CIA Annual Meeting

CIA Annual MeetingCIA Annual Meeting

LOOKING BACK…focused on the futureLOOKING BACK…focused on the future

CIA Annual Meeting Session 2104 – CIA Annual Meeting Session 2104 – Actuaries in DistributionActuaries in Distribution

Actuaries in Distribution

Brigitte Breton

Pierre Vincent

Scott Sadler


An Actuary in DistributionAn Actuary in Distribution

Brigitte Breton, FSA

Insurance Salesman woman


Topics

• Career History

• Motivations

• Field/Market Observations

• Actuarial Advantages/Disadvantages


A little History…

School Insurance/Reinsurance Distribution

Product Development

Pricing/Marketing

12 yrs 4 yrs


Personal Motivations for Switching into Distribution

• 1.

Situation is different for women.

• 2. Time Flexibility Working less hours

• 3. Move to “La Belle Province”


Market Motivations for Switching into Distribution

1. Shrinking # of insurance companies (reduced number of employers for actuaries)

2. Increased Average Age of Distributors (above 50)

3. Increased need for knowledgeable insurance brokers


My “Path”…

1. Team up with a high end MGA (General Agency): packaging specific/individualized insurance concepts

Objective: “how” to sell

2. Acquire a block of business: Objective: “I” sell

3. All of the above and offer consulting services to MGAs:

Objective: “We” sell


Field Observations (Actuaries in Action)

• Actuaries add credibility to the selling process Good results with Accountants and Lawyers

• Need to define our area of expertise vs tax lawyers/accountants (some confusion exists)

• In front of clients, our technical knowledge may become a handicap we need to simplify


Actuary’s Challenge

• Summarize product while fully disclose all material factors/assumptions

KEEP IT SIMPLE!

• Need to be comfortable with the label “insurance salesman”

woman


Field Observations (Brokers in Action)

Two types of sales processTwo types of sales process

Go In Go In

Present One Concept Fact Finding

Sell or don’t sell Extensive Analysis

Get Out Sell or don’t sell

Get Out


Results

More Clients/ Less Clients/

Less Time Each More Time Each


Two types of Sales Brokers

Deal with 1 or Deal with

2 Companies Multiple companies

Go for Price

…but willing to switch model for a “good deal”…


“Good Deal” = Market Efficiency

Basic Sales process/behavior will remain unless a product premium or commission

is exceptionally outside the “level of comfort” (Mispriced? Loss Leader?)

MARKET EFFICIENCY


Field Observation (MGA in Action)

• Typical MGA is in their 60s

• Built a good business over the years (good service fees)

• Lonely Business (does not know how the others operate/what is good profits)

• Carry big potential liability

• Faced with succession planning


Sales Support at the MGA level

Why an Actuary?

• Support the Brokers (in sales situations)

• Support at the technical level (advanced concepts/conversion programs)

• Support the MGA at the management level


MGA ACTUARIAL SUPPORT

• Expense Management

• Risk Management (chargeback exposure)

• Overhead/Profitability Ratios

• Agent Behavioral Projections

• Agency Valuation (Succession Planning)


CONCLUSIONS

Actuaries in Sales YES

Actuaries bring Knowledge

Expertise

Credibility


CONCLUSIONS

Actuary’s basic training weak in the following:

• Communication (summarize, listen to client, keep it simple, selling techniques)

• Small business corporate taxation and challenges faced by shareholder/owner


CONCLUSION

Actuaries in sales can mean:

• Personal Sales• Assist other agents in complex cases• Assist MGA at the management level

(liability exposure, succession planning)


So, do you want to join the dark side…..?


From the Insurance Company’s From the Insurance Company’s Employee PerspectiveEmployee Perspective

Pierre Vincent

Transamerica Life Canada


Looking at the past…• 2 years - Life insurance valuation• 3 years - Product development & pricing

for US Group Pension• 11 years – Life Product Development &

Marketing• 2 years – Sales – Life insurance,

segregated funds & mutual funds


Observation

The independent distribution market is very efficient ...

