ISSUE 85 | FEBRUARY 2013 CONTINUED ON PAGE 4 Failing Forward: How Silicon Valley Works Better By Lance Poole I ’ve recently had the good fortune to make two trips to Silicon Valley in as many months. The first was as part of an innovation immersion project in which I, along with several colleagues, visited companies such as Google, Paypal, IDEO, and others to learn about their innovation processes and what has led to their success. The second trip was to attend a Design Thinking Boot Camp course at the d.School (Institute of Design at Stanford). The first part of this article will focus on what I learned about innovation while in Silicon Valley. Part 2 will spend more time explaining how to use the process. In it, I’ll present an overview on Design Thinking and how it can be applied to insurance product development. We’ll dive deeper into topics such as how to: • Improve empathy, • Define the problem, • Ideate (brainstorm), • Prototypec, and • Test. Part 1 Intro At times it feels like insurance companies and insurance product development are thou- sands of miles away from Silicon Valley. In a sense it’s true—there is a large geographic divide, as the largest insurance hubs in the United States are in New York, Chicago, and Des Moines. The larger divide, however, is in environment and culture. ! Product Product Development Section 1 Failing Forward: How Silicon Valley Works Better By Lance Poole 3 Chairperson’s Corner By Paula Hodges 7 Product Development Section 2013 Council Election By Paul Fedchak 8 The Interstate Compact: Speeding Up Speed-To- Market By PW Calfas 12 Highlights of the October 2012 SOA Annual Meeting By Jim Filmore with various contributor 16 Around The World – Korea: Insurance As Seen on TV? By Greg Becker 19 Antifragile Product Design By Wendy Yu 23 The Impact of Life: How Mortality Improvement affects the life insurance industry today. By Jay Biehl
Transcript
ISSUE 85 | FEBRUARY 2013
CONTINUED ON PAGE 4
Failing Forward: How Silicon Valley Works BetterBy Lance Poole
I ’ve recently had the good fortune to make two trips to Silicon Valley in as many months. The first was as part of an innovation immersion project in which I, along with several colleagues, visited companies such as Google, Paypal, IDEO, and others to learn about
their innovation processes and what has led to their success. The second trip was to attend a Design Thinking Boot Camp course at the d.School (Institute of Design at Stanford).
The first part of this article will focus on what I learned about innovation while in Silicon Valley. Part 2 will spend more time explaining how to use the process. In it, I’ll present an overview on Design Thinking and how it can be applied to insurance product development. We’ll dive deeper into topics such as how to:
Part 1 IntroAt times it feels like insurance companies and insurance product development are thou-sands of miles away from Silicon Valley. In a sense it’s true—there is a large geographic divide, as the largest insurance hubs in the United States are in New York, Chicago, and Des Moines. The larger divide, however, is in environment and culture.
!Product
Product Development Section
1 Failing Forward: How Silicon Valley Works BetterBy Lance Poole
3 Chairperson’s CornerBy Paula Hodges
7 Product Development Section 2013 Council ElectionBy Paul Fedchak
8 The Interstate Compact: Speeding Up Speed-To-Market By PW Calfas
12 Highlights of the October 2012 SOA Annual MeetingBy Jim Filmore with various contributor
16 Around The World – Korea: Insurance As Seen on TV?By Greg Becker
19 Antifragile Product DesignBy Wendy Yu
23 The Impact of Life: How Mortality Improvement affects the life insurance industry today.By Jay Biehl
Web Liason (including PodCasts and LinkedIn)Vera Ljucovic
Other Representatives Jim Filmore, 2013 Life & Annuity SymposiumPaula Hodges, 2013 Annual MeetingMitchell Katcher, 2013 Life & Annuity SymposiumKurt Guske, 2013 Life & Annuity SymposiumJoe Kordovi, 2013 Life & Annuity Symposium
!Product
ISSUE 85 | FEBRUARY 2013
Published by the Product Development Section Council of the Society of Actuaries
This newsletter is free to section members. Current issues are available on the SOA website (www.soa.org).
To join the section, SOA members and non-members can locate a membership form on the Product Development Section Web page at www.soa.org/ product-development. This publication is provided for informational and educational purposes only. The Society of Actuaries makes no endorsement, representation or guarantee with regard to any content, and disclaims any liability in connection with the use or misuse of any information provided herein. This publication should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries.
Donna Megregian, 2013 Life & Annuity SymposiumDoug Robbins, Post 2013 Life & Annuity Symposium SeminarTim Rozar, 2013 Life & Annuity SymposiumRob Stone, 2013 Life & Annuity Symposium
Articles Needed for the Next Issue of Product Matters!While all articles are welcome, we would especially like to receive articles on topics that would be of interest to Product Development Section members based outside of the United States.
Please email your articles to Jim Filmore, Kurt Guske or Stephen Peeples by April 1, 2013 (and that is no April Fool’s joke).
Product Matters! | FEBRUARY 2013 | 3
H appy birthday to us! The Product Development Section has turned 30 years old. Our newsletter started shortly thereafter and will celebrate its 30-year anniversary in 2013. When we survey our membership, the newsletter is always one of the most appreciated values that our members receive from their member
dues. We hope to continue the tradition for another 30 years.
While we honor the traditions of the section, we are always listening to our membership about ways that we can better serve them. Over the next year, one of our primary goals is to optimize the way we deliver valuable research information to our membership. Historically, we’ve published research reports and presented information at the Product Development Symposiums, now known as the Life and Annuity Symposium, and the SOA Annual Meeting. Over the last few years, we’ve added webcasts to our delivery method for reaching our membership.
Since our section membership spans several generations and many different preferences on content delivery, we will be making a conscious effort to deliver our section-sponsored research through methods that will reach each member in a way that is meaningful to you. For each completed research topic, we’ll review how we’ll send this information to our membership:
• Webcasts: We’ll be able to coordinate timing near the publication date of the research, and the webcast allows interaction between researchers and webcast attendees.
• Podcasts: Providing a brief summary of the topic, which will provide enough information to the listener to allow them to decide to investigate the topic further, or that the brief overview provided enough content for their particular interest level.
• SessionsattheLifeandAnnuitySymposiumorSOAAnnualMeeting: These provide a more personal interaction with the researchers, and for those attending in person, an opportunity to connect with the pre-senters directly and immediately.
• The SOAProductDevelopment Section group onLinkedIn.com*: This is available only to Product Development Section members, and provides the opportunity for collaborative commentary, thought-pro-voking questions and a forum for ongoing dialogue.
• ProductMatters!: We’ll let you know about published research through our newsletter, and provide articles regarding the findings.
• SOA.org:Of course the formal published report will be published on the SOA research site.
We may not use all these avenues for every topic, and we’ll certainly include other topics in these media, but we’re hopeful that you will have better access to the results of the hard work of our section volunteers.
I look forward to hearing from you throughout the year if you have other suggestions on how we might better provide value for your membership.
*To join our LinkedIn site: If you are not yet a member of LinkedIn, you will need to create a profile on www.linkedin.com. Registration is free. To join the PD Section group on Linked in, look for the Society of Actuaries Product Development Section group and click the button to join. You must be a member of the section to be admitted to the group.
Chairperson’s Corner
Traditions And AdditionsBy Paula Hodges
Paula Hodges,FSA, MAAA, is 2nd vice president and associate actuary with Ameritas Life Insurance Corp., responsible for Corporate Actuarial Operations. She can be contacted at phodges@ ameritas.com.
4 | FEBRUARY 2013 | Product Matters!
