Getting Business on the Books: An Underwriter’s Perspective
After 23 years as a home office under writer, the most important pearl of wisdom I have is that underwriters must work in tandem with advisors. An underwriter faces a daily challenge to approve cases as favorably as possible and, in order to accomplish that task, he needs the right amount of information.
When underwriters establish new relationships in the field, they find that agents’ perceptions of the underwriting process vary widely. I believe that an underwriter and an advisor should approach this process as a cohesive team whose goal is to get the business on the books.
Following are suggestions for advisors who want to move their cases through the underwriting process as quickly and painlessly as possible, with few—if any—surprises along the way.
The Cover Letter. It doesn’t matter if the case is $250,000 in term life insurance or a $50 million jumbo policy, a cover letter is invaluable to an underwriter. It brings your clients to life by explaining the purpose, amount and special circumstances of each case. It anticipates informational needs so that everyone involved has the same information up front. For jumbo cases, a cover letter that clearly outlines the need for the coverage is especially important. Underwriters love cover letters.
Consistency. Medical history, financials, in-force coverage and all other information underwriters request comes from multiple sources. Nonetheless, the information should be the same—or nearly the same—across all sources. When documents contradict each other, red flags fly and the underwriting process slows. Go through the information with your client beforehand to find and resolve inconsistencies.
Communication. Communication between the underwriter and producer should flow freely. It is to your advantage to have access to the underwriter who is working your case. Expect the underwriter to view the process as a two-way street. I often call producers for their perspective and, with the advisor’s blessing, I may speak directly to the client to clarify information. On rare occasions—again with the client’s permission—I contact physicians and CPAs. Open communication leads to efficient underwriting.
Prepare Your Client. Underwriting is a process, and your clients should be prepared for it. They must clearly understand that the application, phone interviews and requests for medical records and financial information are essential to securing the coverage they want.
The Jumbo Case. Product and underwriting capabilities are two major considerations when choosing an insurer. You also should be aware of a company’s retention limits,1 how much coverage a company can automatically cede to a reinsurer without having a case reviewed (auto-bind capacity), and a company’s jumbo limits.
The insurance need on most jumbo cases is typically some combination of income replacement and estate preservation. Know the insurer’s maximum income multiple2 and projected estate growth calculations so your expectations are reasonable.
Be sure the underwriters have access to internal experts such as advanced marketers, CPAs and actuaries. Know when third-party financial documentation is required and what is meant by “third-party.” Expect the underwriter to use initiative to get the job done right. This may involve anything from a simple Internet search to contacting appropriate third-party experts.
Breaching the jumbo limit can cause huge headaches. It can happen unexpectedly with an automatic reinsurance case if more coverage is in force than was admitted. Breaching the limit raises the potential for challenges down the road and, in some cases, can lead to rescission. The last thing an underwriter wants to hear is “you were over jumbo” after a case was issued on an auto-reinsure basis.
When a case approaches the jumbo limit (typically $65 million in force and applied for with all companies), call your underwriter and discuss strategy before taking the application. He should have a plan for maximizing the coverage and may offer to package the case and send it to another carrier for additional coverage once his company’s coverage is placed.
Be sure your lead carrier has solid relationships with its reinsurers. A life insurer with solid reinsurer relationships and positive audit results can draw on these relationships when cases are up for facultative reinsurance reviews.3
Premium Financing. Because premium financing carries risk for the insured, you should clearly establish its need and purpose for each case. If your client is going to finance the premium, mention this in the cover letter and explain why it is preferable to traditional financing. Be aware of each insurer’s premium financing guidelines regarding maximum age, minimum net worth and approved lenders.
Financial Underwriting. Verification of income and net worth is often required for jumbo cases. When requested, this information must come from a credible third-party source. Look at the paperwork and make sure that:
• CPA letters are on letterhead and signed.
• Tax returns are signed by the client and the preparer.
• Addresses of all the client’s residences are provided.
Occasionally, applicants refuse requests for financial documentation. Prepare your clients. Explain that the insurer needs to verify income and net worth to take on such a large obligation.
Underwriting Older Clients. A mature assessment generally is required with clients 70 years of age and older. Preparing them for it is essential. For example, my company’s mature assessment includes a clock face cognitive test. The client is asked to draw a clock, then draw hour and minute hands to represent a specific time. We also use a peak flow respiratory test; a timed, get-up-and-go walking test; and we ask questions regarding activities of daily living. Tell your older clients to listen carefully to the examiner’s instructions and make their best effort.
As with all other cases, underwriters need to know the purpose of the life insurance. Larger cases usually represent an estate planning need and smaller cases cover a variety of needs. Using life insurance for income replacement may not be appropriate for an older client due to the lack of earned income. In any case, the purpose must be clear. Red flags for the underwriter include:
• The insured does not own the policy.
• The premium-to-income ratio is high.
• The client applied for coverage with multiple insurers.
• The insured does not qualify for the requested face amount.
Underwriting older clients poses unique challenges, both on the medical and financial fronts. Properly completed mature assessments and clear financial need are essential.
Reinsurance and the Substandard Case. As a producer, you must understand any potential medical roadblocks your client’s application may face. Completing the non-medical questionnaire with your client allows you to better understand and prepare for a problematic medical history.
Be aware of the insurance carrier’s “sweet spots.” What underwriting manual do they use? Do they use their own research to establish unique practices? Are they more aggressive medically?
Collaboration among underwriters, actuaries and medical directors created a number of underwriting sweet spots at my company. Any direct insurer should willingly discuss these with you.
An underwriter willing to auto-bind a reinsurer on a substandard case must believe the offer is accurate. Ask the underwriter if the company’s offer remains on the table when facultative reinsurance is requested. If the representative for a company believes an offer is accurate, coverage should be offered up to its retention limit even if, after a facultative review, all reinsurers come back with a higher rating. If the insurance company you are working with takes this approach, requesting a facultative reinsurance review up to the retention amount is a no-brainer. If a reinsurer is only a table or two higher on cases above retention, the underwriter can often place a call and get them to match his company’s offer to secure the amount requested.
The underwriting process need not be painful if you and your clients understand and prepare for it. Provide complete background in a cover letter, strive for informational consistency, communicate with your underwriter and prepare your client.
If you follow these steps, there shouldn’t be any surprises awaiting you at the end.
1. A specified maximum amount of insurance that a life insurer is willing to carry at its own risk on any one life without transferring some of the risk to a reinsurer. The Center for Insurance Policy and Research, http://www.naic.org.
2. Insurers often described coverage limits in terms of multiples of the applicant’s annual income.
3. Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered. Glossary of Reinsurance Terms, http://www.captive.com.
Jerry Capecchi, AALU
AALU, is a senior underwriting consultant at Securian Financial Group, Inc. He has 23 years of experience underwriting individual life insurance coverage at Minnesota Life Insurance Company, Securian’s largest subsidiary.