Six Myths of Impaired Risk Underwriting

… and how to dispel them

The impaired risk segment of the life insurance business is approaching 20% of the total cases written. While this a significant figure in itself, it’s even more compelling when taking into account the premium and commission dollars it represents for insurance companies and brokers. From this perspective, impaired risk is worthy of capturing every advisor’s attention. These risks vary in both type and degree, but once understood and embraced, an immense broker opportunity exists in serving the needs of an aging client base.
Far too often, advisors avoid impaired risk because their thinking is unnecessarily influenced by one or more misconceptions. To see the impaired risk field more clearly, here are ways to get beyond some of the most common ‘myths.’
Myth #1 “Impaired risk cases take too much time.” A broker’s experience, skill level, attitude and expectations all play a role in working successfully in this segment of life underwriting.

It’s true that many marginal brokers- as well as some others- simply lack sufficient underwriting experience to work with cases other than those with a straightforward, immediate solution.

Advisors whose experience is limited to one or two carriers may not be aware of the many underwriting issues that threaten them. It’s true that impaired risk cases can take more time if a broker is not aware of the pitfalls and surprises that can occur during the underwriting process.

However, skilled brokers have learned to recognize impaired risk underwriting issues early in the process so they can obtain relevant information from the client.
Myth #2 “Because I don’t know enough about impaired risk issues, I should stay away from these cases.” While it’s true that the best advisors know their limitations, there’s no reason why advisors should avoid impaired risk cases if they follow these guidelines: 1) View each client as unique. This means the place to start is with the client, rather than a product, when discussing an individual’s risk factors. 2) Don’t assume a client’s medical status until the information is collected, analyzed, reviewed and placed in the context of what an insurance company needs for evaluation. In other words, you need the whole story so that you can assist your client and ultimately complete the sale. 3) Finally, be patient so you gather all the information needed to understand the issues, including APS, tests and exams.

Once you have the information (or what appears to be needed), you are ready to present the case to one or more carriers while you’re looking for the best plan, offer and price.

It isn’t necessary for a broker to do the entire analysis and strategizing. Help is available through alignment with full-time impaired risk specialists. The shopping is done with a general agent or brokerage general agent.
Myth #3       “I’ve been told that impaired risk cases are just too difficult to close.” To be sure, this issue often stimulates ‘hot debate’ and for good reason.

The area of greatest agent and client confusion rests in understanding an inherent conflict between clinical medicine (which a physician practices) and life insurance medical underwriting. This includes an insurance company wanting to charge enough to collect the cost for the risk.

For example, physicians can tell a patient that they are stable and don’t need treatment. However, a doctor saying, ‘The person is doing well’ is not sound insurance underwriting.       Too often, there can be unclear communication between patient and physician. For example, patients can be in denial as to the meaning or significance of their medical status, while the insurance medical underwriter evaluates the risk from a mortality perspective, the heart of medical underwriting.

To better understand this possible conflict, attending physicians see themselves as patient advocates. As such, they can view medical history in the best possible light. An abnormal EKG illustrates the point: the physician may not be overly concerned or order a follow up test if there is no chest pain, while several years later, the client may develop symptoms.

From a medical underwriting perspective, a percentage of individuals will go on to develop a disease that impacts the life expectancy of the total group. Compared to other people with similar conditions, the physician may say, ‘They’re fine.’ The insurance underwriter, however, compares the applicant with a comparable age group that doesn’t have the particular condition.

An insurance company’s medical underwriting department uses a narrow window to make an evaluation and decision. Unlike the physician, underwriters can’t go back and alter their decisions based on changing health conditions. The contract with the company can’t change unless it’s in the client’s favor.

If you consider that there are so many applicants with at least one impairment, it’s important that this area of life insurance underwriting be viewed as a positive challenge, one in which your knowledge and thoughtful attention will have a positive benefit for your clients, as well as for you.       It’s not difficult to master the appropriate skill sets with the proper preparation and knowledge of the many available analytic and quoting resources. A more senior associate, a mentor or a brokerage agency expert can save lots of time and turn a willing and able novice into an experienced pro in a short period of time.
Myth #4 “I’ve always thought that surprises and bad news open the door for competition.” This myth can be dealt with simply, but with due concern with the client, along with the client’s full co-operation with the task at hand.       It’s important to remind the client that you have their best interest in mind, which includes knowing their health history. At that point, you must grasp the challenges and possibilities involved in finding the correct and best solution.

It’s essential that this be presented to the client so that expectations can be explored, understood and managed in a way that the final resolution serves the client’s best interests.

When applying for coverage in an impaired risk case, it’s critical to identify potential underwriting challenges. This is why the broker must be comfortable in discussing medical issues with the client and put aside any feelings of invading the client’s privacy.

It’s important to underwrite upfront, possibly before securing a formal life insurance application. Having the client fill out a health questionnaire, as well as others for specific risks, can help avoid going back to the client, which may be touchy. This includes obtaining a HIPPA medical records release from the client.       Once all the information is gathered together, the case can be shopped to selected life insurance carriers.
Myth #5 “Only inferior carriers with poorer ratings compete for impaired risk business.” More often than not, it’s just the opposite. The larger and stronger companies have much more experience and skill level in handling difficult cases. They bring to impaired risk cases decades of statistical data and trend information, as well as cutting edge underwriting capabilities and an experienced staff, most of which are not available to smaller or less sophisticated carriers.

Stronger companies often create their own proprietary underwriting manuals and offers, something that eludes smaller competitors. In addition, they have niche-underwriting programs to enhance their offers and lower prices to a point where most others can’t compete.

They also have retention capabilities where they can be particularly aggressive with large, challenging cases or have reinsurance treaties that enable them to compete in unique ways for difficult cases.

It’s worth noting that at times a carrier offers a ‘low-risk’ rate, but ‘loads’ the basic premium so that it’s no longer a bargain. These policies have built-in mortality cushions and offer their standard rate for a risk with extra mortality, which is a practice stronger companies do not engage in. These policies allow for easier approval thresholds at standard rates and ease of underwriting.
Myth #6 “Underwriting today is standardized and more of a science than an art form.” While that may be a popular belief, it doesn’t work that way in the real world. For example, decisions from carriers with the same set of information on a client can range from Preferred offers to Declinations.

Certain life companies have a track record of doing a better job with particular health histories, which translates into more favorable offers for the client. Some will underwrite cases with a more clinical underwriting approach than others that may just be too objective for a certain case.

There are carriers that rely more or less on various modern testing capabilities, while others ignore the same tests. Knowledge of crediting, table-shaving programs and specialty niches are critical and vary greatly from one carrier to another.

There is no reason to avoid impaired risk cases. With the right skills and access to the proper resources, any advisor can find success with impaired risk cases. And with an aging population, there are extraordinary opportunities for those advisors who are ready to meet the challenge.

by Allan D. Gersten, CLU, CFP, ChFC for March 2012 issue of Life and Health Advisor Magazine. Mr. Gersten is Chairman of First American Insurance Underwriters, a brokerage firm based in Needham, MA.

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