Failing Forward … | FROM PAGE 1
EnvironmentWhen you first walk into many Silicon Valley com-panies you notice several differences between their cultures and that of a “typical” insurance company. Everyone seems to be wearing jeans. There are 372 bikes parked outside the main entrance of the corporate HQ. The work stations are open, with lots of meeting spaces. The cubicles are small, but very creatively decorated. Traditional offices are almost non-existent. And the food! Google is well known for having amaz-ing food in its corporate cafeteria and ample supplies of snacks and cappuccino. After lunching on some of the best gazpacho in my life, I can attest that they do have great food, and many of the other companies also cre-ate an environment where food is something you don’t have to think about. And the food creates informal gatherings which, in turn, increases communication and community and leads to a more enjoyable, productive work environment.
At every company we visited I asked, “How important is the work environment?” In other words, would you be as innovative with clearly defined hierarchy, grey cubicles with high walls, food that you had to pay for? The resounding response was, “No way!”
So I guess a good question for company executives is, “How do you expect your employees to drive inno-
vation if you have an environment that is so vastly different than that of the gold standard for innovation and creative thought?” You may wonder if you have to redesign the corporate HQ to look like IDEO to get to the right answer. In some cases a dramatic change is required, but for most, small incremental steps can help get your group headed in the right direction. One simple step that we have taken at Protective Life is to turn a conference room into a product development “war room.” We have things on the wall that inspire creative thought and the room is stocked with snacks, à la Google. This room is great for collaboration and solving difficult problems.
CultureAfter seeing first hand how Silicon Valley Companies work, it’s not clear to me whether the culture gave birth to the environment, or vice versa. Silicon Valley firms are complex ecosystems. It’s difficult to boil down the culture and key operating principals into a few key points, but I’ll try. To make the task more manageable, I’ll focus on three areas where the Silicon Valley approach is most different from a traditional insurance company.
• Failing Forward;• Small Teams – People skinny, talent rich; and• Autonomy.
FailingForwardFailing forward is simply the getting to a solution by quickly eliminating possible “answers” by rapidly prototyping and testing. To loosely quote IDEO CEO Tim Brown, failing forward is “building to think, rather than thinking to build.” Each iteration gives some insight and brings you closer to a solution. I’ll cover this in more detail in Part 2.
An important cultural dynamic at work here is that these firms have created an environment where it’s safe to fail. In fact, at most firms, failures are celebrated in some form or fashion because the company recognizes that failure is part of progress. At one company I vis-ited, they actually have a party (with champagne!) to celebrate the biggest failure of the year. Can you envi-sion that? Well if not, you should try! Because embrac-
Product Matters! | FEBRUARY 2013 | 5
the group who is not holding up their end of the bar-gain. Think of how many meetings you have been in with 20 people in the room and 20 more on the phone? It’s not even logistically possible for each member to contribute. The model at most companies is to have a large meeting and then the members each go back to their desk to work on their part of the project. The Silicon Valley model is to have the work get done in a team environment and skip the meeting!
AutonomyDaniel Pink, author of the bestselling book, Drive, defines autonomy as the desire to direct one’s own life. Google is famously known for allowing their engineers to spend 20 percent of their time (i.e., one day a week) working on whatever project they chose. Another way we saw Silicon Valley companies give autonomy was through a hack day. This is a day (or days) to work on any project, with anyone in the company. The company who shared the hack day results with us said that the goal was to come up with an idea that would “improve the lives of our customers.” So as you can see, the end goal is very broad. After the hack days were over, a panel of senior level executives judged the ideas generated. The top three received some small monetary compensation, but more importantly, they were given the opportunity to present their ideas to the board of directors.
So what were the results? One of the top ideas was implemented on the company website just two days after the hack session, and drove substantial increases in website traffic, revenue, and positive press. A key takeaway from this example is that there must be a clear line of sight between good ideas, the impact the
ing failure is part of what has led to game-changing innovation.
Before you think these firms are soft and accept medi-ocrity, let me define failure more clearly. For these firms, they are referring to a low fidelity (“lo-fi”) prototype or test that ultimately didn’t work, but led to insight on how to change the product or process. A “celebrate-able” failure would not be, for example, taking one year to roll out a product with a nationwide, heavily (and costly) promoted launch only to find out six months after launch that there’s a huge risk in the product design. “Celebrate-able” failures are small, quick, and always move the organization forward.
After my Design Thinking Boot Camp experience I have several ideas about how to prototype insurance products and services, which I will outline in Part 2 in the next edition.
SmallTeamsThe companies we visited operated from the “two piz-zas” principal: You want a team that is small enough to be fed on two pizzas. If you are not sure what this means (because, if like me, two pizzas fed you and your college roommate), a two-pizza team would have a maximum of eight to 10 members. Ultimately the make-up depends on what kind of problem you are trying to solve, but the general idea is that you want a cross functional team of talented individuals. Here’s an example: We recently faced a fork in the road around implementing a product on system A, B or C. Instead of debating the question over three months and ultimately not having buy-in from key stakeholders, we assembled a two pizza team in our Product Development War Room and made a decision in two days. The ultimate decision was not the obvious one given goals around launch timing, but the small, talented team was able to devise solutions that none of the individuals could have developed on his or her own. Our team consisted of a lawyer, two systems managers, two actuaries, a project manager, and an operations manager.
Here’s the hidden benefit of small teams: accountabil-ity. There is nowhere to hide in a small team. Every member must make a contribution, or it is apparent to
CONTINUED ON PAGE 6
Here’s the hidden benefit of small teams:
accountability. There is nowhere to hide in a small
team. Every member must make a contribution, or it
is apparent to the group who is not holding up their
end of the bargain.
6 | FEBRUARY 2013 | Product Matters!
idea has, and recognition the contributors receive. If you put a suggestion box in the lobby but do noth-ing with the suggestions, people will eventually stop contributing. If you give employees autonomy to come up with creative solutions, then implement their great ideas, and reward them professionally, you can expect game-changing results.
So what does a hack day look like for an insurance company? I think it would look very similar to the one held by the Silicon Valley company. All that is needed is a clearly defined (but it can be broad) goal, and autonomy for employees to spend a few days com-ing up with solutions. The solution doesn’t have to be a nationwide rollout of a major product. It could be something as simple as a prototype.
ConclusionMy experience witnessing the innovative environment and culture of successful Silicon Valley firms was eye-opening. If your company environment and culture is
the same as that of your competitors, don’t expect to get results that are exceptional. Instead, leverage the principals and process of successful Silicon Valley companies to drive innovation and empower your employees. My theory is this will lead to better solu-tions and increased employee engagement.
ResourcesIf you are interested in arranging an innovation immer-sion trip for your team, consider contacting the people at Innovation Lab (www.innovationlab.com). They provide coaching and facilitate discussion and discov-ery of insights, in addition to arranging the logistics.
If you want to think about redesigning spaces, read Make Space by Scott Doorley and Scott Witthoft.
For more information on IDEO and to also see how they work, search on YouTube for “The Deep Dive,” a great video on the company’s shopping cart redesign.
Failing Forward … | FROM PAGE 5
Lance Poole, FSA, MAAA, is VP, Annuity
Product Development for Protective Life Corp. He can be
life pricing teams. Jim is involved in many topics that impact the pricing of individual life products. These topics include setting of base mortality assumptions, mortality improvement assumptions, conversion expe-rience, and reinsurance structures. In addition to the new position on the section council, Jim is currently one of the co-editors for Product Matters!, the Product Development Section newsletter.
