Modeling Older Life Risks.

Life insurers writing multimillion-dollar policies for wealthy elderly people are learning that sometimes you have to turn underwriting rules on their head.

Twenty years from now, the life insurance industry will have something it currently lacks: an actuarial record for elderly people buying multimillion-dollar policies. In the meantime, insurers making a play in this market are learning that the underwriting considerations they use for younger risks--things as basic as smoking and cholesterol levels-- don't necessarily apply.

Today's producers are doing a better job than ever of reaching people in their 70s, 80s and 90s whose estates have grown dramatically with the stock market. The agents' message is that buying life insurance can protect these estates from the effects of taxes when it comes time to pass them on.

The message seems to be effective. Face amounts of life policies have climbed to $35 million and even $75 million on a single life, said Dr. Paul R. Bell, senior vice president of risk selection at ING Reinsurance, the reinsurance business of Security Life of Denver Insurance Co.

With such high stakes, accurate underwriting becomes even more important. But Bell said industrywide actuarial tables for age-of-issue stop at about age 70. These tables are put together in a number of ways, Bell said. A common one is to start with the issue age and follow it for 15 or 20 years. "So if you follow a 70-year-old, it takes you to age 85 or 90, but that's not the same as looking at an 85-year-old fresh and brand new," he said. "That's an increasing challenge for life underwriters. It's now common for me to look at cases in their 70s and 80s."

Some insurers have developed an expertise in this market segment. Manufacturers Life of North America, the Boston-based U.S. division of Manulife Financial, Toronto, has been underwriting increasingly large coverages on elderly lives since the 1960s and 1970s. Hartford, Conn.-based Lincoln National Life Insurance Co. and other life subsidiaries of the Lincoln National Group, have been focusing on it for 15 years. Both say they have developed solid databases and underwriting expertise.

Scarce Information

But for most insurers, this wealth of information is not readily available. Even Prudential Insurance Company of America, the largest U.S. insurer based on assets under management, has been involved in the elderly market for only five years.

For companies inexperienced in underwriting the elderly, mistakes could prove costly 20 years from now, Bell said.

Compared with other age groups, the elderly are the least homogeneous. Some are still running marathons. others are in nursing homes. A good risk at age 75 could easily live another 10 or 15 years. "So the challenge is to identify the predictors of short-term and long-term longevity;" Bell said. "Our confidence level is more in the realm of postulates and hypotheses. We're testing with our research to see how confident we can be." Underwriting confidence wanes once a prospect reaches 65 to 70 years old, he added.

Underwriters have one demographic element on their side. Bell and others agree that the higher the economic scale, the better the mortality experience. They say that wealthy elderly people tend to spend their discretionary income on preventive health care. As Bell pointed out, enrollment in Medicare does not preclude someone from spending money on health care. The wealthy elderly also typically have medical records dating back many years. Underwriters say that kind of evidence helps them better understand the whole picture.

One surprising thing underwriters have learned from studying the elderly is that conventional notions of standard ratings don't necessarily apply. "We actually have way more information about an 80-year-old applying for insurance than we do about a 25-year-old," said Bob Weir, underwriting director and chief underwriter at the U.S. division of Manulife. "They've already revealed what they're like. You could argue that if they've made it to 80, they should automatically be in the preferred-risk category."

For similar reasons, family histories are less important in underwriting elderly prospects, and Weir said Manulife doesn't consider them. "It's less important to consider the elderly genetically," said Sandy Kelly, assistant vice president for underwriting and risk management. "If they don't have [a particular disease] yet, they probably won't get it."

Insurers are finding other surprises as they study the risks of underwriting the elderly Higher levels of cholesterol appear to be OK, Weir said, but lower levels can indicate an undetected cancer. Low levels of serum albumin are associated with malnutrition and a "failure to thrive," he said. Underwriters are more inclined to accept the presence of coronary disease more favorably, Kelly added.

