Speeding Up Underwriting Will Help Banks Penetrate Mid-Market
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Banks provide a superb opportunity for insurers to penetrate the mid-market because of the huge number of built-in prospects. Just about every American has a bank account.
Most insurers are letting this opportunity slip through their fingers because theyre handcuffed by cumbersome, slow, expensive underwriting and new-business processing.
For insurers to capitalize on the huge opportunity offered by banks (and by the Internet and direct marketing, too), they must speed up policy issuance considerably. "Extreme" underwriting must give way to cost-effective, moderate underwriting geared to speed.
In the mid-market, with its smaller policies and younger issue ages, insurers can save more by trimming policy-issuance costs than they lose in excess mortality from more liberal underwriting.
Heres an example, using the 1998 Generally Recognized Expense Table for illustrations plus the 1975-80 Basic Mortality Tables. For a policy issued to a male aged 30, with a $100,000 face and a $200 premium, we have:
Acquisition cost: $283.
Present value of death claims over 20 years at 7% interest: $1,711.
So for 1,000 policies, the total acquisition cost is $283,000 and the total of claims is $1,711,000.
If speeding up issue processes cuts the cost in half, the insurer would save $141,500. To accept 4% of the applicants at an average of 100% extra mortality, the insurer would spend an additional $68,431. The result: a net savings of $73,069, or $73 per policy.
Besides reducing costs, streamlined underwriting cuts the number of not-taken policies. Taking four to eight weeks to deliver the policy gives customers too much time to change their mind. (Some of these not-takens are also due to policies being issued at premium rates higher than quoted due to substandard ratings.)
If the bank rep isnt willing to personally deliver the policy and resell it, he can lose 15% to 25% of his sales. Reducing the not-taken rate will boost sales of life, health and disability policies, cut fixed sales costs and improve sales productivity.
To continue with the example, we now have an acquisition cost for 1,000 issued and paid-for policies of $141,500. If 20% of all applications do not result in paid policies, then the insurer had to generate 1,250 applications to get those 1,000 policies.
If the insurer can lower the loss from 20% to 15% by issuing policies faster, now 1,062 policies will be issued at the same total cost of $141,500, for a cost per policy of $133 instead of $141, for an additional savings of $8 per policy. Coupled with the savings in the previous example, we now have a total savings of $81 per policy. Moreover, sales will increase by 6.2%.
The biggest time-eater in the policy-issue process is gathering the data deemed necessary to make a good underwriting decision: a paramedical exam, a body-fluid sample of some sort, the attending physicians statement and a report from the Medical Information Bureau. The most time-consuming aspects of this process are scheduling the paramedical and getting the APS.
How does the insurer speed up the underwriting process dramatically without getting whacked with huge claims?
First, replace hard-to-get data with easy-to-get data. Second, use technology to speed processing.
