Serving up the middle market: insurers can regain the middle market by using the right software and databases to speed up policy underwriting and issuance. (Technology).

Today's low- and middle-income markets are on a lean life insurance diet, but this is not by choice. Life and health insurers often target the richest end of the market, leaving the rest of the population to make do with what they can get from their employers. Life insurance is cheaper than ever, yet surveys show that as household income drops, life insurance ownership drops, despite the urgent need for insurance. In the world's richest nation, most people are terribly underinsured.

The insurance industry continues to garner increasing premiums selling fewer but larger policies. But only a few companies are reaping this bounty. The top-20 life insurance conglomerates write 80% of the industry's new premiums. The other 1,470 insurers--as of 1999, down from 2,343 in 1988--scrap for the remaining 20%.

Insurers go for rich clients, because putting new business on the books has become very expensive. Growing competition has led to a much less productive sales force and, interestingly, greater anti-selection from the customers. Customers have learned they can shop their insurance--not only for cheaper rates, but also for more liberal screening. If one insurer rejects you, just apply with another.

The consequences include greater sales expense per policy placed, cheaper premiums and increasingly extensive underwriting to both counteract anti-selection and keep premiums low for the best risks. The only way to avoid red ink has been to increase the size of the sale. While the premium per unit of coverage has dropped, the total premium per policy has risen enough to cover the increase in fixed costs.

New Sales Channels

To reach the middle market, insurers have tried to build more cost-efficient sales channels. Alternate distribution--direct response, work site, banks and stockbrokers--is focused on making lots of sales quickly. These channels are significantly cheaper than traditional agency sales channels.

While a few insurers are doing quite well with alternate distribution, it has not strongly penetrated the mass market, and the bulk of the population continues to buy less insurance. Why is this? Several reasons have been given.

Direct marketing is an uphill struggle, because consumers are bombarded with so much television advertising and direct mail. They ignore TV ads and toss out direct mail. Work-site sales have been hampered by the difficulty of making a two-part sale--first to the employer and then to the employee.

Banks and stockbrokers are unfamiliar with insurance, which is a secondary sale to them. Additionally, banks do not have a sales culture.

But are these reasons a sufficient explanation? Consider bank insurance. Banks are very good at selling investment-oriented products like mutual funds and deferred annuities, showing they can overcome their lack of a sales culture. Even though securities are quite different from certificates of deposit, banks have managed to sell them in volume.

With the passage of the Gramm-Leach-Bliley Act in 1999, many believed banks would finally succeed with life and health insurance. The legislation did lead to an immediate increase in insurance sales by banks--but in property and casualty lines. Banks snapped up property/casualty agencies voraciously, and in just a few short years, property/casualty products have reached 20% of banks' insurance sales, while annuities account for 69%. Noncredit life and health sales remain a mere 5%, where they've been stuck for many years.

Insurers and banks have been working together to sell regular life insurance longer than any other noncredit-linked insurance product. Why do they have so little to show for their efforts?

Annuity products, big sellers in banks, are guaranteed issue. There is no risk selection, and policies are usually issued within a few days of the sale. Guaranteed-issue life insurance always sells well. The face amount is very small, and coverage is expensive on a per-unit basis. While the property/casualty products that banks sell are not guaranteed issue, auto and homeowners policies are required by lenders or by law, as are certain types of business coverage. Since these are must-have coverages, there is no buyer's remorse. Buyers will shop either for the best price or buy from the most convenient source, which may be the bank.

These facts point to one conclusion: The slow, inefficient underwriting and issue process used today is the major barrier to penetrating the middle market via banks and other alternate channels.

Slow Underwriting and Issue

Life insurance applications are screened so extensively it takes an average of 21 days to get a policy underwritten, according to a study conducted by the Life Office Management Association in 2001. Inefficient processing methods add another 17 days, resulting in an average of 38 days in total processing time from taking an application to completed policy delivery, the study said. Disability and medical policies probably take even longer.

