Medical Underwriting and the Mother of Invention
It’s easy to forget that Life insurance was an invention. Writing in 1866, the actuary Cornelius Walford described the workings of the Amicable Friendly Society that had opened for business 150 years earlier: “The plan was this: the number of members was to be 2,000. Amongst those that died in the first year, one-sixth of the total contributions was to be divided.” For those bankrolling this scheme, profit was dependent on the number of deaths in a given year. They had an interest in proposing only the healthiest of lives who were subject to cross examination as to their health and habits.1
Gambling laws eventually swept such schemes aside but not before plentiful losses had accrued. Mortality was high in the first few years at Amicable Friendly. Charles Povey, whose own life insurance scheme at The Traders’ Exchange House Office collapsed in 1710, lamented that “many impositions were put upon the office in its infancy, by peoples subscribing upon the lives of unhealthy persons, and upon such too that it was morally impossible that they should live to 12 months end.”
Lucky then that risk selection was another invention. By 1762, The Equitable Life Assurance Society was asking applicants to sign a declaration of health and face a panel of doctors, with any “unhealthy looking ones” refused coverage. Agents in 1775 were encouraged to ask around the neighbourhood for information on the state of health and the manner of life of a person seeking to be insured. UK insurers began asking attending physicians to perform medical examinations on applicants around 1823.
Comprehending medical information as a predictor of mortality is the bedrock of underwriters’ skills. It’s why Dr R.D.C Brackenridge published his first book on the subject in 1962 and went on to curate five editions of his unique work, Medical Selection of Life Risks, between 1977 and 2006. Another invention, the numerical rating system, first described in 1919, has become the universally accepted tool for differentiating risk.2 Devised as a system of risk evaluation based on mortality ratios expressed as a percentage, it allowed life insurance to be extended to people with less than perfect health. The challenge for underwriters is to perfect a mastery of both domains.
But this status quo is unlikely to be sustained for the next 300 years. It seems likely underwriters will require alternative skills to succeed in future. The primary driving force for most new inventions is need. Underwriting needs a further cycle of invention to fit with a digital world and the way we live in it.
Two parallel social developments will alter the nature of the information processed by future underwriters. One is the rise of the quantified self - the behaviour of measuring and sharing personal physical performance and health status using connected devices. Second is the increasing use of digital health solutions, whether downloads from app stores or as prescriptions from medically approved ecosystems. We will soon hold more detail about ourselves than occasional doctor visits can record. We will expect insurers to use selected parts of our data to provide a more nuanced offering than the numerical rating system can deliver.
There is concern, even once the puzzles of handling data are all solved, that individuals could manipulate the digital data they disclose. But we should again consider the limitation of the current system where, despite best efforts, many applicants have an imperfect understanding of disclosure. It’s arguable that the disclosure of digital information might be better understood and seen as a more transparent transaction than the current method.
Only time can tell if continuous data on sleep, movement, social engagement, exercise intensity and so on is any less or more predictive of mortality than scraps of detail found in extracts of medical records. The current system is capable yet fallible. I suspect if we were to invent underwriting for today we might take a less medical path. Unlike blood, digital data doesn’t spoil in the post or require people to attend appointments at inconvenient times.
Life underwriting has a long history. It also has a history of successfully reinventing itself. Much has changed since the 1930 manual for agents of the Northwest Union Life Insurance Company listed as uninsurable “any married woman, who has not borne at least one normal child, until she has been married for at least five years” - a mother of invention perhaps? A necessity for the next generation of underwriters is to reinvent and reimagine selection and calibrate it to a new digital paradigm. Contact your local Gen Re representative to find out more about how Gen Re is preparing for this future.
- Walford. C, History of Life Assurance in the United Kingdom, Journal of the Institute of Actuaries (1886-1994) Vol. 25, No. 6 (April 1886), pp. 433-437.
- Inspired by seeing the results of the specialised Mortality Investigation of 1903 presented as mortality ratios, Oscar H. Rogers and Arthur Hunter, medical director and actuary respectively at the New York Life Insurance Company, began work on a system of risk evaluation. After experimenting with it over several years, they finally presented their paper The Numerical Method of Determining the Value of Risks for Insurance, to the Association of Life Insurance Medical Directors of America and the Actuarial Society of America in 1919.