CPD: Risk advice – An 8-point guide to better field underwriting and better client outcomes

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Understanding field underwriting philosophy can help set expectations for clients.

Field underwriting leads to better customer outcomes

Field underwriting, in simple terms, is the information gathering and screening of risk advice clients, done by a financial adviser before an application is submitted to the life insurer’s own underwriters. In a sense it is like a triage process, with several benefits:

  • it can help the adviser narrow down the strategic options for the client (for example based on their occupation or health history) and prevent wasted effort
  • it can help narrow down the choice of insurer (to one specialising in specific conditions), and
  • it can help set client expectations around process, time frame, the likelihood of extra information being needed, and potential non-standard outcomes (including loadings or exclusions).

As such, field underwriting can help advance the twin goals of more efficiency AND a better client experience.

Successful field underwriting relies on an understanding of the client’s circumstances and the underwriting approach of the insurer, bridged by an understanding of associated areas including medical terminology, the incidence and costs of serious health conditions, and the principles of behavioural economics. Tapping into the resources offered by life insurers is also critical for effective field underwriting.

As an introduction to the topic of field underwriting, this article will briefly explore the 8 steps that can improve an adviser’s skill and confidence in this foundational discipline.

1. Understand basic risk factors

Underwriting is all about assessing risk factors, to determine the appropriate price and terms on which to admit someone to the risk pool. From a baseline of ‘standard rates’, individuals will deviate up or down due to their own personal risk factors, such as their occupation, lifestyle, and health history. These factors along, with their age and gender, determine their morbidity (risk of illness/disease/injury) and mortality (risk of death).

While the relevance of some of these factors is obvious (smoking is bad, women live longer but have higher morbidity), other factors are more complex.

Similarly, some factors are assessed differently for different products.

Take occupation for example. For products where the claimable event is not linked to your work status (death and trauma), occupation is assessed from a pure mortality or morbidity perspective. But in the context of TPD and income protection, occupation becomes a much more complex, nuanced issue.

Using a surgeon as an example, on the one hand, a degree qualified professional is generally seen as having a higher incentive to return to work (so a lower moral hazard), but on the other hand, an injury or illness which effects their steadiness with a scalpel could end their career. The risk differential – and therefore premium difference – between any and own occupation therefore varies widely across different occupations. Similarly, some occupations have a higher risk of physical injuries, which are easier to identify and quantify, whereas others have a higher risk of significant mental health claims[1].

Co-morbidities

Co-morbidity, sometimes called multimorbidity, is when a person suffers multiple health conditions, at the same time or shortly after each other. These can be physical conditions or mental conditions. Some conditions are proven to have a higher risk of co-morbidity[2], either because the risk factors are the same, or because one condition is known to cause the other, for example:

  • high blood pressure and diabetes
  • drug or alcohol abuse and mental illness
  • depression and anxiety
  • obesity and a variety of conditions including heart disease, cancer, and depression.

People suffering co-morbidities are also likely to be at higher risk of suffering other health conditions, and therefore making a claim.

An Australian study[3] for example, found Covid patients with cancer, chronic kidney disease, diabetes or hypertension had a higher risk of death than those without.

A related point here is to familiarise yourself with the conditions where extra information is likely to be requested, including the extra health evidence needed for older or high value clients. These details, sometimes referred to as ‘non-medical limits’ are generally included in the adviser guides issued by most insurers.

2. Understand trends in health and healthcare costs

Having a general understanding in the incidence and cost of health conditions can help you be more confident and knowledgeable in your client interactions.

Zurich’s 2018 Cost of Care whitepaper[4] was a pioneering adviser resource in this area, bringing together detailed research across the broad spectrum of injury and disease, including a detailed examination of the out-of-pocket and/or lifetime costs associated with many serious health conditions.

New research is released regularly in this area, and it is worth keeping abreast of the data and reports coming from bodies like the Australian Institute of Health and Welfare (AIHW) and the Grattan Institute.

In late 2021, for example, AIHW released its latest data on cancer and heart disease.

The Cancer in Australia 2021 report[5] shows a downward trend in the rate of new cancer diagnoses since 2008, but an increasing rate for females, albeit from a lower base than males.

Cancer in Australia

AIHW estimated that around 151,000 new cases of cancer will be diagnosed in Australia by the end of 2021, which is an increase from around 47,500 cases in 1982.

However, there has been a 5% decrease in the incidence rate over recent years from the peak of 508 cases per 100,000 people in 2008 to 486 cases per 100,000 people in 2021.

The report shows that five-year survival rates from all cancers combined had improved from 51% in 1988–1992 to 70% in 2013–2017.

