiable but needs some ongoing sophisticated study.

In the period 2002-4 inclusively there were 2142 Canadian deaths abroad. Natural deaths accounted for 1533 (although I am suspicious of natural deaths in 10 year olds but at least I will assume it was not a violent death). Accidents accounted for 412 deaths (nowhere does it say if it was the accidental stepping on a land mine or shopping in the wrong part of town at bomb time). There were 99 suicides (having a bad travel day could prompt that action). Murders came in at 98 ( a pretty clear statistic).

The largest number of murder/suicides occurred in USA (29) with Mexico next at 16 and then China at 13. Given my perception of the number of Canadians who travel there these numbers do not surprise me. None of them make me want to rate travellers to any of the three countries. One third plus of the Mexican deaths were older Canadians in the 66 plus category. Dying on a sunny beach outweighs dying in a snow drift. Now on the other hand there were 9 deaths in Iraq and 8 of those were murder/suicide. I still want to decline travellers to Iraq! As I peruse the list of countries and causes of death I note Israel had 11 Canadians die there of which none were from murder/suicide and four of the 11 were on older travellers 66 years of age or over. Similarly the numbers for Germany surprised me but will have no impact on my risk taking price. There were 139 deaths in Germany of which only one was from murder/suicide but 98 of them were on lives over 66! Talk about going home to die. Similarly 49 of 66 Greek deaths were in the older category and there were no violent deaths. Cuba remains high on my vacation list even with knowledge that there were 68 deaths there but none from violent causes.

Other surprises, but none significant to change my perception of risks out there, were Thailand’s 58 deaths of which 7 were murder/suicide, Vietnam’s 87 deaths of which 61 were over 66 years of age and only one violent death, and 2 of Saudi Arabia’s 18 deaths were on young children.

Are we doing this thing called risk appraisal and pricing right today? I think we are pretty close but to make me feel better and the actuaries’ price better we would still need to know how many Canadians travel abroad to each of these countries, plus study the deaths we as insurers have had over the past few years where location of death is outside Canada. In the meantime thanks Beth for doing some digging which is more than any of the rest of our industry (including me) did and sharing it with me. I feel better now that what I do is not perfect but close and still prudent.

Beth Gibson and her statistics can be reached at bgibson@dfs.ca.

Thanks again Beth for taking the time and caring.

Written by

Ross A. Morton

2007-02-02

Underwriters as a profession were under fire as they became more and more in the forefront of broker complaints. Brokers were everywhere and their demands were seen as reasonable by marketing types and unreasonable by underwriters and their leaders. I got into a bit of a controversy (not my first time) by suggesting that education and medical knowledge did not represent 100% of what constitutes a great underwriter. Delivering a message and being flexible were attributes most needed to the medically competent. Underwriting has never been an exact science and with pricing becoming less of an exact science (preferred and the guesses surrounding what price for what preferred criteria were growing) as well as the need to comprehend the complete proposed insured and sell a decision was foremost in skill set demands.

Isn’t it strange that now that higher employment in the life insurance business is escaping the stranglehold of actuaries, the banks are hiring big company actuaries to start their life operations? Just as perplexing is the new trend to hire those endowed with banking experience to run life companies. But I will not critically analyze more informed decisions than mine; rather let’s look at hiring the senior home office underwriter – a subject upon which I can speak with more authority.

Hiring a home office underwriter may first appear to be a tough task. In my business (no, not the banking business), the delicate egos in the field must be catered to by meek minions in head office. Thus, the astute discharge of the demanding task of hiring a home office underwriter suggests that need for Solomonic Skills.

Ask a life broker who to hire and he responds, “The most liberal, of course”. By definition, this is the underwriter who has a strong bias to the word “yes” and needs trifocals. Ask the same questions to the pricing actuary who sets those ungodly low prices for the product and this chameleon of the numbers world screams for the most conservative and restrained of persons.

As a means of placating their desire to be part of the recruiting process, I once asked some field types to suggest what they deemed the most cherished qualities of a senior underwriter. This was not an act of condescending chicanery, but rather a sincere attempt to let those who depend on good underwriters have concrete input. They told me.

After I overcame the palpitations and nausea, I asked for a list of candidates, this time ones that they had actually encountered over the years that would make solid contributions to building teamwork between field and home office. Their responses didn’t have me exactly bouncing in bliss, but at least the nausea stopped. Unfortunately, it turned out that those on this list shared a universal willingness to deal and they all had demeanors who knew how to treat a god – sorry, I mean a broker.

From my own point of view, the two qualities that I would look for in selecting a senior underwriter are expertise in risk evaluation and communication skills.

My critics may well challenge me on the first. With the growing use of computers in the underwriting process, why is expertise in risk evaluation still so important? It’s true that the new expert systems now being offered have superb capabilities to transfer data and eliminate the underwriting drudgery of running your finder down a check list. Indeed, jet issue has become computer issue.

Underwriting logic is now being transferred to computers so a broker in the field can follow the underwriting instructions on the screen and key in the underwriting information. If the client indicates that he is diabetic, the computer program can adapt to this information and pop up additional questions on the screen for the broker to ask. All the broker has to do now is return to the office with his electronic application on disk where it can be loaded into the mainframe for evaluation. (Note: Here we are in 2004 and all that software that contains the rules of the best and most accommodating underwriters still sits idly by. I grossly underestimated the tardiness with which insurers would embrace technology in underwriting and how insurance leadership would continue the drudgery of simple case underwriting. No wonder underwriters are lulled into a trance and then make mistakes on the case that really did need their attention.)

But, and it’s a big but, here’s where the problems begin for the foreseeable future. Unfortunately, the penmanship of most doctors is o bad that no computer scans can hope to load information directly from an Attending Physician’s Statement. Therefore, a senior underwriter or a medical doctor is required to key in the results of an APS into the computer. At this time, it’s faster for a good senior underwriter to make the decisions than it is to key the information and wait for the computer to provide the answers.

So much for competence in risk evaluation. As for communication skills, the reader must surely concede that there are times a question must be asked or a “no” delivered. There actually are recorded cases where the broker impeded and confused the underwriter. I recall a true situation that happened just west of Regina. An application arrived unannounced one day to the desk of an underwriter who had a reputation of being as brazen as any broker. The case was large. The financial history was non-existent.

The underwriter asked in a routine fashion for more detail. The broker being well-trained and versed in the art of diplomacy and tact said to the underwriter, “Cjwhdg lkjkd kd lkjfldk dswq,” or in English, “You’re stupid – there’s a very valid reason for insurance.”

It is best now that I move this story past a few choice pieces of dramatic prose and conclude with the broker’s enlightening statement, “Don’t you know who the applicant is and where the money is coming from?” Not to be outdone by the broker, the underwriter used her barroom verbiage to state, “KlKll ioe iopp laes iitmvc,” or in polite broker English, “I have no idea and would cherish the moment you told me.”

After senior representatives from both camps endangered there well-being by interceding the case reached conclusion. A happy conclusion in fact arrived three months later when the broker educated the underwriter with the tidbit that the applicant was the son of one of the wealthiest men in Alberta and the sole heir to all the money. The broker’s argument was that the underwriter should know all the rich people in Canada (and their heirs) by name.

With the demise of some life insurance providers as predicted by the life industry (always first with the news), there should be more than sufficient talent around in the next few years to fill all remaining senior underwriting positions. With further computer automation of the risk selection process, only the exceptional skilled and verbally competent senior underwriter will survive. Hiring a good one will be easy; they’ll be the only kind left.