The case against ‘case shopping’

The launch of the Generic Personal Statement (GPS) for risk advisers and their clients has generated debate, which I think warrants some comment.

The GPS is destined to save thousands of hours for clients and advisers and will engender a more thorough application completion process, which will enhance productivity and profitability for insurers. Many insurers have recognised this and are actively supporting its use.

Adviser feedback

The feedback from advisers regarding the form itself — now available at www.thegps.com.au — is overwhelmingly positive.

However, the feedback from advisers about the way some insurers are handling the GPS issue in practice indicates that a few issues are yet to be resolved. There have been several instances (that I know of directly) of communication breakdown between a few of the insurers supporting the form.

Business development managers (BDMs) and some ‘junior’ underwriters have apparently not been advised of their company’s approval of the use of the form for the placement of new business cases. This has led to some cases being rejected in the first instance or not being submitted to certain insurers as the advisers have been ‘cut off at the pass’ before they made it as far as submitting the new business.

Several advisers have clearly been told that a company does not accept the form when in fact they do. This, of course, is not good public relations for those insurance companies and loses them business.

Problem solving

Why is this happening?

We have assumed the insurers that have approved the form — and most have — are proactive and enthusiastic in their support of the GPS. However, their approval of the GPS may be tinged with reluctance in a few instances, and it is becoming clear why.

Although the concept of a generic form for gathering personal information is a noble and workable one for the client, some insurers perceive this form will facilitate a costly and counterproductive risk adviser practice known as ‘case shopping’.

This is a practice that I believed had ceased in these times of more professional risk advising, but it seems that ‘shopping’ is still alive and well.

To be fair to newer advisers, other advisers may have mentored them into this practice without realising its impact.

Playing off insurers

‘Shopping’ refers to the practice of getting a client to complete applications, with full personal information, for several insurers at once and submitting them concurrently. The practice is designed to obtain terms and choose the best of those terms for acceptance from several underwriters.

At its worst, the adviser then exposes the situation and manipulates the outcomes with a Dutch auction between the insurers. The other cases are then withdrawn from the ‘unsuccessful’ insurers. This is frowned upon and regarded, quite rightly, as an unprofessional and even unethical practice.

I have great empathy with the insurers’ concerns: that the GPS will be used to ‘shop’ insurance applications around the insurer market.

In reality, however, there is no reason to suspect that the GPS will contribute to the continuation of the practice by the perpetrators.

Why? Because shopping is obviously alive and well now, without the GPS, and because the reason shopping continues is that insurers are allowing it to happen, for that most ignoble of reasons — commercial pressure.

The impact of ‘shopping’

Before handling that hot potato, let’s look at ‘shopping’ and what impact it has on the industry.

Take a common scenario: an adviser works with the client to complete the personal information documents and discovers the client has a health problem that will generate more than a little interest from the underwriters and will most likely lead to adverse acceptance terms. This is known as a sub-standard case in underwriting jargon.

The adviser believes that they are doing the client a favour by letting as many insurers as possible see the case and perhaps even ‘fight it out’ for the right to take on the client on sub-standard terms. The motivation, theoretically, is that the adviser will secure the best terms of acceptance for a sub-standard client.

In reality, the practice of sending a case to several different insurers at once is wasteful, unnecessary, and costly to the industry and end-consumer, and a misdirected method of managing sub-standard clients.

And in its worst guise, it implies imprudent and even dishonest actions on the part of advisers.

Underwriting terms

In order to shop a case, the adviser needs to get the client to complete and sign several applications for several insurers, which are then submitted concurrently, and the responses managed to get the best outcome for the client: this probably being the cheapest premium, usually by obtaining the smallest loading on offer.

Insurers sometimes do apply a different loading to some conditions than their counterparts. This reflects differing experiences with that condition historically as well as the application of different standards imposed by their particular reinsurer.

The other contributing factors in any one individual client’s medical situation, however, usually mean that the terms are a combination of the ‘standard’ loading plus or minus an adjustment for the individual circumstances. A simple example would be high blood pressure plus obesity and high blood fats, or high blood pressure less ideal weight and normal blood fats levels.

There is a question on all personal statements that seeks an answer along the lines of: “Are you currently applying for … any type of life insurance etc” and requests details of those applications. What I am hearing from insurers is that they receive applications that are being duplicated around the industry, but which are not being disclosed on the personal statement that the insurers each receive. The ‘shopping’ tends to come out in the wash later.