Changes in survival rates over time varied by cancer type, with the largest survival improvements seen in prostate cancer, kidney cancer, multiple myeloma, non-Hodgkin lymphoma and tongue cancer. On the other hand, sufferers of pancreatic cancer, lung cancer and mesothelioma have a less than 1 in 5 chance, on average, of surviving at least 5 years after diagnosis.

Australian Burden of Disease Study

Another valuable resource is the AIHW Burden of Disease study, which shows differences in disease burden by gender and age.

Findings from its 2021 report[6], based on 2018 data, include the following:

  • Males experienced more burden (53% of total burden) than females (47%). Dying from disease and injury (fatal burden) accounted for more burden in males (61% higher, largely driven by higher male rates for diseases such as coronary heart disease, suicide, and some cancers), while living with illness (non-fatal burden) accounted for slightly more burden in females (4% higher).
  • For adolescents and young adults aged 15– 24, the disease groups which caused the most burden were injuries (mainly suicide & self-inflicted injuries), mental health conditions and substance use disorders (mainly anxiety disorders and depressive disorders).
  • For adults aged 25-44, suicide and self-inflicted injuries caused the most burden in men and anxiety was the leading cause of burden in women.
  • For adults aged 45-74 years, musculoskeletal conditions and cancer were leading causes of total burden.

3. Understand behavioural economics

An accurate and efficient underwriting process relies on a client being as open and honest as possible. In this sense, an understanding of behavioural economics, or client psychology, can prove invaluable.

The underwriting process is underpinned by the client answering a series of detailed questions about their health and lifestyle. Sometimes, these questions aren’t answered accurately.

A study by reinsurer RGA[7] revealed several drivers of non and mis disclosure amongst life insurance applicants:

  • Financial gain: People prefer to avoid disclosing details that would increase their premium.
  • Psychological gain: People like to present themselves positively (social desirability bias) An example: applicants might not disclose illegal drug use because it is socially frowned upon, rather than to get a better deal.
  • Unintentional inaccuracy: Applicants may not know or be able to remember certain key details or may misunderstand the question.

One of the ways to improve the accuracy of disclosure is to frame questions appropriately. In the context of questionnaires that are prescribed by the insurer, this could mean explaining questions for clients or using cues which normalise or destigmatise behaviours.

For example, knowing people will understate their weight and alcohol consumption, to improve their social desirability, questions which don’t stigmatize conditions, or have high ‘anchor’ points, will generally elicit more honesty.

The RGA study referenced above found that using a higher anchor point and a sliding scale was a more effective way of accurately capturing alcohol consumption than a straight ‘how much do you drink per week?’

Other findings from this study included that:

  • disclosure accuracy was lower if there was a perceived time pressure, and
  • accuracy was improved where questions were simplified or broken down into simpler questions with less cognitive load.

With this in mind, advisers should go to great lengths to simplify, or breakdown questions, especially those which may require people to make mental calculations (‘how many drinks’) or delve into their memory banks (‘have you ever suffered…’). Of course, which questions to do this for will very much depend on the client sitting in front of you.

Similarly, you should ensure the client doesn’t feel rushed to answer.

4. Understand exclusions and loadings and how to preposition them

Premium loadings, and to a lesser extent exclusions, are common mechanisms used by life insurers to ensure the premium they pay for cover is an accurate reflection of their risk compared with others in the risk pool, and with the probability of a future claim.

Whilst a small number of clients offered loadings or exclusions may decide to walk away altogether (ironic given they are, by definition, at higher risk of claiming), this likelihood can largely be mitigated by setting the right expectations from the start.

In other words, minimise surprises.

Sometimes this is made easier because likely exclusions or loadings are known, or can be safely predicted, like exclusions for back injuries, high risk occupations, hazardous pursuits, and some mental health conditions, or premium loadings for obesity, hypertension, diabetes, or smoking.

Important things to be aware of in respect of loadings/exclusions include their exact terms, their ability to be removed, and the process for doing so.

Being familiar with how different insurers view different conditions – and their likelihood of loading/excluding – is also vital here.

It is also vital to know how to communicate unexpected non-standard underwriting decisions. Assuming you have got the very best outcome you can for your client, and that includes some sort of loading and/or exclusion, some of these positioning strategies may help:

  • Congratulations! You can still get cover
    Position the ability to get valuable cover as a positive
  • This is the standard rate for people with your particular condition(s)
    Normalise rather than stigmatise.
  • Keep the same premium or the same cover?
    Given you are at higher risk of claim, does the client need the cover more than ever
  • Extend Income Protection waiting periods?
    If budget becomes an issue for loaded IP policies, working with clients to provide an alternative solution, such as choosing a longer waiting period, which can be substantially cheaper, could be a way of staying within budget
  • ‘Case manage’ their process of getting a loading removed
    This could be by helping the client design a plan to give up smoking, or lose weight, and then applying for the loading to be removed in a year’s time.