JosephKordoviA graduate of Concordia University in Montreal, Quebec, Joe began his career in the life insurance industry in 1992. As assistant vice president, Product Management, Joe is responsible for the continual improvement and development of life and/or living benefit products for Pacific Life Insurance Company. Joe is leading a new area of the company and is building a team and processes to most efficiently and holistically manage the company’s lines of business.
Prior to joining Pacific Life, Joe held increas-ingly senior roles in product development, pric-ing and marketing with Transamerica/Aegon, Sun Life, ING, Swiss Re and TD Canada Trust.
Joe has presented at the Canadian Institute of Actuaries and Society of Actuaries meetings and the Canadian Reinsurance Conference. Joe has been quoted regularly in various Canadian trade publications, is media trained and is an accomplished speaker.
DaveMoranDave joined MBA Actuaries in 2010, a small consult-ing firm in Winston-Salem, N.C. In 2011, the firm was merged with FTI Consulting to begin the growth of its actuarial practice. During his time with these firms, Dave has had the opportunity to work on various projects covering a wide range of topics and issues. Recently, Dave has been working with a life insurance start-up offering simplified products. Prior to moving into consulting, Dave worked at Coventry Health Care both as an actuary and as a member of the Provider Systems Administration team. Through his experience with FTI Consulting, Dave has had the opportunity to look at life insurance products from many differ-ent perspectives, including the viewpoint of a pricing actuary, a valuation actuary, an auditor, and a regulator. This variety of experience has allowed him to con-sider product development from different angles.
I t is the time of year, once again, to say hello to the new members of the Product Development Section Council. Of course, for each “hello,” there shall be
a grateful “goodbye” to the outgoing council members. On behalf of the section council and members, let me extend gratitude to outgoing section members Mitch Katcher, Donna Megregian and Lisa Renetzky. We also would like to thank Stephanie Grass for her year of ser-vice on the council.
Returning to the council are Stephen Peeples, Kurt Guske, Rhonda Elming, Tim Rozar, and new chairper-son Paula Hodges. This past fall, section members cast ballots to elect the following three new section council members: Vera Ljucovic, Jim Filmore, and Joseph Kordovi. Dave Moran was appointed by the council to a one-year term. I am pleased to introduce and welcome the new members to the council.
VeraLjucovicVera is currently employed with one of the largest Managing General Agencies in Canada in a product development role. This national MGA markets insur-ance solutions with actuarial, tax and specialized expertise in all aspects of life insurance, and specifi-cally in its design and custom application. They serve the Canadian market with a broad spectrum of products and a particular focus on the high net worth clientele whose complex estate and tax planning needs require sophisticated life insurance strategies. Prior to this, Vera’s career was focused on the U.S. life reinsurance business in a wide span of rules including pricing, prod-uct development, research, valuation and marketing. Her current role focuses entirely on the Canadian mar-ket and will offer a unique perspective to the Council’s considerable expertise on the U.S. business.
JimFilmoreJim started his actuarial career in 1992. The first 10 years of his career were with direct writing companies and a consulting firm where his experience consisted of pricing and valuation of life (Term/UL/VUL/COLI/BOLI) and annuity (SPIA/Structured Settlements/Fixed Deferred/Variable Deferred/GIC) products. For the past 10 years, Jim has worked for Munich Re. The first seven years of his time with Munich Re were focused on individual life marketing. For the past three years, Jim has been responsible for Munich Re’s individual
Paul Fedchak, FSA, MAAA, is a consult-ing actuary with Milliman, Inc. He can be contacted at [email protected].
Product Development Section 2013 Council Election By Paul Fedchak
8 | FEBRUARY 2013 | Product Matters!
The Interstate Compact: Speeding Up Speed-To-Market By PF Calfas
S peed to market. Consistency of product features across regions. Improving both are common goals of insurance distributors. One method
many companies are using to achieve such improve-ments allows them to receive form approval from their choice of more than 40 states by submitting the form to just one set of offi cial reviews. The method: submit the form for review through the Interstate Insurance Prod-uct Regulation Commission (IIPRC; insurancecompact.org). The IIPRC is the product standard-setting arm of the Interstate Insurance Compact. As the two are so closely related, for purposes of this article the Compact will be used to refer to both the Interstate Insurance Compact and the IIPRC.
StructureThe Compact is an agreement between member states to develop and use a single set of uniform standards as the guidelines to be followed for forms to be approved, in-cluding any actuarial-type requirements. A member state may, upon joining the Compact and as a new uniform standard is introduced, choose to opt out of any uniform standard. This allows for a member state to support uniformity of product standards while simultaneously supporting any unique needs of its population. Aside from LTC-related uniform standards, there has been little opt-out activity among member states.
Member states do not require that form filing and approval go through the Compact filing process. However, any form not filed through the Compact is subject to the unique form filing requirements of the state in which it is filed.
Member StatesAs of November 2012, there are 41 member states. The three largest non-member states, California, Florida and New York all have introduced legislation to join the Compact or are in a pending status. It is not certain that those states will join, but there is at least some interest in Compact membership within the law-making bodies of those states.
Uniform StandardsThe Compact has developed a large number of uniform standards that describe the requirements to be met for each type of form it may review. Additional uniform standards are in development. The uniform standards that have already been adopted are available on the Compact’s website and are a valuable tool for those who develop forms to be filed.
At this time, adopted uniform standards cover only forms for the individual market. Some uniform standards for group markets are in development.
Product types covered by adopted uniform standards include life, annuity, disability and long-term care. The form types covered by uniform standards include policy forms, applications and rider forms, as well as forms unique to certain product features.
Utilizing The CompactForms are filed with the Compact via the System for Electronic Rate and Form Filing (SERFF). When a filing is created, the filing company selects the member states for which the filing will be effective. The filing company may later add to the filing any additional member states, including any states that may have joined after the form was filed.
Beyond a short learning curve the time and effort required to submit a form for approval through the Compact is comparable to that of a typical state filing submission. Also, recent experience has shown that review/response/approval time for form filings through the Compact have tended to be on par with a typical state filing of the same form type.
A recent development of the Compact that is likely to improve turnaround time is the best practices checklist.
Product Matters! | FEBRUARY 2013 | 9
PW Calfas, ASA, MAAA, is an associ-ate actuary with Federal Life Insurance Company. He can be contacted at [email protected].
This new resource is intended to be used as a tool to avoid common errors seen in Compact filings. It was published mid-2012 and is available on the insurance company resources section of the Compact’s webpage.
CostsThe fees for insurance companies to utilize the Compact can be split into two categories: annual registration fees and filing fees. A summary of the current fee structure is in the table below.
FIGURE 1
Fee Type Fee ($)
Annual Registration 5,0001
Filing Fees
Life/Annuity Form 5002
LTC/DI Form 1,000
LTC Rate Revision 500
Amendment to Filing 250
1 –Fifty percent reductions available for both regional filers (12 or fewer states) and registration July 1 and later.
2 –Fifty percent reduction available for regional filers.
Many, but not all, member states collect form filing fees when selected on a form filing through the Compact. A comprehensive chart detailing those fees can be found on the Insurance Company Resources section of the Compact’s webpage.
BenefitsImproved speed to market—as a result of a single filing taking the place of 40+ state filings—is one significant benefit to a company submitting a filing through the Compact. Additionally, enough state approvals to con-sider a product launch can all be received at one time, reducing the uncertainty of a targeted launch date.
Better consistency across markets is another significant benefit to a company submitting a filing through the Compact. Since the Compact allows for one form to be used in each of the 40+ member states, potentially dozens of state-alternate versions of one form can be eliminated. Marketing and administering one version of a product across the 40+ member states can greatly reduce many of
the challenges faced by insurers, both in the home office and in the field.