Duty of disclosure

Bearing in mind that the personal statement is a form of statutory declaration, the client is then non-disclosing these other concurrent applications. If they are not being stated, and details are not forthcoming regarding the other insurers who at that very moment are assessing the very same case, then there is time, effort and cost being expended by every insurer without knowing that another insurer is doing the same.

The serious issue that this non-disclosure on the client’s part (it is their personal statement) opens up a whole other Pandora’s box of risks.

The action being instigated and perpetrated by the adviser is in breach of law yet sitting squarely at the feet of the client who has signed the duty of disclosure declaration. Is it even conceivable that any client who is put into this position by an adviser has a clue as to what they have done in not disclosing the other application submissions?

The practice seems innocuous to the uninitiated. But consider the circumstances within most underwriting departments now — overworked due to a lack of experienced resources; coping with endemically poor application completion by advisers who have not been trained otherwise; and faced with ever-increasing costs of medical evidence while premiums remain under competitive pressure.

Commercial considerations

Insurers assure me that ‘shopping’ is occurring — yet are the advisers being castigated and suffering commercial consequences as a result? I would like to say that I know insurers are taking action against advisers who practise this deception … but I can’t.

How far do commercial considerations go? It’s not often acknowledged in public that less than acceptable practices occur from time to time, yet a collective moral drive to oust them is impossible to rely on.

In other words, commercial imperatives continue to clear a path for advisers to commit acts we would not approve of, with few or no ramifications for their ongoing capacity to advise.

This applies as much to the practice of ‘shopping’ as to other practices of a dubious nature. So, while I am very concerned that ‘shopping’ occurs, I would suggest that it could be stopped if insurers really wanted to stop it.

Best practice

This discussion started in reference to insurers’ recent concerns that the GPS will encourage and facilitate ‘shopping’.

I respectfully submit that insurers themselves through their lack of action encourage and facilitate ‘shopping’.

The GPS argument is a spurious one. A minority of advisers ‘shop’ cases — they will continue to do so with or without the GPS, and it is time the industry banned the practice.

How, then, does an adviser manage a sub-standard client’s underwriting outcome the best way possible for all concerned?

The correct practice is to carefully select an insurer who has the appropriate product and is also known by the adviser to professionally and sensitively handle sub-standard cases with a true commitment to securing cover for the client if at all possible and at the best terms.

A less than experienced adviser would ask, “but don’t all insurance underwriters take that approach?” Alas, no, they don’t. Advisers who have been around know that some are better than others. So the selected insurer is then asked to underwrite this substandard client.

If the outcome appears to be truly unsatisfactory, drawing from the adviser’s experience as a field underwriter, then it is reasonable to make a further effort for the client.

If discussions with the selected insurer fail to elicit the possibility of, say, obtaining further information that may assist in altering the underwriting decision, then it may be reasonable to seek an alternative.

This should be achieved by firstly discussing the initial insurer’s offer with an alternative insurer and then, if they are willing, giving them the opportunity to assess the case as well. (I should point out that some medical conditions are absolutely non-negotiable, so this alternative may not always be feasible.)

Creating better relationships

An ethical adviser manages the situation in this way and the insurers they deal with respond in kind, generally by recognising this adviser as being professional and ethical. This alone can contribute to a better relationship and better outcomes for the adviser’s clients. Trust goes a long way in the underwriting decision.

Historically, ‘shopping’ has been carried out at what cost to insurers and inevitably to consumers? And could the same result be achieved by nurturing a strong and trusting relationship with underwriters so that the adviser gains an education in respect of which risks are handled in which manner by which insurers?

If insurers want to stop ‘shopping’, they can. By simply banding together in a collective effort to stamp out the regular culprits, it should be possible to reduce the incidence of ‘shopping’ to a level that insurers are prepared to accept as a cost of doing business — or not at all.

If advisers are puzzled as to why some companies appear to be less than excited about the GPS, then perhaps I have offered some explanation for this. And if an adviser was told “no” by a company who is on the list, then I would encourage them to keep working up the chain until they get a “yes” — because they will.

Sue Laing is principal of Laing Advisory Services. She can be contacted at [email protected].