Once upon a time, being a standard risk in the underwriting process was the best you could hope for. It meant that your health was at the top of the group of insured lives being considered and eligible for the best rate, and that you would live all the way out to the prediction of the actuarial life tables. Now, life insurers have created a whole tier of preferred and super preferred pricing that makes a standard issue almost seem like a rated policy. The use of underwriting credits is getting more and more sophisticated, and helps companies attract the most favorable risks, but if not priced for properly can work suboptimally in the final tally.
Better than standard risks were created with the idea that someone’s health and longevity status would be longer than the actual mortality tables predicted. Because advances in medicine and medical science continued to increase actual longevity estimates, pricing was less of a concern. People were indeed living longer as a whole and any overestimates or aggressive approaches taken to mortality were almost self-corrected by medical advances. Competition though has forced these previous advantages to become smaller and smaller and, in some company pricing systems, actually anticipated in calculations. So now many grades of pricing better than standard can exist, depending on what triggers the company has set up as credits.
Original credits were set up on traditional risk systems. For instance, the Framingham Risk structure for cardiac risk factors would include blood pressure, build, cholesterol and the absence of diseases such as diabetes and hypertension for example. Credits eventually expanded to other degrees of healthy living, such as diet, exercise, frequency of health exams, and degrees of preventative health measures (mammograms, prostate checks, blood work, etc). More and more are being developed (even considering favorable genetic testing) as guides to separate the “super healthy” and reward them with policy discounts to court their business.
Credits are also used when people are not standard risks in the underwriting process. For instance, take the example of a male who has had bypass surgery for coronary artery disease. Credits might be issued for normal cholesterol with the help of a statin medication, or for a negative treadmill done post surgery, or for regular medical and specialist visits to maintain good health. Diabetes may have a general mortality, but credits may be given for better than average blood sugar control, normal build, good cholesterol, or any testing showing a lack of progression of potential complications. There are credits for good family history, having always been a non-smoker, and for an active lifestyle as well. The use of physician documentation on attending physician statements helps to confirm these factors more than just subjective comments by the potential insured.
Credits have to be carefully considered however and not just sprayed around willy-nilly or they defeat the purpose for which they were developed. For instance, if an insured has trouble breathing from pulmonary disease and smoking, how much credit should a family history for non-smoker parents or having normal cholesterol give you? When the credits can be applied directly to the overall health of the insured and be related to the disease or condition for which they are being credited, they are far more useful than where it is more like a department store where discounts are looked for in any random order.
Another potential problem with credits is that if applied too liberally, they affect mortality reserves and pricing. There was a scene in the movie “Bruce Almighty” where Jim Carrey becomes the Supreme Being and decides to grant the wishes of everyone who prays to him. One of those prominent requests was that everyone wanted to win the lottery. So many people did that the payout turned out to be $17 for the grand prize. If a product is priced for preferred so that 35 percent of people can qualify, and if credits push that number to 50 percent or more, it is no longer profitable. Crediting systems have to be carefully correlated with the mortality they are predicting, because, in a sense, if everyone “wins”, no one wins— when pricing has to be adjusted.
When applications come in, both broker and insured have to be proactive in pointing out the best part of the health status. Underwriters don’t always automatically apply credits and sometimes it takes a reminder to have them do so. Cover letters help do that and point out the most favorable parts of an insured’s health, whether it is excellent to start or impaired but with favorable aspects that put them ahead of others in their similar risk class. Also remember to ask for changes in underwriting philosophies and requirements at the time of application—knowing where the sweet spots are can improve even a good classification that much more favorably.
Robert Goldstone, MD, FACE, FLMI
Goldstone, board certified internist and endocrinologist, is vice president and chief medical officer for Pacific Life and Pacific Life and Annuity. He has extensive brokerage and life insurance experience, having been medical director at both MetLife Brokerage and Transamerica Occidental Life. Goldstone is board certified in insurance medicine and the inaugural recipient of the W. John Elder Award for Insurance Medicine Journalism Excellence. He was also honored as a fellow of the prestigious American College of Endocrinology and has written monthly for Broker World since 1990. Goldstone can be reached by telephone at 949-420-8390. Email: firstname.lastname@example.org.