Underwriting in the 21st Century: Informals—Turning a Pain into Profits

published June, 2008—On the Risk


Underwriting in the 21st Century: Informals—Turning a Pain into Profits

Executive Summary

This article series continues to explore the evolving landscape of underwriting in the 21st Century. In this installment we explore the impact of informal, or preliminary, applications on both the workflow of an underwriting department and on relationships with producers. We spoke with four leading carriers in this market about innovations they have implemented to improve these dynamics, and we also spoke with a reinsurer to gain additional perspective on this marketplace.

We found agreement that informals, if not handled correctly, can significantly bog down an underwriting operation. The solution offered by these companies is to find ways to create a sense of partnership with the producers and a shared interest for both sides to improve the process. Reducing cycle time and the burden on underwriting departments is the key to improving the process-- and increasing profitability.

What are the problems with informals?

Ask any underwriter who reviews informals on a regular basis this question and you will hear a laundry list of complaints from carriers both large and small. Informals were described as a “necessary evil” and an enormous drain on a company’s underwriting resources. Applicants are more advanced in age and have voluminous medical histories. APS’s accompanying a preliminary application can number in the several hundreds of pages (even over 1,000!) and the quality of the records are often times marginal at best. “Three problems we found with informal submissions all came together to tie up underwriting resources and delay cycle time”, explains Pam Anson, ING’s Underwriting Chief Administrative Officer and Head of Corporate Markets Operations, “volume of pages, complexity of case history and the knowledge that certain producers would use ING to shop but not place cases with us were all negatives that needed to be addressed.”

The need to underwrite cases requiring a disproportionate amount of resources relative to the percentage that are actually placed is a key dynamic cited. These cases are complex and the pressure to issue competitive and timely offers can become difficult for underwriters. With as much as half of a carrier’s underwriting capacity potentially tied up with informals -- and the placement rate hovering between 2%-3%-- handling a large volume of informals can become a morale issue for an underwriting department leaving underwriters asking the question: “why do we bother?”


"These cases are large, complicated and require very experienced senior level underwriters to work on them.” M. Cristina Downey VP, Chief Underwriter of XL Re Life America describes the impact on underwriting departments, “At a time when many companies are struggling to secure and retain sufficient resources; competitive pressure and time constraints need to be carefully balance against placement ratios and the cost of lost business".

“As a reinsurer we do not encourage informals and we only see them when the direct
writer is getting a formal app and wants to start the underwriting process. If we receive
inquiries regarding capacity of potentially large coverage, we do not formally reserve
until a formal application is received. Similarly, retros will not reserve capacity if the
reinsurer submits only an informal. As a reinsurer in a large facultative shop years ago,
we reviewed many inquiries and at times the same one simultaneously from multiple
carriers.” XL’s Downey cautions, “The placement ratio is virtually negligible, they are
often extremely time consuming and voluminous and result in either high substandard
ratings or declinations due to medical impairments or questionable financials, high
substandard medical histories, or suspect insurable interest. In today's environment, I would guess stranger-owned and premium financing are emerging patterns as well.”
How are carriers moving from pain to profit?
With the negatives associated with informals, what kinds of innovations are occurring in the industry to make this a more manageable and profitable business model?
“ We identified key areas that contributed to ING's inability to effectively manage and provide timely service on informal submissions." explains Pam Anson, ING’s Underwriting Chief Administrative Officer, “ Quantity and quality of submissions were impeding our ability to provide timely offers resulting in very low formalization and placement of this business. To be successful and improve the placement rate, we needed to identify solutions.”
In the case of ING, they engaged a well thought out Six Sigma process to identify what their biggest challenges were to becoming more proficient and profitable in the informals’ market. ING’s numbers showed them that 33% of their underwriting resources were being spent on informals and it was generating less than 5% placement. They identified interconnected factors that were contributing to this low return on investment: timeliness of offers, quality and quantity of submissions, and the lack of customer partnership in researching product offerings and pricing to determine the viability of placing cases with ING as their first option. To overcome these challenges, ING encouraged the customer to become a participant in the process and began working with various distribution channels to fine tune their offers and reduce cycle time so ING could be first to make offers—instead of last.
The key for ING to reduce cycle time was first engaging the producer to participate in the solution by investing their own resources. “We specifically did not want to refuse informal service support to any of our customers; however, we knew that our new informal process would naturally discourage submissions from customers that were not willing to invest their resources in improving the quality and quantity of the informals submitted,” explained Ms. Anson. ING went to work building partnerships with productive producers by offering them incentives to participate in the process of reducing cycle time.

