NAIFA's Advisor Today Keyword(s)

 E-mail   Print  Share

Extreme Coverage: Underwriting the Overly Active

Many people have hobbies that take them to extremes. While these guys might find it easy to summon the guts, they often have trouble finding insurance.

By Chuck Jones

Got what it takes to pilot a plane? Race a car? Scale a cliff? Many people have hobbies that take them to extremes. While these guys might find it easy to summon the guts, they often have trouble finding insurance.

Life insurance was the furthest thing from young Peter Allegretti’s mind when the airplane he was piloting that afternoon in 1972 quit on him just after he took off from the airstrip.

“I had just taken off and was transitioning from the point of take off to actually flying,” recalls the 52-year-old owner of a health-care purchasing firm in Lake Geneva, Wis. “I was 600 feet in the air when I experienced full engine failure. The propeller just stopped right in front of me! At that point, my plane became a glider.”

Allegretti had had all of 50 hours in the air at this time, but because of the emergency training he received as part of his flying lessons, he knew what to do. “My training specifically deals with this type of emergency,” he explains. “In fact, this is the one scenario that’s drilled into you. I was alone in the plane and I immediately looked for a place to glide and touch down.”

Finding a place to land was relatively simple. He had just taken off from that airstrip in Waukesha, Wis., 60 miles from Kenosha, so he turned the plane around in a swoop and glided it back onto the runway from which he had just taken off. Now that he was safely on the ground, the next problem was to find out what went wrong.

“The plane seemed to be all right,” Allegretti says. “I was able to start it up again, no problem.”

No problem until the next day when, at the start of another flight, the engine quit once more after takeoff. “Well, I wasn’t about to take anymore chances, so I had the mechanic fly the plane,” he says. “And the darn thing quit on him eight times! But after each time, he was able to start it up again.”

The trouble was that somewhere during the rigorous schedule of maintenance, someone had put the wrong size piston rings on the engine’s pistons. “That’s what was causing the engine to quit,” he says. “It was pure mechanical failure-not an error on my part.” “I’ll tell you, I was a little rattled the first time the engine quit,” says Allegretti “but when it failed the second time, I was about ready to quit flying.”

“Then I thought about it. What was the chance of an engine failing twice in two days?” he recalls. “Pretty slim. In fact, it happens rarely. Plus, as pilots, we’re trained to handle-but more importantly, prevent-emergencies. We’re taught that whenever there’s trouble, you immediately look for a place to land the plane. I figured this type of consecutive emergencies would probably never happen to me again, so why not keep flying?”

At the time, Allegretti had no insurance coverage on his life. “I was in college,” he says as explanation. “I was on a shoestring budget-and flying lessons were expensive.”

“No, having my engine fail like that didn’t make me run right out and buy insurance,” he says. “Though, in retrospect, maybe I should have.”

Allegretti didn’t buy any life insurance until years later, when he started his own health-care purchasing company and took on partners in the business. But by then, he had been flying avidly for years. Many insurance companies require people who engage in high-risk activities, such as Allegretti, to pay more for insurance coverage, and some even decline to offer it to such risk-takers. Although Allegretti needed the insurance, would he be able to get it?

Small but lucrative
Thrill seekers, extreme sporters, hot doggers, some may even call them nut cases, are people who need life insurance just like the rest of the population. In fact, most of them especially need it to protect their families and businesses from financial ruin because they have so much that needs protection. Typically, these are wealthy people.

“Scuba divers and mountain climbers and private pilots are people of high net worth,” says Jack Dolan, spokesman for the American Council of Life Insurers, Washington, D.C. “They’ve got the money for these kinds of expensive propositions because they’ve got the money to burn. For example, I heard that climbing Mount Everest is a $100,000 undertaking.”

And it’s undertaking in another sense of the word that worries insurers into not wanting to take on certain insurance risks. “You’ve got levels of extreme in each activity,” Dolan says. “And this gives underwriters some room to maneuver in. For example, scuba diving. If the diver typically stays in the shallows, he’s a relatively low risk. The deeper he dives, though, the bigger risk of mortality he becomes.”

