The Enemy Within: The Theft of Competency and Its Price Tag

Hank George, FALU, CLU, FLMI

Who is THE ENEMY WITHIN?

“He” has no one name, no essential gender.

What “he” has is the incredibly untimely capacity to rapaciously rob your company of its future…and compelling evidence suggests this is indeed what is coming to pass across the global life and health industry.

This essay will explore the pathogenesis of “his” ways and the manifold prices your company will pay for mortgaging its tomorrows by vogue expediency.

Reality and Unreality

No informed person would seriously disagree with the premise that expense control is one of the priorities of the 21st century life and health insurance industry. Broadly speaking, the merit of this is a given. Therefore, its importance is postulated here, lest any reader be disposed to conclude that this author is beaming in from Andromedia, unconscious of the realities of our terran industry!

This on the record, it must be acknowledged that the energized pursuit of expense control has been disposed to focus with fierce intensity on “low-hanging fruit.” That is to say, on dramatically reducing (actually, slashing and burning) outlays for ostensibly logical “targets.”

THE EASY WAY to glory, isn’t it? Don’t stick a naked toe into the certain political maelstrom of identifying wooden Indians posing as senior executives. Don’t challenge complex multifocal ineptitudes of the system and argue for substantive change. Go for quick kills. Get your name on the corporate marquee lest your own tenure be rudely foreshortened!

Among the most visibly delicious targets in the prevailing “fruit-picking” frenzy are networking travel and continuing education.

Networking - a/k/a appropriate business- travel has been denounced as an abuse-ridden “perk.”

Continuing education has drawn the damning label of “unaffordable luxury.”

Both statements can be true in certain contexts.

Neither, however, has been held in sensible restraint as the forest melds with the trees and all that is seen is the green.

Green fads to barrenness at a season’s change and, thus, every artful practitioner of fiscal prudence needs to understand that there are no fewer than seven reasons – I shall refer to them as “domains of jeopardy” – why some brutal cutbacks will come full circle as dirges for those who have myopically imposed them.

Seven Domains of Jeopardy

Reinsurer Relationships

In the life industry, most carriers are heavily leveraged by quota share reinsurance arrangements. Very favorable pricing has been the rule in recent years and insurers have capitalized on this.

The scene changes as we speak.

Concerns for excessive and often imprudent exceptions - not to mention anathematic “business decisions” - have rightlypushed reinsurers to escalate the number and intensity of client audits. Unfavorable audit findings have forced reinsurers to raise prices, to reconfigure treaty language (in sometimes ominous ways that should incited appropriate concern among direct writers) and to terminate (too few, perhaps?) reinsurance relationships.

Direct writers who seek to restore the confidence of their reinsurers will not get very far by stripping to the bone the very essential elements underpinning their capacity to be worthy partners. How are they well served by a cohort of underwriters who have not learned much of anything for years? Wildcat budget cutting has taken a staggering toll on underwriters’ core competency, which one would define as being capable of underwriting new business such that dreams of mortality gains as a (the?) primary source of profitability become a sustained reality.

The pathology unmasked in these frenetic reinsurance audits goes beyond merely making sometimes prudent; sometimes outrageous concessions to producer demands. It unmasks the sober reality that a decade of ignoring education has deconstructed the capability of many home office underwriters to make consistently sound decisions.

Until this issue is fundamentally and effectively addressed, the cycle of bad audits, higher prices and lost treaties must continue.

Expanded Retention and the Profitability of Mortality Gains

With higher reinsurance pricing, direct writers must consider expanding their retention….a step that works ONLY if they have a reasonable expectation of realizing profits from potential mortality gains.

Once again, the Achilles’ heel of ignoring education and industry interface rears its underappreciated head.

You cannot enjoy significant and sustained mortality gains if your underwriters lack the knowledge needed to synthesize profit from prudently competitive offers.

And there is evidence aplenty that the prevalence of truly topnotch underwriters has been nosediving faster than a rock in a pond.
How many retired underwriters, with diffuse skill atrophy, have nevertheless been called from fishing holes and golf courses to band-aid lesions that, alas, are not self-healing?

Fact: most new business operations have miles to go before they rest contentedly in the bosom of mortality-driven profitability.

Don't Underestimate the Brokers

It would be an unthinkable understatement to say that the brokerage community has (merely) gotten better with age!

This underwriter has seen the magnitude of their sophistication. They know underwriting…cold. They have YOU spread-sheeted! They know how to exploit each weaknesses of each new business outlet…as in, which companies make the “best” offers on diabetes; which show no demonstrated comprehension of financial underwriting, which capitulate soonest under pressure, and so on…

…and, so on.

And it is nothing short of logical that this would be so.

To make matters worse – depending, of course, on one’s perspective – the leading brokerage agencies have also pulled off a bit of a coup. They have recruited some of the best risk appraisers from direct companies, putting them to work as their “advocates” on the biggest., most complex, most commission-ridden cases.

Ten years ago, all one had to do to stave off aggressive producer overtures on cases was to hold one’s ground against verbal onslaughts and threats of lost future business. Your adversary, though sometimes bellicose and well connected, was nonetheless essentially devoid of any understanding of what it is that underwriters do, and, thus, how to argue their cause on non-emotional grounds.

We underwriters refer nostalgically to this period as “the so-so old days!”

Now, that voice on the other end of the phone line is apt to be coming from an accomplished professional peer who knows more than your best home office underwriter! This caller can go for the jugular, tying his less proficient adversary in knots.