DiscussionThe following are a few excerpts from a discussion about the Compact. Participants in the discussion are insurance professionals experienced in form filing and compliance functions and include:
• Zyvonne Adams, AIRC, ACSdirector, Legal and Compliance, The Baltimore Life Insurance [email protected];
• Susanne M. Lewis, AIRC, AAPAsenior contract forms specialist, [email protected];
• Mark Nafzigerdirector, Life and Annuity Product Implementation and Compliance, Horace Mann Life Insurance Company [email protected];
Whatdoyouseeas theexpected/potentialbenefitsofparticipationintheCompact?Susan K. Vinson - We’ve been a member since the Compact began. We have filed two life products (whole life and UL) as well as submitted an application mix-and-match filing.
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initial response and less for resubmission responses. The staff is open to phone calls prior to the actual fil-ing to help ensure that we file correctly and include everything needed. I can’t think of anything that didn’t work well.
Whataresomeofthechallengesyou’veencounteredwhenfilingwiththeCompact?Zyvonne Adams - I think I have mentioned that the mix-and-match pro-cess can be somewhat cumbersome.
Have you encountered any specific processes thathadasteeplearningcurve?Zyvonne Adams -Not really.
WhathavebeenyourexperienceswiththeCompactStandards?Susan K. Vinson - We have had very good experiences with the Compact thus far.Zyvonne Adams - Our experience has been good.
Aretheyeasytouse?Susan K. Vinson - We found them easy to follow and understand.Zyvonne Adams - Yes.
Atwhat stage in theproductdevelopmentprocessdoyoureviewthem?Susan K. Vinson - We review them at the beginning of the product devel-opment process to determine if we might benefit from filing through the Compact.Zyvonne Adams - Usually, during the early stages of the process in order to determine if a compact filing will be a benefit to the project.
Are the Standards helpful reference documentswhen responding to objections from a filingreviewer?Susan K. Vinson - Yes, we find that they are.Zyvonne Adams - Yes, they can be.
In all of our filings we received approval within 60 days of the initial submission. (With the application filing we received an overnight approval.) Because we typically file in all states it has been much easier for us to file once with the Compact and receive the approval to then market the approved forms in 40+ states. This results in less filing prep for the contract development team and also fewer state versions to address in our enrollment and mainframe systems; not to mention less variations in our advertising and training materials prepared not only for the field but also for the home office staff.
The speed to market has been well worth the price we pay to be a member. We have called our reviewer and found all staff members receptive to phone calls; in addition they truly seem interested in helping us to get our filings correct. They were even open to discussing the mix-and-match filing before we ever filed. We were a little hesitant to file and called to discuss with our usual reviewer. He told us exactly what he needed to see and as a result we received approval the next day.
Mark Nafziger - We haven’t used the Compact yet, but started paying for the service this year. Our justification for the pur-chase was:• Compact is committed to quickly addressing filings
(60 days) versus more than a year in some states;• We hope to deal with fewer examiners (more effi-
cient use of time);• Less state alternate contract language and applica-
tions; and• Hopefully filing requirements are better document-
ed by the Compact than by the individual states.
What types of forms have you filed through theCompact?Howwouldyou rateyouroverall expe-rience with the filings process?What turnaroundtimes forobjectionsorapprovalshaveyouexperi-enced?Arethereanypartsoftheprocessthathaveworked particularly well? How about parts thatdidn’tworksowell?
Susan K. Vinson - We have filed UL, whole life and an applications mix-and-match. Our experiences have been outstand-ing. Turnaround times were approximately 30 days on
The Interstate Compact … | FROM PAGE 9
Product Matters! | FEBRUARY 2013 | 11
state may otherwise expect to see in a form and that might otherwise have been required as a condition of policy form approval—the Compact does not necessar-ily supersede other requirements related to the way a company does business related to those forms.
So for example, pricing requirements can still apply, administrative requirements, advertising requirements, required notices, and the like could still be applicable.
Again, as a not-yet-user of the Compact, we have not had an opportunity to catalog these distinctions. However, there certainly would seem to be the possi-bility for such continued applicability of state-specific requirements.
Chris Rzany - Agreed. The distinction between policy form require-ments and other requirements related to doing business is a useful one here. The latter category of requirements generally apply, regardless of the fact that a form may have been approved through the Compact.
ConclusionThe Compact can be a valuable tool—one which stands to become more valuable as additional uniform standards are developed and as more states join the Compact—for insurance companies that operate in multiple states. Every such company should become familiar with the Compact to see if it can be of value for its unique situation.
WhilestateapprovalofformsthroughtheCompactreviewprocesscangenerallybeconsideredapprov-alsforuseinthememberstates,therestillmaybeadditional state-specific regulations that must becomplied with or thatmay cause a given producttonotpassallofastate’srequirements. [TwothatmaycometomindareNewJersey’sRuleN.J.A.C.11:4-59 (Annuity Disclosure) and Washington’sWAC284-23-550 (relationship of deathbenefits topremiums)] Do you have a process to determinewhichstateregulationsaresupercededbyCompactapproval and which are not?Are there any suchregulations you would suggest others consider toensure proper compliance when using Compact-approvedforms?
Susan K. Vinson - Our understanding is that Compact approved forms do not always have to comply with state specif-ic requirements. A state’s agreement to participate in the Compact waives SOME of the state require-ments, especially if they are addressed in the Compact forms/rates.
Peretz Perl - While we are not yet active users of the Compact, I may be able to shed some light on what is being asked rela-tive to the responses that have been provided thus far.
The two examples you provided (dealing with annuity disclosure and pricing) are not policy form require-ments per se. They are requirements dealing with the manner in which a particular product needs to be sold (e.g., disclosure), administered (e.g., lapse notices), or priced (e.g., WAC 284-23-550).
As the two respondents below have stated, approval by the Compact clearly supersedes any form-specific requirements—e.g., certain required provisions that a
Highlights of the October 2012 SOA Annual MeetingBy Jim Filmore with various contributors
T his article contains a summary of some of the presentations given at the October 2012 SOA Annual Meeting. This article does not cover
all sessions that are related to product development, but shares observations that have been made by vari-ous members of the SOA Product Development Section Council. We encourage everyone to join our LinkedIn group where you can participate in discussions on these or any other topics that are relevant to our business.
Session 41 – Experience Studies (by Tim Rozar)• Moderator: Kevin Pledge (Insight Decision Solutions)• Presenters: Derek Kueker (RGA) and Steven Ekblad
(Swiss Re)At this session, two expert practitioners in experience analysis provided an overview of the experience study process as well as some of the more nuanced aspects and best practices of effective experience analysis. Derek’s presentation included a very useful demonstration of the difficulties in aligning lapses and exposure on calendar year lapse studies and highlighted the importance of care-fully considering the impact of claim rescissions, intra-year mortality rate calculations, substandard factors, joint mortality rates, conversions and riders in mortality studies. Steven provided additional background on the alignment of the experience and exposure periods includ-ing a discussion of IBNR and claim lags. He discussed the dangers of misinterpreting mortality improvement, uni-variate experience splits and large claims volatility when analyzing experience results. He also provided insights into statistical methods for blending partially credible data with a baseline expectation.
Session 53 – Assumption Setting Best Practices (by Tim Rozar)• Moderator: Jason Kehrberg (Polystems)• Presenters: Kim Steiner (Towers Watson) and Lisa
Hollenbeck Renetzky (RGA)This session covered a variety of topics in the important field of assumption setting. Kim’s presentation covered the assumption setting process with a valuable step-by-step framework. She provided an in-depth look at the organizational structures and governance processes being deployed at best-in-class companies including
requirements around assumption ownership, documen-tation, review and approval, access rights and internal communication. Lisa provided guiding principles to con-sider and demonstrated the challenges associated with assumption setting through a practical re-pricing case study. She discussed the need for consistency in approach when developing lapse and mortality assumptions and important considerations in interpreting, analyzing and applying experience study results.
