Chapter 2 - Cost-Benefit Analysis Of Underwriting Requirements

Question 1

Cost-benefit studies

Answer 1

An integral part of the risk management process. Provide information needed to evaluate whether dollars invested in risk selection information are producing an adequate return on the company’s investment.

Question 2

Cost-Benefit Studies provide

Answer 2

Objective evidence needed to evaluate the cost-effectiveness of an underwriting requirement in particular or the underwriting process in general.

Question 3

Factors to consider when comparing other companies age and amount requirements (10)

Answer 3

1. The bases used to set a company’s current limits, such as results from cost-benefit studies and/or analyses of peer companies limits
2. Other requirements used and the related limits used
3. The underwriting manual and how it is used
4. The underwriting philosophy used vs peer companies.
5. Underwriting proficiency in case workups
6. Target markets
7. Distribution system
8. Products marketed
9. Mortality and other expense expectations.
10. Experience-monitoring capabilities.

Question 4

First Step to Cost-Benefit Study

Answer 4

Determine the objectives to be achieved, such as which underwriting requirements to review. The nature of the study to be conducted and the kind of data to capture will depend on which requirement is to be reviewed.

Question 5

Sentinel effect of testing

Answer 5

The reduction in prevalence observed amount tested individuals. Deters proposed insured’s with known or suspected impairments or abnormal lab findings from apply for insurance or causes them to apply for amounts below requirement threshold limits.

Question 6

Factors effecting which underwriting requirement to evaluate

Answer 6

Competition
Perception (the a particular requirement is no longer valuable at the certain age and amount threshold).
Increasing cost of doing business

Question 7

Design of the study

Answer 7

Most effective based on collaboration amount individuals who are stake holders in the outcome and who represent relevant disciplines that need to be involved. I.e., underwriter, product development actuary, new business admin, research analysis associate, and rep from marketing.

Question 8

Deciding which items to capture will depend on

Answer 8

1. Which data are available for study
2. Which data may be needed for comparisons with other companies’ studies
3. Which data are needed for translation of protective information into quantifiable benefits.

Question 9

Methodology

Answer 9

Established to decide whether, when, and to what extent a requirement is considered to be protective.

Question 10

Contributory Requirement

Answer 10

One that was obtained because of the presence of other information such as MIB or previous underwriting file. Without which the protective requirement would not have been requested.

Question 11

Decisions that need to be handled consistently and accurately:

Answer 11

1. The number of cases chosen for inclusion. Large enough to produce credible and useful results.
2. The analysis needs to distinguish on a case-by-case basis whether a requirement under study was solely responsible for an adverse underwriting decision. A requirement can be said to be uniquely protective when the adverse information is “solely contained in” or “solely triggered by” such requirement.
3. The analysis should identify situations in which a requirement was not uniquely responsible for an adverse underwriting decision. I.e., multiple requirements showing the same adverse information.
4. The analysis should determine why a requirement was obtained by distinguishing age and/or amount of insurance considerations from “for cause”, “medical history”, MIB considerations.

Question 12

Studies have certain limitations “statistical noise”

Answer 12

Cannot take into account factors such as:

1. The sentinel effect
2. The cost of good business lost by delay in taking final underwriting action,
3. The effect of the open market on business when there are changes in market and/or risk classifications employed.

Question 13

Statistical noise

Answer 13

Such shortcomings can be impossible to quantify with a high degree of confidence.

Question 14

After changes are made in using underwriting requirements - evaluate the potential impact on such changes on:

Answer 14

1. broad measures, such as the number of applications received
2. incidence of adverse underwriting decisions
3. average time taken to reach final decisions
4. incidence of requests from producers for exceptions.
5. Total out-of-pocket expenses for underwriting requirements
6. choice and incidence of use of other requirements.

Question 15

Variation of a cost-benefit study

Answer 15

Ordering a requirement on a sample of cases for study purposes only; that is, without any intent of using the resulting information to classify the particular risks involved. Potential problem for an insurer to contest an early death claim but can shorten the time to evaluate and less impact to the proposed insured.

Question 16

Steps in conducting cost-benefit study

Answer 16

1. Select a random sample of cases with underwriting requirements to be evaluated. Should represent dec, pp, and incomplete cases.
2. Cases should require full underwriting.
3. Items to consider recording
4. Cost-benefit or cost-effectiveness of each requirement can be estimated by: (1) determine proportion of requirements resulting in an adverse decision. (b) Determine the average % of extra mortality uncovered. (c) Estimate the dollar value of protection per dollar spent on the requirement if it was solely responsible for the adverse action. (d) Net savings from obtaining a particular requirement are estimated by subtracting their cost from their value. (e) The value of the requirement for supplemental benefits (GI, TDB, ADB).
5. Recording information for study purposes should be done by a small number of individuals (preferably underwriters) to assume uniformity and accuracy in the details coded.
6. The additional costs aside from the requirement should be calculated (i.e., cost of requesting, time to review, etc).
7. In addition - time taken to obtain various req’ts, as well as process various types of apps. The expenses associated w/ underwriting req’ts in comparison to the assumptions used in determining gross premiums.

Question 17

Break even amounts of insurance

Answer 17

The particular amount at which the increase in morality costs anticipated from not obtaining an underwriting requirement is counterbalanced by the corresponding reduction in underwritings costs.
** See b, c, d, and e of cost effectiveness for usefulness in determining the break even amount**

Question 18

Essential Items to record for Cost-Benefit Study

Answer 18

1. File number - Rejections, PP, files closed incomplete, issued and placed, not taken
2. Gender
3. Age
4. Tobacco use
5. Type of insurance (term vs perm)
6. FA - including term and GI, total line, using highest FA.
7. Type of underwriting requirement under study
8. Reason for ordering req’t. Distinguish A&A from cause
9. Add’l req’t’s triggerd by the first item ordered
10. Cost of requirements (plus add’l req’t [i.e., #9)
11. Final action without requirement
12. Final action with requirement
13. Protective value of requirement (mortality percentage points or dollar value of difference between final action with or without the req’t. 500% = rejected case.

Question 19

Optional Items to record for Cost-Benefit Study

Answer 19

1. Portion of app file triggering the first requirement ordered (MIB, exam findings, medical declaration)
2. Nature of application (non-med, PM, physician’s exam)
3. APS dtls (duration since AP was consulted by insured vs AP, # of f/ups sent before rec’ing APS, #of days for receipt of APS, # of days processing of app was delayed solely d/t requesting and processing the APS, fee paid for APS, whether special test was borrowed from AP, whether the special test borrowed changes the underwriting action