Continuing to Reach for the Middle Market: Simplified ... · Continuing to Reach for the Middle...

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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.

© Hannover Rückversicherung AG. All rights reserved.Hannover Re is the registered service mark of Hannover Rückversicherung AG.

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


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


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?

$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

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


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


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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


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?


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


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

The Value of Underwriting...

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

2008 VBT Table - Male Issue Age 35

Value ofUnderwriting


Looked at from a more direct, protective value viewpoint…

Study done to look at simplified issue policies where post-issue APS’s wereobtained

Reviewed 2,443 approved cases (standard or better based on non-medunderwriting)

Of these cases, 152 cases were rescinded due to material misrepresentations– rescission rate = 6.2%

More minor misrepresentations were not included in the analysis, but wouldadd to the overall protective value

Total debits identified = 24,975

Thus, protective value of the APS is ~10%



Risk Classification has allowed for rates that are extremely competitive at the leftend of the curve

Significant preferred factors are tied to verifiable BCP values that createadditional discounts to more simplified underwriting paradigms:


0%2%4%6%8%

10%12%14%16%18%

50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 170%

Prev

elan

ce

Relative Risk

Relative Risk Distribution


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“Beware of the half truth. You may have gotten hold of the wrong half.”~Author Unknown

The Truth, the Whole Truth, and Nothing But the Truth

Driving Veracity

Age Hits

Admit to DrivingInfractions on

App % Admit15-19 4 1 25%20-24 23 7 30%25-29 21 2 10%30-34 6 3 50%35-39 10 3 30%40-44 4 1 25%45-49 1 - 0%50-54 2 1 50%55-59 6 - 0%60-64 2 - 0%65-69 - - -70-75 - - -GrandTotal 79 18 23%

Smoking Veracity

One study found 10% of UrineSpecimens - where applicant claimed tobe nonsmoker - contained cotinine

If 90% of a Company’s risks arenonsmokers then what percent werecaught claiming to be nonsmoker?

If all smokers took their policies then theanswer would be 100%

After considering open market, quiteprobably still a majority of the smokerclass (perhaps 2/3rds) originally lied

Two Studies:


• A Targeted Approach to the Marketmatters

• We‘ve relied on underwritingapproaches to largely dictate ourpricing

• Need to look no further than marketslike COLI to understand that in the SImarket, underwriting approaches aresecondary:

– COLI/BOLI GI Mortality Experience =

38.7%1

– Fully Underwritten Experience =

37.1%1

You Can't Be All Things to All People...

1 - Source: Hannover Life Re Experience Study Database


Typical Product Development Considerations

ProductDesign

Rates

Market

DistributionChannel

Persistency/ Mortality

ClaimsHandling

UnderwritingMethods

Where all of these items are well known, so are the linkagesbetween them


SI Product Development Considerations

ProductDesign

Rates

Market(Where are yougoing to sell it?)

DistributionChannel

(How are yougoing to sell

it?)

Persistency/ Mortality

Claims Handling

Underwriting Methods/Process

Riders, conversions, overlap withfully underwritten, max/min face,max/min issue age, compensation,etc.

Balancing competitiveness anddesire to attract healthy lives withother factors

Application design, reflexivequestions or accept/reject, use of 3rd

party data, post-issue audits?, RTUcases?

Staffing needs; bigger impact due togenerally poorer persistency andmore antiselection concerns

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


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


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


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Sample individual company experience

?

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



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



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.



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.


Simplified Issue Lapse Experience




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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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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


SI Industry Experience Update


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SI Industry Experience Update


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)


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


Thank you for attending!

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