SCORviewsJANUARY 2017

INSIDE THIS ISSUE

TOP 10 THEMES OF 2016 P2

AUTOMATED UNDERWRITING P4

PBR MODEL GOVERNANCE CHECKLIST P8

SCOR ENTERS MEDICAL REINSURANCE MARKET P12

CEO MESSAGE

Looking Back … with an Eye to the FutureWe begin 2017 with a new and, we believe, more engaging look to this publication. In this issue, we review trends observed in 2016 and key areas that SCOR and our clients are focusing on this year.

Industry surveys consistently place underwriting innovation at the top of initiatives un-derway at life companies, and that’s how we see it, too. Accelerated underwriting heads the Top 10 list of 2016 client trends compiled by Executive Vice President Brock Robbins for this edition of SCORviews. Sticking with this theme, co-authors Mary Bahna-Nolan and Dave Dorans take a closer look at the motivations behind accelerated underwriting and SCOR’s commitment to staying at the forefront of this movement.

Regulatory requirements are another theme that resonated among our clients in 2016. R & D Actuary Mike Failor shares expert insight on the transition to Principle Based Reserving (PBR). Mike led an industry team that created a PBR model governance checklist for the American Academy of Actuaries. Intended to foster awareness of po-tential model governance concerns, the checklist’s questions provide practicing actuaries with food for thought when evaluating their own model governance processes.

We round out this issue with a message about our entry into the excess medical reinsur-ance market. Our medical reinsurance team is a group of highly experienced and energetic healthcare professionals who understand the changes occurring in the market.

Looking back on 2016, I am proud of SCOR’s achievements in the Americas. For the sec-ond consecutive year, SCOR was awarded North American Life Reinsurer of the Year by the readers of Reactions Magazine. Our number one position in recurring life reinsurance volume was affirmed again by the North American Life Reinsurance survey. Our LOMA award for Excellence in Education underscores our drive to deepen our knowledge and understanding of the market and the challenges and opportunities facing of our clients.

As we look towards 2017, SCOR seeks to strengthen our value proposition and collaborate with you as a partner in both risk management and underwriting innovation. We appreciate your choosing SCOR as your reinsurer.

By J.C. BruecknerCEO, SCOR Global Life Americas

jcbrueckner@scor.com

SCORviews | JANUARY 2017 | 2

YEAR IN REVIEW

Top 10 Themes of 2016

Brock Robbins, EVP, Head of US Markets

Over the past year, SCOR staff members, including our senior management team, have met with clients on a number of occasions at client offices, industry conferences or our facilities in Charlotte and Kansas City. We value these times to get first-hand information on your business and the challenges and opportunities you face.

In reflecting on conversations with clients, a number of recurring themes stand out. These themes, to a large extent, reflect what we are focusing on at SCOR in order to best serve the needs of your company so you can meet the needs of your customers.

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TOP 10 THEMES OF 2016

1 Accelerated Underwriting (AU) 6 Principle Based Reserves (PBR)

AU programs are underway at practically all of our client companies. They run the gamut from changing age/amount limits on existing products to developing non-med underwriting programs built around new data tools, algorithms and predictive modeling.

Delay, delay, delay. Companies are not rushing into PBR because there are too many unanswered questions. Most are waiting to let reserving rules emerge. At this point smaller carriers are not interested in using the small company exemptions but plan to set their own mortality assumptions, for which they will likely need support.

2 Reinsurers on Board with AU 7 E-applications

Reinsurers are supporting AU programs by:· assuming new underwriting risks· assisting in the development of AU programs· helping clients evaluate new tools, especially as they impact

mortality risk.

A number of companies are developing e-apps to make the application process easier for producers and to capture more data electronically.

3 Product Development Trends 8 Financial Solutions

Simplified issue products are on the rise, which are well suited to:· new underwriting approaches· new distribution· middle market and millennial buyers.Other activity involves living benefits riders, combo LTC/Life products, index options on whole life products and adjustments to IUL products due to new fiduciary rules.

Financial solutions arrangements feature prominently at a number of companies driven by AG48’s impact on captives and the need for capital efficiencies in low interest rate environment.

4 Term Life Repricing 9 Longevity Risk

Term products are the first ones being repriced based on the 2017 CSO Table. Companies also are repricing term for non-med features, adjusting post level term premiums and repricing conversion rates.

We see continued growing interest in exploring the transfer of longevity risk associated with annuities/structured solutions.

5 Diversifying Distribution 10 Resource Challenges

Multi-line carriers focused on increasing life sales via P-C distribution. AU and SI are key strategies for growth in these channels.

IT, actuarial, underwriting and data specialist resources are being stretched due to coinciding initiatives related to business development, back office initiatives and changes required by new regulations. A number of carriers are developing customer- (vs. policy-) centric administration systems.

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AUTOMATED UNDERWRITING

The Industry Turns a Corner2016 may go down as the year accelerated underwriting went from a big idea to a fully operational business model.

Introduction

It’s widely understood that a faster and easier life underwriting process is needed in order to penetrate the underserved middle and growing millennial markets. Carriers also believe that a better buying experience would produce more sales – and fewer dropped sales – in the upper middle and affluent markets.