If products have flaws, distributors and brokers will find them & market these

flaws


The Product Selection Process at the Distributor Level (MGA, Brokers)

• Companies launch products & promote strong features

• The Product Analysts at Distributors:• Review & compare product with competition• Prepare recommended list of products based on

competitive pricing & features• Take advantage of product flaws to propose best

solution to brokers and clients


Product Analysts at distributors will find quickly what the pricing actuaries should

have been concerned about…


Examples of market efficiency• Insurance on broker’s own life• Impact of legal rebating• Decreases in amount of insurance without

penalty to broker or client• Competitive pricing by age group• Long term GIC rates in UL• Segregated fund guarantees• Impact of NCPI• Back-to-back type concepts


Insurance on broker’s own life• A recent case … before the company changed its

commission rules• $2,500,000 of universal life with YRT cost of

insurance• $7,100 in premiums over a two year period• $20,347 in commission and bonus (tax free)• Net gain of $13,247• Two years of “free insurance”

Too good to be true…it was changed recently!


Insurance on broker’s own life• Buys $1,500,000 of universal life with YRT cost of

insurance• Pays $15,276 in premium • Insurance in force for three years• Receives $26,809 in commission and bonus (tax free)• Net gain of $11,533 • This is still available with quite a few insurance

companies in Canada today...

A good deal for the broker!


Impact of rebating • In Alberta, rebating of commission is legal• The client buys $1,500,000 insurance policy

with a premium of $15,276• The broker receives $26,809 in commission and

bonuses• The broker rebates $15,276 to the client• Gross income of $11,533 to the broker• The client gets two years of insurance for free


Insurance amount decreases without penalties• Same case we just reviewed

• $1,500,000 of insurance, $15,276 of premium, $26,809 of commission & bonus

• If insurance is decreased to $100,000 in the third year, the client gets 13 years of coverage for free…

• What is the profitability of paying commission on $1,500,000 when insurance will be reduced to $100,000 after 2 year?


Insurance amount decreases without penalties• Approach often used for tax free accumulation in life

insurance• Broker proposes to accumulate money tax free• $250,000 is deposited in the policy• $4,000,000 of insurance is required to accept this deposit• After 2 years, the insurance is reduced to $2,000,000• After 4 years, the insurance is then reduced to $1,000,000 • All the money accumulates on a tax deferred basis• The commissions paid are 3-4 times what should have

been paid• Who is making the money?


Competitive pricing by age group• The product analysts and brokers use

comparison software to determine the best price by age

• For simple products, production can shift significantly between companies

• Clients are usually well served by independent agents for this type of product

• Direct writers should price each age profitably


Segregated fund guarantees• Older clients with significantly reduced

life expectancy can invest in segregated funds with 100% death guarantees

• Stock brokers suggest to these clients and their family to invest a few millions in these funds.

• The price of these guarantees does not reflect this type of behavior


Long term GICs in Universal Life• Clients invest in long term GICs to earn

higher interest rate• Cost of insurance is deducted from this

GIC • Broker can offer clients long term GIC

rates on short term investments


Impact of NCPI• For clients above age 70, NCPI are different by

companies• If an individual borrows to invest and the bank

requires life insurance =>the lower of (NCPI, Insurance Premium) can be deducted from income tax

• Broker will look for the company with the highest NCPI to maximize the tax deductions

• If the policy is owned personally, brokers will look for the lowest NCPI to have the highest ACB possible


Back-to-back concept• Creative brokers have found that clients

70+ can be declined for insurance in Canada and accepted standard in the US

• These clients often qualify for rated life annuities in Canada

• These programs are sold to investors who get the equivalent of 15+% return before tax


Other proofs of efficiency of distribution• Lapses on T100• Lapses on Joint-last-to-die T100 policies• Popularity of return of premium options

on CI policies


Conclusion• With the increased popularity of independent

distributors, products selection is becoming very efficient

• Pricing / valuation actuaries should evaluate risks carefully

• They should be concerned with rapid sales increase• It can be very expensive to wait until the experience study

• Pricing actuaries should talk often to product analysts to understand how their products are sold

• Good understanding of key drivers in certain markets can be very profitable for insurance companies Actuaries in sales – should they take advantage of

product flaws to maximize sales results?


From a Distributor From a Distributor PerspectivePerspective

Scott Sadler

PAL Insurance Services Limited


• Actuaries have gone over to the dark side.

Find out the real dirt on the sales process.

Are agents worth all that cost?

• Actuaries have gone over to the dark side.

Find out the real dirt on the sales process.

Are agents worth all that cost?