It makes sense that an insurance company doesn’t want to sell coverage to someone who is likely to kill himself soon. “It can be tough for someone who does extreme sports to get coverage,” Dolan says. “If they get it at all, it’s going to cost them more.”

Whether or not a rock climber or a sky diver can get insurance also depends on the company. “Companies don’t act in unison,” Dolan says. “Why will one company agree to undertake a risk and one won’t? In a word: competition.” Nearly 95 percent of the people who apply for insurance coverage get it from the first company they apply to-although that doesn’t guarantee the coverage will come cheap. The other 5 percent simply look elsewhere, he says. “Most people get the coverage they want. They just have to find the right company to apply to.”

One element that helps an insurer decide whether to take on a high-risk applicant is the availability of reinsurance. “High risks are assumed on a facultative basis,” Dolan says. “That means the reinsurer underwrites high risks on an individual basis. This differs from traditional reinsurance, where the reinsurer underwrites a block of similarly situated policyholders.” So someone who bungee jumps might be able to get coverage from a traditional insurer, such as New York Life, but New York Life may call in a reinsurer to help carry the risk.

“It comes down to experience in underwriting data,” Dolan says. “The more people you insured who engage in a certain type of activity, the more you gain mortality experience regarding that activity. More experience makes less expensive coverage, and what’s considered extreme one year may not be as extreme the next. If a sport is new, insurance prices tend to be high.”

At least coverage is more available now than in years past. Fifteen years ago and earlier, many insurers had a blacklist of activities and occupations that, if an applicant practiced, made him an automatic decline. These included airline pilots, ski instructors and even journalists. “There’s really no blacklist anymore,” Dolan says reassuringly. “It varies from company to company, but most people can get insurance if they look for it. There are brokers who specialize in insuring high risks. About the only profession I can think of that might result in a decline from everybody is perhaps a circus performer who’s having knives thrown at his head.”

Taking a chance
The availability of coverage to people who in the past have been underwriting nightmares has increased in the last 15 years as underwriting departments gain mortality experience and ask more probing questions during the application process. Availability of coverage to high-risk individuals has also been a result of the number of high-risk insurers that have sprung up over the last decade and a half.

One such company, Impaired Risk Specialists, Palatine, Ill., has been insuring people who are high underwriting risks for the last nine years. Although the bulk of their customers are people with impaired health, they also insure people who engage in extreme sports and other high-risk activity.

“We look at each case individually,” says Sandee Whited, vice president of the company. “We look at every application closely to determine if this is an acceptable risk for us. We’re usually able to handle the risk because we’ve designed products for people who can’t get coverage elsewhere.” The company will even insure people who test positive for HIV.

Impaired Risk Specialists is able to offer whole life coverage to risk-takers because their coverage is more expensive from the outset. “We cover people with health problems, but also include people who have high-risk hobbies. But premiums for a standard issue for us are more expensive than for a standard issue for a mainstream insurer,” Whited explains.

Not all are rated
Whited gives private pilots as an example of the types of high-risk people the insurer will cover at a standard rate. “Other insurers might decline that business, but we’ll insure it standard,” she says. “We’ve made offers to people who raced motorcycles, but we consider that a higher risk, so we charge an extra fee per thousand in face amount for taking on the additional risk.”

“I was 600 feet in the air when I experienced full engine failure. The propeller just stopped right in front of me! At that point, my plane became a glider.”
?Peter Allegretti

Rating a policy on a thrill-seeker also takes more information than just a check-off box on an insurance app. In the case of a motorcycle racer, the insurer asks more probing questions such as what type of track does he race on, how often he races and whether or not he’s ever had an accident.