Session 54 – UL Deep Dive Part II – Accumulation Market (by Stephen Peeples)• Moderator: Stephen Peeples (Genworth Financial)• Presenters: David Beasley (Oliver Wyman) and Tim
Pfeifer (Pfeifer Advisory LLC)At this session, two experts in the UL market provided an overview of the accumulation market. David focused his remarks on the current state of the accumulation market. In particular, David discussed the emergence and importance of Indexed Universal Life (IUL) products. He highlighted the latest in IUL: Increased Competition, Lower Index Caps, Indexed Loan Rates, Guaranteed Living Withdrawal Benefit, and Survivorship Designs. Tim’s presentation looked at the future of the accumula-tion market. He began with a discussion of the factors that will drive the future. Tim concluded by stepping through each product type and highlighting his expectations for that product in the future.
Session 88: Life Product Development Trends and Issues (by Donna Megregian)• Moderator: Donna Megregian (Milliman)• Presenters: Craig Hanford (Swiss Re), Dean Kerr
(Oliver Wyman), Donna Megregian (Milliman)Participants of this session included Craig Hanford, Dean Kerr and Donna Megregian. This session focused on a few key items impacting product development. Starting the discussion was a look at the current sales for the United States and a brief report in a survey conducted on term insurance providers. Of course the hottest topic for both the United States and Canada is the low interest rate environment. Most countries continue to struggle for profits with the current environment, as new money
12 | FEBRUARY 2013 | Product Matters!
Jim Filmore, FSA, MAAA, is a vice
president at Munich Re responsible for their individual life pricing teams. He
can be contacted at JFilmore@MunichRe.
com.
face amount of 2011 individual life business issued in the United States was only six times larger than that in Canada. The variance in those two statistics is due to the average face amount being 37 percent larger than the av-erage face policy sold in the United States.
Next, the presenters outlined the differences between the regulatory environment in Canada and the United States. The key take-away from my perspective is that the statu-tory reserves in the United States are prescribed and are meant to be conservative whereas the statutory reserves in Canada are best estimate with a provision for adverse deviation. Essentially, Canada valuation law already allows their actuaries to take a principle-based approach.
When asked about recent product trends in the United States, Michael Taht indicated that he sees the following:
1. Regulatory upheaval especially with respect to the impact of Actuarial Guideline 38 on the Universal Life No Lapse Guarantee products.
2. Underserved middle market and trend towards automated underwriting.
3. Increase in equity indexed products (life and annuities).
When comparing product statistics between the United States and Canada, it was noted that premiums per 1000 were higher in the United States. However, that pre-mium difference per 1000 is likely driven by an older issue age in the United States.
2012 credited rates on universal life products are much higher in the United States as compared to Canada. The higher credited interest rates in the United States were noted to be the result of the U.S. non-forfeiture regula-tions. It was also noted that there will be a new lower non-forfeiture rate in the United States for 2013 issued policies. However, that would only provide modest relief from the current low interest rate environment.
Rebecca and Michael noted a number of similari-ties and differences between the U.S. and Canadian markets. In particular, the following points were noted:
rates are dipping below the guarantees on many inforce products and are looking unattractive for new business sales. Both Craig and Dean discussed implications of the current environment from new valuations rates to re-pricing of products.
In the United States, new AG 38 standards will take root starting Jan. 1, 2013, impacting new products and cur-rent financing solutions. Canada has a level COI product that is raising concerns about profitability, especially in this current environment and many have removed their Term-to-100 product offerings. This session had a good mix of information facing both the United States and Canada with some compelling concerns facing the prod-uct development world today.
Session 102 – Inforce Product Management (by Stephen Peeples)• Moderator: Stephen Peeples (Genworth Financial)• Presenters: David Wiensier (Oliver Wyman) and
Mitch Katcher (Deloitte)This session took a look at topics regarding inforce prod-uct management. David’s presentation covered the active inforce management with a focus on low interest rates and COI redetermination. He used indexed products as an example of the changes in guaranteed values for new products. Mitch talked about Predictive Analysis in the context of inforce business. He discussed ways that exter-nal data and reason codes can provide deeper insights and more understanding into customer segmentation which leads to a better understanding of future policyholder behavior.
Session 116: Canada and the United States: Learning from Each Other (by Jim Filmore)• Moderator: Lisa Hollenbeck Renetzky (RGA)• Presenters: Rebecca Rycroft (Oliver Wyman) and
Michael Taht (Munich Re)Rebecca and Michael started the presentation by com-paring the size of the individual life market in the two countries. The premium and policy count was nine times larger in the United States than it was in Canada. That part was probably not surprising to most members of the audience. Somewhat surprising to me was that the
Product Matters! | FEBRUARY 2013 | 13
CONTINUED ON PAGE 14
14 | FEBRUARY 2013 | Product Matters!
which may in part be driven by their closer rela-tionship to their regulatory body (OSFI). A similar relationship in the United States could be challeng-ing given regulation of insurance at the state level.
• The impact of assumption changes (such as inter-est rates) hits immediately in Canada. That means more financial volatility. The U.S. valuation typi-cally doesn’t reflect interest rate changes so quickly which result in more earnings stability. However, that also means there could be less of an early warn-ing system in the United States when it comes to financial results.
The bottom line is that there are many lessons that can be learned in one country and applied to the other. However, one has to be careful to consider the nuances of the marketplace to which it is being applied to ensure that an appropriate conclusion is reached.
• The Canadian insurance and reinsurance market-places are more consolidated than in the United States.
• Canadian insured population is more homogenous than the United States (perhaps due to a smaller number of writing companies which have similar underwriting practices).
• There are fewer preferred underwriting classes in Canada.
• The Canadian marketplace originally priced their term-to-100 products with ultimate lapse rates in the mid single digits. Today, that product is typically priced with an ultimate lapse rate of less than one percent. A similar trend was observed over the last few years with respect to the pricing of Long Term Care policies in the United States. Thus, we may want to take those lessons into consideration when setting the ultimate lapse rate on lapse supported products in the future.
• Canadian actuaries have the ability to exercise more judgment in setting statutory reserve assumptions
Highlights of the October 2012 … | FROM PAGE 13
Greg Becker is aproduct development
actuary at theReinsurance Group of America, in a role that
covers Europe, the Middle East and Africa.
He can be contacted at: gbecker@rgare.
com.
16 | FEBRUARY 2013 | Product Matters!
Around The World: Korea Insurance as Seen on TV? By Greg Becker
to 90-minute infomercials. It appeared to me as though all the standard infomercial gimmicks are being used. There are contemporary references to Facebook and Twitter, and viewers are constantly encouraged to pick up the phone to call the telesales departments.
