CPD: Responsible underwriting 2.0, creating trust, affordability, and claims confidence


Responsible underwriting has evolved from an inwardly focused risk management process to an externally focused process that is transparent, socially aware, adaptive, and sensitive to evolving community expectations.

Introducing responsible underwriting 2.0

When viewed from a technical perspective, it is tempting to characterise life insurance as revolving almost entirely around the interplay between product design, pricing, underwriting and claims. And while this true on one level, when viewed through a consumer lens, life insurance can be distilled down to something far simpler and more fundamental – a promise to be there to pay claims.

In a sobering piece of research from PWC, 78% of Australians said they viewed life insurance as important, while only 42% believed their life insurer would be there for them in their time of need[1].

Being there to pay claims relies on two related concepts, the first being that the insurer is quite literally still in business and has the financial resources to honour those claims. The second, which facilitates a theoretically smoother claims process, is that the insurer is confident that when they first admitted the client to the insurance pool, it was on the right terms, and at the right price.

At the heart of both these concepts is the idea of sustainable – responsible – underwriting.

Life insurance underwriting has always been a balancing act, treading a fine line between encouraging enough new lives insured into the insurance pool to keep it viable, whilst also ensuring their premiums and policy terms accurately reflect their likelihood of claiming.

Treading this balance has never been more important, nor more challenging.

A fundamental reshaping of the workforce is colliding with health and societal trends that are driving claims incidence – especially for disability and trauma cover – ever higher. At the same time, a cost-of-living crisis is engulfing many households, as the Reserve Bank’s desire to quell decades’ high inflation has seen almost a year of successive mortgage rate increases.

Meaning Australian families’ need for life insurance is increasing, just as their ability to afford it is decreasing.

Responsible underwriting is therefore about an approach to underwriting which truly puts the customer at its heart. It is an approach that drives the long-term affordability of life insurance, it is an approach that drives the payment of more claims in less time, and it is an approach that creates more consumer confidence and trust in their insurer. Ultimately, it is an approach that is making the entire life insurance sector more sustainable.

In this article, the first in a series exploring the future of life underwriting, we will explore the concept of sustainable – or responsible – underwriting in more detail, including how it has evolved. We will look its fundamental principles, the outcomes it can drive, and the challenges to implementing it effectively.

The basics of underwriting risk

The basic premise of life underwriting is to assess the risk profile of an individual, relative to the likelihood of them claiming on a life insurance policy.  In order to do that they need to understand the circumstances of the individual across a number of criteria, including:

  • age and gender (simplistically, the likelihood of claim increases with age, and females have lower mortality but higher morbidity)
  • occupation and income (needed to determine whether the job itself has higher risk of death or injury, and also to judge appropriateness of sums insured and likelihood of return to work)
  • pastimes and sports (mountain climbing, motor racing and scuba diving are risky, and footballers have high rates of injury)
  • lifestyle (alcohol, tobacco and other recreational drugs are linked to higher mortality and morbidity)
  • health history (current state of health, any past health issues, and any family history of hereditary conditions).

Underwriting is done with reference to a price point

Assessing whether one individual represents a higher or lower risk than another is meaningless without context, and in life insurance that context is the standard premium rate.

That premium rate is calculated (and legally certified) by actuaries, who – with reference to a variety of data sources including life mortality and morbidity experience tables – essentially predict the likelihood of experiencing a claimable event, in turn allowing them to calculate a premium which reflects this risk (along with other costs such as distribution, administration, and the cost of capital).

With reference to this standard premium rate (which varies by age, gender, and smoker status), and after understanding the risk profile of the applicant, the underwriter then calls on other data sources (usually consolidated as a set of guidelines) to determine whether that applicant should be accepted in the insurance pool at standard rates and on standard terms, or whether their increased risk justifies:

  • paying a loaded premium, and/or
  • having certain risks excluded, or
  • being denied cover altogether.

Underwriting has always been about sustainability

In one sense, underwriting has always been responsible and sustainable, because its role has been to ensure that customers enter the insurance pool on the right terms. If that process is applied correctly, then – on the basis that actuarial assumptions about price and likely expected claims experience are correct – the pool should become sustainable well into the future.

Underwriting as part of a feedback loop

Underwriting and claims are both part of a continuous feedback loop, where signals about health trends and claims experiences are fed back to actuaries. In the event that there is a deviation between expected and actual claims experience, then this signals the need for some (hopefully minor) adjustments to premium rates, and potentially even to underwriting guidelines and philosophies.

Sometimes these deviations are small, and represent minor corrections within the parameters of some fairly evident trends, such as mortality improvements (good), or the proliferation of HIV in the 80s and 90s (bad). Other times, insurers are caught by surprise, and major intervention – rather than minor tweaking – is required, as it was with retail income protection recently.

