You’re a senior underwriter and today you are about to face a senate enquiry into the underwriting practices of your company. You’ve been underwriting for quite a while now and apart from the odd complaint, everything seems to be in order. Your business follows the re-insurer guidelines for mental health conditions, so although you’re a bit nervous, today should go ok. Except it doesn’t, very quickly.
Penny Wong starts with a gentle question about why your company places a mental health exclusion on people who have disclosed ‘stress’ in their applications. Well, that seems fairly obvious; if you’ve had stress before, you’re more likely to have it again and proudly say so. She shows you copies of DSM5 and ICD 10 and asks you to show her the section that classifies ‘stress’ as a diagnosis. You have seen these books floating around somewhere in the office, but as hard as you try, with camera flashes being discharged, you frantically flick through and can’t find that section. It doesn’t exist. So she asks you how you can offer a product with exclusions, based on the absence of a medical condition. You say, with withering confidence that the re-insurer manual advises you to do this. She looks at you with a blank expression. Out of the corner of your eye, you can see Adele Ferguson busily taking notes that you know are intended for your questioning when you are discharged from the enquiry.
At this point, Senator Wong decides she is going to go into a bit more granular detail. Which you thought was fine before the first question, but now, not so much. She asks you why a person who lost their parent and experienced grief, would be excluded from making a claim for anorexia, somatoform disorders or just about any other disorders. You know this is standard practice, and you go to show the reinsurer manual section that supports this approach. She asks you to put down the manual and explain to the enquiry why someone is more at risk of having anorexia, as an example, if they have experienced grief. You then remember, quite proudly, well, we wouldn’t do that, we don’t consider grief a mental health condition. You feel temporarily relieved until she poses the same question about just about any other condition you could think of. What is the increased risk of schizophrenia in someone who has depression? Or of Anorexia nervosa if a middle-aged man has suffered from an anxiety disorder? As you struggle to answer these questions, she tilts her head slightly to the left and appears to look straight through as you suddenly become aware of your bladder; again, you can see Adele furiously taking notes while your phone starts vibrating with a message from your CEO (unfairly) telling you to lift your game.
The questions move on. This time it’s on more solid ground, pricing. You are relieved, because after all, how can you be expected to be an expert on mental health, it’s so confusing? Pricing is so much more straight forward. So this time you see that Dasher is asking you questions. Anyone has got to be better than Wong. He asks you the percentage of reserve that is usually set aside for mental health conditions. It’s a bit unfair because you are not an actuary, but you have heard that these claims represent around 25% of your reserve and if you extend that to all subjective based symptom conditions, maybe a lot higher. So you tell Sam that its roughly in that ballpark. He seems satisfied with that answer, you are relieved. Then the senator asks you, if you have excluded mental health conditions and the applicant is otherwise a good risk, what adjustment do you make to the price of your product? The question doesn’t make much sense and you ask him to re-ask it. He says, if your product is not offering cover for mental health conditions, it only covers 75% or less than a usual product. So, by charging standard pricing when you have already excluded mental health conditions, isn’t that discriminatory? D.I.S.C.R.I.M.I.N.A.T.O.R.Y. Adele is now almost punching the keys as she is typing the next headline. You know there must be a good reason that you would charge people with mental health conditions the same, even after you have reduced the scope of the policy. Sam is waiting. The media is waiting. Your phone is vibrating. Your head is throbbing. At this stage, you are anticipating exclusions on your own policy.
The above vignette is foreseeable and plausible. It may not happen to you, but it will happen to someone in your organisation and it will not be pleasant. This is the Harvard pre-mortem approach. We will start from a position of failure and work backwards to see why it failed. There may be some very good answers to the questions I simulated above, but do you have the capacity in your organisation to know if your answers will be sufficient?
Life insurance is an old business and it is a conservative business. The products have been complicated and the consumers uninformed. This has meant that past and current practices that would have gone previously unnoticed, you will now need to assume will be finely scrutinised on an ongoing basis. It is a new, permanent reality. The fact that you used to practice in a certain way is not a sufficient basis to substantiate you continuing to practice in that way.
There is one basic test that any external regulator is going to adopt: whether your approach is evidence-based. If it is not evidence-based, you invite criticisms of being unfair and engaging in taste-based discrimination. If it is evidence-based, the task it to make sure that evidence can withstand scrutiny. Will it satisfy regulators and senators if your evidence is based on a European or South-African cohort that bears almost no resemblance to your customers? Can you make reasonable inferences from the population studies to inform your decision to not offer terms, load or to exclude? And when you are making loadings, why are they 25% or 50% or 100%? Is the increased risk at that level, or is it guessing? Is your CMO qualified to answer queries?
No one is expecting a perfect response to this issue, but they are expecting a good process-based remedy. If you answer Senator Wong that your company has done an exhaustive review and that you have identified weakness and established a timetable for correcting those weaknesses, you will do fine. No one will be satisfied if you are relying on re-insurers to answer fundamental questions about your business practices.
Dr Doron Samuell is a consultant psychiatrist, graduate of Harvard Business School and soon to obtain his masters in Behavioural Economics from the London School of Economics. He presently working as a strategic advisor to the Insurance Council of Australia and AMP and is the chief medical officer of several insurance companies. He continues to run his own successful professional services company, Profession Opinions that has over 400 medical specialists Australia-wide.
This article only represents the views of the author and is an attempt at addressing a very serious issue by the use of humour and visualisation. Comments attributed to real people are to be read as fiction.
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