Accelerated underwriting in Canada:

Accelerated underwriting (AUW), a growing practice even before the pandemic, is now firmly established in the life insurance application process. AUW is the waiving of certain traditional underwriting requirements (e.g., fluid evidence, vitals) for a subset of applicants that meet favourable risk requirements in an otherwise fully underwritten life insurance process. While the interpretation of AUW can vary from one insurance company to the next, what is universal is that the “no fluid” aspect of AUW translates into a faster, less invasive buying experience for the majority of life insurance applicants.

But giving up underwriting evidence for speed is not without risk for insurers. Less evidence translates to diminished confidence in the health of the applicant, which can throw the “risk versus reward” formula off-kilter if other risk-mitigating steps aren’t taken.

As the industry continues to develop, refine, and expand AUW, it is imperative that we consider the implications and address the challenges of these programs. The entire industry has a role to play in ensuring the sustainability of AUW in Canada, from enforcing good risk management practices to challenging ourselves to rethink product and underwriting designs. Insurers must be confident in their underwriting while still delivering the same value to customers at speeds they now expect, all while managing their risk exposure. How do we strike this balance? 

Munich Re, Canada (Life) produces the Canadian Individual Insurance Survey, an annual publication that captures industry insights and trends across Individual Life and Critical Illness products. According to historical survey results, ten years ago the maximum no-fluid limit was $500,000, and around 15% of new individual life policies were underwritten without fluid evidence. Today, 60 to 70% of individual life policies are placed without fluids at limits as high as five million dollars. So now, the five million dollar question is: what have we lost by foregoing fluid evidence, and can we get it back?

With fewer data points of evidence gathered during the application process and limited third-party data sources in Canada to fall back on, it becomes more challenging to assess risk in an AUW program. Applicants have a greater opportunity to take advantage of information asymmetry—that is, the applicant may know more about their own health than what is being shared with the insurer. In theory, the less confidence an insurer has in an underwriting assessment, the higher the premium that should be charged to compensate for the lack of evidence. And yet, from our survey, we’ve seen the average premium for a Term 10 policy drop from $2.10 ten years ago to about $1.90 today. That decrease in premium is consistent with the average improvement in overall mortality for those years and likely reflects the cost savings from insurers requiring less underwriting evidence. The pricing may also reflect the impact of COVID-19 and changes in the interest rates over the years. But have we also compensated for the reduced level of confidence that we have, and is it enough?

On the flip side, AUW does deliver clear benefits in terms of customer experience. We see in our survey that ten years ago, it took 30 days on average to issue a policy. It now takes less than 20 days on average, and presumably, this number should continue to drop as insurers look to increase their straight-through-processing (STP). One might assume that a streamlined purchase process would get more policies into the hands of Canadians. However, the number of policies being placed is not growing. Looking at Individual Life policy counts reported by LIMRA—they fell 20% in the last 10 years, although overall premiums have grown due to a focus on high-net-worth business.¹

This is our challenge: To develop a framework to underwrite and understand risk in a customer-friendly way that also supports putting more policies in the hands of Canadians.

When introducing an AUW program, insurers should anticipate a change in underwriting decisions compared to those made using traditional underwriting approaches. For instance, an applicant who fails to disclose uncontrolled diabetes might receive a standard rate decision through an AUW program that doesn’t necessitate insurance labs. In contrast, under a traditional underwriting process requiring lab tests, the insurer would likely decide to decline coverage once lab results discover the undisclosed impairment. Similarly, AUW programs can impact decisions to offer coverage at higher premiums, such as when undisclosed health issues or tobacco use are detected. 

In order for carriers to understand the impact their AUW program has on their decisioning, carriers should implement the use of Random Holdouts. Random Holdouts (RHOs) refers to a practice where applications that would typically have been underwritten with minimal evidence beyond the application and/or tele-interview are randomly selected to undergo additional underwriting requirements. The additional evidence could be some combination of fluids, vitals, and/or non-routine Attending Physician Statement (APS). RHOs can be used by a carrier to measure mortality slippage, which is the expected deterioration in mortality of an AUW block of business versus the mortality performance of the same block had it been fully underwritten using a traditional approach.  

