Andrew Wibberley: Ratings, exclusions and the customer

A few years ago now I was lucky to learn how to underwrite from a collection of experienced heads that form a key part of anyone’s apprenticeship. A fundamental part of the underwriting folklore handed down was that:

• the big decision is whether a case is insurable or not
• the next big one is whether it is standard rates
• it is always better to rate than exclude
• the case you’re worrying about is unlikely to be the one you’ve got wrong

As I spent more time out in the real world (or at least with advisers and distributors) I’ve had cause to rethink much of that seasoned advice. First and foremost the language now sticks in the jaw – we underwrite people, not cases. The dehumanisation of the impact of the decision you make does matter. Whether we are making a decision or programming a computer to make one remembering that the impact will be on an individual – and their family – will get the most appropriate response from all involved at any stage in the process..

There are some situations where the risk associated with a condition is so great that an exclusion has to be applied, and some where the risk is too broad for an exclusion to work and so a rating is the only logical answer.

There are many situations where the underwriter does have a choice – and the idea that a rating is always better than an exclusion needs to be challenged.

There are undeniably problems with exclusions as they currently work:

• The person is not covered for something that everyone else is. Even where exclusions are well written and explained there is the risk that over time the nature of this is forgotten or confused in the event of a related claim
• There is the potential for extra challenge at claims stage (for insurer and customer) around exclusions
• The adviser does not get any reward for the extra effort in explaining the policy. Indeed where exclusion discounts are applied they get less than they would have done otherwise
• Insurers do not get feedback on whether the exclusion was in fact a fair response – we do not collect data on “claims that did not occur due to exclusions being applied” – and so it is hard to assess or improve the treatment of these groups

And yet, increasingly from advisers there is the view expressed that:

• People understand their own primary illness and do not expect cover for this
• An exclusion may allow the person to be underwritten more quickly than going through a more thorough underwriting process to establish the exact rating that should apply, which may be the critical factor in getting someone any insurance
• They would rather self-insure the excluded risk (often in the belief that they are unlikely to need time off for it and so they don’t want to pay more for it
• It is easier to explain the logic for an exclusion than a rating

Where possible the underwriter should actively offer the choice to the customer, acknowledging that they can then make the best decision for their circumstances. This puts the customer (and adviser) back in control of the process, able to choose what is best for them and their situation. Basic behavioural economics would suggest that allowing the customer to have that choice in itself is more likely to result in completion of the policy – which after the effort put into underwriting should be a key success factor in the underwriting process.

Systems now exist to present this choice to customers as often as the underwriter wants, or feels able to do so. I think we need to look to adopt this approach to better meet the needs of people with medical conditions or interesting hobbies who are applying for Income Protection to help get more people over the line to having the protection they need and want on fair terms.