Policy stacking:
a fluid situation

The COVID-19 pandemic has now resulted in over 40,000 confirmed cases and 2,000 deaths in Canada. Society’s response of physical distancing has led to significant changes in our work and personal lives. Even with all the changes, financial advisors still need to put insurance policies in the hands of Canadians. Those financial advisors were probably well prepared for working remotely – many of them have been doing it for years – but few could have been prepared for the impact of physical distancing on the typical insurance sales cycle: no more face-to-face meetings with applicants, paramedical service disruptions, even getting wet signatures to deliver a policy cannot be done. All of these processes are being rethought in light of the pandemic.

Underwriting departments across the country have moved quickly to implement temporary changes to “keep the taps flowing”. The biggest underwriting change has been an increase in the face amount of insurance that can be placed without collecting fluid evidence (the “no fluid” limit).

No fluid limits have increased, they have not been eliminated. So if the higher no-fluid limit is now $1,000,000 for certain ages, how should an advisor act when they have a client with a demonstrated financial need for a $3,000,000 policy? Or a $10,000,000 policy? Munich Re is seeing evidence that some advisors have turned to policy stacking instead of taking a smaller policy and postponing the application for larger amounts until fluid testing resumes.

Stacking happens when an advisor submits applications to several insurers for smaller face amounts to achieve the desired larger coverage amount. For example, taking out three $1,000,000 no-fluid policies at three different insurers to get a total of $3,000,000 in coverage.

An applicant with a need for $3,000,000 in coverage is avoiding fluid collection by applying for multiple smaller policies at the same time. The only intention of that applicant may be to get the higher coverage amount. However, they may also know that their fluid tests would lead to higher premiums, a change in smoker status, or even denial of coverage. There is no foolproof way of distinguishing between perfectly healthy applicants that are stacking in order to get the insurance they want and those applicants with prior knowledge of how a fluid test may play out.

Even if a single insurer is comfortable with their risk exposure on a stacked policy, reinsurers likely are not. The reinsurer has coverage from that applicant ceded to them from multiple insurers. Reinsurers are exposed to the potential that the applicant has more insurance than is justified without fluid collection.

If stacking becomes commonplace, there is the real potential that the mortality premium paid by the insurer for reinsurance coverage is not enough to cover the risks that are ceded. As it becomes clear that the price was inadequate, premiums charged would increase and no fluid limits would be lowered, making risk assessment more restrictive. Stacking risks setting back the goal of the industry to simplify the sales process and make insurance more affordable.

Insurers should be on the lookout for stacking behavior, especially at this time. Munich Re would recommend insurers apply their no-fluid rules using the total amount of insurance that an applicant either has pending with all companies, is applying for or has purchased this year. Insurers could ask for applicants to fully disclose this information and can then utilize the MIB Life Index to validate those disclosures.

COVID-19 has changed the way everyone works. We as an industry should be prudent and maintain the best risk management practices available to us. This is the only way we can truly ensure a stable and sustainable insurance marketplace; one that embraces innovation and is around to meet the long-term financial needs of Canadians. Stacking and changes to fluid collection is just one area where we need to tread carefully as an industry. And being careful is crucial, because the approach to assessing risk during COVID-19 is, well, fluid.

Policy stacking presents a financial risk to reinsurers, insurers and consumers alike. As an industry, we need to remain vigilant in our risk management practices especially during a pandemic.

Fluid tests (or lab tests) can include a variety of paramedical testing, such as blood tests and urinalysis, that are important determinants of risk that both carriers and reinsurers rely upon. For example, urinalysis and blood sugar tests help identify whether someone has an elevated risk for diabetes.

Without the results from fluid testing, insurers have to depend on many other risk factors: age, applicant disclosures, body mass index, smoking status, fixed vs. adjustable premiums, previous coverage denials, old lab test results, etc. Ultimately it comes down to the risk appetite of the insurer and reinsurer to determine the “no fluid” limit they are comfortable with.