Financial Underwriting

Transcription

1 Financial Underwriting The next stage. John Turner Regional Underwriting Manager SR L&H Zurich

2 Agenda Why financially underwrite? Goals in financial underwriting. Problems in financial underwriting. excessive sums assured the agent use of income for measuring insurability overlap between different covers independence of evidence Slide 2 Tips and tricks

3 Why underwrite financially? Equitable Life Insurance Mortality Study 1934 Ratio of Total Premium to Income Mortality Ratio Less than 7% 71% 7.5% to 12.5% 95% 12.5% to 17.5% 113% 17.5% to 22.5% 140% 22.5% to 27.5% 170% Over 27.5% 177% Slide 3

4 Why underwrite financially? 30 Death Claim Experience by Amount -Face amounts over $250,000 (1982) Heart Cancer External Slide 4 Expect Actual Source: Swiss Re L&H, internal claims study

5 Why underwrite financially? SRL&H Large Amount Death Claims by Amount ( ) Cause Average sum claimed Cancer $578,446 Heart $571,535 Other $530,924 External $728,945 Source: Swiss Re L&H America, claims study,1993 Slide 5

6 Why underwrite financially? Studied cases with face amounts over 3,000,000 US Actual deaths were 222% of expected Comments attached to report were: there was an excess number of deaths by violent and accidental means Manufacturer s will now require the following on all large cases cocaine screens treadmill tests Slide 6 3rd party financial statements Source: Manufacturers Life large amount study 1989

7 Why underwrite financially? Unemployment and suicide in Japan percentage Year m orta lity (p er 10000) Unemployment Rate Population Suicide Rate Source: Japan Ministry of Health and Welfare Slide 7

8 Why underwrite financially? Suicide and unemployment in the United Kingdom suicide rate [in 100'000] unemployment [%] Male Female Slide 8 Sources: Labour Force Survey and WHO/Europe, HFA database

9 Why underwrite financially? Disability Income Percentage of those who after 5 months of disability ever return to work. 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% < Replacement ratio >150 Slide 9 Source: Meninger Study (US)

10 Why underwrite financially? Because: the issuing of the insurance impacts the chances of the insured event happening. And also because: the underwriter gets the blame when he fails to protect the company Slide 10

11 Goals in financial underwriting Establish an insurable interest ( what is the loss to the beneficiary) consistent with the amount in force and applied for Relate the amount of insurance to the demonstrated needs Keep the amount of coverage within the capacity of the proposed insured to pay for it lapse risk Slide 11 Avoid the exotic speculative case that has the power to entice even the most seasoned underwriter to ignore basic financial underwriting principles

12 Goals in financial underwriting More fundamental/basic accept as much good business as possible decline as much bad business as possible unfortunately differentiating the two is not always easy Slide 12

13 Problems in financial underwriting excessive sum assured If a case is excessive: is it exaggeration? is it speculation? is it fraud? is it explainable? Excessive amounts are purchased for different reasons, not all of which are dangerous to the insurer, e.g. tax efficiency investment driven sums assured Slide 13 overzealous salesforce

14 Problems in financial underwriting excessive sum assured If a case is excessive: Reduce cover Decline Accept full amount Go for more evidence to try and justify it Slide 14

15 Problems in financial underwriting the agent The agent: Financial underwriting seen as questioning ability of agent Loss of face for agent having to go back Financial motivation for agent for case to complete But, agent was at the sale, so only he can tell you if plan was bought or sold. Speak to, and build up relationships with, the agents They can be huge help explaining why particular plan or amount was sold Slide 15 If they understand why you need something, more likely to obtain it

16 Problems in financial underwriting -is income the best basis for measuring insurability? Yes - if available and accurate. Disclosures by client can be brief and understated. But books are rarely written for insurance purposes True income and financial status may not be provable Tax returns (if available) of limited value Details of overall lifestyle, other sources of income and net asset position often useful. Number of cars, value of home, clubs, place of residence, business history/profile, etc. Slide 16 But should only be used to help borderline decisions, and do not replace good financial underwriting

17 Problems in financial underwriting -is income the best basis for measuring insurability? Personal cover gives an emotion free value of an individual Business is a reflection of how valued an employee is by his employers Self employed indicator of success in own business (usually profit rather than income) Partnership protection not first piece of evidence but helpful indicator of likely value of share in business Inheritance tax of no value Slide 17

18 Problems in financial underwriting -overlap between different covers Personal / keyman cover depending on who owns the company Personal / share protection always overlap Keyman / commercial loan protection no overlap they are the same. Always consider who eventual beneficiary is Multiple applications under different names may just be a way of inflating insurance amount, with fraudulent intentions Slide 18

19 Problems in financial underwriting independence of evidence How independent is independent third party evidence? Accountant Private banker Lender Agent Life assured s own company Internet Slide 19

20 Tips and tricks Tip number 1: There are no tricks Slide 20

21 Tips and tricks Financial underwriting is a combination of common sense applied with a little knowledge of accounting It is not important to exactly value a person or company, more important are trends Pay attention to warning signs. These can be: finance based, i.e. negative net asset value but just as often behaviour based, i.e.: failure/delay producing evidence excessive pressure to accept Slide 21 inconsistency of information

22 Tips and tricks Tip number 2: When in doubt, ask. Financial underwriting is far more subjective than medical, so check your suspicions with others Underwriters are not accountants. Your companies, however, have them, when in doubt, use them. If none available, use your reinsurer, we love suspicious cases. Slide 22 the end