In the US, a common approach to gauge the level of mortality slippage is to look at individual RHO results and compare what the AUW underwriting decision would have been against the final decision once accounting for the additional underwriting evidence. Then the RHO differences are weighted by the present value of expected claims. Today, no uniform approach is used in Canada to calculate mortality slippage. An insurer’s ability to calculate mortality slippage can be influenced by how and when in the underwriting process RHOs are identified, whether an RHO’s theoretical AUW decision is determined despite being held out, and the volume of RHOs being conducted, particularly in the “age and amount” cells of most interest. 

Wastage is the broad category referring to submitted applications that are not proceeded with, closed out as incomplete, or the offered policy was not taken by the applicant. Sometimes a request for underwriting evidence may lead the applicant to reconsider their insurance purchase for entirely innocent reasons, such as the inconvenience of having to submit blood and urine. However, when the reasons are less innocent we would refer to the wastage as “selective”. Selective wastage happens when a customer walks away from their insurance application specifically to avoid giving evidence to the insurer that will adversely impact their insurance eligibility and/or premium. 

According to Munich Re’s 2024 Individual Insurance Survey, the average level of wastage for all Individual Life applications was 11%. However, wastage rates were lower for applications processed on a no-fluid basis and higher if the applications were held out. This variance indicates that the likelihood of wastage is influenced by how much evidence is collected from the applicant. Munich Re’s experience also indicates that wastage can differ by sales channel, which may be attributable to varying degrees of advisor influence by channel.

Insurers with above-average wastage rates should view their RHO results as not truly random, and may only represent the skewed proportion of applicants who were willing to submit additional evidence.

Selective wastage is a challenging problem to solve. It’s difficult to quantify how much wastage is selective and what the implications are for the rest of the business that is not randomly held out. However, there could be another option—and that is post-issue underwriting (also known as post-issue audit in the US).

Post-issue underwriting is monitoring that is completed after the policy is issued. This is a practice that is common in the US, typically by requesting an APS, but it is scarcely used in Canada. Instead, in Canada, we generally rely on the claims adjudication process to be able to revisit the disclosures, or lack thereof, in an application.

Post-issue underwriting gives an insurer the opportunity to proactively revisit the application once it has been issued to verify that the policy was decisioned correctly and is charged an appropriate premium. Post-issue underwriting can even result in the rescission of a policy if significant adverse information about the policyholder’s health is discovered. According to a recent study conducted by Munich Re Life US, 14% of post-issue audits uncovered that applicants were issued a better risk class under an AUW program than what should otherwise have been issued. Depending on the insurer, post-issue underwriting might not even impact the policyholder directly at all and can instead be used as a tool to understand and adjust AUW program performance.

There are many reasons why post-issue underwriting has not been well-used in Canada to date, but the challenges are not insurmountable, and thus, we challenge the industry to reconsider it as a risk mitigation tool to strengthen the underwriting in an AUW program. 

Could we take other actions to improve AUW programs in addition to holdouts, mortality slippage monitoring, and potentially, post-issue underwriting?

If we were to really push the industry, one notion is to make premium adjustability the standard and not the exception. Policies where premiums can be adjusted are common in the US and form a stable foundation for AUW programs. The ability to evaluate the performance of a block of business post-issue and adjust premiums is a powerful one. This flexibility could give insurers additional confidence in the ultimate value they will achieve from a policy. However, there are many angles to consider, from consumer and distribution friction to regulatory hurdles and financial risk versus reward. 

We all have a role in ensuring that AUW programs meet insurer and market needs for the long term. Distribution can help by buffering policyholder expectations and gauging comfort levels around post-issue underwriting and all associated outcomes. They can also establish sales concepts about the value of adjustable products.

Reinsurers bring their underwriting and analytic skills to the table to help establish risk controls such as mortality slippage calculations. They also work with clients to understand the ultimate mortality costs of their block and adjust accordingly, all while keeping the sales process and user experience in mind.

Regulators and legislators overseeing the life insurance industry can drive actions that would improve the industry's performance and ensure Canadians have viable insurance products to ensure their financial health long-term. Tax, capital, and oversight policies of regulators and legislators can encourage or discourage any form of sales concept or underwriting approach. Policy actions that encourage adjustability could, in turn, motivate insurers and reinsurers to broaden access to insurance products. Of course, any selective actions that insurers decide to utilize, whether it’s in relation to targeted holdouts, post-issue underwriting, or the development of more premium adjustable products, must be done in a manner that adheres to their obligation to treat customers fairly.