Shocks to the system – life insurance profitability

If the product design, pricing, underwriting and claims feedback loop operated efficiently, then life insurers should exhibit consistent, predictable, and positive profitability at any given time.

Up until recently however, the overall Australian life insurance sector, was making substantial losses, largely attributable to one product category – Individual Disability Income Insurance (IDII).

Indeed, in the 5 years to December 2019, IDII products recorded losses in excess of $3 billion[2], a figure which threatened the sustainability of both the product category and the overall life sector. It was this threat to sustainability which prompted APRA to intervene in the sector, an intervention which resulted in an overhaul of product design, and which kicked off a cycle of premium increases which is still continuing.

A shock to the system of this magnitude only occurs when there is a substantial divergence between what the actuaries expected, and what actually occurred, begging the question: what took them by surprise?

The answer in this case was a combination of industry product design and spiralling mental health claims.

Mental health and life insurance – it all happened so quickly

The proportion of Australians suffering a mental health condition has increased steeply in a relatively short period of time.

According to the National Health Survey series[3], the proportion of Australians aged 15 and over suffering mental and behavioural disorders more than doubled between 2001 and 2021 (from 9.6% to 21.4%.) The Australian Institute of Health and Welfare estimates over 2 in 5 (44%) of Australians have experienced a mental disorder at some time in their life[4].

Mental health claims under life insurance have similarly skyrocketed, climbing 53% between 2013 and 2018 alone, according to KPMG analysis[5], which also found the average length of claim increased 36% over the same period.

Mental health is now the leading cause of claim for TPD, and the third leading cause for Income Protection, making it the second largest cause of claim overall[6].

Responsible underwriting of mental health

Across the industry, a traditional ‘responsible underwriting’ approach has usually been one based purely on risk pricing and protecting the sustainability of the pool through limiting entry where risk was not well understood.

Certainly, the initial underwriting response to mental health was shaped by the industry’s general lack of experience and data was skewed towards the inclusion of exclusions.

There is a wide spectrum of mental health conditions, ranging from general anxiety, and mild depression, through to more significant conditions such as schizophrenia and bipolar disorder. These conditions differ in their complexity, their treatment, and their longevity. But the relative recency of the growth in poor mental health has contributed to a general shortage of detailed mental health morbidity data.

This fed an initial industry underwriting response to mental health sufferers that was ‘one size fits all’’. For a period of time, anyone reporting any sort of mental health condition ­– regardless of how severe and whether or not they were currently suffering from it – was likely to be offered a mental health exclusion, or have their application declined outright.

A new type of ‘responsible underwriting’

The life insurance industry doesn’t exist in a vacuum, it exists within a community. There is now widespread recognition by insurers that remaining sustainable means balancing commercial considerations with the needs and expectations of the wider community. It must have social licence.

In the case of mental health, the government and mental health advocates made it clear that the approach taken by life insurers was not acceptable.

In response, life insurers have significantly reshaped their approach to underwriting mental health, in several major ways:

  • putting in place plans to accelerate the collection of data, to allow better decision making
  • taking steps to better educate underwriters about different mental health conditions
  • replacing the blanket exclusion approach with a more individualised approach so that not all mental health conditions are treated the same, allowing people previously excluded to get cover
  • being more transparent and consultative with stakeholders including mental health advocacy groups.

Such an approach can be thought of as one as the earliest examples of ‘responsible underwriting 2.0

Other trends underwriting will need to adapt to

While the detailed analysis above is specific to mental health, the responsible underwriting response is a framework equally applicable to the many other social, economic, and regulatory changes insurers will need to deal with in the future.

1. The changing nature of work

Occupation has long been a significant risk factor considered by underwriters, and as the nature of work changes, underwriting must adapt. Megatrends, such as the ageing of the workforce, are unfolding. In the 20 years leading up to April 2021, the workforce participation rate of older Australians more than doubled (from 6.1% in 2001 to 15% in 2021)[7], and in the future, we are likely to see evolution in product design and underwriting to cater for the insurance needs of this segment. The gig economy and the flexible working revolution, as well as constantly emerging new occupations in fields such as AI, virtual reality & drone technology, are similarly likely to force changes in the way income and occupational risks are underwritten.

2. Health – Long term trends and emerging risks

Life expectancy is increasing, as are survival rates for serious diseases like cancer. Increasingly, people are living with, rather than dying from these conditions, and in the future, it is likely that a history of suffering serious health conditions will no longer represent an automatic ‘decline’ from underwriters too. Obesity represents a challenge to underwriters, as its prevalence is increasing, and it can exhibit strong comorbidity with other health conditions, including heart diseases, musculoskeletal issues, and poor mental health. Risks associated with head injury in contact sports leading to an increased risk of developing CTE (Chronic traumatic encephalopathy) are only just beginning to be understood and can pose a new challenge for underwriters to consider.

