Why Teleunderwriting is the Only Viable 21st Century Option

Hank George, FALU, CLU, FLMI
February, 2007 • Teleunderwrtiting Essay 1

Introduction

Welcome to the first of 12 articles covering the subject of teleunderwriting from many perspectives and in considerable depth.

We hope these articles will assist readers in gaining the broadest possible insight and perspective as regards the phenomenon known as TELEUNDERWRITING.

There are two specific terminology points that need clarification at onset, lest anyone encounter difficulty in deciphering the intended meaning of key words we will use in these articles:

We will use the term “medical report” to refer to reports obtained from physicians, clinics, hospitals and other sources containing medical records of proposed insureds. We will do this because there are different names for such reports in the global underwriting world: APS, PMAR, APR and so on.

Likewise, we will use “producer” as a general term for all manner of insurance salespersons. We will do so because there are many different names given to specific genre of producers throughout the world, including “agent,” “broker,” “intermediary,” and so on (not to mention those muttered under an underwriter’s breath when exasperated with their legendary tenacity and inventive strategies for getting what they desire!).

We invite your comments and questions, which should be directed to this underwriter.

All e-mails received on this subject will be responded to promptly and some may be used – with the author’s name only if permission is given to do so – in our publications Hot Notes and JournalScan.

What is teleunderwriting?

When the word “teleunderwriting” finally makes Webster’s dictionary, the entry will likely read something like this:

Teleunderwriting (tel-li-un-der-right-ting) n. use of telephone interviews to gather and expand upon risk-related insurance application information.

Intrinsic to teleunderwriting is the amplification of all YES answers to application risk-related questions. This is done with what are commonly referred to as “drilldown” questionnaires. Each questionnaire asks a series of scripted questions relevant to a specific application question.

If one only asks application questions and records the answers, without drilldown-type amplification, the word “teleunderwriting” becomes a misnomer.

The preferred term for this rather limited (and marginally worthwhile) process is “personal history interview” (PHI).

Once a teleinterview is completed, it goes to the underwriter handling the case in question. It is then used in conjunction with all other age/ amount screening requirements to determine if an underwriting decision can be made without resorting to further (elective) requirements. In most cases, the additional requirement in question is a “for cause” (“for cause” as distinct from “age/ amount”) medical report.

What has caused so many insurers worlwide to change from traditional underwriting to teleunderwriting?

“We will see significant changes in underwriting in the future. Technology-enabled simplicity and speed will redefine the customer’s experience with the underwriting process, and the vast amounts of information collected will allow us to more swiftly “close the loop” with claims and mortality data, resulting in enhanced product performance…”

Bill Goings
President, Life Insurance; Genworth Financial
Broker World
January, 2007; page 40

Like any basic change in how a firm conducts any core element of its business process, changing to teleunderwriting takes time and – let the truth be told –costs money.

Any insurer pondering this fundamental metamorphosis in their approach to new business needs to understand that substantial costs will be incurred and significant commitments of both technological and human resources will have to be made and sustained until the job is done.

Nevertheless, these sacrifices are among the most worthwhile any insurer will ever make because of the payoffs cited by companies that have embraced teleunderwriting.

This is a list of the widely acknowledged advantages accruing from teleunderwriting. Almost certainly it could be expanded upon by chief underwriter officers (CUO’s) in companies where teleunderwriting has been “up and running” for years (and we would welcome their comments!):

• Lower new business acquisition costs – one of the major priorities of senior management in nearly every insurer around the globe.
• Reduced application-to-issue cycle time – also a major corporate priority cited by “Big C’s” (CEO, COO…) in presentations, interview articles, etc.
• Reducing the volume of “incompletes” (applications submitted with one or more questions unanswered) – a major…no, make that incredible…source of frustration for home office personnel. Incompletes are essentially eliminated as regards that portion of the application taken via teleinterview.
• Divesting producers of as many home-office imposed burdens as possible in the hope this will spur them on to write more new business (rather than go fishing!).
• Improving customer/consumer impressions of the underwriting process. For the first time in history this could actually happen, given that teleunderwriting is driven by what applicants tell us about themselves (and we never ask them to stop talking!).
• Minimizing incidental nondisclosure and antiselection. Note the distinction between nondisclosure resulting from how we have ineptly gathered risk-related information in the past (which we chose to call “incidental”) vs. its more grievous counterpart antiselection (intentional nondisclosure). Traditional underwriting is fraught with incidental nondisclosure, which is a direct result of how risk histories have historically been taken. Likewise, the incidence of antiselection invariably escalates when “interested parties” are positioned to “filter” risk-related information coming from those being questioned.
• Optimizing the impact of new and emerging technologies, such as electronic and voice signaturing. You know what we’re talking about here, so I pass on the “opportunity” to lay bare the impoverished extent of my “knowledge” of this subject.

