Individual life insurance business refers to life insurance policies offered to individuals rather than groups. The life policies aim to provide financial support to the policyholder or their dependents in the event of disability, illness or death. Examples of such policies include whole-life policies, term life policies, funeral policies and endowment policies and may carry riders such as accidental death, disability and critical illness riders as a way of offering complete protection.
Because of its elective nature, individual life business carries a high risk of adverse selection, and prudence requires medical investigation of applicants to ensure that an organization keeps a healthy pool of well-priced risks. The purpose of a medical investigation is to assess the general health position of an applicant before they are allowed into the risk pool. The cost of medical investigations is borne by the insurance company and forms a significant part of the onboarding cost.
The dilemma for insurers is striking a balance between adequate medical investigation and optimization of onboarding costs for the organization. Limited medical underwriting requirements expose the insurer to the risk of onboarding substandard risks or poorly pricing the risks. On the other side of the coin, there is an overcalling of medicals, which will lead to the increased cost of onboarding and also the risk of overburdening the client with too many tests. Clients naturally do not want to go for medicals and the longer the list of medicals to be taken, the less attractive the product becomes.
The question that follows is when to start calling for medicals and how many medicals an underwriter should call for. Traditionally the free cover limit was directed by actuaries, keeping in mind that back then insurance brands had considerable substantial monopoly power because of asymmetric information. In this age, several factors should be considered in determining the free cover limit. The two most important factors are actuarial evidence and competitor activities, as clients can now easily compare what insurers A and B are offering at any given point in time.
In terms of which medicals to call for, the unwritten rule, unless under special circumstances, is that the cost of medicals should not exceed one month’s premium. However, this cannot be applied in isolation; factors like competition and general industry trends in pricing, product type, the average price for medical services and observed customer behavior play a part in upholding the rule. In markets with serious price competition, it may not follow that the first premium will be sufficient to pay for medicals that will allow underwriters to adequately review a risk.
It is important for an organization to carefully scan its internal and external factors that influence its decision on free cover limits and medicals. A constant review is necessary for continuous alignment with shifting industry trends. There is no one-size-fits-all approach, and it is up to each insurer to come up with a combination that meets its needs.
Authored by Mike Chimedza – Life Underwriter