• The Sales Process at Pal Insurance

• Fact Find / Needs Analysis• Integration with existing structures• Strategy Inventory• Program architecture• Implementation• Servicing




• Fact Find• Client details (DoB, smoking status,

etc.)• Asset ownership• Corporate structure• Tax liability

• Limited actuarial involvement

• Fact Find• Client details (DoB, smoking status,

etc.)• Asset ownership• Corporate structure• Tax liability

• Limited actuarial involvement


• Integration with existing structures• Working with the client and their

“other” advisors (tax, legal, etc.) • Understand what planning has already

been done• Building a consensus for the role life

insurance can play• Educating the decision makers as to the

types of life insurance in the market• Actuaries enhance the credibility of the

process

• Integration with existing structures• Working with the client and their

“other” advisors (tax, legal, etc.) • Understand what planning has already

been done• Building a consensus for the role life

insurance can play• Educating the decision makers as to the

types of life insurance in the market• Actuaries enhance the credibility of the

process


• Actuarial Issues• Participants focus on their area of

expertise • Educating the decision makers in

language they understand• Advanced tax planning teams

established by some insurance companies

• Actuarial Issues• Participants focus on their area of

expertise • Educating the decision makers in

language they understand• Advanced tax planning teams

established by some insurance companies


• Strategy inventory• Insurance is one solution, there are

others• Insurance is not “free”• Work with other advisors to

document cost / benefit analysis of the options

• Strategy inventory• Insurance is one solution, there are

others• Insurance is not “free”• Work with other advisors to

document cost / benefit analysis of the options


• Actuarial Issues• Insurance is not for traditional

income replacement purposes• Financial underwriting as well as

medical• Ownership / beneficiary designations• Does historical lapse experience

apply?• Whose pricing mortality do you use,

direct writers or reinsurers?

• Actuarial Issues• Insurance is not for traditional

income replacement purposes• Financial underwriting as well as

medical• Ownership / beneficiary designations• Does historical lapse experience

apply?• Whose pricing mortality do you use,

direct writers or reinsurers?


• Strategy Inventory - an ExampleMNS 45 standard risk• $25M capital gain on death• $11.25M tax bill (45% tax rate)• Options to pay the tax include:

• Sinking fund to accumulate needed $• Borrow funds at death• Sell part of the company• Insurance to pay tax• Charitable gift to eliminate tax

• Strategy Inventory - an ExampleMNS 45 standard risk• $25M capital gain on death• $11.25M tax bill (45% tax rate)• Options to pay the tax include:

• Sinking fund to accumulate needed $• Borrow funds at death• Sell part of the company• Insurance to pay tax• Charitable gift to eliminate tax


• Sinking Fund• Deposits for 10 years• 5% pre-tax rate of return • 45% annual tax on investment earnings• Target accumulation at attained age 85• Annual deposit = $428K• Assumes

• Death at life expectancy

• Sinking Fund• Deposits for 10 years• 5% pre-tax rate of return • 45% annual tax on investment earnings• Target accumulation at attained age 85• Annual deposit = $428K• Assumes

• Death at life expectancy


• Borrow funds at death• Amortize over 10 years• 6% interest rate • Annual Payment = $1.4M • Assumes

• Company is able to borrow money when needed

• Company is able to repay money when it is borrowed

• Borrow funds at death• Amortize over 10 years• 6% interest rate • Annual Payment = $1.4M • Assumes

• Company is able to borrow money when needed

• Company is able to repay money when it is borrowed


• Sell part of the company• Cost = $11.25M• Assumes

• There is a market for the stock• Share price can withstand the sell-off

• Sell part of the company• Cost = $11.25M• Assumes

• There is a market for the stock• Share price can withstand the sell-off


• Life Insurance Solution• Choices include

• Advisor • Company• Product

• Assumes• Applicant can pass underwriting

• Life Insurance Solution• Choices include

• Advisor • Company• Product

• Assumes• Applicant can pass underwriting


• Plan Design• How much coverage?

• $11.25M to pay the tax• $25M to eliminate the tax

• How long do they need coverage?

• How will they pay for coverage?

• Plan Design• How much coverage?

• $11.25M to pay the tax• $25M to eliminate the tax

• How long do they need coverage?

• How will they pay for coverage?


