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Continuing to Reach for the Middle Market:Simplified Issue Products in Today’s MarketActuaries’ Club of the Southwest – Spring 2012 MeetingDallas, TX – June 29, 2012
Jason Rickard, Vice President, Hannover Life ReLloyd Spencer, Vice President, Hannover Life Re
Disclaimer
The information provided in this presentation does in no way whatsoever constitutelegal, accounting, tax or other professional advice.
While Hannover Rückversicherung AG has endeavoured to include in thispresentation information it believes to be reliable, complete and up-to-date, thecompany does not make any representation or warranty, express or implied, as tothe accuracy, completeness or updated status of such information.
Therefore, in no case whatsoever will Hannover Rückversicherung AG and itsaffiliate companies be liable to anyone for any decision made or action taken inconjunction with the information in this presentation or for any related damages.
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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1The Market Today vs. Yesterday
Agenda
Product and Marketing Considerations
Simplified Issue Experience
Industry / Regulatory Update
Accounting Update
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
The Breadth of the Fully-Underwritten Individual Life MarketMortality Experience v. Price
Contemporary Mortality Experience v. Current Market Price
Premium Rate Source: Compulife® Quotation System and HLR’s Internal Premium Database
Conclusion: Current Fully-Underwritten Product Pricing Tracks Emerging Mortality Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
The Breadth of the Simplified Issue Individual Life MarketPublished Premiums
We tend to think of the SI market as being much more homogenous• Yes, there are fundamental differences in broad market category (Single Premium UL,
COLI/BOLI, Final Expense, etc.)• But just looking at the expanding middle market SI term market, how homogenous is the
market?
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A B C D E F G H I J K L M N O P Q R S T U V
Term Premium ComparisonSI "Best Class", Male, NT, $200k Face Amount
RelativePremiumLevels
Source: CompuLife and internal HLR premium database
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
LIMRA has been doing studies on the un-served middle market for years.• A search in the LIMRA databases will yield well over 100 articles related to the middle
market and simplified issue products
Financial crisis has certainly had an effect…• Mortgage term products have all but disappeared with the absence of any significant
new home sales.• Middle market impacted most significantly by the crisis:
– Have always had somewhat of a discretionary view towards financial planning
While an appearance that little progress has been made, there’s been morethan first meets the eye• Product development and underwriting advances have helped move the market
beyond smaller niches• More than anything though, movement has largely been driven by distribution (banks,
IMOs, internet brokers/aggregators)
Still an estimated 35 million U.S. households that have no life insurance• According to LIMRA, that’s nearly a 50% increase in uninsured households since 2004.
The Middle Market - A Decade in Review
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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Focus a decade ago was with Banks• Immediate access to the middle market• Banks look to forge partnerships that allowed them to distribute products beyond
typical savings and loan spread-based products• Only a moderate amount of success
More and more, consumers getting comfortable purchasing life insurancewithout a face-to-face encounter• “Consumers are willing to pay a premium for quality service associated with a personal
sales channel.” – LIMRA: How the Middle Market Buys Life Insurance (2004)
• “Many middle-market consumers are not just willing but prefer to buy financialproducts without face-to-face meetings.” – LIMRA: Who Will Serve the Middle Market(2011)
The Middle Market - A Decade in Review
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Insurance Carriersability to sell SI or
STP productsprofitably
Growing Comfort inDirect Marketing
Approaches
Advances in RiskSelection
Technology/Tools
DevelopingPredictive Modeling
Technology
Un- Or Under-Served Market
How Do You Move the Model?
