The Financial Impact of Underwriting Class Exceptions

The Financial Impact of
Underwriting Class Exceptions
Jim Filmore, FSA, MAAA
Second Vice President & Actuary
Munich American Reassurance Company
November 2006

Overview
• Typical underwriting class structure
• Example of 3 applicants
• Graphical effect of class exceptions
• Numerical effect of class exceptions

General Population Mortality Distribution
Multiple Preferred UW Class Structure
Pref + Pref Standard Substd Decline
0 1
Qx

Sample Underwriting Criteria
Pref + Pref
Standard
Cholesterol < 210 < 240 < 300
Ratio < 4.0 < 5.5 < 7.0
Max. Weight 195 215 245
(6 ft.)

Underwriting Information
Individuals A, B, and C
A B C Pref
Cholesterol 238 245 175 < 240
Ratio 5.3 2.5 2.8 < 5.5
Max. Weight 212 175 220 < 215
(6 ft.)
Preferred? Yes No No

Preferred Underwriting Deviations
Applicant A meets all of the preferred underwriting
criteria. Applicant B does not meet all of the criteria, but
overall is a better risk than applicant A.
Should applicant B be eligible for a preferred rating also?

Preferred Class Without Deviations
.
B
.
A
Pref +
Preferred
.
C
Standard
0 Qx 1

Preferred Class with Deviations
.
B
A
.
Preferred
Standard
Pref +
.
C
0 Qx 1

Preferred Class with Deviations
.
B
A
.
Preferred
Standard
Pref +
.
C
0 Qx 1

Preferred Class with Deviations
.
B
A
.
Preferred
Standard
Pref +
.
C
0 Qx 1

Single Preferred Class UW Structure
Numerical Example
Pref Standard Substd Decline
0 1
Qx

Single Preferred Class UW Structure
Numerical Example
Pref Standard Substd Decline
0 1
Qx

Allocation of Term Premium Per Pricing
Profit
Expenses
Mortality
Capital/Reserves

Allocation of Term Premium after Exceptions
Profit
Expenses
Mortality
Capital/Reserves

Increased Mortality from Class Shift
Increased
mortality
Original mortality

Decreased Profitability from Class Shift
Decrease in profit
Remaining profit

Preferred Underwriting Deviations
The shifting of risks from one underwriting class to a better
class will have an impact on mortality.
Keep in mind that a given percentage increase in mortality
will have a much greater affect on profitability.

Multiple Preferred UW Class Structure
Numerical Example
Pref ++ Pref + Pref Standard Substd Decline
0 1
Qx

Closing Comments
• Keep in mind that the impact of an underwriting class exception
may be greater on the reinsurer (as compared to the direct
company) as a much larger percentage of the reinsurers
profitability is dependent upon an accurate mortality assessment.
This can be especially poignant in the case of a permanent policy
with a large single premium that may provide spread income for
the direct company, but not to the reinsurer who is providing YRT
reinsurance for the mortality risk.
• What appears to be a small % increase in mortality actually has a
much larger impact on the profit margin as the profits are a much
smaller % of the total.