Due Diligence in Group Underwriting - Why It Matters for the Long Term
As a Berkshire Hathaway company, Gen Re abides by four key underwriting disciplines as described by Warren Buffet in his annual report:
“At bottom, a sound insurance operation needs to adhere to four disciplines. It must:
- (1) Understand all exposures that might cause a policy to incur losses
- (2) Conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does
(3) Set a premium that, on average, will deliver a profit after both prospective loss costs and operating expense are covered
(4) Be willing to walk away if the appropriate premium can't be obtained.”
- There’s much to consider here, but let’s look at the first discipline. On a scale of one to ten, how well do you feel your underwriters understand every exposure they are assessing when it comes to your Group business?
- As we've seen through working on our annual Group Life and Disability Market Survey over the years, it's not uncommon for companies to have “fits and starts” when it comes to sales growth. The company turns the proverbial faucet on and sales begin to skyrocket; then it pulls back into “fix and strengthen” mode in order to balance things out - only to turn the faucet back on again, and the cycle continues.
- Underwriting can be particularly challenging during those high growth periods; this is when it is vitally important for the risk being presented to be fully understood. Underwriters are responsible for protecting the company by balancing sales growth pressures and sound underwriting principles. In Group insurance, there are a couple important ways to support this balance.
Confirm Key Plan Details
- In many of the facultative case underwriting reviews we conduct for our Group Life and Disability reinsurance clients, a common reason we may not accept a reinsurance risk at face value is information that is unclear, incomplete or unverified.
- Suppose an insurance carrier writes a Group Life policy with the intention of duplicating the incumbent carrier’s current plan design and provisions. However, the new carrier reviewed only the Summary Booklet and Summary Plan Description provided with the Request for Proposal. Based on that, they sell and implement a Supplemental Life plan with a Guarantee Issue Limit of 3x salary up to a maximum of $500,000, believing they’ve matched the existing plan and provision.
As it turns out, the current Guarantee Issue Limit is actually $500,000 with no 3x salary limitation. Proper due diligence and review of the incumbent carrier’s actual policy would have revealed that the Guarantee Issue did include a 3x salary limitation when the policy was originally written; however, it was removed at the last renewal. The reason it was removed was the Employer could only administer a dollar Guarantee Issue, not a times salary limitation. Due diligence by the new insurance carrier would have identified this prior to the completion of the sale.
As the 3x salary limit was an important component to managing the amount of Guarantee Issue, its removal from the prior carrier’s policy ultimately increased the new carrier’s risk. An employee making a $50,000 salary had been eligible to enroll for a $500,000 benefit on a Guaranteed Issue basis under the prior plan, where the underwriting and pricing of the new policy assumed this employee could enroll to a maximum of only $150,000. The risk of adverse selection was significantly heightened since the medical underwriting requirement was essentially waived for an additional $350,000 of coverage.
- Complete and Accurate Census
- Last year, a client requested that we conduct a MarketCheck on the topic of data quality in the quoting process. Periodically, our research center will do these checks when a topic seems of broad interest to the marketplace. The results of the MarketCheck revealed that when confronted with missing census data, underwriters commonly tend to apply assumptions. However, making assumptions based on missing or unclear data not only results in potentially negative impacts to the bottom line, but also influences a company’s competitiveness on the case.
- For example, assumptions based on missing employee age, gender, occupations, age reduction schedules, etc. often results in calculating rates that are either too high or too low. Rates skewed low can win a carrier business that is underpriced, while rates skewed high can mean a carrier issues an uncompetitive quote, therefore losing an otherwise profitable new sale.
- There’s no doubt that being the company that pushes back and requires complete and accurate information is easier said than done, especially in a highly competitive market. Encouragingly, all 18 companies that participated in the MarketCheck reported they are proactive in convincing brokers, sales reps and employers of the benefits of obtaining complete information when quoting. Further, over 50% of participants either “almost always” or “frequently” receive the requested information across case sizes.
- Companies that philosophically support the discipline of due diligence in the underwriting process may feel the pressure in the short term, but will be the winners in the long term.