This document provides an overview of the life insurance industry and discusses why individual life and health insurers have focused on wealthier customers, leaving many with inadequate coverage. It argues that the slow underwriting and issue process is a key barrier preventing insurers from effectively serving middle-income customers through alternate distribution channels like banks. Faster instant issue underwriting could address this by reducing costs, application fallout rates, and sales representative workload, potentially reviving the industry.

1. Chapter One
Overview
“The Primal Instinct of all life is that of self-preservation, and its secondary
phase is for the safety and well-being of kindred and offspring. The fury
with which the higher creatures in Nature fight to protect their mates and
young is well known…It is almost a truism that every human being is
elementally interested in safeguarding his property and possession, and
thereby enhancing the contentment and welfare of those he loves. In
modern civilized life, though there are varied and desirable ways of
ensuring this end, Life Insurance is pre-eminently the safest and most
popular, because in all its ways it appeals to provident, and most of all to
the person of moderate means. ”
This was written by Terence O’Donnell in 1936.1 Today we find
the low and middle-income markets on a lean life insurance diet, but, as in
1936, this is not by choice. Life insurance is cheaper than ever, yet
surveys show that as household income drops, life insurance ownership
drops − but the perceived need for more insurance rises.
Insurers Chase the Affluent
Individual Life and Health insurers have been steadily gravitating to the
richest end of the market, leaving the rest of us to make do with what we
get from our employers. As a result, most people have inadequate insur-
ance for all their needs.
1
O'Donnell, T., History of Life Insurance in Its Formative Years. Chicago:
American Conservation Company, 1936.
1

2. This situation has come about because putting business on the
books has become very expensive. In the old days, each insurer had its
own turf. A single agent would handle a group of neighborhoods, with
little competition. He would go door-to-door, sign everyone up for small
amounts of insurance, and personally collect the premiums on a weekly
basis. This worked both because there was little competition and because
people were home at predictable times.
As time went on, competition became very heavy and an agent
could no longer “own” a neighborhood. Furthermore, people became
more mobile and women went to work, so the agent could not predict
when people would be home. Consequently, agents stopped going door-
to-door and developed prospecting techniques such as referrals,
networking, mailers, and so on. For a few decades this proved to be very
successful, and the industry grew rapidly − leading to tremendous
competitive pressure. The result has been a continuing diminishment of
agent productivity, and, interestingly, greater anti-selection from the
customers. Customers learned they could shop their insurance – not only
for cheaper rates, but also for more liberal screening. If one insurer
rejected you, you could just apply with another.
What are the consequences of this? Greater sales expense per
policy placed, cheaper premiums and increasingly extensive underwriting
(which is done both to counteract anti-selection and to allow lower
premiums for the best risks as a response to competitive pressures). The
only way to avoid red ink has been to increase the size of the sale, so that
although the premium per unit is dropping, the total premium per policy is
rising enough to cover the increase in fixed costs.
2

3. More Efficient Sales Methods Are Developed
How does this situation get turned around? For the last several decades,
the focus has been on more cost-efficient sales channels. So-called
alternate distribution is focused on making lots of sales quickly. In this
category we have the following:
• Various types of direct marketing (e.g., no field agent involvement)
- Media advertising (TV, radio, periodicals) with consumers respon-
ding by mail or phone
- Mail offers
- Internet
- Outbound phone (telemarketing)
• Worksite sales, whereby products are optional to the employee, and
the employee pays part or all of the premium. The premium is col-
lected by payroll deduction.
• Bank or broker-dealer agencies, department store agencies, and so
on, whereby the insurance agencies take advantage of the customer
relationships of the sponsoring entity to boost the sale.
There have also been many changes in the “traditional” agency
systems. Most significantly, relatively few insurers today have their own
‘captive’ sales forces. Most agencies today are part of organizations that
are ‘independent’ of the insurers, although they will have a handful of
insurers with whom they have their primary relationships. This was driven
both by the market need of captive agents to provide their customers with
more choices than one carrier could offer and by the insurers' need to
eliminate the tremendous fixed cost of agencies that were not providing a
sufficient return on investment.
Market Penetration Continues to Shrink
Sadly, while some insurers are doing quite well with alternate distribution,
it has not enjoyed a strong market penetration. The shrinkage of insur-
3

4. ance for the bulk of the population continues. Many reasons have been
given for this, including the following:
• For direct sales, mail and media advertising overload and the ability of
a few insurers to saturate the market.
• For worksite, the difficulty of making a two-part sale – first to the
employer and then to the employee.
• For banks and stockbrokers, the sponsoring firms' unfamiliarity with
insurance and the secondary nature of those lines within the sponsor-
ing firm. In addition, banks do not have a sales culture.
These reasons are certainly valid and well-founded, but I have
come to believe they are not a sufficient explanation. Let us consider
bank insurance for example − an area in which my firm has conducted a
great deal of research. Banks have become very good at selling invest-
ment/savings-oriented products such as mutual funds (12% of total fund
sales2) and deferred annuities (20% of total individual annuity sales 3),
demonstrating that they can overcome their lack of a sales culture.
Although investment products are a natural extension of banks' own
savings offerings, these products are quite different from CDs. Nonethe-
less, banks have managed to sell them in great quantities.
Additionally, there has been tremendous success overseas with
bank sales of basic insurance products, such as Life and Critical Illness, to
regular folks. With the passage of the Gramm Leach Bliley (GLB) Act in
1999, there was every reason to believe that the US would finally see
some significant successes with life and health insurance sales in banks.
As it happens, GLB did lead to an immediate increase in insurance sales
by banks, but it was in Property and Casualty (P&C) lines. Banks
snapped up P&C agencies voraciously, and in just a few short years P&C
products now represent 20% of their insurance sales. Annuities are 69%.
2
Statement by Christopher Condron, President and CEO of Axa Financial, Inc.,
in "Making His Mark," appearing in Best's Review, April 2002.
3
Derived from bank annuity sales figures in the ABIA Study of Leading Banks
in Insurance, October 2001, and total annuity sales figures in the ACLI Life
Insurers Fact Book, 2000.
4