This sales approach is popular and not just a Korean phenomenon, having already spread in the region to China and Taiwan. This success story has not been without hiccups. Statistics from the Korea Life Insurance Association (KLIA) show that more than 10 companies were still selling products using home-shopping channels in 2010, but that 2010 sales were far lower than 2006 sales, partly due to the reduction in the number of distributors.5 Some new entrants have been able to buck the trend, and the top four companies all maintained first year premium sales of more than $1.5 million in 2010.5
Speaking personally, I have never dared to own a tele-vision, never trusting my self-discipline and the risk of being sucked in. But I have not isolated myself from the real world, and I have an enviable DVD collection and regularly dip into freely available content on the web. Maybe many others in the United States are like me, and research suggests that more and more people are actively controlling their TV intake. Nielsen reported in 2011 that for the first time in 20 years the number of “TV households” (those with at least one television set and a cable, satellite, or antenna connection) had dropped in the United States, despite a rise in the num-ber of total households in the country.6 It is probably fair to say that people viewing television proactively are less likely to download ‘home shopping channel’ programming. Does this mean that home shopping will be less influential in the future in the United States? Probably yes, but this Korean example reminds us of the importance of customer segmentation.
South Korea has 17 million broadband connections7 and was rated first on the International Telecommunications Union Development Index in 2010 and 2011.8 Despite one of the highest penetration rates of high speed broadband internet access in the world, Koreans are showing that the traditional TV distribution chan-nel is robust, and that certain segments may still find it appealing. The future for Korea could see other distribution channel proliferation, but trusted proven
T his is the third article in our series on product trends around the world. Each issue focuses on the protection market of a different country
or region, regarding interesting product developments, new distribution ideas, regulatory responses and indus-try initiatives.
Plenty of attention has been placed on exciting new technologies and the potential for mobile distribution and Internet sales. Television, using infomercials and home shopping channels, has been a popular distribu-tion model in Korea. Just what are the prospects for traditional TV-based distribution in this era of rapidly changing technology?
According to Nielsen research, the average American watches nearly five hours of video each day, 98 percent of which is viewed on a traditional TV set.1 Advertisers see this attention as an opportunity, and advertisements, infomercials and home shopping channels try to sell us everything.
In Korea, insurance sales using infomercials, known as “homesurance,” started in late 2003 with a cancer product sold by PCA Life. By mid-2004, many insur-ance companies had entered and were using TV for brand building, brand awareness and financial educa-tion. Fourteen companies were using the homesurance distribution channel to sell various types of insurance. The uptake was brisk with178,000 policies sold in the quarter of 2004 2, and 767,000 policies being sold using TV-based distribution between April 2004 and February 2005.3
The products are often aimed at the needs of women and their dependents with sales of term life, accident, and products covering health and critical illness proving to be popular. Targeted clients are often married home-makers in their 40s living in smaller cities. Policies often offer good value with premiums 10 percent below products offered by alternate distribu-tion channels. There is even a Korean Life Annuity available on CJ Mall4, a channel on the CJ Home Shopping Network.
While I cannot claim in my experience in Korea to have understood the majority of what was being said, I have seen examples ranging from 90-second advertisements
Product Matters! | FEBRUARY 2013 | 17
END NOTES
1 “The Cross Platform Report – Q4 011” avail-able from http://www.nielsen.com/us/en/insights/reports-downloads/2012/the-cross-platform-report-q4-2011.html
2 Korea Insurance Research Institute and “Profile of the South Korean Insurance Market” by Mason, Moya K. 2008, available from http://www.moyak.com/papers/south-korea-insurance-market.pdf
channels will continue sales to the late adopters. Early adopters get the headlines, and they often are the mass market of tomorrow, but not always. Will internet-enabled TV be a lifeline to infomercials in Korea? We’ll have to “tune” in to find out.
Product Matters! | FEBRUARY 2013 | 19
Antifragile Product DesignBy Wendy Yu
If gain/loss is a nonlinear function, the average is mean-ingless. In The Black Swan, Nassim Taleb gives the following advice: “Don’t cross a river if it is four feet deep on average.”3 The gain associated with the one foot deep section (i.e., quick and easy crossing) cannot offset the loss (i.e., drowning) associated with the seven feet deep section.
In his January 2012 Econ Talk, Taleb uses fragility to describe nonlinear exposure to tail events.4 For the fragile, shocks bring higher harm as their intensity increases (see figure 1) and decisions cannot be made based on averages. For the very fragile, decisions can-not be made based on the 98th percentile result because the 99th percentile result is much worse. For the robust, where exposure to tail events is linear, decisions can be made based on averages, given sufficient patience and capital. For the antifragile, shocks bring more benefits as their intensity increases.
Figure 1: Defining Antifragility
Why Long Duration Recurring Premium Products Are FragileLong duration recurring premium products are fragile because of the cycle of de-risking and re-risking.
In higher interest rate environment, guaranteed prod-ucts are priced attractively and tend to dominate the product mix. In lower interest rate environment, adjust-
F inancial institutions perform the pivotal role of bringing together people who want to invest and people who need funding. Prior to the fi nancial
crisis, some banks brought together providers of short term funding and those who needed long term funding. The resulting bank failures led to new regulatory re-quirements.1 These requirements essentially discourage short term investors from making long-term funding commitments. Hence, long-term investors should ben-efi t from more investment opportunities.
What can the life insurance industry do to benefit from these opportunities? Can today’s life and savings prod-ucts provide funding in a way that would enable the industry to make the most of these opportunities? Or do they prevent the industry from capitalizing on the new regulatory requirements?
The first part of this article illustrates why long dura-tion recurring premium products are particularly risky using the concept of fragility. To price recurring premium products2, we make assumptions about how future premiums would be invested and how much investment income would be generated. Even if these assumptions are correct on average, profits are likely to be lower than expected due to the cycle of de-risking and re-risking.
The second part explores some ideas for antifragile products, which would enable the industry to benefit from the new banking requirements.
How Fragility Complicates Decision MakingAs actuaries, we know that no assumption is perfect and that the purpose of setting assumptions is to be good enough on average. This year, mortality may be 1 percent higher than expected, resulting in X million in losses. Next year, mortality may be 2 percent lower than expected, resulting in 2X million in gains. If 1 per-cent deviation always translates into X million impact (i.e., a linear function), gains and losses will offset over time so that the mortality assumption is good enough on average.
CONTINUED ON PAGE 20
Wendy Yu develops investment strategies for insurance busi-nesses. She can be contacted at [email protected].
For the artifragile, shock bring more benefits as their intensity increases
AntifragileRobustFragileVery Fragile
Benefit
Harm
For the fragile, shocks bring higher harm as their intensity increases
Event Size
great effort is lost and the ability to pursue new oppor-tunities is constrained.
Yes, it is possible to address interest rate exposure using derivatives, but hedging creates counterparty or liquidity risk. When hedging reinvestment risk associ-ated with single premium long duration products, the risk may be manageable. For example, we can increase the liquidity of the asset holdings to neutralize the liquidity requirements created by the derivatives. For long duration recurring premium products, reserves build up over time so the asset portfolio may not be big enough to absorb the risk. Of course, counterparty and liquidity exposures are also nonlinear6, so hedging merely transforms one kind of fragility to another.
If long duration recurring premium products are fragile, what product would be antifragile?
Antifragile Competitive AdvantageSome consider the ability to offer long duration interest rate guarantees one of the key competitive advantages of life insurers relative to other financial institutions. I think the ability to sell illiquid products (i.e. products with low cash value) and generate stable funding is a more compelling competitive advantage. Liquidity is likely to become a critical driver of investment return. Investment return is critical to the profitabil-ity of inforce business and the competitiveness of new products.
This is not to suggest that selling illiquid products is easy but that, by adding features such as acceleration of payments on disability, life insurers have the capability to create illiquid products that meet individual liquid-ity needs. As liquidity premium becomes a much more important component of any long-term investment strategy, illiquid products would garner more interest.
