Business Decisions

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Business Decisions

• Are you Covered?

Optimum Re Underwriting Seminar September 10th,
2007 Gord GIBBINS, FSA, FCIA, BSC Senior Vice
President, Development Optimum Re
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Case Study 1

• Company As Underwriter, following their own
  underwriting manual and after referral
• to their Medical Director, rates a case 200 for
  overweight and high blood
• pressure. They communicate their decision to the
  agent.
• A week later they get a call from the agent
  saying Company B has rated 150 and
• he really needs 150 to place the case. The
  underwriter, to placate the agent
• agrees (without further investigation) to rate
  the case 150.
• Is this a business decision? Explain.
• Can the case be placed into Company As
  automatic reinsurance pool?
• The case, having been placed in your automatic
  pool, is discovered on a routine audit. What do
  you expect to happen?

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Case Study 2

• Company A has 3 non-tobacco classes. (SP, P, SNT)
• It has well defined criteria for these classes
  published to the field and
• extensive wiggleroom guidelines. All were
  shared with reinsurers during
• the last reinsurance pool quoting process
• A specific case has a HDL ratio of 2 (SP
  guideline is 4) and a blood
• pressure of 140/85 (sp guideline 130/85). All
  other aspects meet the SP
• guidelines. The underwriter offers sp (super
  preferred).
• Is this case a business decision?
• Can it be placed automatically in your pool?
• The case, having been placed in your automatic
  pool, is discovered on a routine audit. What do
  you expect to happen?

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Case Study 3

• A 60 year old applies for 1 million. For your
  company
• the routine requirements call for a stress test.
  However
• for Company B, Whom the agent also writes for, a
• stress test is not required until the amounts
  exceed 1
• million. The agent has asked you to waive the
• requirement. You agree subject to receiving all
  the
• regular evidence.
• Is this case a business decision?
• Can it be placed automatically in your pool?
• The case, having been placed in your automatic
  pool, is discovered on a routine audit. What do
  you expect to happen?

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And The Industry Says!

• Reports of the Society of Actuaries Underwriting
  and Mortality Survey Committee.
• Business Decisions (Direct Companies)-March 07
• Business Decisions (Reinsurance)-Jan 07
• Survey Done May 2006

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Caveats

• ? Practices relate to 14 Reinsurers (includes 2
  Retro) and 60 direct writers so by no means a
  look at the whole industry.
• ? Results relate to practices as of May 2006.
• ? Not all companies answered all questions and
  not all responses were consistent across all
  questions eg. Some companies that said they
  didnt make business decisions answered some of
  the questions about business decisions.
• ? Some companies had trouble with the predefined
  definitions of business decisions.
• ? Percentages are used in these slides but in
  some cases the number answering is small.

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What is a Business Decision

• - 2 definitions provided

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Definition 1

• A decision which results in a better offer to
  the
• customer than that obtained by strictly following
• the companys underwriting guidelines
• (including any explicitly-defined stretch
  criteria
• for preferred classes).

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Definition 2

• A decision which results in a better offer to the
• customer than that obtained by following the
• companys underwriting guidelines (including
• any explicitly-defined stretch criteria for
• preferred classes) where those criteria allow for
• some underwriter judgment.

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Definition Choices
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Definition Other Points

• 1/3 of the direct companies do not define stretch
  criteria so using Definition 2 may mean they are
  more similar to ceding companies with stretch
  criteria.
• Comments made in both surveys point to
  underwriting decisions which do not effect
  mortality profitability not being considered as
  business decisions.
• 90 of direct companies consider waving a
  requirement an exception.

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Do You Allow Business Decisions?
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Direct Company Allowing Business Decisions on
Preferred

• 80 allow on all preferred classes 20 on all
  but the best preferred class.
• 27 vary their practice by age and 33 by amount
• Some referred to only within their retention
  or taking outside the treaty.

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Direct Company Allowing Business Decisions on
Standard/Substandard

• 50 have limits on such decisions
• Of these
• - 61 limit face amount
• - 50 size of rating (number of tables/size of
  flat extra)
• - 44 issue age

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Common Reasons for Making Business Decisions
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Most common Preferred Criteria on which a
Business Decision is Made
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Consider The Impact of Business Decisions in
Pricing Mortality?
(Yes)
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Do you track Business Decisions?(, Volume,
Number)
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Percentage of Business Decisions Direct
Companies (by count)
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Maximum Allowable Percentage of Business
Decisions Reinsurerpreferred/std-substd)
Only 4 reinsurers responded
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Process Related to Business Decisions

• Do you have a formal process to

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Can A Case Underwriter. . .
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Does The Process Involve?
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Does the Process Involve Your Reinsurers?
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Action Taken if Dont Consult With Reinsurer
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If Cede Automatically do Reinsurers Anticipate
Such Action
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How do Reinsurers Feel About Allowing Business
Decisions?

• Do Reinsurers allow business decisions?
• ? 43 on preferred
• ? 73 on standard/substandard
• ? 55 on waiving requirements

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Do Reinsurers allow Business Decisions To be
Placed in Automatic Pools?

• Results require interpretation of other
  comments.
• We concluded at least 50 of the reinsurers and
  retros do not allow unless they are paid the
  true rate.
• Some allow if priced for in the treaty.

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Do Reinsurers . . .

• Insist business decisions practices be documented
  in treaties 57 Yes
• Require periodic documentation of of such
  business decisions 50 yes
• Specify the maximum allowed in the treaty 36
  yes

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What Actions Have Reinsurers Taken? (May 04-
May 06) As a Result of Ceding Company Making
Business Decisions ( of reinsurers saying they
took this action)
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Ceding Company PerspectiveActions Taken By
Reinsurers on Business Decisions Cases
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Business Decisions - Takeaways

• Know what you company expects
• Know what your reinsurer(s) expect
• Make sure underwriting practices are consistent
  with actuarial pricing
• Communicate, Communicate, Communicate

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Business Decisions

• Are you Covered?

Gord GIBBINS, FSA, FCIA, BSC Senior Vice
President, Development Optimum Re