5. Although non-credit life and health sales premiums have increased, they
still constitute a mere 5%, where they have been stuck for many years.4
I recall what I believe to be the earliest efforts to sell life insurance
in banks, in the early 1980s. Insurers and banks have been working
together longer to sell life insurance than for any other non-credit linked
insurance product, and still have little to show for their efforts. So what
gives? Clearly many banks are overcoming the impediments of lack of a
sales culture and unfamiliarity with insurance products. It could be argued
that, like investment products, P&C products are a very good fit for banks,
because of the nice tie-in with their lending activities. This is certainly
true. But banks have been trying to sell life insurance for a long time.
Clearly they see a fit (life insurance can be viewed as complementary to
savings, making up for any shortfall in a family’s needs that may occur
due to premature death), but have not been able to make it work. What
could the explanation be?
Within the answer to this may rest the final key to removing the
barriers to profitable mid-market sales. This, in turn, should revive an
industry that is rapidly shrinking to just a handful of large insurers that are
currently dominating the market. Consider the following:
• Annuity products, which are big sellers in banks, are guaranteed
issue. There is no risk selection, and policies are usually issued
within a few days of the sale.
• Guaranteed issue life insurance offerings sell well through all sales
channels, even though they are always for very small amounts and
are usually expensive on a per unit basis.
• Although the P&C products that banks are now selling are not guaran-
teed issue, auto and homeowners policies have the advantage of
being required for loans or by law, as are certain types of business
coverage. Since these are must-have coverages, there is no buyer’s
remorse. Buyers will either shop price or buy from the most
convenient source – which could very well be the bank.
4
The statistics in this paragraph are taken from the ABIA Study of Leading
Banks in Insurance, October 2001.
5

6. The Culprit − Slow Underwriting and Issue
Consider that modern life insurance applications are now screened so
extensively that it takes about 3 weeks to get a policy underwritten,
according to a 2001 study conducted by LOMA5. The same study tells us
that due to processing methods currently in common use, another 3
weeks are added to produce an average of 6 weeks in total processing
time from taking an application to completing the policy delivery. This has
a number of consequences, including the following:
• All of this hands-on processing is expensive.
• The sales representative is burdened with assisting in gathering
underwriting requirements, securing missing information, following-up
on the progress of the application, delivering the policy, and re-selling
the policy to an applicant who is often experiencing buyer’s remorse
by the time the policy finally arrives.
• 14% of applications do not get issued due to declines (5%), incom-
plete requirements or information (6%), or withdrawals (3%). After
issue, another 7.5% of the policies are declined by the customers 6, so
almost 20% of all “closed sales” fail to actually result in paying poli-
cies.
• The customary underwriting screening tools do not lend themselves to
direct-marketed plans. When they are used, firms with which I am
familiar have found that the delays in issue can lead to higher than
20% fallout since there is no agent shepherding the case. If simplified
underwriting is used, the turnaround is usually just a day or two from
application receipt to policy mailing. However, the sacrifices for this
are high:
- The screening is often inadequate, so premiums are high and the
claims are frequently unacceptable.
5
Taken from LOMA's "Individual Life Insurance Service Turnaround Time
Survey, 2001 Report." This report includes data from 43 participating U.S.
companies.
6
ibid.
6

7. - Benefit offers have to be severely limited to reduce the insurer’s
exposure on any single claim.
Could this slow issue process explain why, even in alternate
distribution channels, great headway is not being made in the mid-
market? This expensive processing and the 20% fallout of applications
are certainly costly to the insurer.
Let us also consider the sales rep’s position. A typical $100,000
Term Life policy might carry a premium of $200 per year. A generous first
year commission would be 60%, which is $120. But only 80% of the sales
result in a paying policy, so ultimately the rep only averages $96 per sale.
On the other hand, a modest annuity sale of $5,000 would typically carry a
3% commission, which would result in $150 for the rep. Almost all of
these sales result in a paid policy, and the rep has very little follow-up to
do after the sale.
I am sure the reader sees my point. Now let us suppose we could
get a well-screened policy issued instantly. What would that do for us?
An agent could quote the exact price for which the applicant would qualify.
If the applicant were uninsurable, that would be known instantly. Thus, all
applications would result in issued policies, and the not-taken rate would
be negligible. Furthermore, the rep would have no follow-up to do.
Finally, most of the issue and underwriting staff, and a lot of the mail room
as well, would be eliminated at headquarters. Voila! Life and health
coverage would be easy, low cost sales.
Instant issue techniques can be used for direct response if the
applicant places his order by phone or the Internet. In the former
situation, the phone rep would ask the necessary questions and enter the
responses on the computer. In the latter, the applicant would do the
computer entry himself. Because the applications are going through a
high quality automatic screening, much richer benefits can be offered than
is typically the case today and, again, most applications could be ex-
pected to result in paying policies.
Is all this just a dream, or could it become a reality? Yes, it could, and
sooner than you might think!
7