Get this fixed or get out the Maalox.

You’ll need it, after swallowing that which your outclassed underwriters will be served up by these pros.

What is sad is that it doesn’t have to be this way.

But, if ransacking meager education budgets, keeping underwriters perpetually tethered in millstonesque cubicles and relying on depleted knowledge bases rife with mold and mildew sum up your prevailing modus operandi, you are institutionalizing your own downfall.

SARBANES-OXLEY

The industry is still sorting out the complexities here. Implications within implications. All graphically unclear (as is the nature of things born of politicking).

One S-O issue comes to mind: the caliber of underwriting decision-making, as reflected in file documentation.

We live and die by what we do and what we don’t do. The operative “do” of our times is to race through files at the behest of brokers, and others, and ignore the fundamentals that, to use the vernacular, cover our collectives arses.

In court, poor underwriting file documentation, defined as that which impedes one’s tracking of the underwriter’s reasoning (or the lack thereof) - and most urgently so when said (alleged) reasoning deviates one iota from the resident gospel - portends grievously doomed uphill battles.

The same is true when laboring to respond to incisive bullets contention in reinsurer audits.

You can insist on documentation until you are oxygen-depleted. Nevertheless, if the reasoning process that is documented is flawed because it is driven by obsolete information, you may well wish nothing had been written down at all!

Ask your Chief Compliance Officer and your Chief Counsel how at ease they are with the status quo in the cold light of Sarbanes-Oxley.

“Value-Added” IS D-E-A-D

It wasn’t long ago that direct writers were bathed in luxurious “free” education and training, lavished by reinsurers (and some service providers).

Many would agree that, among the reinsurers in those days, Lincoln Re was the most prolific of providers of what was known affectionately as “value-added.”

Lincoln Re, of course, is gone now.

It is a sign of the times that reinsurers and service providers – under every bit as much expense-control pressure as direct writers - have had to cut steeply into what they can affordably tender up for clients.

You can’t have it both ways: commoditized prices and generous menus of “bells and whistles.”

Dismayingly, given the interval since this process began, these realities have as yet failed to “sink in.”

Reality check: the barren moonscape of all-but-extinct “freebies” is unlikely to change any time soon.

You are on your own, like never before. And you’d better come to grips with the fact that because it was once free doesn’t therefore make it expendable. Just the opposite, actually, because now all of what remains of the energy of reinsurers is being hyperfocused on your submissions via intellectual electron microscopy!

Dynamic Science

The pace of change in medical science is faster today than at any time before. New insights seem to emerge with numbing rapidity, in every domain of medicine. Many of them change risk implications of prevalent impairments, so you’d think staying current would assume an appropriate level of priority.

Think again.

Four years ago, this underwriter began to write and speak about something called “pulse pressure.” This being the difference between the systolic (higher) and diastolic (lower) number in the blood pressure, as determined by a complex calculation know as subtraction.

If your systolic BP is 140 and your diastolic NP is 90, then your PP (140-90) is 50.

Pulse pressure has profound implications for insurability at older ages. It should change how your underwriters assess BP risks. Now, go look and see, if, four years after the message was sent, and sent, and sent, it has had any impact.

No, eh?

See what I mean?

The company that infuses pulse pressure into its BP underwriting paradigm gains the critical edge.

Care for another dozen examples?

Something has to give here. You cannot de-prioritize knowledge when that knowledge drives profitability.

The odds strongly favor your mortality being the victim of this protracted (since the 90’s!) “oversight.”

Dynamic Industry

Ten years ago, I created several study groups. Their mission was to provide forums for something almost unheard of at the time: the unfettered opportunity to simply talk to one another, to learn, to share – with solemn deference to what is proper and consonant with antitrust concerns - in an environment of peers who share the same issues.

Two groups mushroomed into five, soon six. The health insurance study group has been taken up by LOMA, as has a brand new critical illness study group to be launched in 2006.

The four life groups find the most conscious of direct writers having key person representation one, two…even all four groups; holding on to their seats at these tables with courageous tenacity.

Some members have been held hostage on their desire for study group participation, head-locked by THE ENEMY WITHIN into walking away. In most such scenarios, chief underwriters have been unable (for fear of their jobs, no less) to mount a sufficient counterattack against misguided mandates from bosses who simply have no database to appreciate what they are throwing away.

The enrollment patterns of these study groups reflect pervasive pound-foolish pedantry that prevents the very people who must keep pace with dynamic change, from doing so. As more than a few once-insular carriers have come to appreciate through the study group experience, you MUST keep your finger on the pulse of that which impacts your own industry. Ignorance, black-hole-class knowledge deficits and obsolete thinking extract a huge price in terms of the insurer’s ability to functional competitively and profitably.

Knowledge does not come knocking.

If you don’t weigh in at the cutting edges of information, insight and connectivity, you lose.

A recent survey of technical underwriting issues among 69 representative direct writers exposed the length and breadth of (said graciously) misunderstanding of contemporary reality. Prevalent failures at sorting that which makes contemporary sense from that which paves the road best not taken will most assuredly make their collective presence felt at, fiscally-speaking, the end of the day.

Closing Comments

Has a case has been made to rethink your priorities as regards resource allocation?

Has the blunt urgency of education and interface been adequately clarified such that you might yet throw “dumbing down” into reverse gear?

If not, know that these words are destined to resonate in the hollowness of your bottom line.

THE ENEMY WITHIN forages on your future.

“His” fleeting glories shape your corporate headstone.