In simplistic terms, yield is the sum of duration pre-mium, credit premium and liquidity premium. Duration premium is the yield pickup from investing in assets with longer maturity. Credit premium is the yield pickup from investing in assets with credit exposures. Liquidity premium is the yield pickup from investing in illiquid assets.
able products are more marketable since they enable policyholders to benefit from rising interest rates. Hence, lower investment income as rates decline is not offset by higher investment income as rates rise (see figure 2). A larger event size (i.e., more dramatic inter-est rate cycles) would amplify the swing in the product portfolio and exacerbate this nonlinearity.
Figure 2: Interest Rates & Product Mix
Certain aspects of today’s environment are unique, but the cycle of de-risking and re-risking is a familiar one, as illustrated by this quote from an Oliver Wyman paper5 written almost 10 years ago:
“The late 1990s boom and the following correction were felt most by European life insurers, who benefited from—and then suffered from—their leveraged equity positions and the impact of declining interest rates on guarantee liabilities.”
“Unsurprisingly, the management agenda in Europe (as well as in developed Asian markets, who have suffered from declining interest rates that have exposed high guarantees) has for the last four years been overwhelm-ingly defensive: retrenching back into core markets, de-risking, re-capitalizing and cost-cutting.”
If re-risking and de-risking lead to re-capitalizing and retrenching, then the nonlinearity is even greater. Debt or equity may be issued under unfavorable conditions. Market share gained over time through
20 | FEBRUARY 2013 | Product Matters!
Antifragile Product Design | FROM PAGE 19
1. More guaranteed business written in higher interest environment
Interest Rate
Time
3. More adjustable business written in lower interest rate environment
2. Lower than expected investment income on guaranteed business
4. Higher investment income results in higher credited rate on adjustable investment
...the ability to sell illiquid products (i.e., products
with low cash value) and generate stable funding is a
more compelling competitive advantage.
According to Philip Turner, Global Head of Strategic Product Development & Marketing at RBS:7
“Pre-crisis, liquidity was abundant and the liquid-ity premium negligible compared to credit premiums (returns linked to asset prices) and duration premiums (returns linked to interest rates). There was, therefore, no particular need for insurers and pension firms to consider liquidity as an investment factor.”
“In the teeth of the crisis the premium for a risk-free asset moved up to 200bps, while in 2010 those spreads were around 120bps. They are moving higher as the spectre of Basel III approaches.”
The ability to sell illiquid products and generate stable funding is an antifragile competitive advantage since it would enable the industry to benefit from higher liquid-ity premium in stressed market conditions.
Obviously, product design is heavily influenced by regulation, so it was encouraging to see the launch of the OECD Long Term Investment Project in February 2012. The objective is to identify and promote policy options to support “patient capital,” which “allows investors to access illiquidity premia, lowers turnover, encourage less pro-cyclical investment strategies and therefore higher net investment rate of returns and greater financial stability.”
Antifragile Value PropositionAntifragile being a desirable characteristic, is it possible for life insurers to create an antifragile value proposition without taking on nonlinear exposure to tail events? In The Black Swan, Taleb recommends a “barbell” strategy in which investors put 85 percent to 90 percent of their portfolios in extremely safe instru-
Product Matters! | FEBRUARY 2013 | 21
CONTINUED ON PAGE 22
ments and the remaining 10 percent to 15 percent in highly speculative bets. This is an antifragile invest-ment strategy for the customer since the downside exposure (10 percent to 15 percent of the portfolio) is much smaller than the upside potential created by the highly speculative bets. Please note that the insurer is not taking on nonlinear exposure to tail events; the downside protection comes from the extremely safe instruments, not a guarantee from the insurer.
In many parts of Asia, perhaps because the 85 percent to 90 percent floor gives comfort to more risk adverse investors, this barbell strategy is quite popular. If an asset management firm is known for its ability to pick highly speculative bets, it could also gather the safety-seeking assets by offering combination products where deposits are allocated between a speculative fund and a safe fund. I think life insurers are also uniquely positioned to offer these kinds of products because some highly speculative bets require patient capi-tal, which can only be provided by institutions with stable funding.
Is Antifragile Possible?Both ideas above would require a single premium product structure. Liquidity premium is volatile and ability to source good speculative bets varies over time, so guaranteeing either would be imprudent. Is it possible to sell a product if pricing and availability change frequently?
ClientDemandsA common view is that clients demand long term guar-antees on future premium deposits. If priced to reflect the potentially huge costs associated with tail expo-sures, guarantee charge would have a massive impact on expected return so that these products would only be attractive to a small market segment.
DistributionNeedsAnother common view is that advisors need a stable
Duration premium (D) = 10 year euro swap rate
Credit premium (C) = iBoxx euro corp bonds
Liquidity premium (L) = iBoxx euro covered bonds
22 | FEBRUARY 2013 | Product Matters!
Call to ActionBecause life insurers operate in an environment where regulatory requirements and client needs are so complex, we cannot know what works until we try. And try again. Here is a call to action. Let us experiment and make our products more robust and perhaps even antifragile.
product portfolio so that they can provide their finan-cial planning expertise without unnecessary complexi-ties. The reality is that product portfolios have never been stable.
To quote Albert Gibbons and Stephan Leimberg in their 2010 Estate Planning article:8
“We experienced an earthshaking change in the early 1980s from whole life to universal life with its conse-quent shift of risk to the policy owner. In the 1990s, there was a further move to equity-based variable uni-versal life. Post-2000 saw no lapse guarantee products take center stage.”
“Planners can expect a continuing-to-change land-scape. The questions are: ‘Is the direction outlined above short-term or long-term?’ ‘How do professionals navigate these waters on behalf of their clients?’”
To successfully launch an antifragile product, the life insurer would need to work with the advisor to manage client expectations.
Antifragile Product Design | FROM PAGE 21
END NOTES
1 The Liquidity Coverage Ratio and the Net Stable Funding Ratio standard.
2 In this article, recurring premium products refer to those with investment guarantees. Recurring premium products without investment guarantees should not be very sensitive to investment assump-tions.
3 The Black Swan: The Impact of the Highly Improbable was released in April 2007
4 Antifragile: How to Live in a World We Don’t Understand was released in December 2012
5 Going on the Offensive – the $1600BN Prize origi-nally published in June 2004 by Oliver Wyman
6 For example, an insurer can pay a third party to provide liquidity, but if multiple institutions need liquidity at the same time, the costs may be much higher than expected.
7 Finding yield: a liquidity trade off published in June 2011
8 Are No-Lapse Guarantee Life Insurance Products Disappearing? Forever? - Insurance Trends and Topics, ESTATE PLANNING by Albert E. Gibbons and Stephan R. Leimberg
Product Matters! | FEBRUARY 2013 | 23
The Impact of Life: How Mortality Improvement affects the life insurance industry today.By Jay Biehl
This article was previously published in the December 2012 issue of Best’s Review magazine
C ontributor Jay Biehl is senior vice president of Mortality Pricing and Research with Hannover Life Reassurance Company of America. He
Actuaries view the term “mortality improvement” in a special way. In fact, the term sometimes takes on a life of its own as opposed to understanding exactly how it should be viewed in the setting of the overall mortality assumption.
The life insurance industry has various opinions on the definition of the mortality improvement assump-tion. Life insurers say things like “it’s 1% a year for 30 years” or “it’s 2% a year for 15 years” and fellow professionals are quick to offer an opinion. But how can anyone have an opinion regarding the mortality improvement assumption unless they understand what base assumption it is being applied to, such as the 7580 Table, 2001 VBT or something else?
Unfortunately, too many times the presumption is that the slope in the base table is “appropriately” set for the business in question, so that the question “what is the mortality improvement assumption?” can adequately stand on its own. It is imperative that the slope of the baseline assumption be appropriately vetted before opining on the level or amount of mortal-ity improvement.
