Fraud and misrepresentation pose a significant financial burden on the insurance industry. When adding up the cost of extra commissions and underwriting resources, as well as the cost of excess mortality experience, you can quickly see how expensive anti-selective behavior can be for the industry. The price tag is estimated to be in the billions! As a result, insurance companies charge higher premiums to mitigate the financial impact of anti-selection and provide a less than ideal experience for agents and consumers.

The cost of post-issue policy audits further contributes to the challenge. Most life insurance recissions occur during the contestability period, generally within the first 2 years of a policy being issued. Beyond the financial repercussions, companies also face reputational risk with each negative consumer experience, and the gradual eroding of trust that death claims will be paid.

Determining the exact cost specific anti-selective behaviors impose on the life insurance industry has been a challenge. As an industry, it is imperative we seek a clearer understanding, so companies can continue to streamline the insurance buying process, price the individual not the problem, and provide affordable life insurance coverage to the many individuals and families who need it.

Measuring the impact

To better understand the impact of anti-selective policyholder behavior on the life insurance industry, MIB partnered with RGA to analyze data in the MIB In Force Data Vault. This contributory database, developed by MIB in partnership with TAI, is the only one of its kind in the industry and contains in-force, applied-for and terminated policy data populated by participants in the MIB Total Line and Jumbo Services. By using this data vault to examine applicant behavior, we are able to flag potential instances of adverse selection, specifically stacking and churning.

To augment the database analysis, RGA interviewed industry leaders across seven life insurers who provided additional insights related to their perceptions of the risk of these types of behaviors.

Key Findings

The full results of the study can be viewed on the RGA website. Key findings include:

• In our sample of data from 10 carriers, 7,560 policies from 7,500 individuals were flagged as potential churning cases, accounting for approximately $7.5 billion in face amount, of which $5.6 billion was retained by the carriers.

• 6,061 policies from 2,035 individuals were identified as potential stacking cases. This represents approximately $1.7 billion in face amount with $1.3 billion retained across the 10 carriers.

• Churning and stacking are of greater concern for insurers writing policies with small to mid-level face amounts than for those writing policies for high-net-worth individuals.

• When comparing responses to prior RGA research, the study shows that insurer concern over anti-selection has increased in the past 10 years. Additionally, interviewees acknowledge that anti-selection is increasingly difficult to identify and will likely continue to grow due to accelerated and automated underwriting.

• When examining data in MIB’s database, behavior patterns indicating potential stacking were observed more frequently for individuals aged 40+ (especially 50-59) relative to the total policies issued within the dataset. Behavior patterns indicating potential churning were observed relatively evenly across age bands.

• Applicants for policies with face amounts at or above $2 million had disproportionately higher levels of behavior indicating potential churning, with the $3-5 million band having the highest level. Since churning may be linked to agent behavior, these results could be driven by higher commissions for agents at higher face amounts.

• Policies with less than $500,000 in face value demonstrated the highest risk of potential stacking behavior, which may be related to a high likelihood of use of accelerated underwriting for lower face amounts.

In addition, insurers interviewed expressed a need for more digital and data-driven tools to help prevent anti-selective behavior as the industry modernizes and digitization continues to expand. While digitization of the application and underwriting processes can make it easier for consumers to purchase the important insurance coverage they need, it also can increase the potential for fraud and misrepresentation.

The MIB In-Force Data Vault, developed together with TAI, is the only data solution in the industry that addresses this challenge by providing insight into in-force policy, pending application and terminated policy data. The MIB Total Line Service leverages this data to provide a robust picture of insurance exposure on an applicant, either at the time of underwriting or retrospectively, to help insurers proactively identify and manage the risk of errors, omissions and potential fraudulent behavior. As the database grows, so does our ability to detect and deter adverse behaviors across the industry. We invite all carriers to participate, not only to the benefit of their own bottom line, but to help prevent fraud across the entire industry and help make insurance more affordable for the consumers we serve.

To learn more, visit https://www.mibgroup.com/solutions/inforce-data