Life InsuranceMar 4 2021

How does the 'tailored approach' in underwriting work?

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Scottish Widows
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Scottish Widows
How does the 'tailored approach' in underwriting work?
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But, recognising that each policyholder is different, insurers have also tried to offer them the flexibility to “tailor” policies to suit their particular needs.       

A particular breakthrough came from the development of the ‘menu-based’ approach, which dates back to the mid-1990s. 

This offers the simplicity of buying different types of protection products from a single company, involving only one policy fee. 

Different cover types can be chosen for different amounts and lengths of time, enabling policyholders to adapt cover to suit whatever stage of life they are in.   

Changing trends

The huge win from an underwriting perspective is that protection menus require only one set of medical underwriting to be performed, even if the policyholder is taking out life cover, critical illness cover and income protection. 

The consumer only has to answer one set of medical and lifestyle questions on a single application form, and the insurer – should they require them – only has to send off for one GP report or arrange one medical examination. 

The big challenge is that the advice process is quite complex and it’s hard for insurers to get IFAs’ attention.--Chris Pollard

This can all shave weeks, or even months, off the underwriting process.   

But during more recent years the term ‘tailored underwriting’ has tended to be used in conjunction with a trend for individuals to receive more flexible – and possibly also more generous  –  terms by taking out covers that focus on specific conditions. 

This idea can arguably be traced back as far as 2006, when Virgin Money launched the first cancer-only plan and, although this was subsequently followed by a similar product from AIG, the approach never really took off because underwriting for cancer on standard critical illness cover policies became so advanced.  

The more recent trend, however – which so far only applies to life cover – dates back to April 2017, when The Exeter launched Managed Life, a life policy aimed at both those with type 2 diabetes and those who are overweight. 

After going through the underwriting process, applicants are offered a higher premium than the average healthy person would pay (typically two and a half to three times as much) but also the chance to improve the premium annually if they exercise control factors effectively.      

If, for example, an obese individual loses weight or a diabetic effectively controls their blood sugar levels, they can earn premium reductions. Conversely, if weight or blood sugar levels increase then the premium could go up.

Royal London also launched a similar Diabetes Life Cover plan in April 2017, but this does not cater for obesity alone and, although offering the chance to obtain premium reductions, it will never actually increase premiums beyond initial levels.

Alan Lakey, director of CIExpert, says: “I welcome this underwriting approach because, although it wasn’t impossible, it was pretty difficult for diabetics to get cover before. 

“The theory is that diabetes and, in the case of The Exeter, also obesity, can be underwritten in a more precise manner, and the better the underwriting we have then the more likely people are to be able to get cover.”

However, the products have not been breaking any sales records, and The Exeter acknowledges that its much broader Real Life plan – launched in November 2018 to cater for people with multiple health problems or complex medical histories  – is doing three times the level of business of Managed Life.        

There are advantages from insurers not knowing everything about each individual, as it means they can offer them a pooled risk term.--Andrew Wibberley

Market challenges

Chris Pollard, chief operating officer at The Exeter, says: “The big challenge is that the advice process is quite complex and it’s hard for insurers to get IFAs’ attention. 

“Another reason why the Managed Life approach probably hasn’t caught on with other insurers is that it’s very expensive for us to underwrite the medical evidence. 

“We only accept around 2 per cent of cases via technology whereas standard insurers use technology for somewhere around 80 per cent of cases.”

The Exeter and Royal London also face competition from a number of intermediaries specialising in non-standard health risks and high-net-worth IFAs which have their own underwriters who carry out their own form of tailored underwriting.  

Jerry Brown, head of underwriting and claims at IFA Salus, says: “I would always prefer to place such risks via another specialist market that bespokes the cover than to use the Exeter-type product. 

“Because we mainly deal in high-net-worth cases, we tend to shop around individual underwriters. This doesn’t give people the chance to improve their premium annually but we could rebroke every three or four years and seek better terms.”

Importantly, this high-net-worth tailored approach also avoids the need to have to engage the policyholder every year to provide further medical information, which is undoubtedly one of the greatest challenges facing The Exeter and Royal London. 

But it is unlikely that either version of tailored underwriting will ever be perceived as more than a niche area.

Andrew Wibberley, director of underwriting consultancy Alea Risk, says: “Every adviser, customer and charity says they want more tailored underwriting but at some point you lose the benefits of the group approach. 

“There are advantages from insurers not knowing everything about each individual, as it means they can offer them a pooled risk term.      

“So, as information on particular risks gets better and better and enables you to get the best possible terms for an individual, it might mean standard risks begin to lose out. Aspects of this are in fact happening already, so tailored underwriting is not necessarily a joyous one-way street.”

Edmund Tirbutt is a freelance journalist