Demonstrating your professionalism and confidence to clients on health-related matters will make them more comfortable in fully answering sensitive health questions. One way you can do this is by understanding life insurance claims data, including the frequency, volume, and acceptance rates of claims across products and across insurers.

The best sources of this data are APRA and ASIC – for high level data such as volume and acceptance rates – and individual insurers for more detailed breakdowns. Table 1, below, shows APRA data for the 12 months ended 30 June 2021.

Table 2 is sourced from the ASIC Moneysmart website and shows claims acceptance rates for retail advised death cover policies, by insurer.

6. Understand the importance of financial underwriting

Financial underwriting is a specialised field, the main objective of which is to determine that cover being applied for is appropriate. This can mean validating:

  • the client is not over insured relative to their income or other circumstances
  • there is an insurable interest
  • the sources of income that would stop and continue in the event of disablement
  • the underlying financials in complex business insurance cases (keyman, business succession, loan protection)
  • the client can afford the premium.

In most cases, financial underwriting is done via simple questions included in the application form (income, other cover held etc), whereas for more complex and/or higher value cases, the insurer may require additional information.

To a large extent these circumstances can be predictable, as can be the type of extra information the insurer will require (Profit and Loss statements, partnership agreements, tax returns, additional questionnaires etc). As above, the key point here is to set client expectations early, including by asking your own screening questions for cases which seem more complex.

Most insurers include high level financial underwriting requirements in their Adviser Guides.

7. Rely on pre-assessment tools

Pre-assessments go hand-in-hand with field underwriting and involve getting an indicative sense of how a client is likely to be underwritten by an insurer. This can allow you to narrow down your choice of insurers as well as indicate those aspects of your client’s situation which may require more clarification and information gathering. Pre-assessments can therefore improve your efficiency as well as manage your client expectations.

Each life insurer tends to approach pre-assessments differently, in terms of their process, their responsiveness, and their accuracy. Pre-assessments do not represent ironclad offers of cover, nor definitive rejections. But they can help identify possible ‘speed bumps’ in the process of getting your client covered.

8. Build strong underwriting relationships

For all the techniques and resources discussed here, ultimately the most valuable foundation in effective field underwriting is the maintenance of strong relationships with underwriters, not as a way of circumventing pre-assessment processes, but to help build your own knowledge, about underwriting in general, and about the philosophy and approach of any individual insurer.

The good news, according to Zurich, is that the increasing digitalisation of underwriting processes is freeing up underwriters to engage with advisers in a more collaborative way. Which is a good thing, given their 2021 underwriting survey[10] found that nearly half of advisers still prefer face-to-face engagement with underwriters.

Other attributes advisers identified as important were:

  • high-quality communication from Underwriters and Case Managers
  • sustainable competitive decisions, and
  • a service model that genuinely supports collaboration.

In a way, you could say that strong underwriter relationships are almost about doing some of the underwriting in advance!

Conclusion

Effective field underwriting can make the process of risk advice more efficient and improve your client experience. An understanding of key underwriting principles and client psychology will not only allow advisers to ask the right questions in the right way, but it will also help convey a sense of confidence and professionalism which can put clients at ease and make them more comfortable in answering sensitive questions.

Ultimately, by setting the right client expectations as early as possible, field underwriting should lead to less surprises, and stronger client relationships.

 

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References:
[1] https://www.canstar.com.au/life-insurance/underwriting-life-insurance/
[2] https://www.verywellhealth.com/comorbidity-5081615
[3] https://www1.racgp.org.au/newsgp/clinical/study-identifies-four-main-comorbidities-associate
[4] https://www.zurich.com.au/content/dam/au-documents/files/advisers/cost-of-care-whitepaper.pdf
[5] https://www.aihw.gov.au/news-media/media-releases/2021-1/december/cancer-survival-rates-continue-to-improve-while-de
[6] https://www.aihw.gov.au/news-media/media-releases/2021-1/november/health-impact-of-coronary-heart-diseases-decreases
[7] https://www.rgare.com/knowledge-center/media/articles/how-can-life-insurers-improve-the-dtc-application-process-a-behavioral-science-analysis
[8] https://www.apra.gov.au/life-insurance-claims-and-disputes-statistics
[9] https://moneysmart.gov.au/how-life-insurance-works/life-insurance-claims-comparison-tool
[10]https://www.zurich.com.au/advisers/news/adviser-news/2021/how-underwriting-leads-to-better-experiences.html

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