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The Individual Insurance Market

Black Boxes

Underwriting & Marketing Practices


Thomas Stoiber, F.S.A, M.A.A.A., Managing Consultant and Actuary, Stoiber & Associates, Milwaukee, WI.

William Lindsay, President, Benefit Management and Design, Inc., Denver, CO.

Tom Stoiber provided a peek inside the first of two "black boxes" explored during this session, explaining how underwriting works and discussing some common misperceptions about its role in individual insurance.

He began by reviewing the underwriting process, beginning with field underwriting by the agent, followed by a medical assessment and examination of the attending physician statement, and ending with an underwriting decision to accept, "rider" (accept with coverage restrictions), rate-up (accept at a substandard rate), or reject the applicant.

Mr. Stoiber emphasized that, despite popular perceptions of "cream skimming" by companies, most applicants are healthy and accepted for coverage at standard rates. Because most people are healthy, the insurers' goal is to underwrite as little as possible without accepting too many substandard risks. If a company underwrites too strictly, healthy applicants may go elsewhere, and the company sacrifices volume of business for quality of business.

Mr. Stoiber also challenged the conventional belief that group coverage is underwritten less than individual coverage, pointing out the opportunities for "invisible" underwriting of group coverage. In contrast, underwriting of individual coverage occurs only at the time of application and is explicit.

Bill Lindsay described how individual insurance is marketed and how marketing and underwriting interact. He reviewed the many different types of products that are lumped together as individual coverage and pointed out that an important characteristic of the market is its emphasis on niche, special-needs-oriented products. He emphasized that the potential market is narrow and marketing to individuals is expensive.

Mr. Lindsay outlined three primary goals of marketing in this market:

  • Convince an unwilling buyer that he needs coverage (to bring healthy people into the pool).
  • Appeal to young, healthy prospects (again, to improve risk in the pool).
  • Minimize adverse selection.

He listed the primary prospective purchasers of individual coverage and different ways of finding them. He emphasized that an insurer's primary marketing focus is not the consumer but the agents who identify prospects, field underwrite, educate clients about the products, and provide ongoing customer service.

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