When it comes to understanding the impact and benefits of digital transformation in financial services, one of the most significant areas to focus on in life insurance is underwriting. It sits at the heart of the insurance business model, and for decades has been filled with friction, needle sticks, lengthy waits, paper processes, and an endless number of touchpoints that leave clients and their advisors feeling frustrated. It was ripe for innovation.
Enter accelerated underwriting, a data-driven solution that life insurers have been implementing over the past several years. It enables a faster, less invasive, and digital purchase experience for clients, and its value cannot be overstated in the new COVID-19 world with virtual interactions and inability to obtain traditional underwriting inputs, like paramedical exams.
The significantly improved client experience gets most of the spotlight for this important innovation, and rightly so. Yet now that accelerated underwriting has emerged from its infancy, there is an opportunity to move the conversation to best practices and competitive advantages regarding data-driven underwriting, as these have important ramifications for long-term product value and individual financial security.
Even in the face of digital transformation, the simple and unchanged fact about life insurance is clients need to know when they buy a life insurance policy that the company issuing it will be there when needed to pay the claim, often several decades later.
One of the most important factors to the long-term performance of life insurance companies is management of mortality risk, which in turn relies on consistent high-quality underwriting. Now that underwriting is increasingly data-driven, the mortality experience of insurers is increasingly reliant on accelerated underwriting algorithms. Rigorous design and execution of automated underwriting programs is critical then to carriers’ mortality experience and your clients’ financial security.
So, what should advisors be asking about the accelerated underwriting processes of insurers when recommending insurance solutions to your clients? Here are three questions:
- Is there a tradeoff between short-term gains and longer-term mortality risk? Traditional underwriting is an expensive process with staffing and the cost of underwriting requirements, like medical records and exams. The cost reduction benefits then of automated underwriting can be significant and realized quickly. It is important to make sure that the insurer is not adopting automated processes that deliver short-term cost benefits but at the expense of longer-term increased mortality risk. Look for insurers that prioritize financial strength and product performance and are not willing to trade them for short-term cost reductions.
- Is the insurer using custom or aggregated data? Accelerated underwriting relies on data, and the more the data is customized to the individual insurer’s business, the more useful and relevant it will be to underwriting the risk. Avoid insurers that build accelerated underwriting programs based largely on third-party aggregated data, and instead look for insurers that can use their own data to build accelerated underwriting programs that are more specifically customized to their business and the clients they serve.
- Does the insurer have a track record of high-quality traditional underwriting? Accelerated underwriting is ultimately limited by how good an insurer is with its traditional underwriting. Automating an inferior process will not deliver superior results. Look for companies that have proven track records of superior mortality, long-term product value, and high policy persistency, as these factors all point to strong traditional underwriting. In the case of mutual companies, the payment of annual dividends also underscores the success of underwriting practices over time.
Accelerated underwriting has clearly been a game changer for insurers and clients alike. It is creating a better experience for clients, while also potentially improving mortality and morbidity experience and lowering expenses for insurers. But it is important to evaluate each insurers’ approach because not all accelerated underwriting is created equal, and ultimately, the differences impact the financial strength of the insurer itself and most importantly, the long-term product value and reliability for clients.
