Assessing Risk in Life Insurance - Case study 1
August 22, 2012| By Tony Forte | Life | English
As a leading provider of facultative reinsurance we receive many challenging cases to review. For the next few months I thought I would turn the table and offer cases for the reader to review. Let's say, you were presented with a professional athlete, or more specifically, a professional football player.
Amount applied for: $3,000,000
Over the last two years this individual has played for two different teams, each under a one-year contract. His involvement in both instances was limited to special team status. He is currently unsigned and trying out with a few teams. His salary last year was the league minimum of $450,000. If he makes a team this year the new minimum will be $540,000. This player lists his net worth at slightly over $600,000. There is no life insurance in force.
On the surface, at his age and with no insurance in force, a salary slightly exceeding $500,000 clearly justifies the $3,000,000 amount being requested. Or does it? Several years back, Sports Illustrated, published an article on how professional athletes managed their finances. The article indicated 78% of former NFL players were bankrupt or dealing with financial issues within two years of retirement. Apparently, football players are not alone. That same article reported that 60% of NBA players were also bankrupt within five years of retirement.
Which brings us back to our applicant. What questions would we ask before deciding on this coverage?
There are many, but here are a few:
- How would he pay the premium if no team were to pick up his contract? Is this an early lapse risk, or potential over-insurance scenario?
- An internet search describes our applicant as a utility player. What are his future prospects - in football or other gainful employment?
- What assets are in his current net worth? Is it comprised of a well rounded investment portfolio or - expensive toys?
- How is he managing his current finances? Are there signs of financial stress, perhaps a history of late payments?
- And, speaking as a NY Jets fan, I would ask where he is likely to play? OK, forget this last question, but we sure could use a good open field tackler.
During the course of underwriting, a different risk aspect surfaced. An EKG, taken during a team physical, was interpreted as showing changes suggestive of heart disease. No further work-up was performed and the Proposed Insured has no interest in pursuing further investigation.
In summary, we are presented with a 28-year-old, currently unemployed, professional athlete, applying for a $3,000,000 life policy. Taking a step back and looking at the larger picture reveals questionable financial justification in the context of possible cardiac damage. That combination of risk factors raises the specter of anti-selective behavior. Said slightly differently, financial justification assumes greater significance when underwriting impaired lives.
Looks like my college professor was right - sometimes the whole can be greater than the sum of its parts. It’s a calculation underwriters make each time we assess a risk.