What the Underwriters Know

MBA executives and underwriting specialists have been involved in the quoting process and working with the underwriting process for self-funded plans over the last 30 years. So, we have seen our fair share of underwriting issues.

We recently attended a seminar where we learned the methodologies insurance underwriters use to rate plans. During this event, we came to the conclusion that not many TPA’s or brokers truly understand the underwriting process.

This seminar was a powerful teaching moment for us because it emphasized the need for the entity requesting a quote to know more about the process as well as the factors involved in creating the quote. This knowledge enables Third Party Administrators and Brokers to do a better job for their clients.

Some of the factors involved in the quote creation process include:

• Experience Rating
• Credibility (size of the group)
• Community Rating by Class (CRC)
• Large Claim Pooling Methods

According to S. M. Snow of S. M. Snow and Associates, the individual that conducted the seminar, “the method of assessing the appropriate rates are antiquated and flawed.” Snow went on to inform us that much of the rating process uses industry standards that date back to the 1950s, including the Industry Rating Factors (IRF) based on the antiquated SIC codes.

While the saying goes, “If it isn’t broke, don’t fix it.” This is definitely broken and needs to be fixed.

Looking at the current IRF structure, how many businesses are not specifically included? How many are placed haphazardly into this poorly constructed industry classification structure. For instance, in the 50’s all automobiles were manufactured by dozens of laborers wielding blow torches, wrenches, and screwdrivers. Today, many automotive manufacturers are mostly automated with robotics, which has transformed the automotive industry, but the codes used to rate the health risks automotive employees face remain the same. This can also be said about the thousands of new technologies and businesses that have grown since the 1950s.

Another piece of the puzzle is the human factor. One might think that the insurance industry is geared and driven by tables and equations. And for the most part, the industry does rely heavily on numbers. However, this does not mean that the methodology of underwriting is without a human touch. There are still people in the mix, sales quotas to meet, and investors to be satisfied. There is an arbitrary “profitability” to be established and added to the mix after all other factors have been considered.

So, what is the point? The point is that most brokers and insurance consultants do not know what goes into determining insurance rates or premiums. If you do not know how the process works, how can you request adjustments or make the appropriate argument to the underwriter to modify rates?

So much of the information given to the underwriter comes from well-established predictive models. They do not take into account other factors, such as business growth, how the workforce is changing, or other factors important to their changing business model. How many brokers know what is really important to an underwriter? Do they know what information they should provide to best reflect the changing demographics and business elements of the clients? Do they know what information they should provide in order to help ensure that the rates and premiums are properly adjusted?

Underwriters are not machines or equations. They truly want to help, but they often need the proper information and motivation! The right company, one with many years of experience and a working knowledge of how all of these factors work together, will have a powerful impact on the overall outcome of your medical plan underwriting.

MBA is that Company.