"Many people outlive the things that kill younger folks," Bell said. Smoking may not have to be considered a negative underwriting factor on an elderly person who has smoked many years, for example, though it would be considered a negative on a young person. All other things being equal, an elderly smoker applying for insurance might not be rated any differently than an elderly nonsmoker. The same might apply to high cholesterol and high blood-sugar levels. "Their biology is the difference," Bell said of elderly with those risk factors. "They may have outlived the disease because it doesn't ravage them:"

Active Seniors

Underwriters also might have come to some consensus about the importance of activity levels. To get positive ratings, elderly applicants don't have to be running marathons, but they must be able to handle the activities of daily life and interact with others. Terry Savage, chief underwriter at Viaticus Inc., places an emphasis on daily activities when assessing prospects for his senior settlements business, in which the company buys existing life policies from elderly people who are not terminally ill.

Viaticus is a subsidiary of CNA Financial Corp., Chicago, which has a prosperous long-term-care insurance business. In assessing older life risks, Viaticus melds life underwriting with that of long-term care, Savage said. "For LTC underwriting, you look at functional capacity rather than physical status," he said. "Medical history is not as significant as the current functional status."

Travel also is an excellent indicator, especially if the senior does it for pleasure, Savage said.

"We look at frailty and loss of cognition," Kelly said. "Once those things begin to appear, the life expectancy is dramatically impaired."

One of the big challenges to underwriters is to separate normal aging from the onset of something pathological, Weir said. "If a doctor noted 'forgetfulness' in a patient exam six months ago, does it indicate dementia?"

To judge if an elderly person is active, Bell considers activities such as attending church, holding a part-time job, shopping and driving a car. He said travel is a "pretty good stress test for people." When underwriters are "on the fence" about classifying a case, Bell said these activities can serve as a deciding factor.

Some indicators don't bode well for a positive rating. Weir said Manulife wants to see a prospect's driving record; accidents indicate problems, especially since an elderly person is more likely to die in one than a younger person. Living alone is a concern. "It means we might not get as much information since no one is there to watch over a person or take the person to a doctor," he said.

Manulife's expertise in the elderly market has evolved because the demographics of its estate-planning client base has changed. "The estate-planning market is growing much more quickly than the rest of the insurance market," said Steve Finch, assistant vice president in product development. "We're in estate planning, and the people needing it are getting older." He said that 10 years ago, clients were typically in their mid 70s. "Now we're seeing lots of them in their 80s, and some are over 90," he said.

A New Old Market

The industry as a whole doesn't have much experience in underwriting older-age risk, said Charles Baltz of Lincoln Life, the brand name for Lincoln National's life companies. That state of affairs has "put a greater premium" on companies in the forefront of analyzing the clinical data and putting it to work in their underwriting practices, said Baltz, Lincoln Life's underwriting vice president and chief underwriter.

"It's not accurate to say we're uncomfortable with older-age risks. For those of us in the market now for a period of years, familiarity and repeated exposure begins to build a body of comfort," he said. "I expect that that comfort level will continue to increase as that underlying body of experience builds, much as was true with impaired-risk underwriting that was new to the industry many decades ago but that is commonplace now with virtually all carriers."

There is no question that a prospect who is 78 years old presents an underwriter with much more potential volatility than someone 38 years old. "What our emphasis on training does is balance in the underwriter's mind that potential volatility with the fact that there are many people in these older age ranges that don't offer mortality risks we're not used to," he said.

Even for a company as big and as old as Prudential, writing large cover-ages on older prospects is still a relatively new business. Prudential has been in business for 120 years, but it has been involved in this older-age market for only about five years, said Paula Romano, vice president of the underwriting department in Newark, N.J.About 1.5% of the company's new life insurance policies are written for people 70 years old and up, said spokeswoman Laurita Warner.

Since Prudential's block of business is so big--at the end of 1998, Prudential ranked third among U.S. insurers in life insurance in force--its several hundred underwriters rely on the company's own mortality system for most of the policies it writes. "The downside to that is we don't have a lot of our own data on the elderly buying big policies," Romano said. "For that, we look at medical data banks and journals. There's just not a lot of inside material."

Prudential has added to its medical manual a section about underwriting the older ages, and it reviews the manual quarterly.

