Underwriter Audits: 12 Factors to Consider

Hank George, FALU, CLU, FLMI


Underwriter audits are indispensable resources for chief underwriters. While not the only basis for assessing performance, they are the single most significant benchmark where line underwriters are concerned. It would be essentially impossible to manage underwriters without having sufficient insight into their performance on the job.


In my two life underwriting study groups – consisting of a total of over 50 chief insurer and reinsurer underwriters – this subject is invariably on the agenda for discussion. This is largely because there are marked differences in how chief underwriters structure and conduct underwriter audits. 


The purpose of this essay is to identify key factors relating to audits and offer some thoughts related to each of them. There is no “right” vs. “wrong” answer to any of these issues and how they are addressed often differs based on considerations external to the auditing process per se. 


Who should perform underwriter audits?


In some companies, the more experienced underwriters audit the work of their less experienced peers; then, they themselves are audited by the chief underwriter.


I believe this system is inherently flawed. 


Underwriting experience measured in years of service is a deceptively poor benchmark for auditing prowess. Too many underwriters with decades of experience have baggage such as fixed and immutable notions that collide with contemporary best practices. 


As an external auditor, I have seen far too many situations where the most experienced underwriters have systematically passed along bad habits and long-obsolete “knowledge” to junior underwriters. 


For example, in one large company that had introduced teleinterviews with drilldown questions in the year prior to the current audit, great emphasis had been placed (and rightly so) on taking as many actions as possible without resorting to medical records. However, a number of veteran underwriters clung to the notion that this mind-set was fundamentally wrong because it failed to maximize the underwriter’s ability to make the best decision “the way we have always done it.” 


Therefore, as they audited the underwriters’ cases, they considered the decision NOT to get a physician’s report on mild ulcerative colitis or a 3-year-old isolated bout of chest pain to constitute an error in judgment and marked down the underwriters’ performance accordingly. 


In another company, some veteran underwriters held misguided perceptions as to when certain elective tests should be procured. They insisted on over-ordering ECGs and CDT alcohol markers even when sound decisions could be made without these costly add-ons. Thus, when an underwriter took action without ordering these tests in situations where the veteran would have done so, it was construed as a mistake. 


I believe the ideal auditor is a person who specializes in this role. This would be a relatively more experienced underwriter whose own audits have consistently reflected excellent judgment, consonant with the company’s underwriting philosophy. 


By having one auditor, we maximize the consistency of audits and create a perception of fairness in terms of how one underwriter is appraised as compared to his or her peers. 


In order to make it budget-feasible to designate one person as auditor, we can add additional accountabilities including auditing quality of paramedicals; working with vendors, auditing teleinterview drilldowns to optimize the use of the most productive questions, auditing underwriting engine rule sets and business information output…and also have this person oversee the company’s underwriting education efforts. It would also be ideal for this person to maintain a modest case file. 


A fair number of companies have gone over to this approach and reported excellent results.


Should external auditors be used?


Surprisingly, only a handful of the companies in my study groups used external underwriting auditors. 


The advantage of an external auditor comes by way of identifying issues that might not be readily appreciated internally. However, for this to occur, the external auditor must be selected carefully, emphasizing the skills that are most germane to the company. 


For example, the company may do a splendid job of assessing medical underwriting but need help with financial underwriting (not an uncommon scenario in smaller shops). It may also be helpful to get a second opinion on “big picture” issues like file documentation. 


The main drawback to external auditors is the cost. Indeed, this is undoubtedly the driver in many companies’ decisions to forego an outside source of expertise (penny-wise, as they say, is often pound-foolish).



How often should performance audits be conducted?


There is an incredible range of intervals among insurers, ranging literally from once each year to every month! Both of these approaches make no sense, at least in the vast majority of new business operations…for what I hope are obvious reasons. 


In my view, the most suitable general guideline is quarterly performance audits. This is frequent enough to provide considerable insight into how underwriters are doing their work without making the audit process too expensive. 


In some shops, semi-annual audits may suffice, especially if the underwriting staff is fairly veteran and there have not been any undesirable trends in recent audits.


What is the appropriate mix of cases to be audited?


Obviously, you want to review as many aspects of performance as possible. Therefore, you will want to see both currently pending and completed files. I do not think an ideal audit is possible if currently pending cases are excluded. 


