Medigap Underwriting – Is It Really All That Simple?
When an insurance carrier is considering entering the Medicare Supplement (Medigap) market, a common belief is that the typical underwriting process is simplified for this product requiring little preparation and decision-making. After all, this is Medigap we’re talking about – it’s pretty straightforward, right? Well, yes and no. While the product features are largely standardized, not placing enough emphasis on the underwriting function runs the risk of suboptimal sales and profit results.
It is true, Medigap underwriting can be much simpler than other types of individual insurance frequently purchased by consumers today. Take life insurance, for example. Common underwriting requirements include blood/urine testing, paramedical exams and copies of medical records. The consumer who makes it through the approval process may be offered a policy that costs many times the standard premium quoted by the agent. The application form itself may be complicated with multiple pages dedicated to a long list of questions relating to medical, occupational, financial and avocational risk.
Medigap underwriting, on the other hand, is a more simplified process. Carriers usually base their decisions on no more than three pieces of information. Of course, all require an application. A telephone interview with the applicant and/or a pharmacy report showing the history of medications prescribed to the individual might also be required. For the most part though, that’s it.
But let’s look closer at the application. Unlike life insurance, most Medigap apps are designed using the “knock-out” type of question. For example, if the applicant answers “yes” to a question about having a stroke in the last three years, he or she is out. If the individual answers “no”, he or she is still in. Seems simple until you start reading the underwriting guidelines designed to aid agents in filling out the application. For example, these guidelines might require a set of additional questions to be asked in order to distinguish the “good” from the “bad” stroke history. Pretty soon, the agent is knee deep in the details of the applicant’s personal medical history.
The theme continues as the agent proceeds to the medication history, often a major decision factor. The insurance company gives agents a long list (hundreds) of medications and tells them to not sell a policy to people taking any of the medications on the list. The applicant is asked to list all of the medications and dosages they have used within the past year or two. Then, as information is obtained from the pharmacy report and/or the telephone interview, you can imagine how discrepancies can surface and lead to delays in the process as the underwriter tries to sort out the facts and risk.
Hanging in the balance is whether carriers can maintain and improve underwriting efficiency and effectiveness throughout this process. When trying to keep to a simplified process, it can be quite challenging to accurately and consistently accept or reject risks on either side of the tolerance point for pricing. The challenge becomes even greater when we consider how competitive this business is.
Changing a long-established process can be daunting to consider. Finding the right mix of improved risk selection while keeping the product marketable is not easy. We will continuously monitor trends and conduct research in this area. As a matter of fact, we are finding some promising results from our recent research leveraging behavioral economics. For more information feel free to contact me.