The practice of underwriting insurance is a fine mixture of art and science. To be successful, it takes a lot of common sense, even more experience and a well-rounded team of experts. Time and practice are the true keys to the profitable underwriting of life, health and disability insurances. As you can probably imagine, factors such as age, gender, occupation risk, financial viability and adverse health history play significant roles in the underwriting of most insurance. But other, less obvious factors come into play when working in the specialty-risk side of the life and health marketplace.
Unlike the textbook-like, rigid foundations of “traditional” life/health underwriting, the specialty market is much more flexible and fluid. Most of the participating carriers are found in the European markets that historically follow property and casualty platforms and are accustomed to shorter terms of insurance and shorter windows of risk than what we traditionally find with U.S. companies. While the underwriting methods of American insurers closely follow a scale of black and white, the shorter-term policies coming out of carriers like Lloyd’s of London fall more frequently into shades of grey. Their underwriting methodologies and their ability to more readily adjust rates and coverage terms and conditions allow them to profitably take risks that U.S. companies wouldn’t normally touch—many times successfully finding square pegs that will fit into round holes.
While acknowledging such flexibility, specialty-market underwriting faces a number of curious obstacles and challenges that are specific to the plentiful and diverse product lines available through companies like Lloyd’s.
Life and accident insurances become very interesting to underwrite when a proposed insured is traveling or living overseas. Risk analysis becomes even more complicated when the client is a private security guard, journalist, missionary or government contractor stationed in areas like Northern Iraq, Libya and Afghanistan. Most of the available products include war and terrorism benefits, making the attention to political risk very important.
U.S. State Department warnings and alerts as well as a thorough daily canvassing of world news reports provide the due diligence in the underwriting of international insurances which provide death benefits. Considering the recent socio-economic and political climates of the world, risk analysis has evolved over the last couple of decades and has become quite sophisticated. Underwriters not only consider rate-loading per individual countries, but more specifically for certain cities or territories within those countries.
For example, the Bujumbura Province of the nation of Burundi is considered a high risk locale, but from an underwriting standpoint, most of the rest of the country is at a tolerable, low risk level. The differences in risk levels translate to considerable price fluctuations. A typical “flat extra” for the nation of Burundi is less than one dollar per thousand of benefit while the loading for that rural province of Bujumbura would require five dollars per thousand of benefit. Location of risk weighs heavily on the basic underwriting concepts and the eventual prices of international life and accident policies.
Another specialty product that is dictated, perhaps even more infamously, by location of risk is Kidnap and Ransom (K&R) insurance. The K&R centers of risk exposure happen to mostly overlap with the life/accident side, but have additional epicenters of concern in Mexico, Central America and South America.
Kidnappings for ransom have become a worldwide epidemic of great revenue sourcing for petty criminals and more organized syndicates including terrorist factions and drug cartels. Thousands of Americans, Australians and Europeans are detained against their will every year throughout the world. Targeted victims range from traveling executives to tourists to journalists to industrial workers, and the ransom demands vary as equally. Express kidnappings, common to Brazil, are quick and usually non-violent hijackings that end with an ATM payout of cash. At the other end of the spectrum are long, violent, drawn-out detentions for political and/or financial gain that can last years and usually end with the death of the victim or with a payout that can reach millions of dollars. Long-term kidnappings are associated with many countries in Africa and the Middle East, as well as Mexico, Venezuela and the Philippines.
The underwriting of K&R policies focuses on the planned business and personal travel itineraries of clients. In addition to risk location, underwriters analyze specific travel routes and modes of transport within a hazardous country. Employed security measures and previous threat history are also important in the calculation of K&R risk. Persons traveling with a personal or corporate-sponsored private security detail are usually considered at lesser risk than those being guarded by local police, foreign military or those without any protection.
Unlike the travel oriented focus of the K&R market, specialty-risk disability insurance tends to require serious focus on mental and physical health risk. High-limit disability insurance is a sector of the personal accident market that notably requires the most adept underwriting skills among the entire accident and health insurance industry. Disability insurance in itself requires superior underwriting talent to gauge a relative unknown—the probability, over a period of time, of an employed person to lose, by accident or sickness, his ability to physically earn an income.
The sedentary, fast-food lifestyles of Americans have led to more impaired risk disability cases than ever before. Underwriters are being faced with a daily barrage of medically-challenged prospects. Type II diabetes, coronary artery disease, morbid obesity, high blood pressure and sleep apnea have become commonplace among those seeking disability insurance and underwriters are having to rely more heavily on their medical directors to find a comfortable balance between benefits and pricing. The costs of underwriting medically-substandard disability insurance are soaring.
Health history, age and build are of course major role players in every underwriter’s analysis of disability cases. But occupation and daily work duties are additional significant variables in the specialty-risk arena. Occupations like professional athlete, commercial diver, airline pilot and coal miner require more attention to work-related risk than would an executive.
Financial insurability is also of great importance when underwriting disability policies as complications come in many forms. Insurance is commonly needed for start-up companies without acceptable trails of financial documentation. Underwriters also see individual disability applications from persons with bankruptcy histories and large amounts of business income versus personal earned income.
In the world of specialty-risk disability, life and health insurance, underwriters are forced to wear many hats if they are to successfully and profitably indemnify the myriad of risk that is out there.