Review of Loadings and Exclusions

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Continuing my journey in the weeds on existing business servicing; policy terms. More specifically, reviewing policy terms for existing clients.

Tuesday, August 8th 2023, 3:27PM 11 Comments

by Jon-Paul Hale

I've had experience over the years where this aspect of reviewing policies for clients has had a massive difference in the approach from insurers.

Some have changed over the years too. The most extreme example I've had is cardiac and cancer exclusions due to a family history with Southern Cross with no symptoms that they refused to review at the time.

Yet, today Southern Cross only ask family history questions on the extension covers, cancer meds and trauma covers, and not for the base medical benefits.

So things do change, but some can still be a significant challenge too.

The approach from Sovereign is probably the best one from a client perspective, and this is where AIA continues to apply this. If an exclusion or loading is being reviewed, they will look at just the causes for that exclusion or loading.

This means that the client, in a situation of having other things now out of shape, only has the elements of the changed risk with the terms being reviewed being looked at.

Looking at the other end with the approach from others, the underwriter requires a full application (specific to the risk, medical, occupation, or financial) to assess the review of terms. This opens the door to other conditions now present influencing the decision on terms.

This is less of a concern for things like shoulder exclusions, but it becomes a problem when we are talking about premium loadings. The whole-person assessment means that while the original issue triggering the loading may have been resolved, other now-developed problems are why the loading isn't removed.

There are arguments for and against both situations.

The tight focus on the issue for review has the advantage of removing terms more effectively. At the same time, the insurer assessed the risk at application and determined that "thing" was an increased risk while taking on the risk of other issues developing in the future. So you could consider this a fair approach.

As an adviser for clients at an individual level, this is a good thing, desirable and able to assist in improvements in the future.

The counterargument is that the whole risk assessed and then reassessed manages the risk to the insurer, and it could be argued that the insurer is prudent in their risk management.

Not as friendly for the individual but helpful to managing pressure on premiums for all policyholders in terms of premiums gathered to address resulting claims.

Which is best? That's pretty subjective, given your position in the equation.

From the client's position, you'll want the specific review answer; as an adviser, you will say much the same.

But there's a cause-and-effect issue here as the same clients and advisers will complain about rising premiums.

The removal of loadings for specific issues removes the premium income from that individual risk and applies the risk to the rest of the pool for the claimed reality from those same clients in the future.

More specifically, other clients pay where the approach has reduced premium income that subsequently has a claim.

We've all seen the increases in premiums over the last few decades. While this is from both improvements in medical technology for diagnosis and a decline in the population's general health, it has also come from providers' success in paying claims.

With passback options in the market for over 20 years, we can now see the expansion and creep of policy wordings, particularly trauma covers, resulting in overall increases in premiums.

This is double-edged; assisting existing clients with relevant current policy terms also applies increased pressure on premiums from increased claims.

The idea that passbacks only apply if it doesn't result in an increase in premium at the same time isn't entirely accurate.

The insurer gets to lift the underlying premium on the existing policies as a direct result of an overall claims increase caused by the application of passbacks.

I suspect the insurers are only doing it this way because the incremental increase of underlying premiums is more significant than the rise in claims costs vs the drop-off directly associated with increased costs (which also reduces claim experience).

Passbacks may not be an immediate increase at the time, but the "2% or whatever it ends up being" overall increase in base rate premiums next year from claims pressures will still happen, and passbacks will contribute to that.

Why are passbacks relevant to loadings and exclusion reviews?

Because the approach to passback and pooled risk premiums is part of the consideration of how an insurer might tackle terms review underwriting.

Is there a simple answer here?

I don't think so. I do feel we need to be careful with what we wish for.

That old policy, priced as it was 20+ years ago, may not have the subtle partial payment nuances of the passed-back policy today. Still, it is significantly more likely to be in place on the cover and premium structure it was than the passed-back policy of today.

And that's sort of the point; we put coverage in place to work; if the policy isn't there to claim when needed, we may have missed the point.

This is where the Partners Life mess of trauma products may have some intelligent insight if used well, and I'm not talking about how it's been "sold" to us.

Instead, you have an advice plan for clients with a comprehensive trauma starting point that is more stepping back than reducing. Age-related premium pressures allow migrating moderate and severe trauma products to maintain cover levels and manage premiums rather than lowering or removing trauma cover.

What do you think?

Tags: Jon-Paul Hale

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