ING offered producers the ability to contract with vendors that could summarize APS’s in advance of submitting the informal application and then would pay out a bonus on every case that was submitted in this manner and then placed. Producers submit APS’s to vendors at negotiated rates to be summarized and then they are delivered to ING. Without taking on any additional internal staff or overhead, ING reduced the time it took for home office underwriters to review a submission on average 30 minutes and this in turn drastically reduced cycle time from the previous 30-60 days to their 5 day target.

“This paradigm shift in how ING handles informals put us in the position that we became value added partners to the producers and remain forefront in their minds.” Said Ms. Anson, “By creating incentives for the producers to stop submitting voluminous medical records and instead work with us to summarize those records and create a concise health overview of the applicant, we all benefited and achieved our goal of moving from the last offer to the first and our placement rates moved to the 7% range and profitability immediately improved.”

From Cristina Downey of XL Re’s perspective, there are some guidelines that a carrier should use when evaluating the informals market and producer relations, “Carriers should focus on producers that have a track record of high placement with them. Submissions should carry a considerable face amount of yearly premium and the applicant should be fresh in the market and carry MIB authorization. Producers expectations need to be managed and they should be ready to accept that time service might not be a priority for these cases and that they won’t be reimbursed for expenses if they order requirements without specific consent from underwriting.”
Do improvements handling producer relations lead to improvements handling informals (and vice versa)?
When American National Insurance Company (ANICO) started accepting informal submissions from brokers their goal as a new entrant into the brokerage life arena was to compete not only on price, but by also building value-added relationships with producers and delivering expedited cycle time to get to offer.

They began by requiring that all informals be submitted with summarized APS’s with a total limit of 10 pages for all submissions. According to Jeff Moore, a National Sales Manager with ANICO, “We have seen a significant improvement in cycle time by cutting down on the pages to review and our producer relationships also benefit from our assistance in “pre-underwriting” these cases. Once we introduced outsourced APS summaries to the process, our internal capability to underwrite informals and make offers increased by more than double. For a new player in a highly competitive market, that is a big deal! By using an outside firm to do APS summaries we were able to significantly increase our underwriting capacity without detracting from our capacity to handle formal applications.”

This process has resulted in ANICO’s cycle time decreasing from 3-4 weeks to 2-4 days. They have also built up goodwill and trust with producers who view the summaries as very insightful and valuable as it bolsters their capabilities as well.

Downey of XL Re also sees opportunities to work in a positive fashion with producers,
“A good producer will not just send junk and if there is a very good producer that
occasionally may need help on an inquiry they should be accommodated. A large
profitable agency that expects support on a regular basis from the direct writer should be
given a quick reference set of criteria, for example: alcohol/drug abuse treatment in the
last 6 months or no cases already assessed Table 8 or higher by another carrier.”


Conclusion

The consensus among those we spoke with is that carriers need to work with producers to improve the quality of submissions and reduce cycle times so that informals can be a sustainable business model for both sides. Carriers need to lead the way by clearly establishing guidelines and expectations with the producers to help eliminate decline submissions. Carriers also need to implement incentive programs to cut down on the volume of paper through innovations like APS summaries. To ensure goals are being met, carriers need to have reliable metrics in place to run cost-benefit analysis to determine where the profitable relationships are, and who is costing the company money—and then focus efforts where it counts.
Informals are a double edged sword. If they are not managed with innovation and a sense of partnership between producer and carrier they can become counter productive to any carrier regardless of size. But, handled correctly they can actually help improve producer relations and can be a healthy contributor to the bottom line. As the saying goes, “you get out of something what you put into it.” In the case of informals, the companies that are putting in the extra effort to work smarter, instead of harder, are getting a lot in return.