Finding the Perfect Intersection of Risk Management and Marketing in a Covid-19 World
COVID-19 has legitimately had a major impact on life insurance underwriting and risk management processes. It has already become a major cause of life insurance deaths; in some hotspots eclipsing cancer and heart disease as a cause of death.
Creating a three-headed problem for life insurers
- Avoiding anti-selection by consumers who know or suspect they have been infected but not yet sought treatment;
- Reducing death benefit exposure on in-force policies for a pandemic risk that wasn’t factored into pricing; and
- Reducing an enlarging number of abandoned new applications from purchasers who do not wish to undergo an intrusive underwriting process that forces them into close contact with multiple strangers.
Executives have to navigate through these issues as they seek to meet business planning objectives.
How can companies accomplish this without engaging in extreme responses, that solve one problem at the expense of exacerbating another problem?
The first step is to best manage your mortality exposure in the form of anti-selection and in-force blocks that have larger than average exposure to COVID-19 co-morbidity factors.
The point here is to not manage overall death benefit exposure to COVID-19, but to adapt one’s underwriting process to sniff out any ill-intentioned consumers. These consumers seek to anti-select, as well as, cover the risk of issuing policies on insureds who are infected, but still asymptomatic and untreated.
Often the only way of determining whether an applicant is COVID-19 symptomatic, in the absence of widespread testing is:
- Good field underwriting by the agent and
- Paramedic performing a medical examination
However, such a process may be unacceptable to either the applicant, the agent, and/or the paramedic. Some insurers have paused their review of applications 30 days to understand which applicants are seeking treatment for a COVID-19 infection or just refusing applications on certain age groups.
Other than as a very short term interim fix, this strikes me as an effective overreaction to the risk.
Refusing all life product access for those above a certain age will eliminate exposure to a significant chunk of COVID-19 deaths, but also eliminates as customers the 90% of people falling into this group that have not been infected. This eliminates large portions of the life insurance market that seeks to use the product in an estate planning setting.
It also fails to account for the fact that a large number of the deaths in this group involve nursing home residents, who cannot be underwritten successfully even under pre-COVID-19 rules. Even refusing to issue on this age group for those exhibiting significant COVID-19 co-morbidity factors, would be a more measured approach.
The following is another way to handle this issue, which would be more consumer-friendly.
Price the anti-selection risk and then issue policies on applications where a medical examination does not get submitted at a higher rating class (e.g. non-smoker standard or a class B rating v. select preferred).
None of this would require a state filing or a change in the policy’s pricing. At the same time, the carrier would not have to deny access to the product to a whole large class of consumers. The carrier would be compensated for any added risk appropriately in the interim period.
Detecting those who are asymptomatic and untreated at the time of application is a major concern.
An easier way to protect the insurer would be to utilize an application supplement at the time of policy delivery, where the agent could only deliver the policy on the signature of the supplement. It would represent that the insured hasn’t had appositive COVID-19 test or been treated for COVID-19 infection since the application was submitted.
With a Compact filing, a simple application supplement could be up and running in most states very quickly. In approaching regulators, the insurer could take the position that they are trying to limit as much as possible, denying consumer access to the product.
This issue should be handled by re-evaluating capital management and reinsurance strategies. There is precedent for pandemic related reinsurance coverage in a stop-loss format. Life insurers in the past, have chosen to forego this coverage due to expense management concerns.
The first step would be to perform an actuarial study of the required capital to support the new and in-force business. Many carriers have this information readily at hand already. The stop-loss coverage could then be tailored to cover underinsured death claims due to COVID-19 above policy reserves for an amount over total surplus less required capital plus an appropriate capital cushion.
This would limit coverage and expense to only what is necessary to:
- Maintain ratings
- Financial strength
One Step Further
For a carrier concerned about application abandonment or adverse sales impact, the carrier could even go a step further than what is suggested above.
Give the consumer the option to be re-rated to an improved rating class, if they complete the medical exam within a specified period after the policy date.
In doing so the carrier would give the consumer a “can’t lose” proposition and also gain valuable consumer research into the elasticity, between intrusive underwriting requirements and the price of coverage at the consumer level.
As social distancing rules are relaxed, most consumers would presumably get the exam and apply for an improvement in the rating class. The results of those exams would give the carrier a very clear snapshot of the protective value of using medical exams to surface undetected disease in general not just for COVID-19.
Flourish Post COVID-19
These suggestions are by no means exhaustive in developing a COVID-19 underwriting and marketing strategy. The carriers that flourish post COVID-19, are going to be those that take a more nuanced and innovative approach, to both risk management and marketing.
To avoid overreacting to one challenge at the expense of the other will require a scalpel and not a chainsaw. As Hippocrates once said, “first do no harm” to the franchise, but than don”t fail to address the side effects of that approach.