The cumbersome new business process has several consequences. First, all this hands-on processing is quite expensive. Additionally, sales reps often must help gather underwriting requirements, secure missing information, follow up on the progress of the application, deliver the policy and resell it to an applicant who is often experiencing buyer's remorse by the time the policy finally arrives.

There is huge waste in the system: 14% of applications don't get issued due to declines, incomplete information or withdrawal by the applicant. After issue, another 7.5% of policies are declined by customers. Thus, more than 20% of all "closed sales" fail to result in paying policies.

Consider the salesperson's perspective. A typical $100,000 term life policy might carry a premium of $200 per year. A generous first-year commission would be 60%, or $120. But, with only 80% of "sales" resulting in a paying policy, the rep averages only $96 per sale. On the other hand, a modest annuity sale of $5,000 typically pays a 3% commission, or $150. About 99% of these sales result in a paid policy, and the rep has little or no follow-up to do after the sale. It's no wonder that middle-market salespeople would rather sell annuities.

Traditional underwriting tools do not lend themselves to direct-marketed plans. Delays in issue can lead to higher than 20% fallout, since there is no agent shepherding the case. When simplified underwriting is used, turnaround is usually just a day or two from receipt of the application to policy mailing. But since screening is often inadequate, premiums are high, and losses are frequently unacceptable. And benefit offers must be severely limited to reduce the insurer's exposure on any single claim.

Technology to the Rescue

Suppose it were possible to issue a well-screened policy instantly. An agent could quote applicants the exact price they'd receive. If the applicant is uninsurable, it would be known immediately, and no application would be submitted. Since all applications would result in issued policies, the not-taken rate would be negligible. Instead of baby-sitting applications through underwriting, salespeople could spend all their time selling. Insurers could eliminate most issue, underwriting and mailroom staff Selling life and health coverage would be easy, and it would cost little to process applications.

New underwriting tools will soon make it possible to do a high-quality risk screening in less than an hour. Further advances in technology may soon make field issue of a fully underwritten policy possible.

New underwriting databases can be accessed instantly online today. The most recent, and most promising, is the prescription drug history database. Since there are medications for almost all serious medical conditions, the applicant's prescription history can be as revealing as an attending physician's statement. Combine this information with the motor vehicle record database (for data on drunken and reckless drivers), Medical Information Bureau data, and a personal history interview (similar to Part 2 of the application, with drill-down questions if the applicant responds with adverse information), and the insurer can get a good picture of the applicant's risk profile.

Up to typical nonmedical limits this data may prove sufficient to dispense with blood and/or urine tests and attending physician's statements-the biggest sources of delay. Several vendors and a few reinsurers have developed, or are developing, expert underwriting systems that take the personal history interview, feed in database information and automatically evaluate all the information and deliver an immediate underwriting decision.

Field issue will be accomplished with point-of-sale software on a Web site that allows the agent to enter application and personal-history information on the computer. The software calls up the database information and then runs everything through an expert underwriter. After the agent has the decision, he or she can use the software to get exact rates from various carriers. Once the carrier is chosen and the sale is finalized, the agent can print a policy on the spot. Then, the agent electronically transmits all the customer's data to company headquarters, where it automatically flows to the administrative system.

Millions of average-income Americans would gladly buy insurance if someone would just approach them with simple, well-priced life and health products that meet their needs and can be delivered within a reasonable time frame. And reclaiming the middle market isn't an option for the vast majority of insurers; it's a necessity for survival. With the right strategy and technology, the 90% of the U.S. population that isn't affluent is within their grasp.

Maria Thomson is managing principal of Thomson Management Solutions Inc., a national consulting firm based in Brimfield, Mass., that specializes in streamlining underwriting and issuance and developing basic life and health insurance products for the middle market. This article is adapted from her forthcoming book to be published by Actex Publications.