All insurers are looking for ways to stand out in an increasingly competitive market. Over the last decade or so the world has revolved around preferred programs as a way to attract the “healthier than average” client and such programs have been wildly popular. In addition, but subtly, some companies have tried to attract the “mildly substandard” market by developing programs that envelop several substandard classes within their standard premium. Many marketing-friendly names have been assigned to these programs but for simplicity’s sake we will refer to them as expanded standard programs. In addition, we will use a Table 4 (200 percent of standard) to standard program for the purposes of this article. This article’s goal is to explore the advantages and disadvantages of expanded standard programs from an underwriting perspective. You will need to decide if the benefits outweigh the pitfalls.

What makes expanded standard programs attractive? Simply put, it gives a company the chance to offer a policy at standard rates when another could only offer substandard. Keep in mind if something sounds too good to be true, it probably is. (See David Wylde’s companion article for the actuarial perspective of expanded standard programs.)

The Benefits
Those in favor of these programs point out that they can streamline the underwriting process. A questionnaire could be used instead of getting a slower or more expensive requirement if further diligence is required – lots of time and money can be saved.

In addition, a company may find itself in an untapped niche market. So much has been made of the preferred market and those that are highly substandard will likely take a policy wherever they can get it. Mildly substandard applicants can pick and choose, since the possibility of ending up without an offer for coverage from any company is minimal. Also seeing the word “Standard” on a policy instead of “Substandard” or “Issued at Special Rates” can go a long way when an agent is trying to close the deal.

The Risks
Now allow me to play devil’s advocate. Expanded standard programs have a wealth of potential pitfalls that should be considered before developing any program of this type.

First, we have the issue of fewer requirements. While these programs allow for some flexibility in ordering additional information, the trick is knowing when it’s really safe to go without that APS or extra test.

A few disorders routinely linger in the standard to Table 3 range. Most disorders have a wide range of potential ratings. Diabetes is a perfect example of a very common medical condition that can seem well controlled using routine labwork but can easily morph into a highly substandard case based on information from the primary care physician. Using fewer requirements often lulls underwriting departments into believing that shaving programs are the perfect avenue for their less experienced folks: the range of ratings puts less pressure on the underwriters and reduces the potential for errors. In reality, only the most experienced underwriters can look at minimal information and determine if it’s really safe to go without additional details.

Then there is the “mildly substandard” niche market. Traditionally, the standard premium rate is often slightly higher than that of a true standard rate that does not include shaving. What you gain in “mildly substandard” business you may lose in “true” standard business. If a client applied for preferred but missed it because his build was off by 15 pounds, chances are that he’s still a very good risk. But if all he is offered is a surcharged standard rate, you may lose the sale to a company that has a more competitive standard rate.

Finally, there is the “give ‘em an inch and they’ll take a mile” risk. Expanded standard programs are very delicate and allowing the occasional Table 5 risk to slip in may seem harmless in isolation but has the potential to undermine overall mortality. If your company routinely allows Table 5 to be issued as Table 4, that practice should be absolutely avoided when there is a shaving program in place. Remember: Deviation = Disaster.

Here are some suggestions to maintain the underwriting integrity of an expanded standard program:

Know What Risks You Are Taking

1. Underwrite with the same level of diligence that you would if there were not a special program in place – get the APS, get the MVR, and get the extra lab test if that’s what you would do under traditional circumstances.
2. Don’t push any risks beyond the bounds of the program. If the risk requires more debits than the program allows, don’t make the exception.

Analyze What You’ve Got

1. Track “true” ratings versus “issued” ratings. This is a step many companies forget. Keep a log of cases that are issued standard that includes the true rating as well the disorder in question. For one thing, your reinsurance partners will probably request this information so you might as well have it handy. Additionally, you can spot interesting patterns.
2. Watch claims patterns. Be aware not only of contestable claims but of all claims that were issued under an expanded standard program. Did the underwriter obtain all the information needed for a reasonable decision? Are there any interesting patterns by cause of death?

When constructed carefully and monitored properly, expanded standard programs can help you issue cases that may have been lost before. Consult with your reinsurance partners for assistance when developing any special program.

Editor's Note: For the actuarial perspectice to expanded standard underwriting programs, please see David Wylde's article.