• Plan Design10 Year Term Insurance

• Lower initial rates• Renewal features vary by company• Conversion options vary by company• No CSV, no exit strategy

• Plan Design10 Year Term Insurance

• Lower initial rates• Renewal features vary by company• Conversion options vary by company• No CSV, no exit strategy


Company A Company B Company C Company D

Age 45 $14,587 $14,665 $15,002 $15,140

Age 55 $92,325 $74,852 $76,765 $87,702

Age 65 $232,500 $212,440 $217,840 $254,427

Age 75 $612,040 $627,677 $623,315

Convertible to 70 N/A 65 65

Renewable to 75 85 85 80

Total payment $3.4M $9.1M $9.3M $6.6M


• Plan DesignPermanent Insurance• Term to 100

• Level premium • Cash Value features vary by company

• Minimum Funded Level COI UL• Level premium • Ability to pre-fund future charges

• Plan DesignPermanent Insurance• Term to 100

• Level premium • Cash Value features vary by company

• Minimum Funded Level COI UL• Level premium • Ability to pre-fund future charges


• Permanent Insurance Options• Term to 100

• $77K annual premium

• Minimum Funded Level COI UL• $85K minimum premium

• Same Company • Is the ability to increase funding at

some future time “worth” $8K annually?

• Permanent Insurance Options• Term to 100

• $77K annual premium

• Minimum Funded Level COI UL• $85K minimum premium

• Same Company • Is the ability to increase funding at

some future time “worth” $8K annually?


• Plan DesignPermanent Insurance, with CSV

• Maximum Funded UL• $446K premium for 10 years• “self-funding” thereafter• 3.5% interest assumption

• Participating Life• 20 Pay, high early CSV plan design• $446K premium for 10 years• “Self-funding” thereafter• Current dividend scale

• Plan DesignPermanent Insurance, with CSV

• Maximum Funded UL• $446K premium for 10 years• “self-funding” thereafter• 3.5% interest assumption

• Participating Life• 20 Pay, high early CSV plan design• $446K premium for 10 years• “Self-funding” thereafter• Current dividend scale


UL Par

Death Benefit

Age 55

Age 65

Age 75

Age 85

$ 16.7M

$ 17.2M

$ 20.0M

$ 25.0M

$ 17.1M

$ 14.0M

$ 20.3M

$ 28.5M

Cash Value

Age 55

Age 65

Age 75

Age 85

$ 4.4M

$ 5.9M

$ 8.8M

$ 13.7M

$ 4.5M

$ 8.3M

$ 14.2M

$ 23.1M


• Actuarial issues• Investment options on UL product• Guaranteed minimum GIA rates

eg: 90% GoC rate - MER• Reliability of bonus interest feature

• Sustainability of dividend scale

• Actuarial issues• Investment options on UL product• Guaranteed minimum GIA rates

eg: 90% GoC rate - MER• Reliability of bonus interest feature

• Sustainability of dividend scale


• Actuarial issues• Guaranteed increases tied to tax liability• Return of premium feature• Reinsurance capacity

InitialUltimate

• Are there embedded options that are valuable to the client?

• Are there features that add cost that are of little value to the client?

• Actuarial issues• Guaranteed increases tied to tax liability• Return of premium feature• Reinsurance capacity

InitialUltimate

• Are there embedded options that are valuable to the client?

• Are there features that add cost that are of little value to the client?


• Implementation• Review of facts• Summary of Planning Process• Summary of existing structures• Review of Cost / benefit analysis

• Ask for the cheque

• Implementation• Review of facts• Summary of Planning Process• Summary of existing structures• Review of Cost / benefit analysis

• Ask for the cheque


• Actuarial issues• “Not Taken” rates increase with

travel time from fact find to offer • Lowest price doesn’t always “win”• KISS principle

• Actuarial issues• “Not Taken” rates increase with

travel time from fact find to offer • Lowest price doesn’t always “win”• KISS principle


• Servicing – term plans• Update of facts• Market survey• Conversion opportunity

• Servicing – term plans• Update of facts• Market survey• Conversion opportunity


• Actuarial Issues• Anti-selective lapses• When does your term product

break-even?• Does conversion rate vary by face

amount?• Are conversion costs accurately

reflected in pricing?

• Actuarial Issues• Anti-selective lapses• When does your term product

break-even?• Does conversion rate vary by face

amount?• Are conversion costs accurately

reflected in pricing?


• Servicing – permanent plans• Update of facts• Update of policy values vs

illustration• Variance analysis• Review of asset allocation for UL

plans

• Servicing – permanent plans• Update of facts• Update of policy values vs

illustration• Variance analysis• Review of asset allocation for UL

plans


• Actuarial Issues• Mortality, lapse rates vary with face

amount• Does source of earnings analysis

reflect policy size?

• Actuarial Issues• Mortality, lapse rates vary with face

amount• Does source of earnings analysis

reflect policy size?






CIA Annual MeetingCIA Annual Meeting

LOOKING BACK…focused on the futureLOOKING BACK…focused on the future

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