While the slope of the underlying mortality assump-tion is a key dynamic for understanding the impact of the mortality improvement assumption, the process for setting the baseline assumption is beyond the scope of this article. For now, let’s assume the basic slope of the mortality assumption is appropriate such that the mor-tality improvement assumption does in fact stand on its own. But, let’s also put forward a thought process that is somewhat different than how mortality improvement assumptions have generally been set.
Two ConsiderationsTwo basic tenets underlie how insurers think about the mortality improvement assumption, and they form the basis for the somewhat different manner in which the mortality improvement assumption is set.
First, mortality improvement does not affect all age/gender/smoking status subgroups in the same
manner. Individuals who recently have been under-written and classified in the best risk class will have the least expected amount of mortality improvement. In other words, to the extent there are breakthroughs in medical technologies or medical protocols, those advances will have very limited effect on individuals who do not suffer from these impairments.
The opposite is true as well. Those further from the underwriting process and/or in less-preferred or substandard risk classes have a greater chance that medical advances will have an impact on their mor-tality and mortality improvement will be greater at this end of the scale. However, some technological advances will have an impact on both super-preferred and substandard risks equally. Advances in automobile design, for example, have an impact on motor vehicle deaths as cars are designed to absorb the impact of a crash and dissipate the energy away from the passen-gers in the car.
Second, the insured population will exhibit mor-tality improvement faster than the population in general. There is a general socioeconomic effect at work—insured lives obtain more tangible benefits than does the population in total because they use these medical and technological advances more effectively. Therefore, there’s a practical limitation in benefits obtained through these advances as we move from standard and substandard insureds to the general population.
With those as the basic tenets, let’s turn to the specifics. It’s important to differentiate between the “best esti-mate” view and what to use as a “pricing assumption.”As a working definition, the best-estimate assump-tion is the 50/50 assumption—the expected “mean” outcome. Due to the limitations in understanding future impacts to the force of mortality, when setting the pricing assumption for mortality improvement it is common to introduce some conservatism to the best-estimate assumption. Two steps are involved: setting the best estimate; and then considering how to trans-form the best estimate into a pricing assumption.
Start with the amount of observed population improve-ment from 1980 to 2007 obtained through the Human
CONTINUED ON PAGE 24
Jay Biehl, FSA, MAAA, is senior vice president of Mortality Pricing and Research with Hannover Life Reassurance Company of America. he can be contacted at [email protected].
24 | FEBRUARY 2013 | Product Matters!
Mortality Database, and adjust for both the impact of smoking cessation through this period and the socio-economic differences between the general population and an insured-lives population. The data produces a curve that looks like the one below. (The chart focuses on the male, non-tobacco risk class. The other risk classes will follow a similar thought process.)
The shape of this curve poses the question of wheth-er mortality improvement is shaped entirely by the attained age or if there has been a benefit of being at the “right age at the right time.” In other words, is there a cohort effect as well as an attained-age effect? One of the best ways to observe this phenomenon is to use a “heat map” of the improvement factors by age and time period:
U.S. Male Data – Human Mortality Database
effect is the driver of the observed improvement and how much is viewed to come as a result of an attained-age effect. (A five-year cohort shift has been imple-mented here.)
Now let’s illustrate a 45-year-old male non-tobacco risk. If we shift the earlier Mortality Improvement graph to the right by five years and examine age 45, the portion of the curve that becomes relevant looks like this:
The blue line is labeled as the ‘ultimate’ mortality improvement, defined as the best estimate assuming the effects of underwriting have worn off. The red line represents the discount applied to the ultimate best estimate due to the implication of the first basic tenet that the expected amount of improvement closest to the time of underwriting is discounted the most, with the impact being graded off over time.
Clearly the distance between these lines is dependent on a few items. First, the amount of underwriting that has occurred (that is, fully underwritten versus simpli-fied issue). Second, the actual discount was driven by how much was perceived to be eliminated by the under-writing process. Third, the curves grade together over the length of the commonly viewed select period—in this case, 25 years. It is important to understand that the red line represents the best-estimate view of mortality improvement for a “fully” underwritten product issued to a 45-year-old male non-tobacco user.
Generally, pricing assumptions are based on the “best estimate” assumptions; then the premium is calcu-lated in a way that reflects the underlying risk in the product and provides an appropriate risk/return margin for the company.
The mortality improvement assumption tends to vary from this mentality for a few reasons. First, it is
Annual Mortality Improvement- MalesSmoothed
The Impact of Life ... | FROM PAGE 23
30 Year Pricing HorizonMale Age 45 NT
This view demonstrates that the improvement is driven by attained age, time period and on a cohort basis (diagonally). As such, a cohort effect was introduced that shifts the pure attained curve to the right; how far depends on one’s perspective of how much the cohort
Product Matters! | FEBRUARY 2013 | 25
extremely difficult to fully articulate the amount of mortality improvement that has been observed in an insured-lives population because there are a number of minor changes in underwriting protocols, risk-class distributions and ceding company contributions (if using industry-available data) that can have a significant impact.
Second, mortality improvement doesn’t occur in a nice smooth pattern from year to year based on the timing of medical developments along with the speed of intro-ducing those advancements into the insured population. As such, while the 30-Year Pricing Horizon curve may well represent the long-term best estimate, shorter peri-ods may exhibit a very different perspective.
Finally, while there is every reason to believe that mortality improvement will continue, given that it has existed for hundreds of years, the reality is that any mortality improvement assumption is a bit of a “bet” relative to the ongoing penetration of known develop-ments and the introduction of new developments. In addition, there are clearly items that have (and will) move the needle backward. The early years of the AIDS epidemic had a material impact on mortality improvement, affecting some segments of the insured-lives population more than others—for example, males versus females.
Currently, there are significant concerns about obesity in the United States. Just because there has been mor-tality improvement historically that should be expected prospectively, to ignore the impact of forces that dete-riorate mortality isn’t a responsible position.
This leads to the need to explicitly introduce conserva-tism into the best estimate in order to reach a pricing assumption.
One of the ways to accomplish this is to increase the level of conservatism by policy duration starting with the best-estimate assumption. We are effectively building a bridge from one basis to the other by considering the best estimate and the overall amount of conservatism desired by the organization.
In the end, insurers should recognize that while mortal-ity has improved for hundreds of years, in reality it has occurred in a manner that is anything but smooth from calendar year to calendar year. One can think of move-
ments in the stock market as an analogy to changes in mortality. Generally, we know which direction each of these will move, but the shorter the period of time, the greater the chance the assumption and the reality will vary and may vary materially.
As such, the improvement assumption is ultimately a short-term bet as to what will happen over what appears to be a fairly long time (the pricing horizon), but in fact is relatively short in terms of the hundreds of years that have shaped our opinion as to how mortality expectations change over time. While we can build a framework around setting the mortality improve-ment assumption, at the end of the day the question is really very simple: How big of a bet are you willing to make?
Key Points TheSituation: Mortality Improvement assumption is not a simple equation.
What Could Happen: Any mortality improvement assumption is a bit of a ‘bet’ relative to the ongoing penetration of known developments and the introduc-tion of new developments, such as the appearance of the AIDS epidemic.
What Needs to Happen: Better understanding of Mortality Improvement assumption, final assumption, and best estimate approach.
30 Year Pricing HorizonMale Age 45 NT
...there are significant concerns about obesity in the
United States. Just because there has been mortality
improvement historically that should be expected
prospectively, to ignore the impact of forces that
deteriorate mortality isn’t a responsible position .
