Andy Milburn guides us through what the underwriter believes are the most important factors that affect product pricing.
Actuaries can be a secretive bunch. After all, how many of us non-actuarial types understand even half of the detailed mathematical conversations they have? It is probably time to change this and, to that end, this column tries to explain some of the pricing strategies protection providers could adopt, and their impact on advisers and customers.
It seemed a good idea to ask those responsible for pricing protection products for their views on some key issues too. Underwriting has a huge impact on the pricing of protection products, so that seemed as good a place to start as any.
In conjunction with the Institute of Actuaries, Munich Re surveyed 39 of its members – the key individuals responsible for pricing of protection products sold in the UK – to see what they thought about underwriting and how the different aspects of it affect price.
The question was asked: “What are the five most important factors related to underwriting that you believe have an impact on the premium rate?”
Don’t worry that the percentages don’t add up – remember they picked five factors each. For example 21 of the 39 participants (54%) picked ‘clarity of questions asked’ in their top five topics.
It is not surprising that non-disclosure rates came in at number five in their answers. We have talked about this topic for ages and it still has a high profile. The higher the non-disclosure rate, the less accurate the pricing of the insurer’s book becomes. That is why tele-underwriting has been so popular – it reduces non-disclosure and helps us to price more accurately based on better information.
Type of product might be surprising to some but remember that the benefits of life cover compared to income protection are very different, similarly with whole of life cover and normal term assurance. Those differences in how the benefits are calculated and paid can have a huge impact on the price quoted as the risk is so different. What is surprising is that those responsible for pricing our products believe that ‘type of product’ is in itself an ‘underwriting factor’. It is further evidence that underwriting is more a description of an insurer’s new business process rather than just being a part of it in the past.
Experience and quality of the underwriting team can have a big impact on how protection is priced. It is great if you have rules and standards that the team have to operate to but if the underwriting team members choose to ignore or stretch those rules, then the business written by that insurer could be different to that they intended to write.
Clarity of questions asked came in at number two. There have been some great examples of this where the question could be “When did you last see your GP?” What if the client visited their GP’s surgery two weeks ago, didn’t see their GP and just picked up a prescription? Does the client say “two weeks ago” or do they state the last time that they actually saw their GP face to face, or both? I am sure readers can think of many other examples to back up why asking questions in the right way is vital. Those who price protection products recognise that too.
This brings us to the number one answer. Over two thirds of those surveyed believe ‘underwriting philosophy’ is the key underwriting factor affecting how protection products are priced. Some in the industry mention this a lot, yet for many of us it remains something intangible and confusing.
We discuss non-disclosure rates, ‘big t’ or ‘little t’ tele-underwriting, reducing the number of unnecessary GP reports while all the time forgetting that these subjects are all part of an insurer’s ‘underwriting philosophy’.
An insurer’s ‘underwriting philosophy’ could be many things. You can prove this point by putting those words into Google. You receive 727,000 results. There are many descriptions of what underwriting philosophies are, from ‘conservative’ to ‘professional’, from ‘efficient’ to ‘profitable’. An underwriting philosophy can be some or all of these things. It could quite easily be thought of as the sum of all of the underwriting parts. Maybe that is what the pricing experts behind our protection products believe too?
