Insurance innovation still guided by fundamental principles

The life insurance industry must keep insurance fundamentals ‘top of mind’ when designing and implementing technology-backed risk solutions. This was among the messages shared by Munich Reinsurance Company of Africa Limited (MRoA) during its 2018 Life Client Seminar, hosted at venues in Johannesburg and Cape Town in September. In a presentation on emerging trends in global insurance markets a team from MRoA also reflected on how technology-backed innovation enhanced the outcomes of tried-and-tested insurance principles and practices.

The rise of automated underwriting programmes (AUPs) in the United States is a case in point. Although introduced as early as 2007 the uptake of such programmes was initially slow. A turnaround was achieved from 2015 as advanced data analytics made it possible for US risk carriers to incorporate ‘big data’ in their AUPs – including demographic data, medical bureau information data, drug prescription data and motor vehicle records to name a few. The success of AUPs in the US from 2016 confirms how technology can enhance traditional methods of categorising clients based on the risk they present and pricing their policies accordingly. It is estimated that 15-20% of term life policies in the US market are now written through AUPs without the need for fluids (blood tests) at underwriting.

AUPs resonate with insurance brokers and Insurtech companies and have found wide acceptance among today’s tech-savvy consumers. Early entrants to the US Insurtech market can issue policies in as little as 10 minutes without being selected against. “The message for South Africa is that there will be a convergence of data [and we will soon have] something that will help our industry take AUPs to the same level we are seeing in the US market,” said Michal Nejthardt, Head of Business Development.

The importance of ‘first principles’ in insurance product design and underwriting were highlighted by Johan de la Rey, Business Development Actuary, in a frank assessment of the total permanent disability (TPD) retail policy claims experience in the Australian market over the past decade. “Munich Re noticed a steady increase in both count and amount of TPD claims – this was not company specific as a similar trend exhibited across four major life insurers in that market,” he said.

The principles of insured events require that an event be:

o Definable: Leave no room for argument as to whether a claim meets the definition of the insured event;
o Reasonable: Not too frequent or too rare – the insured should be neither better off nor worse off after receiving the insured amount;
o Manageable: Losses should be random in nature or else the insured may engage in anti-selection; and
o Rateable: The risk should be measurable using statistics and experience.

Mistakes made in the Australian TPD market included anti-selection; weak product definitions and a challenging insurance environment. De la Rey noted that almost 50% of first year claims in this market were due to mental health issues (notoriously difficult to pick up at underwriting) for amounts well above the portfolio average, indicating ‘breaks’ in both the ‘reasonable’ and ‘manageable’ principles. The ‘reasonable’ principle was further eroded due to weak product definitions that resulted in own occupation TPD eligibility criteria expanding into occupations with a high risk of disablement.

An increasing focus on pro-consumer outcomes in the financial services sector also impacted on claims pay-out decisions. “The insurance industry is under constant scrutiny and (in Australia in particular) many companies were under pressure to pay the 50-50 claims for fear of negative media exposure,” he said. To bring first principles back to bear the industry could consider reducing maximum sums insured under TPD benefits; restricting large sums assured to the activities of daily living (ADL) basis; reducing sums insured with age increases; and reviewing total coverage across all disability products. De la Rey also suggested reviewing eligibility criteria and tightening weak definitions.