Is this a list of advantages without precedent, or what?

What is the “downside” of teleunderwriting?

Notwithstanding the fact that its implementation takes time and costs money, teleunderwriting may not have – depending on how you define the term – any major “downside.”

The primary concern aired by those apprehensive of teleunderwriting is that there might be deterioration in mortality and morbidity results. This, they say, is all but inevitable if one relies on information given by applicants in lieu of shagging down as many medical reports as we have always done in the past.

If this concern were valid, it would make teleunderwriting far too risky (especially in the United States, given our razor-thin premiums and high volumes of term insurance).

Fortunately, it isn’t.

Valid, that is.

In fact, there is impressive evidence that teleunderwriting actually culminates in BETTER mortality and morbidity results than traditional underwriting despite reduced dependence on slow, expensive requirements.

This underwriter has been made privy to countless observations recounting highly favorable findings during internal teleunderwriting auditing process. Many have been shared publically at underwriting study groups as well as local, regional, national and global underwriting conferences.

True, little of this is accessible as yet in the form of published studies…

…and, of course, the reason such studies are not made public derives from the proprietary advantages firms realize from the success of their teleunderwriting programs.

Proprietary information perceived as conferring competitive advantage is held closer to the vest these days than at any time in the history of underwriting. Don’t expect to find much more than anecdote and the occasional terse summary in this regard.

No matter, actually.

Because, what we DO KNOW constitute powerful affirmations of the bottom line payoffs from teleunderwriting:

• Nearly all companies that have initiated teleunderwriting have never reversed course. The cause of temporary (as has been true in all cases known to this author) retreat from teleunderwriting hasn’t been non-profitability. It has been unexpectedly brisk resistance from producers. Resistance that need never (as we will explain in a future essay) have spiraled out of control.
• Companies experiencing ventricular ectopy when medical report ordering dipped below their comfort zone have made fine-tuning corrections, righted their ship and not backed off one bit from teleunderwriting. One carrier’s chief underwriter relates how they commenced teleunderwriting at a time when they got medical reports on 35% of new lives. When – after onset of teleunderwriting - this number took too steep a drop, timely auditing got matters back on track. Today, she says they get medical reports on 15%. Recent audits assure this is “where they should be.” The actuaries are all smiles. So are her boss…and their CFO.
• Most insurers that initially used teleunderwriting on just a portion of their business – single product, face amount threshold, a subset of distributions or producers – have expanded its deployment. They tested the water with a toe, found it to their liking and joined their peers.
• Reinsurers have steeply escalated the frequency of audits. This was not done, of course, out of concern for teleunderwriting per se (at least not in North America). More to the point, we know of no instance where teleunderwriting was denounced as the culprit in an unfavorable audit. Too few triglycerides debits, perhaps; not teleunderwriting. Most of us know precisely what that REAL culprit was and, though thankfully much diminished, still is. Bottom line: insurers have not reported any insurmountable treaty-negotiation problems incited by reinsurer objection to teleunderwriting at any forums this underwriter has convened or otherwise attended.

If teleunderwriting confers many advantages and little adversity, why haven’t all insurers gone over to it by now?

Having worked with hundreds of life, health (medical), disability and critical illness insurers worldwide, allow me one (incredibly) salient global observation: not all insurers “move toward the light” at the same pace.

Many forces operate within the walls of large and small insurers. Some give rise to progress; others undermine it.

Those distrustful of and/or threatened by change can pose formidable obstacles, greater than one might at first imagine. They can be insidious as well as tenacious. I have been in their midst. I have seen them in action.

Imagine this:

You have just presented a well-researched overview of things proactive insurers are currently doing to facilitate much-overdue improvements in the risk assessment process. Improvements intended to realize the pay- offs from teleunderwriting cited earlier in this essay. Then, you stop for questions and are openly decried as a “huckster” by an influential individual in the audience.

Or this:

You present a lecture which had previously engendered audible approval from peers as well as other disciplines. You get no challenges during Q/A, but you do get handwritten hostility on feedback forms. The comments don’t take substantive issue with your message. They’re personal attacks on you, the well-intentioned messenger. You get past your frustration when you see how your message had been (mis-)construed as a threat to the status and security of those who made the disconnected comments.

