The changing role of the underwriter
In the early 1900s the only underwriting criterion was age… Over the next eight decades insurers included gender and social sins such as smoking and drinking in the equation. More recently medical technology has opened new doors for underwriting. A major change occurred in the 1980s when blood testing was introduced at lower sums insured due to the high prevalence of HIV / Aids. And nowadays it is not uncommon for underwriters to request other medical screens (such as ECG) as a pre-condition for risk cover.
“New products, expanding markets and growing competition force underwriters to adapt their underwriting practices,” said Cliff Jooste, Chief Underwriter at RGA Insurance. He was presenting at the final RGA Technical Seminar for 2011. The first part of his presentation tackled the traditional role of the underwriter and how this role has evolved over time.
The traditional role of the underwriter
An underwriter acts as a gatekeeper between the insurer and the client. Their job is to select risk by determining which risks should go “on the book” and which should be declined… Once this decision is made the underwriter places these risks into an appropriate risk pool by either accepting the cover on standard rates – or with a loading (if non-standard risks exist). Each life introduced to the pool is classified according to the risk it introduces… “And the underwriter’s primary concern is to get enough lives into each risk pool – at the right premium – to ensure that the business is profitable,” he said.
A measure of the underwriter’s success is to what extent the actual mortality in the risk pools match the actuarial pricing assumption. In doing so all stakeholders interest are served: The policyholder is covered at an optimal premium for the risk, and the insurer, broker and underwriter all trade profitably! Jooste added a number of functions performed by underwriter. He used the term “facilitator” to describe the critical role the underwriter plays in placing business on an insurers’ book. Underwriters also play an increasingly important part in the business acquisition process. An underwriter has to provide quick feedback between the insurer and the broker. It’s a complex and time consuming task that centres on supporting the broker and getting the broker to support the insurer.
A complex market introduces new demands
An underwriter has the make or break decision when it comes to adding new business… “25 years ago you’d approve 85% to 90% of new business at standard rates and decline the rest,” said Jooste. The underwriter adopted a prudent approach to risk assessment to protect the book, and you could even say that risk assessment was the core competency of underwriting at that stage.
Today’s underwriter handles all of the above tasks, but must do so faster (quick turnaround on decisions), cheaper (by economic use of resources) and without losing the sale. All of a sudden the underwriter has to play the role of marketer – building relationships to encourage brokers to place business through their company. “Every day we walk the fine line between protecting the book, but also making sure we put enough business on our books for the stakeholders to make money,” he said. Aside from the core competencies already mentioned underwriters have to act as salesman, negotiator, counsellor, auditor and adviser!
The 21st Century underwriting landscape
Competition is the buzzword in the South African insurance market. South Africa is one of the most competitive markets in the world, with a range of complex products to show for it. This competition exists in virtually every sector of the market. So, for example, each time an underwriter receives a case he / she can be sure of competing against at least two or three other businesses. The pressure is on to cut the cost of cover to the bare bones.
Competition has also created the tools to reduce premiums and accept previously uninsurable risks. Product innovation and medical advances have made it possible to extend standard (or near standard) covers to obese people. Underwriters have to decide whether to place more of this type of business on their books – or rather avoid it totally.
Technology is also playing a part in redefining underwriting roles. Many companies operate a black box approach for standard risk assumptions, allowing the underwriter to focus almost exclusively on non-standard risk. Over time the skill the industry will demand is for those who can write rules for the black box rather than those with traditional risk assessment skills. Regulation is skewed toward consumer protection and the Internet is redefining the insurer distribution model too.
South Africa versus the rest
Is South Africa on par with the rest of the world where underwriting is concerned? “The biggest challenge in the local market links back the competitive environment we transact in,” said Jooste. Overseas companies are more concerned with the economic climate, simplified issues (short-format applications and quick issuance of business) and how to adapt financial and medical underwriting practices in the 65-plus age group!
In the UK we’ve already witnessed the development of underwritten annuities – a product which offers better annuity rates to unhealthy people. The industry will have to find new ways of predictor modelling to determine which group of lives are less healthy and deserve better rates on these products. Research and development will be critical to stay ahead of the game. Underwriters will have to work with actuaries and claims people to proactively adapt their strategies.
Editor’s thoughts: Underwriters play an essential role in the insurance environment by ensuring your client’s are assigned the correct risk rating. It will be interesting to see how the insurance industry evolves if brokers continue pressuring underwriters for standard ratings regardless of risk… We’re also keen to see what new products insurers come up with given our already “busy” risk product universe. Do you think the South African market is ready for insurance products for the 65-plus age group? Please add your comment below, or send it to gareth@fanews.co.za
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