Life insurance illustrations often contain multiple pages of densely packed numbers and legal disclaimers and are subject to the Life Insurance Illustration Model Regulations of the respective country. An illustration depicts the expected costs and benefits related to the policy, based on several assumptions including macroeconomic forecasts such as interest rates. In most markets, it is mandatory that a policy application must include an illustration and the policy must be applied for as illustrated. The agent and the policyholder must sign such an illustration and submit it to the insurer along with the new business application.
Let us look at some critical parameters that define illustration outputs and how technology can aid in choosing the right product from the right carrier for the customer.
Life Insurance Illustration Process
Life insurance advisors use sales illustration for explaining the benefits under the proposed insurance policy to the potential customer. In-force illustration is for policies that are already active in the policy administration system for more than a year and are typically applicable for flexible premium permanent life products like Universal Life and Variable Universal Life. The latest policy snapshot needs to be imported from policy administration system including policy value, death benefit, loan balance and so on. Policy changes like face amount variations, death benefit option changes are requested at the time of reprojection. For a personalized output to the applicant, illustration system should be tightly integrated with other point-of-sale applications like needs analysis, contact management, e-applications, new business systems.
The key features available in a typical life insurance illustration software are:
- User can specify face amount and find premium under various premium options or specify premium and consider the face amount options respectively. Future changes in premium outlay, face amount changes, death benefit option changes, distributions can also be illustrated. The illustration presents a view of year-on-year policy value, surrender value and death benefit amounts under guaranteed and non-guaranteed assumptions till the policy maturity based on:
- Current earnings (interest rate/dividend that helps grow your cash value)
- Mortality (the actual cost of the life insurance)
- Expense charges (the insurer’s fees)
- Guaranteed values (floor values) are contractually guaranteed by the carrier and usually around 3%. Non-guaranteed values (ceiling values) assume high interest rate and carriers restricts the maximum non-guaranteed rate to around 8% (or as per regulatory guidelines) in this software. Expense charges summary provides a year-on-year view of various costs and charges that are deducted from beginning policy value and interest credited to arrive at ending policy value. Cost comparisons play an important role in cash value accumulation because there can be variance up to 80% in costs between prudent and imprudent companies.
However, the solutions available in the market do not address the complete needs of the agents, brokers, and end customers.
There are several capabilities that need to be enhanced in the illustration solutions available in the market, keeping in view the below mentioned aspects.
- Repeated data entry for multiple illustration systems - Independent agents and brokers have business contracts with multiple insurance carriers and they usually explore the rates / coverage features by accessing the illustration systems of various carriers. The manual process of entering details into multiple illustration systems and generating illustration outputs is a potential candidate for automation using robotic process automation (RPA) bots.
- Lack of data flow within the illustration system - Currently users enter data into various upstream and downstream applications repetitively. The data captured in upstream applications should flow seamlessly to downstream systems as part of the move toward consolidation and enhanced user experience. Carrier’s illustration system should be integrated with customer need analysis and product recommendation software, e-Application, new business system and policy administration system for running in-force reprojection illustration.
- Getting insights from differently formatted illustrations - Lack of uniform format by insurers makes it difficult to compare illustrations. As the illustration outputs are in secure PDF file formats, intelligent data extraction tools may be required to convert them into machine readable text. It is a herculean task to compare multiple illustration outputs manually. By leveraging various technologies like AI/ML and data analytics, the comparison can be done based on critical parameters, like:
- Guaranteed and non-guaranteed policy values
- Cost indexes (surrender cost and net payment Indexes) for 10 years, 20 years, and so on
- Present value of all costs and charges listed under expense charges summary section
- Undisclosed bonus interest rate if any added to current interest rate in assumptions
- Internal rate of return
- Indexing options chosen and their historical performance for indexed products
- Comparison of fixed, indexed, and variable fund performance against industry benchmarks
Conclusion
The ability to compare products and present multiple scenarios for various products across multiple insurers is becoming the norm. To provide the right product advise to customers, producers should be equipped with best-in-class illustration comparison software which is integrated with carrier’s upstream and downstream systems. API-first integration approach with industry standard compliant data interchange formats will help in seamless flow of data across various insurance carriers/systems. Insurers are adopting illustration systems that provide compliant sales outputs, user-level rating maintenance tools, support for mobile and tablet computing, and backend linkage to e-application, underwriting, and policy administration systems for straight-through processing.
Author:
Naresh Kumar Kesanapalli
Principal Consultant – Insurance at Tech Mahindra
Naresh is a life insurance SME, representing insurance domain competency team of Tech Mahindra. Naresh brings with him 28 years of experience in life insurance domain which includes insurance operations, insurance software product development, platform modernization, delivery management and thought leadership.
Contributors:
Ravi Kumar Nadimpalli: Life Insurance SME at Tech Mahindra
Sree Ram Edara: Head-Insurance Competency