“If it’s an additional risk, most other companies won’t want to fool with it,” Whited says. “We try not to out-and-out decline anybody. We look at the actual risk involved with that activity. Take rock climbing. Sometimes we’ll underwrite it, sometimes not. If they’re climbing Mount Kilimanjaro, there’s like a 50 percent mortality risk in climbing it. We’d probably decline that.”

Underwriting extreme sports is not easy, Whited says. “We’ll underwrite it if the risk seems appropriate, although the coverage will be expensive,” she says. “From a business standpoint, it’s not worth insuring these people. They’re not easy to underwrite and there are more death claims to deal with.”

Extreme selling
Sometimes finding an insurer that will underwrite an avocational risk is easy, but selling the policy is hard. Eve Bruce, LUTCF, 46, an agent with Allstate in Longmont, Colo., found that out when one of her auto and home clients came to her for $1 million in term insurance last year. Trouble was, the guy races cars as a hobby.

The client, a 46-year-old businessman in nearby Loveland, had been Bruce’s client since 1989. He wanted the term insurance to cover his mortgage and to protect his wife, children and business from financial ruin. But his obsession with racing his suped-up 1967 Chevy II in quarter-mile drag races at speeds that average 170 miles per hour made the coverage very expensive.

“He wanted $1 million of term, so he came to me,” Bruce says. “In addition to having his auto and home [insurance], I had a whole life policy on his wife.” Although the client had been racing cars for six years and had never had an accident, Allstate offered him a term policy that was heavily rated.

“I told my client that the policy was subject to review in two years,” she explains. “After that, it was conceivable that the premiums would go down. Basically, I just went to him with the offer and said, ’This is the best I could do.’”

Allstate’s best offer, however, was too high for the client and he declined the offer. “There was such a big difference in the premium amount I initially quoted him and the premium the company finally offered,” she says. “I think it spooked him. But I told him outright that his racing could be a problem.”

The high cost of insurance offered by Allstate didn’t scare the client off getting coverage, however, and he finally bought $1 million in term from Northwestern Mutual for much less in premium. “He got a better rate at Northwestern Mutual,” Bruce says. “Their offer was about half of what ours was. But what could I do? I’m not a broker. All I could offer was what I had.”

Unlike with some insurers, Bruce could not bargain the underwriters at Allstate to make a better offer. “There’s no cajoling the underwriters,” she says. “At my company, they never back down on the rates.”

The right agent
Peter Allegretti, the 52-year-old Wisconsin executive with the passion for flying, realized that when he went into business with a couple of partners a few years ago, he was going to need insurance to protect his family and his considerable real estate and financial holdings. He turned to his flying buddy and friend since high school, Jeff Beitner, CLU, ChFC, an agent with New York Life in Richmond, Va.

Scuba divers, mountain climbers and private pilots are peple of high net worth. They’ve got the money for these kinds of expensive activities because they’ve got the money to burn.

Like Allegretti, Beitner is a private pilot as well as a scuba diver, and has had experience in getting affordable insurance for risk-takers like himself. Beitner says about 20 of his clients have high-risk hobbies, which include flying, mountain climbing, scuba diving and parachuting.

“I’ve got a lot of clients like Pete,” Allegretti says. “The high-risk people I deal with are typically 45 to 60 years old. They’re mostly male, but I’ve got a couple of their wives who share their enthusiasms. They’re usually healthy and their incomes are over six figures.

“There’s a lot of money in this market,” he says. “These people have higher incomes than most, and it shows in their choice of recreation. Many of the people who fly, scuba dive and all, are participating in what some call a rich man’s sport. So this is a lucrative market to work in.” How lucrative? Beitner says the typical whole life face amount for extreme sporters ranges from $500,000 to $2 million, and sometimes more. “You might say they’re fairly well-off,” he adds.

In November of 1999, Allegretti called Beitner about getting $1 million in coverage. The next weekend, Beitner jumped into his own private plane and flew to Wisconsin to call on his friend, landing the plane in Allegretti’s backyard airstrip.

