What Lies Beneath.

Medical testing is an important step in the underwriting process to determine the actual risk a prospective insured presents.

Still waters run deep. But if you dive in headfirst without knowing what lies beneath, hidden rocks are likely to break your neck.

It's the same with risk assessment. Medical testing can be eliminated for a cheaper and faster life insurance issuing process--but you're likely to pay for your actions in the end if underwriting requirements are treated more as a commodity than a protector of future mortality profits. Insurers who waive tests because they don't want to make waves with a cantankerous applicant or producer are throwing protective value, and possibly corporate profitability, down the drain.

Protective value exists whenever the estimated mortality savings of a medical test or medical history exceeds the cost of the service. It's a basic premise of business--spend a little, make a lot. Yet, this concept is under fire today as it has been in the past. In 1992, an industry publication printed words that could as easily be penned today: "Remaining committed to sound underwriting principles has gotten tougher amidst the recent turbulence in the insurance industry...All must understand that it is suicidal to sacrifice long-term profits for short-term results. In short, we need to recommit ourselves to being in the business for the long haul" (Reinsurance Reporter, 2nd Quarter, 1992).

Almost 10 years later, the robust economy of the 1990s has upped the ante in financial circles, changing the definition of a large life insurance case. The Internet has created sophisticated consumers of medical information and has spawned insurance buyers who are more aware of their own health status, increasing the likelihood of seeking insurance while knowing of specific ailments. And society's hectic pace juxtaposed with the insurer's desire to sell makes it tough for the direct underwriter to return to the client to ask for more of the potential insured's time for additional medical tests.

Some key, and simple, tests currently going by the wayside--taking with them the protective value they add--include these:

* Treadmill electrocardiograms: Studies indicate that treadmill EKGs provide tremendous protective value. It is important to consider the market in which you are operating. We are not doing ourselves any favors, and we will actually hurt mortality results, if we drop this effective tool without replacing it with another test of similar predictive value and cost. Is it an inconvenience? Probably so. But how inconvenient are several early cardiac claims that could have been avoided or properly priced?

* Chest X-rays: This is perhaps the most controversial requirement. While many insurers do not include this test as part of their routine work-up, it holds consider. able value, particularly when used in those with a history of tobacco usage. There is merit in setting a high testing threshold for those not at high risk. If you look closely at the facts, the risk you manage by finding only one significant ailment will easily offset the cost of the test. For the very large case, particularly for older applicants and those with a long tobacco history, chest X-rays provide protective value.

* Financial Disclosure: The 1990s' robust economy led to new reasons for purchasing life insurance. The high-stakes potential on Wall Street led to a lowering of the insurance industry's tests for financial worthiness. But today's volatile marketplace, with initial public offerings, profit-challenged dot-corn companies and venture capitalists, cries out for due diligence anew. Contracted white-beards also present a problem. White-beards are people well known in their industry, and young management in start-up operations contract with them to add credibility to the new company and to help secure loans. Management then seeks key-man life insurance on them.

Also a challenge for underwriters are applications for policies seeking far too much insurance compared to the individual's actual net wroth. These miscalculated large-line needs are still a primary source for anti-selection. Waiving traditional methods for determining financial worthiness can be quite costly.

* Labs: Full blood tests allow a maximum of information at minimum expense while maintaining favorable protection from anti-selection. The trend toward substituting oral fluids for blood ignores the protective value of blood. Doing so is a viable option only if you are willing to price accordingly. Information from blood also allows for precise competitive pricing. Reducing one's lab requirements from the industry norm can quickly lead to "targeting" by both the proposed insured and producers.

Barry A. Wilkinson, a Best's Review columnist, is vice president and chief underwriting officer at Lincoln Re, Fort Wayne, Ind.