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Category Life Insurance

Scientists and specialists

22 January 2004 Bill Monday

There is no room for chancing in today’s financial and legal environment. If you consider the amount of cover offered in today’s policies, no company is going to accept questionable decisions.

No room for changing

Every effort is made to prevent poor underwriting through various tools such as underwriting guidelines, internal auditing, peer review, and the use of multidisciplinary risk assessment teams. Training of staff is a high priority within the industry as it is staying abreast of the latest medical information. To address this issue of questionable decisions, bargainable underwriters and unnecessary delays and requests, I would like to write a series of articles discussing the
underwriting process as well as the challenges facing the underwriter in 2003.

We have come a long way since the days of initial underwriting. Brackenridge, in his book “Medical selection of Life Risks” gives us insight into the history of underwriting. In the early days of this industry it was possible to insure a person’s life without their knowledge! In 1725 the agent was asked to examine the applicant, prove their identity and ask them whether they had had smallpox. The famous Astronomer Edmund Halley was the first person to develop mortality tables when he wrote a paper called “An Estimate of the Degrees of Mortality of Mankind drawn from Curious Tables of the Births and Funerals at the City of Breslaw”, Medical examinations were first used for assessing risk in the USA in 1809.

Today we as an industry and professional body must use evidence based medicine when applying a loading to a policy on medical grounds. We must classify risk in order to ensure equitable treatment of policyholders and financial soundness of the industry. It is also true that private voluntary insurance only works if clients believe that the extent of the premium
charged equals the expected value of claims plus expenses. We must also note that we are privileged to be in a country with acts of law prohibiting unfair discrimination.

Medical underwriting is obviously only a part of the underwriting process if one considers issues such as insurable interest,financial underwriting, existing cover and so forth, but I am going to concentrate on the medical component as I feel it is the area most under scrutiny. There are a number of tools available to the underwriter to assess medical risk and it would be true to say that more medical underwriting is performed as the sum assured increases. It is very interesting to look at what the general public feel should be used for assessing risk. In an opinion poll performed in the USA it was found that 69 % of people feel that smoking was a factor that should be used to set premiums for life insurance, 49% felt age was a factor, 48% considered cancerto be a factor, 25% considered cholesterol to be important and 25% felt family history was important. Genetic information was felt to be important by only 13% of those polled.

Information needed
The information that is presently used includes medical history on the application, blood results such as cholesterol, liverfunction and HIV testing, findings from an insurance medical examination, special investigations such as lung function testing and ECG’s, and information gathered from Medical reports and specific medical questionnaires. The underwriter may
also have access to records from previous underwriting of the applicant. With this information the underwriter is then tasked to make an appropriate underwriting decision.

As examples of the underwriting process, in this series of articles I am going to look at common causes for policies to be loaded and I hope this will assist in better understanding of underwriting

Common causes
One of the most common causes for a loading is obesity. As in America, the South African population is on average becoming more overweight. In Europe, obesity has increased by 14% over the last decade and we are following in the same footsteps. The Insurance industry uses Body Mass Index (BMI) to assess obesity. This is a Formula used worldwide and can be calculated by dividing your weight in kilograms by your height (in metres) squared. As an example if you take a man weighing 80kg with a height of 1.8 metres, his BMI is 80/ (1.8) 2 which is 80/3.24 = BMI of 24.7. Be brave, work out your own BMI! Obesity is defined as having a BMI of over 30, severe obesity is a BMI> 35 and morbid obesity is a BMI > 40. Mortality and morbidity is increased in obesity. Obesity is associated with the development of some of the most prevalent diseases of modern society.The greatest risk is for diabetes, where a BMI of >35 increases the risk 93 fold in women and 42 fold in men. The risk ofischaemic heart disease is increased 86% by a 20% rise in weight in men whereas in obese women the risk is increased 3.6 fold. As a Doctor in the industry I am seeing an increasing number of cases of middle-aged applicants who are overweight, hypertensive, diabetic with raised cholesterol. This is known as the “Metabolic syndrome” and places the person at much higher risk for heart disease and stroke.

Add smoking to this scenario and you are sitting on a time bomb. Given this medical information on the increased risk associated with obesity the underwriter is in a position to apply an appropriate loading based on evidence based medicine. Obviously there are other factors taken into consideration such as associated risk factors for heart disease and the actual build of the person. You do not want to load an applicant with the body of Arnold Schwartzenneger just because his BMI is raised. It is for this reason that the medical examiner is asked to assess the build of the person at the time of underwriting. This discussion covers the height and weight and build portion of a medical examination and in future articles I will dissect each component of an insurance medical with the aim of providing better understanding of insurance medicine.

Quick Polls

QUESTION

Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

ANSWER

[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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