“Pete needed the coverage and, to me, he seemed like a good risk” Beitner says. “He had been flying for 20 years and never had an accident. So, we applied to New York Life for a mix of term and whole life.

“They may tell you differently, but the underwriters do not treat all business the same,” he points out. Because I’ve been with them for so long [24 years], they treat my business a little differently than that of a beginner’s.”

Because of the quality of business that Beitner has given New York Life over the years, the company is likely to take a favorable look at his applications when it comes time to underwrite.

“I’ll often write a cover letter that goes along with the app if there’s a chance of a rating problem,” he says. “I’m like a character reference. I’ll even call the underwriters to put a favorable light in their heads about my client. Basically, I’m a salesman with the underwriters.”

Caution regarding high-risks
Although New York Life would not comment specifically on Allegretti’s case, Dennis Flaherty, chief underwriter for the insurer, says the company is careful about the high-risk business it will underwrite. “Extreme sports, as its name implies, is a step beyond the normal,” he says. “We don’t insure people who take risks with their lives.” However, he adds with a touch of resignation, “But we’re also in the business of selling insurance, not declining it.”

Although the number of risk-taking clients with New York Life policies is “extremely small,” those who do have coverage don’t pay as much for it as you might think. “It all comes down to mortality exposure,” he says. “How often do they take risks-and what are their experience and safety records?”

In the case of flyers, the insurer classifies them into several groups: student, private, commercial and military. Military pilots, because of the quality of training they receive, get the most favorable rating of the four. Also, contrary to what you may believe, the number of hours flown actually works against the applicant in underwriting. “The more hours they’re in the air, the more often they’re exposed to risk of mortality,” Flaherty says. “At the private pilot level, less hours equal a better rate.”

Training and safety record, regardless of the activity, are the two underwriting elements that are determining factors in rating a policy, he says. “What we’ve got to watch out for is the guy who’s 42 years old and decides he’s going to retire early and do what he’s always wanted to do-fly an airplane. He’s never flown before; completely new to the activity. That’s the type of person you have to be careful of.”

Dead reckoning
Jeff Beitner’s task was to calculate how to play his flying friend’s app for $1 million in coverage as he submitted it to underwriting. “I let them know how long Pete had been flying-his experience-and that he’s never had an accident,” Beitner says. He also wrote one of his famous cover letters and followed up with a phone call. Then all Beitner and Allegretti could do was sit back and anticipate the outcome.

The offer came back: $250,000 in whole life and $750,000 in term coverage. “He got his million,” Beitner says proudly. “Honestly, I thought he was going to get a standard rate-not bad, mind you, but more expensive than preferred. Then he winds up with a nonsmoking rate instead!”

That was a little over a year ago. Since then, Allegretti has applied for $1 million more in coverage and is taking out another $1 million policy to fund a buy/sell agreement with his two partners. Beitner expects the underwriting to go smoothly, especially since the policy for the partners is involved. “That gives us a little leverage placing the personal coverage,” he says. Allegretti also is looking to convert all his term coverage to permanent insurance over the next few years.

“Everything’s expensive when you fly a plane,” Allegretti says. “Insurance is expensive, maintenance is expensive, fuel is expensive. It costs me over $10,000 a year to maintain and fly my plane, but I enjoy it so much. And even if the insurance were expensive, I’m not going to quit doing what I enjoy just to protect my assets.”

“I know I’m not going to fly forever,” he says a bit wistfully. “Flying costs money, but it’s money I’m willing to spend. There’s a cost-benefit ratio at work, and right now, I enjoy flying so much that it’s worth the money I sink into it.

“That’ll change one day, when I’m older. Then I’ll just let my son fly me then,” he adds with a laugh.


See other articles about Life Insurance

Conference Newsletter

Contact Us   |   Reprint Permission   |   Advertise   |   Legal Notices   |   Join NAIFA   |   Copyright © Advisor Today 1999-2017. All rights reserved.

AT Blog
Product Resource
Digital Magazine