Underwriting - from static to dynamic

In an industry that continues to evolve, finding new ways of gathering client data is fast becoming a trend. With developments in the medical field as well as increased access to relevant information, enabled through technology, life insurers are required to reconsider the traditional ways of pricing risk.

These traditional underwriting models are based on standard rating factors and ignore a client’s constantly changing health status. There is no reason why this should be the case as information is freely available, such as how often people exercise or go to the gym and even how much healthy food they consume.

Out with the old

Traditionally a client’s premium would be determined by the initial underwriting done at policy inception. A client’s risk assessment would only be done once, with the life insurer predicting future mortality and morbidity risk based on that alone, overlooking the client’s changing health status.

This prediction is based on a number of standard rating factors that include: age, gender, smoking status, level of wellness, hazardous activities and socio-economic circumstances. Insurers typically use this as a base to determine the client’s premiums for the duration of the policy term.

“The problem with this approach is that credit is quickly eroded to the point where mortality calculations are based on the average mortality rate of similar clients. We have found that this static model penalises healthier clients who will be overcharged throughout the duration of their policy term,” says Gareth Friedlander, Head of Research and Development for Discovery Life.

While some rating factors, such as age and gender, cannot be controlled, other rating factors, including smoker status and level of wellness, can. “Because of this, the client’s risk assessment should change over time through managing and measuring the rating factors used to predict illness and death,” says Friedlander.

Adopting new techniques

“The dynamic underwriting philosophy, as we refer to it, allows life insurers to unlock value through a more accurate risk assessment over time,” continues Friedlander.

With rapid changes in technology, life insurers should be able to rely on big data which takes into account health and wellness information that is monitored and assessed continuously rather than only at inception. However, not many traditional life insurers have the necessary infrastructure to gather such crucial information. While this may not be possible, advisers need to reconsider the traditional approach of interacting with clients once a year. If clients are engaged on a regular basis, up-to-date information on clients can be attained and assessed.

By using current health and wellness data throughout the policy term, a more accurate risk assessment can be conducted. “This will allow insurers to pass on a substantial amount of value back to clients,” says Friedlander.

Underwriting incorporates accidental risk assessment

The model of dynamic underwriting has proved to be successful in other areas, such as leveraging technology in the short-term insurance space, which allows long-term insurers to use this technology to more accurately price accidental mortality. “Statistics show that nearly one in five death claims last year were as a result of motor vehicle accidents,” says Friedlander.

The information gathered using innovative tools such as telematics technology help keep client’s safer, further decreasing the insurance costs. By driving well, clients can reduce their risk of being killed or injured in a car accident. Such data can therefore be used to reward clients for driving well. This is a trend which is becoming a major influential factor in the industry.

Incentivising clients to live healthier

Another trend is one which sees life insurers rewarding clients for managing their health and wellness. “An active rewards structure is very effective in changing clients’ behaviour by offering them incentives for healthier lifestyles. This change in behaviour is in turn able to shift the underlying risk curve and ensures lower costs for clients,” he concludes.