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The last two years have radically changed the home office underwriting landscape in a way that will impact the offers agents’ receive on their cases for years to come.  The source of this upheaval has been the reinsurance audit. 

The reinsurance audit, not unlike an IRS audit, allows reinsurers to take a close look at all of the business “ceded” to them by direct writing carriers.  Remember, agreements between reinsurers and direct writing carriers are contracts in which the underwriting details of what each party pledges to do and not do are spelled out.  Reinsurance audits in the last two years have provided ample evidence for concern over the integrity of these agreements.  The primary point of contention is underwriting guidelines.  Reinsurance costs are based on risk assumptions that are reflected in their underwriting guidelines.  Direct writing carriers agree to follow these guidelines. It may seem a simple matter to agents for a direct writing carrier to change the pricing of applicant with hypertension and elevated cholesterol from standard to preferred.  After all, they need the offer “to win the case.” But from a reinsurance perspective, it is not that simple.  Magnify this tendency to “go outside of the underwriting guidelines” for larger cases, more complicated medical issues, and older age clients, and the pricing assumptions of the agreement quickly falls apart with reinsurers assuming a block of business not supported by their rates.  Not surprisingly, reinsurers are unwilling to accept this financial hardship, and their response to audit findings has shaken up the life insurance industry.

First and foremost, reinsurers have increased the frequency and depth of their audits.  Second, they have refused to pay death claims in cases where their guidelines were grossly violated.  These two factors alone have dramatically changed the underwriting mood and style of direct writing carriers, forcing home office underwriters to protect themselves by adopting audit proof underwriting.  Here is what this means to agents:

1. The end of unlimited business decisions.  The ability to make concessions outside of the established underwriting guidelines has been severely curtailed including the waiving of requirements. 

2. The end of ignoring non-essential medical records.  The ability to ignore medical records, no matter how superfluous appearing, has been severely curtailed including dermatology, orthopedic, and alternative medical care APSs.

3. The end of accepting undocumented explanations.  The ability to accept the client’s explanation for underwriting concerns has been severely curtailed including excuses for lack of follow up, poor compliance with medications, and lifestyle concerns.

Bottom Line:

Agents are going to have work harder to get the best offers for their clients.  This will involve more effective field underwriting, presenting more realistic pricing assumptions to clients with known underwriting issues, and working with the client and his or her physicians to obtain clarification on medical issues.

Female 74, Non-smoker, $6,000,000 Individual Coverage
Height 5’ 5””, Weight 142 lbs
Current Medications: Elavil

The applicant was declined for life insurance based on suspicion of dementia.  Her medical records indicated a decline in cognitive functioning in the last eight months.  She had not underwent a neurological workup.

Discussion: Further investigation of the case revealed that the applicant has been put on Elavil following the onset of depression following the death of her husband eight months prior.  She had no previous history of depression.  The applicant consulted her physician about the declination for life insurance.  Her physician replaced Elavil with a different class of anti-depressive medication.  Once she discontinued the use of Elavil, the applicant’s cognition returned to normal and she was issued a policy at standard rates.  Anticholinergic drugs like Elavil, Pamelor, Bentyl, and Pro-banthine can cause confusion, memory loss, and mimic early dementia.