Implications of Underwriting Decisions TWUC April 4, 2011 Doug Ingle, FALU, FLMI Vice President Underwriting Research

Implications of Underwriting DecisionsTWUC April 4, 2011

Doug Ingle, FALU, FLMIVice President Underwriting Research

Underwriting Decision Implications

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Disclaimer

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We Look at the TreesManagement the Forest

Underwriting is about reviewing individual cases and classifying risk

Your results produce global strategy and underwriting philosophy for your company

Each Company’s philosophy is unique

3Underwriting Decision Implications3

Risk Classification Answer

There really is no one “Right” answer just as there is no one set of “Preferred” rules for the whole industry

Think About it:

• For each of our Companies our Best Preferred Class is Based on Our Own Underwriting Rules Unique to Our Company

• Our Competitor’s Best Preferred Class Has Different Rules• Safe to Say: THERE IS NO ONE RIGHT ANSWER FOR WHAT A PREFERRED RISK

IS

Then, How can we all succeed?

Underwriting is the process of “Aligning an Underwriting Philosophy with an Actuarial Pricing Philosophy”

– When in sync, your company can be successful


Underwriting is About the “Rare”

Most of the time We Don’t Find Anything!

Agent: Do you really need that ________(fill in the blank: blood, urine, APS, EKG) chances are you won’t find anything anyway!


Premium 101

Premium is about the “Rare” 1,000 people all have $1,000 life insurance policies 1 out of 1,000 is expected to die next year

Question: How much money needs to be collected from each person to cover the payout? (Payout=$1,000)• $1.00

Question: How many are expected to live? • 999


Premium 101

Prior Slide:• 1 out of 1,000 expected to die• “Double the mortality” means 2 out of 1,000 expected to die

– In our world that’s 100 debits or 200% of standard

So, What Happens When you Double the Mortality?

Question: How much money needs to be collected from each person to cover the payout? (Payout = $2,000)• $2.00

Question: How many are expected to live?• 998

Underwriting Decision Implications7

Underwriting: Rare is Important

If you don’t buy in to the philosophy that rare is important then……

To understand what we are entrusted to do• Let’s assume no underwriting• How many people are found by the underwriting process and avoided death claims


Compare

Death Rate in the US Population• 1999-2001 Decennial Life Tables1

2001 VBT (Valuation Basic Table)2

• SOA Life Insurance Industry Table

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1Arias E, Curtin LR, Wei R, Anderson RN. United States decennial life tables for 1999–2001, United States life tables. National vital statistics reports; vol 57 no 1. Hyattsville, MD: National Center for Health Statistics. 2008.

2http://www.soa.org/research/individual-life/final-report-life-insurance-valuation.aspx


Comparison of Death Rates

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3The VBT 2001 displays duration 1 Male Composite ANB

41999-2001 Decennial Table 2 Males


Deaths and Premium

Age 25 expect 0.39 deaths per 1,000 applicants

How much money need to collect from 1,000 people to pay for death? • 39 ¢

How much would each person have to pay if there was no underwriting?*• $1.33

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*Assumes no antiselection and all must purchase insurance


Convert that to a Rating (Age 25)

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US Population = 1.33 Insured Population = 0.39

• In other words, that would be like rating all 1,000 applicants ~ +250 (Table 10)


Underwriting

Out of 1,000 applicants how much mortality is identified by the underwriting process?

• Death rate from 1.33 to 0.39• 1.33 – 0.39 = 0.94 (less than one person per thousand)


Survival Comparison

How many expected to survive one year in underwritten vs non-underwritten population?

– If 0.39 per thousand die, that means 999.61 live– If 1.33 per thousand die, that means 998.67 live

The survival rate for the US population compared to the survival rate of the insured population is

Or a 0.09% lower survival rate


What do the 2 Survival Curves Look Like?


Note the Y-axis After 10 years out of 1,000 people;994 of SOA people survive986 of US Population survive

What’s Expected?

Have you ever heard this before?

• Most 65 year olds have high blood pressure• A lot of 70 year olds have a history of a heart attack• So, why would you rate what is normal for that age?

What percent of Applicants do we expect to issue without a Rating?

Does that vary by Age?


Compare insured lives mortality to US Population Mortality

What percent of US population is insured lives mortality?

In other words:• (VBT mortality) / (US Population mortality)

– 0.39 / 1.33 = 29%– 0.35 / 1.80 = 19%

For mortality to be that much lower the insured lives health status cannot mirror the US general population


Risk Class Distribution by Age5


5Woodman, Journal Ins Med1990:22(2);98-101

Why do we Get Requirements?

Requirements are used to find the rare A hit (finding impairment) is just the starting point Requirement value is based on “Magnitude”

Small hit– From Super Preferred to Preferred

Big hit– From Super Preferred to Decline


MAGNITUDE

Magnitude = Debits


Question

Underwriting Budget for Requirements• Scrutinized by many• Easy to “see the money”

The rest of the equation pertains to the mortality impact the requirement has• Often not studied• Nor well understood


The One Minute Requirement Study

The Value of Requirement ‘X’ Take a random sample of applicants (100)6

Requirement has value when it is a “surprise finding”• Surprise finding = Hit

Magnitude is based on number of debits found• More debits = More value

For many companies 1 debit = 1% increase in mortality


6Mast,J Cost-Benefit Analysis of Underwriting Requirements Intermediate Non-Medical LifeInsurance Underwriting ALU 202 1st edition. 2006

The One Minute Requirement Study

Add up all the surprise debits found in the sample• For example:

• That’s 6 “hits” and 800 debits• Total number of people in sample = 100• Total debits/total number in study = 800/100• On average find 8 debits per application


One Minute Requirement Study (Results)

If 1 debit = 1% increase in mortality then 8 debits means a 8% increase in mortality if that requirement no longer obtained

Done! Caveats:

• Assumes – No Antiselection– The intentional focus on mortality side of the equation alone


What’s That Mean?

Use Financial Underwriting Background to answer that question

Common Profit Margins for Corporations• 5 – 10%

If Mortality increases by 8% erodes profits by that percent on the mortality component of the premium


Take Homes

Not many people are found by underwriting especially at the younger ages

Yet the few deaths avoided have a major impact on what the remaining individuals would need to pay

Underwriting is about finding the “rare”


Thank You

Documents

Implications of Underwriting Decisions TWUC April 4, 2011 Doug Ingle, FALU, FLMI Vice President Underwriting Research