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Straight-through processing has a high utility with distributors, but price is alwaysimportant…
Creates an inherent impediment in advancing the straight through processingapproach to selling in the middle market:
Life industry has done too good of job advancing the fully underwritten market• The value of full underwriting can be seen in a variety of different lenses• The challenge as market focus expands is the expectations are now set relative to fully
underwritten rather than relative to guaranteed issue
Targeted approach is still the best approach• Don’t underestimate the value of a limited and targeted approach to the market
Compensation and issue costs are arguably still too high• Lower underwriting costs help, but are offset by higher mortality and in many cases
significantly higher lapse rates
The Middle Market Conundrum
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Looked at from purely an actuarial viewpoint…
Typical first year select factor in the 2008 VBT table is somewhere in the 75-80% range:
Over a typical pricing period, fully select underwriting is eliminating 25-50%claims vs. ultimate mortality
These key pricing elements areimpacted greatly by all of the otheritems. You know you are not going to be
able to select out all of the lives withimpairments; the desire is to attractas many of the healthy lives aspossible
With such a wide array of markets tosell in, this factor in many waysdrives everything else
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
SI Underwriting Considerations
ApplicationDeisgn
• Simple paper application with knockout criteria• Teleapp process initiated in a variety of ways• Electronic application with drop downs or reflexive criteria
Third PartyProviders
• Pharmacy database checks• Motor Vehicle Records• Medical Information Bureau• Credit Checks• Identity Verification• Predictive Modeling Systems
Process
• RTU’s• Process of utilization of third party data• Build criteria and inclusion of mild substandards• Post-issue audits• Potential for risk classification• Supportive of claims adjudication process
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
SI Product Development Considerations
Product and Pricing ConsiderationsTargeted
Competitiveness
Issue Ages limits
Max face amount
Rider and Conversionoptions
Compensation
Allocated Expenses
Discount rates andtargeted profitability
Required Capital
Assumed mortality andpersistency
Targeted Market / Distribution Approach
Lead Generation
Homogeneity of the market
Direct, Brokerage, IMO,etc.
Other products offeredwithin distribution channel /How the product if offered
Targeted Demographics
UnderwritingConsiderations
Application Design
Third PartyDatabase Tools
Process
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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Simplified Issue Experience
Sample individual company experience
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Nonmed experience can provide some clues as to what to expect longerterm
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SI vs. Fully Underwritten Experience
SimplifiedIssue
Fully U/w
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Experience
2002-2007 ILEC Experience(Common Company Study):
“Nonmed” business proxied as allbusiness with face amounts from$25k - $99k
“Fully underwritten” businessproxied as all other policies
HLR Experience:
Data explicitlyidentified asunderwritten onnonmed vs. paramedor medical basis
Both data sets suggest a relatively persistent difference in mortality, not diminishinguntil later durations
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Experience
Durational pattern in theearly years looks somewhatdifferent from pure nonmedexperience
Overall level of experience ismuch higher than purenonmed experience
Significant variation bycompany makes aggregateresults difficult to interpret
Two primary questions in theanalysis then are:
1.) What drives thevariation?
2.) Will the long-termmortality trend in a similarway to nonmed experience.
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Experience
Lapse experience tends tobe much worse thanexperience for even nonmedpolicies.
Lapse rates varysignificantly by company,product, market, distribution.
Conservation efforts haveproven to be relativelyeffective, as many lapsesprove to be involuntary.
This will certainly haveimplications on the long-termslope of mortality.
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Lapse Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Lapse Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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Simplified Issue Lapse Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Lapse Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Simplified Issue Lapse Experience v. Mortality Deterioration
SI Lapse Rate Implications for Mortality Deterioration• Order of Magnitude Cannot be Ignored
• Convergence to Ultimate Medically Underwritten Insured Mortality?
► Will Cracking the SI Mortality “Nut” Require a RubeGoldberg-esque Exercise in Actuarial Design?
Source: www.rubegoldberg.com gallery of drawingsActuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Industry Experience / Regulatory UpdateValuation Mortality Table Construction
Life Actuarial Task Force Mandate• “…to develop new mortality tables for the valuation of…pre-need,
simplified issue and guaranteed issue forms of life insurance…”
• Expectation is the development of separate tables for each segmentof the market for products subject to limited underwriting
► Current Status Define Goals for Project (Joint SOA / AAA Project Oversight Group)
Survey Companies – Nature of Market, Data Availability (Early 2010)
Data Call (March – July, 2011)
Data Compilation / Data Quality Analysis (July, 2011 – current)
(Very) Preliminary, Initial Take on SI Experience
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
SI Industry Experience Update
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
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SI Industry Experience Update
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Industry Experience / Regulatory UpdateValuation Mortality Table Construction
► Next Steps Continued Data Quality Analysis (Summer 2012)
Develop Experience Mortality Table(s) by Segment (Late 2012)
Develop Valuation Mortality Table(s) by Segment (Early 2013)
Academy Recommendation to LATF (Mid-to-Late 2013)
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012
Accounting Update
FASB Accounting Standards Update 2010-26(Accounting for Costs Associated with Acquiring orRenewing Insurance Contracts)
• Effective January 1, 2012
• Revised Definition of Deferrable Acquisition Costs
• Must be Directly Related to Successful Acquisition orRenewal of the business
Actuaries' Club of the Southwest - Spring 2012 Meeting - June 29, 2012