Chennai: Many insurance failures - life and non-life- can be attributed to imprudent underwriting/selection of risks for insurance.
According to Mike Wood, chief actuary, AMP Sanmar Assurance, ''There should be consistency between an actuary's assumptions in designing and pricing of a product with that of underwriting.''
While insuring poorer sections of society needs no major underwriting skills as protection is given on a mass scale (mass scale insurance cover is given to a big group), the same cannot be said of a preferred life product - a policy for the upper echelons of society, characterised by large policy and high premium. "Underwriters should take extra effort to see that the mortality rates are low in this portfolio," he adds. In rural markets, the average size of a policy is small, with differing mortality rates. This should be factored into underwriting.
The threat of AIDS spreading in the country is also a cause of worry to the life insurers. Wood feels that insurers, before taking the first premium, could insist on prospective customers filling out a special AIDS questionnaire before accepting the first premium.
''Policyholders could be asked to undergo an AIDS test every five years till the policy matures. All the insurers should evolve a uniform code relating to genetic information and AIDS while underwriting a proposal.''
Wood, who has two decades of actuarial experience, is here as Australian company AMP's representative in the Chennai-based life insurer. AMP Sanmar is a 74:26 joint venture between Sanmar group and AMP.
From a single historical underwriting philosophy by one dominant life insurer, the Indian market should now see differing approaches by new players, he remarks. Excerpts from an interview:
As a part of prudent underwriting principles, can life insurers ask a prospect for genetic information?
There are mixed reactions to that idea. Some feel it is unfair, as insurers can decline cover if they find negative traces in the genetic test report. On the other hand, it is suppression of material facts if a prospect does not disclose all that he knows about his health condition after finding something negative in a genetic test. To that extent, life insurers are at a disadvantage.
What is the practice abroad?
The practice differs from country to country. While countries like France, Belgium and Denmark prohibit asking for such information, it is voluntary in UK, Germany and South Africa. In countries like India, Japan, USA and Canada, there is no legislation or code on this aspect. There should be a common industry approach to genetic and AIDS issue.
A lot of money is spent on AIDS awareness/prevention in India. Even the Bill and Melinda Gates Foundation has donated $100 million towards AIDS initiatives. How do you, as a life insurer, view the AIDS threat and what steps can insurers take to protect themselves?
In India, the AIDS threat for life insurers is quite low. But that shouldn't lead to complacency. Ten years ago South Africa was in a stage where India is now. But today 25 per cent of the pregnant women in South Africa have tested HIV-positive. Again, it should be stated that India need not take the South African route, as life-styles and beliefs are quite different here.
But India is in the early stages of a potential epidemic, with around 4 million living with AIDS.
Life insurers can ask a prospect to fill in a detailed questionnaire and ask a policyholder to submit an AIDS test report every five years. Here the proposals contain a simple question, whereas overseas the questions relating to AIDS are much more elaborate.
As a safeguard measure, insurers can issue only five-year policies renewable at the end of the fifth year subject to the policyholder testing HIV negative.
What happens if a policyholder contracts AIDS during the course of the policy?
At the time of renewal, insurers can exclude/restrict the death/mortality cover and offer savings focused policies like short-term money back policies.
Can a life insurer exclude the risk of death due to AIDS from the policy purview as done by general insurers here in respect of health care policies?
In theory, it is possible but in practice such exclusions dos not work. It will be difficult to prove that the death is due to AIDS because of the stigma attached to the disease. Doctors will attribute the cause of death to other common diseases and not to AIDS. The way out is to design robust products, reduce guarantees and price and reserve extra for AIDS mortality.
You have been with several life insurers in several countries. What is the difference you find in underwriting practices in India and others?
In India, the reliability of medical reports is one major issue for insurers. Secondly, the issue of moral hazard is of some importance when it comes to insuring a woman. Here insurers take extra care in issuing a policy when the husband takes out a policy in his wife's name and when the sum assured is on the higher side - disproportionate to his/her income levels. In Australia, the issue of moral hazard does not get as much importance as it does here.
There is a need to upgrade underwriting skills in line with the improvement in mortality improvements. Mortality improvements have an impact on annuity pricing.
What are the new products/segments AMP Sanmar is looking at now? How has the performance been?
We are looking at pensions. From time to time, we have been looking at single premium products. However, single premium policies are difficult to launch at a time when interest rates are falling.
We are now consolidating our operations in the south and have established a presence in Maharashtra and Gujarat. We are happy with the progress made till now.