Been there…experienced that…and you do see, I hope, why I recounted both experiences.

This is what some people do when confronted by arguments for change to which they lack credible responses!

And teleunderwriting epitomizes change.

• Some actuaries will resist. They being the few for whom it does not compute that most people tell the truth most of the time…even when applying for insurance. They will demand statistical evidence which contented peers in other companies will deem far too proprietary to share. They will not be assuaged with inferential arguments like those presented early on in this essay, no matter how logical and valid they may be.
• Some chief underwriters all-but-reflexively undermine progress. Change is threatening to them. It might jeopardize the “good thing I have going.” This is most prevalent among some, who, near retirement, have been on virtual “cruise control” for years. Others – far more worthy of the positions they hold – will understandably fret having their best talent diverted from production sans appropriate staffing accommodation. For them, I have nothing but empathy.
• Some production underwriters will insist that “you can’t underwrite [whatever] without a doctor’s report.” This will be regurgitated episodically because long-departed mentors told them it was so…25 years ago; ipso facto, it must (still) be true. They’ll confabulate myriad excuses why teleunderwriting must fail when they (finally) apprehend that they will be expected to use judgment in lieu of mindlessly applying “rules” cast in concrete in a manner wholly reminiscent of - and replaceable by - a machine. I’ve seen them sitting with arms crossed and glaring at anyone with the temerity to suggest teleunderwriting confers unprecedented opportunity for their growth as risk appraisal professionals. They will pass into the mists of history and the company will be better off for it.
• Some medical officers will decry the premise of substituting an interview with a lay person for records from their practicing peers. They will do so utterly oblivious to larger issues on the table. Issues from which they have foolishly – if skillfully – insulated themselves, holding fast to (what should be) relics of the past as evidence of their vital contribution to the company. Those who see beyond this intellectually flawed and lethal posture will flourish. The rest will be as big a loss as the aforementioned underwriters.
• Some chief technology officers will say what they always say every time they are asked to allocate adequate resources for any project. Nothing you haven’t heard n+1 times…
• Some CFOs – other than those few whose meager corporate impact is (self-)limited to ravaging low-hanging fruit (read: learning and networking) to “save” a handful of coins – will shudder at the initial costs of implementing teleunderwriting; then come to be firm allies of change in due course. They will see the longer-term bottom line advantages.
• Some producers will bellow objections for one of three reasons: (1) because reactive railing against change precipitated by insurers is what they do, (2) they shrewdly see how certain longstanding “advantages” will be lost and/or (3) they fear home office interaction with their clients. They may have valid arguments as regards point #3.

There will be resistance to teleunderwriting on many quarters simply because change begets resistance.

Resistance which, in the main, has nothing to do with the merits of the change being proposed!

The reasons why some companies have not (as yet) come over to teleunderwriting are nearly as numerous as the number of such companies. Here are some of them:

• Entrenched resistance for any of the above-mentioned correctable reasons
• Insufficient budget funds to do both that other URGENT project and teleunderwriting in the same fiscal year. For them, there is always next year…or the year thereafter.
• The fixed false belief that teleunderwriting is inappropriate for cases in the “high-end – older-age – brokerage – substandard market,” where you “simply must have a medical report [not to mention 10 other things] on every case”…as if the only motive for teleunderwriting is to reduce medical report ordering in a vacuum!
• Multiple (and often shifting) distribution channels, some of which are more conducive to rapid teleunderwriting implementation than others.
• The wishful notion that taking medical histories electronically at websites results in the same desired level of disclosure and protective value as teleinterviews.
• An aversion for doing just about anything before 80%+ of other companies do it first, in fond hope of acquiring a map on the cheap of the putative mine field awaiting them.

Looking at the advantages to companies doing teleunderwriting – doubly so in consideration of certain foreseeable developments that will impinge upon their traditional underwriting process (declining medical record content; escalating medical record costs) – one can only conclude that the clock is ticking…

It may be as little as three years or perhaps as long as a decade before non-teleunderwriting insurers finally succumb to the consequences of standing pat.

Succumbing is what companies do when they can no longer compete effectively in a highly competitive marketplace.

Perhaps the most apt wake-up call in this context comes from a television commercial for an automobile oil filter:

“Pay me now…or pay me later.”

This essay was written for informational purposes only. Hank George and Hank George, Inc. do not recommend or endorse any specific business practice or procedure discussed herein. All business considerations concerning matters covered herein should undergo proper and sufficient scrutiny by appropriate management personnel of the companies involved prior to implementation on any basis.