Another positive health trend that underwriting can play a role in is wellness, where people are increasingly adopting healthy behaviours to take back control of their own health and wellbeing. The underwriting process, by helping people understand the mortality risks associated with obesity, alcohol consumption, and tobacco usage, may act as a catalyst to meaningful behavioural change. Similarly, requiring applicants to consider their family health history, and the presence of any potentially serious symptoms (e.g., sudden, unexplained weight loss) can create awareness of possible ‘red flags’ in their health.

3. E-cigarettes/vaping

The growing popularity of e-cigarettes (vapes) is an example of a health trend that is not yet fully understood. Because of their newness, data on the health effects is not as comprehensive as that existing for tobacco usage, however emerging studies show e-cigarettes can contain harmful chemicals and may also cause DNA damage. In most states and territories, it is illegal to use e-cigarettes in place where smoking is illegal. This is an example where the decision of many insurers to treat e-cigarette usage in the same way as cigarette smoking is not only responsible from a risk perspective, it is an approach generally endorsed by the wider community, who harbour wider concerns about their longer-term health effects, and their rapid take up by young people.

4. Transgender and gender diversity

Underwriting will need to adapt to changes in the way people identify from a gender perspective. Gender is relevant from both a risk pricing and communication perspective. At the moment, most insurers, including Zurich for example, still only offer two binary gender options, but are working towards offering non-binary options in the future:

 “When you apply for life insurance with Zurich you can disclose the gender identity that most suits you. Today, that still means choosing between two binary gender options, but we’re working to offer non-binary options to our customers in the future.”[8]

Genetic testing

Genetic testing is becoming more sophisticated and more affordable, putting it within the reach of the average person. Typical tests range from the basic family tree and ethnic origin type tests – offered by website such as ancestry.com – through to more comprehensive tests for medical purposes, such as those which test for genetic conditions. To the extent that test results could encourage a person to take out life insurance – thereby exposing the insurer to anti selection risk, this has been a controversial and much debated topic. Scientists and doctors were fearful that people would choose not to take a test in case it harmed their chances of obtaining life insurance. This could set back research efforts and put individuals at risk if they indeed were unknowingly carrying some genetic condition.

Rather than simply denying people cover to people who have taken genetic tests, the industry – in an example of the new breed of responsible underwriting’ consulted with many stakeholders, and agreed to a self-imposed genetic testing moratorium[9]. Under this moratorium, Australian life insurers agreed to a set of principles to ensure that Australians felt free to undertake genetic testing without fear it would prevent them obtaining life insurance. These principles include not requiring applicants to take genetic tests, and not asking for the disclosure of any adverse test results for sums insured of up to $500,000 of life and TPD cover, and up to $200,000 of trauma cover.

What are the characteristics of responsible underwriting?

The responsible underwriting of the future will balance sophistication, empathy, and social awareness. It will be:

  • Data driven and AI powered
    Growing claims experience and technological advances will enable more data to be gathered and interpreted than ever before, with Artificial Intelligence turbocharging the ability to underwrite and price risk at a more individual level.
  • Trend aware
    Social trends can be just as relevant to risk as health trends.
  • More personalised
    The abundance of data, combined with the power of Artificial Intelligence, will turbocharge the ability of life insurers to underwrite and price risk at a more individual level.
  • Reflect community concerns and standards around inclusivity and transparency
    Life insurers recognise that they can’t take their social licence for granted, and will need to shape their approach to be consistent with evolving community expectations.
  • While still remaining risk focused and disciplined.

The outcomes of responsible underwriting

If implemented diligently, the ultimate outcomes of the new ‘responsible underwriting’, should include more people being able to get cover, more affordable cover, more stability and consistency of pricing for existing policy holders and lives insured (less surprises), greater community trust in life insurers, a more personalised and convenient underwriting experience, and the payment of more claims, more quickly.

Together, all of those outcomes can underpin the sustainability of a healthy, vibrant, life insurance industry, that improves the lives of individuals, families, and the communities they live in.


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[1] https://www.pwc.com.au/insurance/future-of-life-insurance-mar17.pdf
[2] https://www.apra.gov.au/news-and-publications/idii-back-on-track
[3] https://www.abs.gov.au/Ausstats/[email protected]/Lookup/9FF78528B74F5AC5CA256DF100796E89
[4] https://www.aihw.gov.au/mental-health/topic-areas/mental-illness
[5] https://advisers.zurich.com.au/content/dam/au-documents/advisers/tools-and-resources/individual-disability-income-insurance.pdf
[6] https://www.aph.gov.au/DocumentStore.ashx?id=d0ed5689-21b2-4440-96f0-b936d76e351f&subId=705543
[7] https://www.aihw.gov.au/reports/older-people/older-australians/contents/employment-and-work
[8] https://www.zurich.com.au/latest-news/magazine/lgbtq-hub/applying-for-life-insurance.html
[9] https://fsc.org.au/news/media-release/genetics-moratorium

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