Today, term shops are all over the board from barely automated to fully integrated, end-to-end systems. For the most part however, companies still run their term business on fairly outdated and patched together systems. A lot of companies have integrated the front end processes but few companies have complete end-to-end integration of their term program – what we call Straight Through Processing, or STP. In an STP environment all systems from application to issue are integrated electronically.

 

Dorans: STP is definitely the operational model to have in a highly competitive term environment, especially if underwriting processes are integrated into the system – namely tele-interviews and rules-based underwriting. Then a company is positioned to transform their business. Our experience shows that this type of mortality management can actually improve mortality experience.

 

But very few companies are truly operating in this environment today. Even companies that claim to operate in an STP environment usually use work flow to link images (electronic versions of paper) back into existing, traditional underwriting processes. While processes may be slightly improved there is no accretive value to the medical history data collected. There seems to be some fear that use of the newest technology in the underwriting process will undermine the relationship that many companies count on between their underwriters and producers.

 

Apple: Some of this resistance stems from the failure of earlier attempts to automate underwriting. In the late 1980’s, carriers and technologists used “expert systems” trying to automate impairment underwriting, which is incredibly complex. Technology providers learned an important lesson about what can and cannot be automated.

 

Today, rules-based systems are used to deal primarily with preferred risks, where most of the selection criteria are driven by medical data. Selection evaluation really comes down to assessing any deviation of data captured from lab work, paramed histories, etc. from approved underwriting guidelines. Unburdening the underwriter from the repetitive tasks of checking application questions and lab values that are normal can actually free them up to spend more time establishing relationships with producers and working on the complex underwriting issues.

 

There’s also some resistance from agents and producers because of a perceived – or real – loss of control over Part II of the application (the medical questions). I believe many of these concerns are pretty easy to dispel once the benefits and overall process improvements are fully understood.

Dorans: One of these benefits is high quality data. There is a pressing demand these days for a more granular understanding of why products perform the way they do. From our reinsurance vantage point, we see wide variance in company experience with what on the surface appears to be almost identical products and processes. Closer scrutiny of the details available when using state of the art rules based systems are providing great insights, and this process should only accelerate as we accumulate more data. This kind of tracking is extremely time-consuming when you’re working with yesterday’s technology.

Apple: It’s not only time-consuming, it’s often impossible to get meaningful information from a system that’s not designed to manage policy level data. The industry has traditionally focused IT resources on tracking and collecting financial data that provide retrospective analyses. We’re beginning to see more companies reallocating resources and spending additional time and budget on data collection for prospective analysis of the underlying elements that impact long-term profitability.

Dorans: While there are more constituents to satisfy today, the product line manager still has the most to gain – and lose – from data quality. Poor or insufficient data create a significant performance risk. For example, the risk of being selected against is much greater than it used to be because technology enables buyers to zoom in on the cheapest policy in the market.

 

Ideally, every individual policy cell would meet target profit hurdles, but that’s not reality. And credible experience is emerging that subsidized pricing cells are being found and exploited by the market. Any gaps in your product, from pricing to requirements or ratings for certain medical conditions or hobbies are prone to being exploited by sophisticated distributors. Term writers need systems in place to spot these trends in time, before they discover they have a big problem lurking in their portfolio.

Apple: This is a case where term writers can use technology to protect themselves from technology! Today, we have tools that monitor production in real time, at a level granular enough to compare actual sales by cell against expected results. Using these tools can have a positive effect on a company’s bottom line.

Dorans: Underwriting consistency is essential when selecting preferred risks. Insurers price with very thin margins, assuming that underwriting standards will be followed. Traditional means of identifying gaps in training or other problems in underwriting often take too long to be effective.

Apple: We mentioned earlier that rules-based underwriting systems are designed to help in the selection of preferred risk. I think it’s one of the best ways to maintain consistency.

 

Now, consistency doesn’t have to be 100 percent. Underwriters need flexibility so that exceptions can be made when it makes good business sense. Rules-based systems support this reality; most are designed with stretch criteria already set up. But ultimately, the focus needs to be on underwriting quality because at the end of the day mortality is still the most important factor in how a term product performs. Companies need real-time underwriting audits so that on any given day they can see what cases are approved out of the norm.

 

The demand for meaningful information is coming from all directions. One of the toughest calls executives make today is where to deploy finite technology resources. Companies need help, and they’re looking for strategic partners who understand their business and know how to apply technology effectively. I think that’s why the term solution that Transamerica Reinsurance and VectorMastek have partnered to provide is so valuable. We can help a company capitalize on automated underwriting tools without making a substantial commitment to a whole new IT infrastructure.

 

Dorans: In fact, our pricing model directly speaks to the limited resources available to many term writers. By bundling a mortality management system with reinsurance, we offer an innovative financing solution that essentially eliminates the need for an upfront capital investment in IT.

 

Costs are amortized into the reinsurance arrangement; so a relatively large-scale project, which would have a hard time getting off the drawing board on its own, becomes imminently doable. 

We’ve talked about many of the benefits of STP and technology-enabled mortality management in term programs. Are these benefits unique to term insurance?

Apple: Absolutely not – the need for better mortality, lower costs and timely processing crosses all product lines. Term is a good product for test driving a mortality management system. Once a company has introduced mortality management to their term environment, adding on another product is relatively inexpensive because the risk assessment process is no different than for any other mortality-based product.

 

You know, companies have spent a lot of IT dollars building front-end systems – illustration – and back-end systems – administration – but the piece in the middle – underwriting – still looks very much like a 1970's process. Companies have a lot to gain by taking advantage of new tools, and term is a great place to start.

 

Dorans: We’ve been in the business of providing value-added services for the term business for some time and we've learned a lot about what is needed to market a product that is both profitable and competitive. From a manufacturer’s perspective, it takes good product development, efficient operations and effective risk and capital management. But to reach top performance, a term life program needs the tools available on an integrated platform. Technology is the key element to improving profitability and managing expenses, which is why we are so excited about our partnership with VectorMastek.

 

I can’t end our conversation without asking you about the recent acquisition of your company by MajescoMastek. This organization is well-known in global financial services markets as a provider of technology solutions and integration services. How will being part of MajescoMastek affect your company’s value proposition?

Apple: Vector has had a strategic focus on understanding the operational and expense challenges our customers have servicing their distribution forces and policyholders. We are excited now to be a part of Mastek, a very large world-class information technology firm. The unique industry domain knowledge of Vector combined with the deep technology experience of Mastek enables VectorMastek to offer customer-oriented solutions for new business processing and risk assessment problems that inhibit growth and profitability in the life insurance industry.