Why consumers want their direct life insurance underwritten upfront

Direct life insurance is here to stay, writes Marcello Bertasso, but consumers may prefer the peace of mind offered by a policy that is underwritten upfront.

The old adage that life insurance is sold and not bought is beginning to lose credibility.

Direct life insurance sales constitute around 13.8 per cent of overall risk insurance sales in Australia. Consumers are starting to turn the corner about the importance of life insurance and are looking for different ways to purchase it.

However, another old adage, ‘Let the buyer beware’, or more aptly put, ‘Let the buyer be aware’, does still apply, perhaps more so then ever.

Direct life insurance is life insurance that is distributed through a non-intermediated sales channel — the consumer deals directly with the life insurer without a financial adviser or planner involved.

Direct life insurance does not aim to replace advice-based decision-making. It’s targeted at those who already know what they want and are wishing to complete the purchase on their own.

As this sector of the life insurance industry continues to grow, many insurers have adopted this channel as a significant component of their distribution strategy.

The range of products distributed directly continues to grow, currently 1,381 products are marketed.

Not only is there diversity in the protection these products offer (life insurance, accidental death, accidental injury, income protection, trauma cover, etc), there are also diverse methods of ‘underwriting’ the contracts.

Underwriting can be defined as the process of assessing the eligibility of a customer for a financial or insurance product.

In the life insurance context, it refers to the assessment of medical and financial eligibility to determine if the insurer is willing to enter into an insurance contract with a customer.

In direct life insurance, the insurer may employ one or more underwriting processes to assess or mitigate the ‘risk’ it assumes by entering into the contract with the insured/applicant.

These processes include:

• up-front underwriting: prior to the acceptance of contract material information is provided to the insurer for an underwriter to assess; and
• retrospective underwriting: assessment of adherence to the policy eligibility requirements and conditions are done at the time of claim.

These processes are further refined into full up-front underwriting, limited up-front underwriting, pre-existing condition exclusions and accident-only cover for a limited period.

These underwriting processes can have a profound effect on the final product, most significantly on the pricing and consumer experience through the underwriting and claims processes.

In general, prices for direct insurance products are more expensive when compared to intermediated products.

This is typically because the products are designed with limited or no underwriting. The cost of cover is between 120 and 160 per cent more expensive than fully underwritten products. This additional cost reflects the risk (volatility) of additional claims.

Due to the historically low penetration of direct insurance products, and a by-product of disintermediation, not a great deal is currently known about the consumer experience when dealing directly with the underwriting and claims processes.

Product providers have tried to make the underwriting process simpler by introducing on-line automated underwriting.

The product providers assess the applications electronically using ‘smart’ underwriting rules engines, often in real-time.

They provide the applicant with an immediate decision on their application, indicate if human underwriter intervention may be required and gather all the underwriting information to be packaged for an assessment by the underwriter.

In the claims area, it is probably safe to say that where the product features are simple (eg, straightforward life cover), the experience is comparable to fully intermediated products.

However, with complex products, such as trauma cover, it may be a daunting and confusing process for the claimant to successfully lodge a valid claim.

Product providers recognise this and are working towards making the claims process simpler and clearer and, like underwriting, potentially in real-time, or with very short turnaround times.

Direct life insurance is without doubt here to stay.

The consumers that purchase life insurance protection directly will need to balance the scales between simpler, easier to access but slightly more expensive products and full featured, fully underwritten products that have potentially fewer issues should a claim arise.

If forced to choose, I would opt for a product that was underwritten up-front with full disclosure. Knowing that once accepted cover will be enjoyed with certainty and that the policy will deliver on the promise of protection gives me peace of mind for tomorrow.

Marcello Bertasso is AMP’s head of underwriting.