The cost of convenience in insurance: Underwrite at proposal time, or claim time?
Best Practice Advice & Compliance & Sales & Marketing for Professional Services

The cost of convenience in insurance: Underwrite at proposal time, or claim time?

April 27, 2020

by Tony Vidler  CFP logo   CLU logo  ChFC logo

Convenience in insurance can come at a steep cost: When does your client want to have the drama with their insurance company? At underwriting time, or at claim time?

The cover is going to get underwritten at some point, it really is just a matter of when.

This is a confusing facet of the life & personal risk insurance business; this perception that some companies are easier to do business with than others due to the apparent lack of barriers in underwriting processes….and while that is true to a degree, it is not always as simple as it seems.  Many advisers and brokers make the same mistake as many consumers in this respect, and both do so for the same reason: they have not had to go through the claims process.

To be sure, different insurers have different retention levels, make some different morbidity and mortality assumptions occasionally, and they definitely target different parts of the consumer-market with their pricing and underwriting terms. These factors undoubtedly make a difference to the underwriting process for any personal risk proposals.  

However, regardless of different insurers views of the variables to be given particular weight during the underwriting process, there remains a comprehensive underwriting process that will be employed by the majority.  Then there are offers where there appears to be no underwriting at all.   In a few cases this lack of underwriting is a deliberate strategy aimed at convenience for a particular niche – some examples where suppliers offer policies which are limited in scope for a period of time but then expand the coverage after effectively a waiting period, or switch campaigns that feature a strong price proposition are usually priced very appropriately for very carefully considered risks.
But nthen there are offers which appear to be provided to the entire market, rather than a niche need or clientele, and where there appears to be no underwriting at all.  The question then is simply whether the risk will be fully underwritten at proposal or at claim time.
We have seen in recent years some insurers remove the barrier to business by streamlining the underwriting process – some even going so far as to do extremely simplistic underwriting of perhaps 5-10 questions. That type of underwriting effectively identifies only immediately impending claims, which of course are risks that are not taken on by the insurer. This is a much murkier area as the insurer simply avoids taking on those impending claims entirely, but what about all the other policies it does accept with minimal underwriting though?
The reality is that the majority of the easily underwritten cases will be medically underwritten in the event of a claim. That of course is the precise time that a client or an adviser doesn’t want problems.  The purpose of insurance was to create a certain outcome when clearly defined events occurred wasn’t it?  These “underwritten-at-claim-time” policies do precisely the opposite: they introduce uncertainty in certain events.
Contrast that with the philosophy of fully underwriting and assessing the risk in full at the time of proposal. In the event of a claim most of those types of cases do not require full medical underwriting to settle the claim – it has been done at the outset, the risks appropriately weighed up and priced, and a high degree of certainty provided to the client. Sure there will often be some medical evidence required to validate the claim (for example; show that a heart attack did actually occur), but the claims managers are not going through the entire medical history looking for problems to include in the decision on whether or how to process the claim.
The difference between the two philosophies is a fairly stark one: higher claims certainty versus higher immediate convenience.
It may be that a client, or an adviser, will knowingly decide that immediate convenience is preferable to higher claims certainty, and therefore work with minimal underwriting to put some cover in place. They take their chances at claim time of course, but if convenience was the key driver then this must be an expected future possibility.
I believe that the majority of consumers prefer certainty from their insurance contracts rather than convenience.  I also believe that one of the barriers to getting consumers to use insurance at higher levels is the lack of understanding that this is their fundamental choice.
For most consumers, and for their advisers, there is far greater merit in working with a full underwriting process at the outset despite the time it takes and the hassle it causes, and the difficulty in obtaining the required information or even reasonable terms for the client. Because in doing so right at the outset, before any money has changed hands or a contract has been entered into, the client can create greater certainty that the product will perform at claim time as they expect.  It makes doing the business harder, but will usually make handling the claim easy.
For the adviser, there is far greater certainty that their advice and process will stand scrutiny well with a full underwriting process at the outset.  There is a far greater probability of the “good client outcome” which is demanded by industry scrutineers.
In the underwriting battle between claims certainty or immediate convenience, the better bet for all is on taking the inconvenient path at the initial underwriting stage for better long term business relationships and product performance at claim time.  In this respect, despite the greater emphasis by consumers (and the greater pressure it creates for advisers), advisers would be best placed to ensure that clients understand the choice at its most simple level when placing personal insurance:
Consumers Choice:
Convenience = Uncertainty + Probable Unhappiness
Certainty = Inconvenience + Future Happiness
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