In recent years, Prudential has found that with certain impairments in older applicants, it is possible to take a more liberal or aggressive underwriting approach. "If diabetes comes later in life and it's mild, it is possible to treat it," she said. "We've found we can tailor our underwriting to reflect this." And while industry height and weight charts for all ages usually say lighter is healthier, Prudential underwriters have come to recognize that being a little heavier at older ages is better than being too thin, Romano said. Much of what Prudential adds to the older-age section of its manual, in fact, highlights ways underwriters can carve out more liberal treatment of impaired conditions, she said.

Working Toward the Same Goal

In writing the wealthy elderly, producers and insurers depend upon each other's expertise.

From his office in the southern California town of Agoura Hills, Michael Gallop has built a strong brokerage operation that specializes in very large placements and impaired risks. Half of his firm's clients are worth between $100 million and $1 billion. Last year, his company produced about $10 million of target premium, with the average premium about $100,000 per case. Also last year, the company wrote its largest case, a $350 million policy for a young married couple. The policy was underwritten and issued in just two weeks.

Gallop may well be the prototype of the broker/producer that taps into the jumbo policy market, including the one emerging among the elderly. He's been in the business a long time, he knows what the carriers want, and he understands what each carrier can provide.

"We have a strategy that's very effective," he said. "It's important to do this in a controlled, strategic, pre-thought-out way."

His first guideline is to avoid bringing reinsurance into the equation unless it's necessary. "You don't have relationships with the reinsurers, and they and the direct writers are bound to act within the guidelines of the reinsurance treaties," he said. "Those treaties are in place even before your case shows up, so you lose the ability to negotiate and strategize."

That leads to his second guideline: Work with companies that retain a high proportion of their risk. "You can do a $100 million placement with only three or four companies," he said. He mentioned Prudential Insurance Company of America, MetLife Inc., MassMutual Financial Group, Manufacturers Life of North America and Lincoin National Life Insurance Co. as companies that have retentions of at least $10 million.

Finally, Gallop selectively brings carriers into a case. "You don't just throw a case out there to 50 companies and see what happens," he said. Retention limits, product type (whole life, universal life, variable life, etc.), underwriting capability and flexibility, and the performance of products are all factors he considers in deciding.

Though it may be harder to underwrite older life risks, Gallop said these policies can be profitable for insurers. "Products are priced to take that into account," he said. "It's not necessary for an insured to be alive in 20 years for insurance sales to be profitable for an insurer."

Generally speaking, an annual premium for a healthy 80-year-old is about 10% of the face amount, Gallop said. Working with insurers to underwrite older prospects has become easier in recent years, said D. Scott Brennan, president of The Brennan Group LLC in South Bend, Ind. "Even though older clients have enough medical records to wallpaper a small home, a lot of them are in good health," said Brennan, a member of the Million Dollar Round Table, an organization for high-performing agents. "A lot of insurers don't bat an eye about underwriting large policies on these people. They won't bother for a $100,000 policy, but mention $1 million and they'll underwrite it."

Brennan said his biggest life policy ever--$10 million--required the applicant, who was an older person, to undergo a medical exam, a treadmill electrocardiogram and an X-ray of the lungs. The candidate had to provide blood and urine samples, and insurers pored over the medical history with particular attention on the previous 10 years. Six companies in all looked at the case, and their risk classifications ranged from standard to impaired. One company determined that the case was too risky and declined to make an offer. "The best experiences I've had, where I really had a good handle, were when I had a good, open relationship with underwriting," he said. "Not an assistant, but with somebody who can sign off."

Tough But Fair

Brennan said he looked for tough but fair underwriting. "You don't want a company giving away the business, conducting a fire sale. That always scares me. You want underwriters who are experienced. You can tell with underwriters just by their tone when they call, within the first minute, whether this man or woman is used to doing this." He said if a client dies early he doesn't want a company coming back and complaining that it pushed the application through for him.

Like Gallop, Brennan also values quick service. "Sometimes you think a company is sitting on an application, or that it's working from the top of the pile, or that an application is lost," he said. "That happens more than it should. That they understand we have a time deadline always helps everybody."

Insurers have their own expectations about their producer partners.

"First and foremost, we're looking for an atmosphere of mutual trust and cooperation in which the broker represents our eyes and ears to the client," said Charles Baltz, underwriting vice president and chief underwriter at Lincoln Life, the brand name for Lincoln National Group's life companies. "We look to the producer as the only person in the equation that physically meets with the client to give as full a picture as possible."