When assessing currently-pending cases, it is particularly instructive to see those that have been around longer than the median underwriting time for all cases of a similar type. In other words, if you turn around larger cases in a median of 18 days, you will find a bounty of information by focusing on those still pending more than 3 weeks after initial review. 


I always prefer a mix of completed files, making certain I see a sufficient number that were:


1. Approved as applied for


2. Rated (and, in America, denied preferred status)


2. Declined/postponed


3. Closed files. 


Each subset accommodates different aspects. I also like a goodly portion of more complex and recently handled cases. 


I like to see a mix of medical impairments (which can be ascertained in North America via MIB codes). Underwriters may be unduly liberal in cardiovascular risk assessments and conversely too conservative on cancer cases (this, by the way, is the most prevalent dichotomy in most audits I have done).  



Are reinsurance audits surrogates for external audits?




The focus of reinsurance audits is, by its nature, on issues that matter to the reinsurer. Many times, they will isolate cases where poor judgment was (putatively) used and these may be helpful to the chief underwriter in a performance assessment context. Nevertheless, these are essentially anecdotal in nature.


Many of the most important aspects of audits – which we will discuss further on – are either not a concern to reinsurers or, at least in the case of over-ordering requirements, may be perceived by the reinsurer entirely differently than they would be by the chief underwriter. 


Take what value you can get from reinsurance audits…just understand their inherent limitations and do not pretend that they are a practical substitute for your own audits. 


How important is the ordering of elective requirements?


Underwriter judgment in this domain is likely as important as how well they assess complex impairments. 


The APS (physician’s report, PMR, GPR) is the most expensive and time-consuming routine elective requirement. Aggregating my audit experience, I must conclude that between 25-35% of APS’s ordered by underwriters are unnecessary. It is 5 times more likely that an unneeded one will be ordered than a necessary one ignored!


In North America, we have a rather broad menu of potential elective requirements. They range from inordinately expensive ($750+) and tediously slow treadmill ECGs to motor vehicle records costing a few dollars and obtained instantly. 


I have noticed over-ordering of MD reports, ECGs/treadmills and alcohol markers and under-utilization of hepatitis C, microalbumin and NT-proBNP. 


There is an unfortunate phenomenon operative among a subset of underwriters. It is the ordering of marginally justified, if not flat-out pointless, additional requirements simply to put off the decision-making process…or, even worse, grabbing at straws for some “magic bullet” to get them off the hook for having to rely on sound judgment! 


Undesirable traits in requirement ordering need to be “nipped in the bud” lest they become reinforced or metastasize to others. 


How important is dutifully referring complex medical cases to medical officers?


I served for nearly a decade as a medical officer equivalent. Over that interval, at least 70% of the cases referred to me – or asked about as I conducted “rounds” going from underwriter to underwriter – should have been decided by the underwriter without my help!


One of the most unfortunate consequences of indulging too many referrals is that it reinforces the uploading of the decision-making process to staff personnel when, in fact, this process should rest solely with line underwriters. It is one thing to seek advice on a particular aspect of a complicated medical impairment and quite another to use access to medical officers as a means of avoiding accountability. 


In my audits, I scrutinize these cases carefully, especially on written referrals where the thinking process of the underwriter should (and sometimes actually is!) fully laid out. Indeed, referrals without a recommended resolution of the issue should be returned to the underwriter without comment!


How important is file documentation?


All things considered, this is often the area which receives the least effective attention from auditors. 


When an underwriter makes a decision on a multifactorial case and also when the underwriter renders a final judgment that is not entirely consistent with manual guidelines (or advice from referees), sufficient documentation is essential for the auditor to assess performance, as well as for anyone who may later have to deal with the case due to advisor appeal, reinsurer consternation, early claim, etc.


Poor documentation needs to be addressed on a priority basis and is often one of the most glaring deficiencies I find (but, then, I prioritize for looking!)


There is another insidious aspect of file documentation, one that has become all the more urgent in this age of compliance departments. I recently saw a file where an underwriter made the following entry:


“Probably should have been a table 2 but I took at standard because the advisor needed it to qualify for the MDRT [Million Dollar Round Table].”


Just imagine the consequences inherent in such a statement if it is found on a contested claim during the discovery process by the plaintiff’s attorney, who then says sarcastically:


“I thought you said during the deposition you do not make blatant exceptions deviating from your underwriting ‘rules’!”


Bottom line: file documentation needs to be reviewed from various perspectives and is a high-priority component of every underwriter audit. 


How important is service to the field force (advisors)?


