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At the end of our paper “Underwriting in China – A Digital Transformation”, we opined that the ability to collect structured underwriting data was an important spin-off benefit of online life insurance application and automated underwriting processes.
Here we discuss how a better understanding of behavioral economics (BE) can improve the quality of structured data and bring new insights to the underwriting process in China.
In layman terms, BE “combines elements of economics and psychology to understand how and why people behave the way they do in the real world”*.
Insurers have previously assumed that if sufficient information is presented to potential customers to facilitate their understanding of all the important elements of a product, a purchase decision can be made easily. Given the background, all insurers have to do is to ensure the simplicity and accuracy of the underwriting questionnaire. This thinking originated from traditional economics where all customers are assumed to be rational people.
Most customers feel that they understand their insurance needs. However, underwriting questions and product features are not always easily understood by buyers. As a result, during the actual application process, they may not behave rationally. This irrational behavior will very often play a more dominant role when customers actually commit to purchasing the policy.
Under a traditional underwriting process, a health questionnaire is more like a declaration. By moving the underwriting process online it’s possible to keep track of the time customers spend on each question. Too long a time is a good indicator that customers do not quite understand what the question is asking for – or that they have something to hide.
We collected and analyzed underwriting data and found that the amount of time taken by customers at each step of the process could provide valuable feedback on customer behavior. Based on that, we could then refine the underwriting process and improve risk management.
The list of medical questions for long-term mortality products was updated during the interim development phase of the Chinese life insurance industry’s digital evolution. The question wordings were modified with the aim of making them easier to understand.
Additionally, layers of “reflexive” health questions were further developed to encourage clients to give accurate answers about their medical conditions.
We tested two different ways of asking questions, both using “Yes/No” checkboxes followed by several conditions from which to select. In the first group, a reflexive questionnaire used only clinical terms and the clients had to read and answer the prompts by themselves.
These reflexive questionnaires are commonly used to confirm details of treatment, diagnosis and prognosis.
In the second group, the questionnaire was designed using standard, non-specialized wording. If the client answers “Yes” for certain medical conditions, the entire application process will cease.
The average time spent completing the first group’s questionnaires was longer than that of the latter group, which may be due to the increased focus needed to complete the questionnaire. The principles of BE adopted in designing the Group 2 questionnaire were meant to encourage disclosure of medical conditions and improve the reflexive questionnaire completion ratio. According to our research results, both expectations were achieved.
However, it’s worth noting that information asymmetry between clients and insurers is likely to widen because the final underwriting decision relies more on the client’s subjective disclosures during this streamlining process.
To address this conflict, we need to pay particular attention to the balance between improving underwriting efficiency and the potentially increased misrepresentation of risk induced by automating the process.
In addition to those BE methods that have proven useful, we also need to explore additional aspects to validate the value of this “pursuit of efficiency”.
We collected more than 580,000 pieces of follow up smart questionnaire records, among which thyroid nodules ranked as one of the top disclosed conditions, accounting for 11.5% of all disclosed conditions and diseases.
More thyroid ultrasound examinations have been carried out during physical examination, which has significantly increased the detection rate of thyroid nodules nationwide. On the other hand, since most thyroid nodules are detected by physical screening absent of any clinical symptoms, more than 90% are reported as TI‑RADS (Thyroid imaging reporting and data system) stage 1 and 2. There is no malignancy tendency in TI‑RADS stage 1 and 2, and even in TI‑RAD stage 3, only 5% of people will eventually develop thyroid cancer in the future.
The average cost of thyroid cancer surgery and its related hospitalization is between RMB30,000 to RMB40,000, most of which could be covered by the social security medical plan. Therefore, more often, this condition adds no extra claims burden on commercial medical insurance.
Hypertension and breast nodules ranked as the second and third most disclosed conditions, accounting for 8.05% and 5.46% respectively. The increased breast nodules detection rate is also impacted by screening guidelines. This number would have been higher if it had been gender standardized.
This is in line with our belief and observation that increased screening will result in a higher prevalence rate of breast nodules. For both conditions, there is no significant difference between the insured population and the general population.
After analyzing the data on disclosed conditions, we focused our effort on where it is most worthwhile, improving the reflexive questionnaire of thyroid nodule as well as other frequently disclosed conditions. This resulted in an even faster underwriting process for a notable percentage of clients, as well as improvements in the take‑up rate of policies.
Since the formal launch of our Underwriting Process Modification Solution (UPMS), we have collected data for interpreting the risk selection results. Here are the major findings:
The take‑up rate of different underwriting decisions by customers clearly demonstrated that the acceptance rate of policies with exclusion underwriting decisions were very similar to those accepted as standard. This finding was quite the contrary to our belief that customers will mostly accept standard underwriting decisions only.
We also compared the loss ratio in the initial two years of two different underwriting processes (in the same medical reimbursement product): traditional health questionnaire only vs. smart questionnaire process (UPMS 4.0). Better loss ratios were observed in the UPMS 4.0 group. We assume that customers find the smart questionnaire easier to read and understand. This is especially true for knowledgeable clients who understand their health condition and prefer to have insurance products that best suit their needs and mitigate the uncertainty of future health risks.
We set up three groups from the same UPMS medical reimbursement product according to the different risk profiles of the applicants. The loss ratio of the initial two policy years from the substandard underwriting group was actually better than that of the standard group, which aligns with our expectation when we designed the solution. We assume that when a client actively seeks protection, he or she is more likely to provide honest answers to the clearly described questions in the smart questionnaire. When they made the purchase decision, they accepted the conditions of the protection, and they were more willing to keep the policy long‑term.
The “simple” change in asking prospects for details resulted in higher levels of condition disclosure and other encouraging results, proving once again that small changes can make a big difference.
The digitization of the life insurance underwriting process in China is accelerating. The Gen Re Underwriting Process Modification Solution (UPMS) project has been well received in the Chinese market, and we have kept pace with this fast-paced evolution of the insurance market.
Our collaboration with clients happens at each step of the underwriting process. Based on our knowledge of the Chinese market, our evidence-based underwriting manual, and our view of the future of the underwriting process, we have successfully provided tailor-made underwriting assistance to our clients.
What’s next? Only time will tell. We will continue to draw inspiration from these experiences to achieve a better balance between efficiency, customer experience, and underwriting results.
* Last accessed 28 March 2022.
Segment Chief Underwriting Officer and Senior Medical Officer
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