As part of that picture, Lincoln Life wants a good sense of overall activity levels, including work and hobbies, Baltz said. It also expects a producer to identify the purpose of the coverage amount sought and how he or she arrived at that amount as appropriate to meet the financial situation being solved by the insurer, he said.

Lincoln Life views the well-to-do elderly as its target market and has taken steps to be a major player. Baltz declined to disclose retention limits, but he said the company had expanded its "unilateral capacity" to write bigger policies at all ages. It has beefed up training so the underwriters and medical staff "are more attuned to and are increasingly comfortable with things unique to older-age risk," he said. The medical staff has performed extensive research on cardiovascular and cerebrovascular disease and some of the cancers that tend to be more common at advanced ages, and it has provided focused training programs about them for the full underwriting staff. The medical staff and underwriters stay current on medical developments and advances, and they adjust their underwriting practices to reflect the clinical information that is emerging for the elderly market segment, Baltz said.

Lincoln Life also is trying to design and develop products for this market segment. Its strong performers have been individual universal life, survivorship (second-to-die) universal life and variable universal life, Baltz said. Lincoln Life and companies it recently acquired have been focusing on this market segment for 15 years. Baltz previously worked for Cigna Corp.'s life insurance business, which Lincoln purchased a couple of years ago. In a separate transaction, it bought the life insurance business of Aetna Inc.

Manufacturers Life of North America, known as Manulife, started writing coverages on elderly lives in the 1960s and 1970s and is "probably the leader" in writing that business, said Bob Weir, underwriting director and chief underwriter for the Boston-based U.S. subsidiary of Manulife Financial, Toronto. It was also one of the first to develop a survivorship product.

Manulife can write policies with limits of $15 million for survivorship policies, $10 million on a single life and $5 million for age 80 or older without using reinsurance. Even if the company chooses to reinsure some of these risks, Manulife does not need to consult with its reinsurers on each case. "There's a difference between reinsuring and having to go to a reinsurer for the business," Weir said. "We have an amount we can write on our behalf and the reinsurer's behalf. The broker may not even know reinsurance in involved."

For larger cases that require facultative reinsurance, the producer may have to wait longer for approval.

The company's underwriting staff is experienced and well-prepared to respond quickly to producers, said Sandy Kelly, assistant vice president for underwriting and risk management. When recruiting, Manulife seeks people with at least 10 years of underwriting experience and with experience in the reinsurance market or working with older-age cases.

The company has no career agents, and Kelly said it has found most independent producers in this market to be very knowledgeable. "That helps us," she said. "They're working with professionals of the client. Their overall knowledge and understanding of this business makes our jobs a lot easier."

While there is some interest in variable life products, producers and their clients typically want the guarantees of fixed-account policies, Kelly said. Manulife primarily sells universal life, which carries some investment risk as compared with whole life, but it recently launched two variable products with 20-year no-lapse guarantees. Survivorship has been popular because at older ages, one of the people is often uninsurable, Kelly said, and the policy insures both lives.

Due to its size, Prudential has long had some of the highest retention limits on a single life in the United States. Up to age 65, Prudential underwriters are authorized to write up to $30 million of coverage. That limit grades down to $20 million at age 75 and $5 million at age 80. Over the years, these high retention limits have helped the company respond to producers' and applicants' requests for speedy approval. But with interest growing in even larger policies, Prudential has had to turn to reinsurance to help it compete in the new market, said Paula Romano, vice president of the underwriting department in Newark, N.J.

Prudential maintains a large career force, but most of its wealthy, elderly clients comes through PruSelect, the company's brokerage distribution arm that coordinates independent producers. Romano said these producers often select Prudential because it offers such high levels of coverage. "The ability not to have to seek reinsurance allows us to respond quickly," she said of the cases Prudential can fully underwrite.

Romano also said Prudential would negotiate its underwriting decisions. "We like to say underwriting is an art, and it's always useful to understand the needs of the broker," she said. But she added that Prudential would not try to beat the competition at all costs. "Our bottom line is to put a fair and accurate price on the risks," she said.