This is another vital aspect of the underwriter’s daily work that is sometimes insufficiently addressed on performance evaluations. 


Consider that the CEO’s first priority is usually maximizing premium income (sales) and the Chief Marketing Officer’s first priority – especially these days in the USA – is retaining advisors while recruiting more of them, and it comes as no surprise that how the underwriter relates to the field force is a matter of enormous importance.


You often have to do a little digging to determine whether producers’ questions and requests were responded to in both an adequate and time sensitive manner. 


It is worth the effort. 


Every inquiry should be responded to.


Calls to explain adverse action should not be executed at times when the underwriter expects the producer to be out of the office!


Discussions with advisors should be prudently documented. 


Selling underwriters on the importance of this aspect of their work is not all that difficult. Just relate one or two horror stories about what happened when the leading producer called the CEO and aired out a legitimate grievance regarding the failings of an underwriter in this context; to wit: If you want years of highly competent hard work to go for naught in terms of prospects for promotion, keep it up! 


I have seen more underwriting careers crash and burn over matters directly related to conflicts with advisors than because of poor decision-making. 


Who should give feedback from audits?


The chief underwriter…unless it is absolutely impossible for a darned good reason!


Some companies have underwriting supervisors and other middle managers that have little or no background in case underwriting. These individuals should not give audit feedback as a rule, and NEVER when the feedback is negative. 


It is bad enough that so many companies buy in to the notion that you do not have know anything about underwriting to oversee underwriting professionals. Allowing these individuals to give negative feedback is tantamount to throwing another log on the fire.


The tone of the review should be positive and constructive, unless it is a mere pre-termination formality. 


I do not believe that underwriters should be told where they “rank” among their peers. Pitting people off against one another is a surefire way to create morale problems and intradepartmental conflict. I realize that some corporations resort to this cheap trick; a sad reality which makes it neither prudent nor productive. 


Should audits be presented as learning experiences?




Except in the most egregious circumstances, audits are about honing and fine-tuning skills. The underwriter is learning from his or her mistakes and becoming a better underwriter for having done so. 


Framing the audit review as a learning experience accentuates the positive aspect and puts the underwriter’s mind at ease. It is the approach lest likely to make either party uncomfortable or lead to an escalation of tension. 


Some years ago, the chief underwriter of a 15-some underwriting shop took a novel step to reinforce the notion that audits are positive learning experiences. She gave me the audit reports on her underwriters and asked me to prepare a presentation addressing all of the issues that surfaced in the audits. Everything from heart murmurs and relationships between lab test results to insurable interest and – as ever – the concept of CONTEXT and connecting the dots! 


The presentation, lasting 3 hours with the floor open for discussion at all times, maximized the impact of audit findings in terms of changing how underwriters approached the issues at hand. It also reinforced essential concepts that we often do not mull over on a day-to-day basis. 


Which is the more significant marker of underwriter performance: productivity or quality?


This just happens to be one of the more contentious issues of the day in underwriting management. 


Historically, quality was the driver and quantity of work was only a secondary consideration, coming to bear in a tiny portion of audits. 


Today, there are those who hold that productivity should matter more than quality of underwriting in terms of measuring performance and, with that, consideration for salary increases, bonuses and technical position promotion. 


In my experience, most chief underwriters and underwriting supervisors holding to this notion have come from two cohorts: 


Those who have never underwritten a case

Those who have been browbeaten into submission by bean counters and thus lack the will to stand up for what they know in their hearts is right.


It is absurd to value productivity more than quality. It invites the worst kind of invasive antiselection: hastily approving cases to keep one’s volume up. 


Should productivity and quality have equal weight?


This is more problematic. 


Which of the following underwriters would you rather have in your shop or be disposed to hire?


Underwriter A has a track record of top 20% productivity and bottom 40% quality.


Underwriter B has a track record of bottom 40% productivity and top 20% quality.


If you chose underwriter A and I were your boss, I would find a new role for you in the company!


The only saving grace here is that most high quality underwriters are also highly productive underwriters…because a healthy portion of quality underwriting involves being able to efficiently distinguish the forest from the trees as well as not ordering unnecessary requirements. 


At the end of the day, year, or sales contest, the mission of the underwriter is to make the best decision possible based on the information at hand. All other considerations, important as they are, take a back seat to this defining accountability. 


No doubt many and perhaps most of you disagree with some (God forbid, all!) of what I have written.


Good. That’s the whole point of airing out issues!


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