Knowing this, companies have been looking for ways to innovate around the underwriting process for at least a decade. Advancements were made in the simplified issue (SI) arena where e-data and software algorithms enable point of sale underwriting and policy issue for face amounts up to $250,000. But the SI underwriting model – assessing individual risk without the use of paramedicals, labs or medical records – had not been viable for larger amounts of coverage.

Three years ago, the first life insurer broke through the barriers in the fully underwritten market. Principal Financial introduced an accelerated underwriting (AU) program for face amounts up to a million dollars, with the same product characteristics and premium

as a fully underwritten product. This was a pivotal moment. It put the market on notice that at least one company was going to do things differently and had figured out an approach.

This past year, a number of other carriers have actively entered this space. No longer just talking and investing, they are rolling out – or are on the verge of rolling out – AU programs to include some portion of their business with larger face amount policies.

The approach to AU that companies are taking varies a great deal – from automating traditional underwriting processes to assessing risk with non-medical e-data and predictive analytics. Using predictive analytics to correlate financial and other non-medical factors with mortality is still very much in the very early stages, but ultimately this approach may be the game changer than the industry needs to stay relevant in a changing consumer marketplace.

Mary Bahna Nolan, EVP, Head of Life R&D

mbahna-nolan@scor.comDave Dorans, SVP, Velogica ddorans@scor.com

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In 2017 we expect to see several programs offering larger amounts of coverage at fully underwritten rates with at least some portion of applicants underwritten without fluids.

As a reinsurer, SCOR has participated in the transformation of the underwriting process on several levels – as an innovative solutions provider (Velogica), as a thought leader and consultant helping clients develop AU programs, and as a risk partner taking on mortality and lapse risks in new and uncharted markets. From each of these vantage points, it is apparent that the industry has turned a corner. The SI and fully underwritten markets are merging.

At the Forefront of Simplified Issue & Beyond

SCOR has been at the forefront of the accelerated underwriting movement for nearly a dozen years. Velogica, our underwriting platform and algorithm uses electronic data in conjunction with ap-plication data to underwrite life insurance applications in real time, usually delivering results in less than one minute. Since its market entry in 2005, Velogica has underwritten in excess of 2.5 million lives for our clients in the U.S. Our current annual run rate across all clients in the U.S. is approaching a million applications.

Upon receipt of application data from the client, we order addition-al data including prescription drug profiles, motor vehicle reports and MIB records. Velogica’s sophisticated algorithm develops a risk profile that considers each data source individually but also incor-porates any positive or negative underwriting ramifications of re-lationships between data sources. This provides a more nuanced and accurate recommendation than simpler rules engines. Velogica generates final underwriting recommendations on about 95% of simplified issue cases. Each underwriting recommendation also in-cludes all of the underlying data for potential underwriter reviews and includes reason codes that explain what data sources factored into the final recommendation.

The Velogica underwriting engine has specialized in providing final recommendations on policies up to $250,000; however it has also proven to be a valuable component in a fully underwritten program. Incorporating Velogica’s risk appraisal capabilities into a traditional underwriting process allows for more automation and point of sale recommendations on higher fact amount business. Applicants who are eligible for approval via the Velogica engine can get coverage at the same premium rates as applications going through full un-derwriting. Those who are not eligible for approval via Velogica are triaged to traditional full underwriting.

The most recent version of Velogica (V4) has the ability to incor-porate new sources of instantly available digital data that are or will soon be available on individual applicants. These include clinical lab results and electronic health records plus non-medical evidence such as criminal history, financial background, underlying credit history components and social media data.

SCOR is heavily invested in understanding and integrating new sources of external data to continue the advancement of accelerat-ed underwriting for higher face amount business. We also are using predictive models to mine years of Velogica-underwritten business for mortality relationships and patterns that may not have a corre-sponding entry in a standard underwriting manual. This generates hypothetical rules that we can test in a “rescore” environment. We regularly match our underwritten population to the Social Security Administration’s Death Master File, allowing us to take advantage of historic underwriting decisions and electronic data to play “what if” with our rules – with actual quantifiable mortality impact.

The Velogica team at SCOR includes more than 30 dedicated pro-fessionals including Velogica-specific underwriters, actuaries and in-house IT professionals. Additionally, there is significant collabo-ration across the Velogica team and the SCOR Global Life Mortal-ity Research and Development Center. These combined resources strengthen SCOR’s ability to apply the latest learnings on mortality, lapsation and emerging underwriting trends to support carriers participating in simplified issue and fully underwritten markets.

Continued

Since its market entry in 2005, Velogica has underwritten in excess of 2.5 million lives for our clients in the U.S.

SCORviews | JANUARY 2017 | 6

Accelerated Underwriting - A Core Focus

The SCOR Global Life Mortality Research and Development team is a global, cross functional staff of underwriters, statisticians, data scientists and actuaries. The team has significant expertise in experience analysis and focuses on a number of areas. An import-ant research focus involves the value of fluids in the underwriting process to determine where and when the information contained via fluid collection impacts an underwriting decision. This insight is especially valuable in working toward an accelerated underwriting paradigm that omits fluids when applicants meet other risk assess-ment criteria. → (See Accelerated Underwriting Opportunities in the September 2016 SCORviews). The team is dedicated to R&D around new data sources – including facial analytics – and the uses of these tools and algorithms with an electronic point of sale un-derwriting platform.

SCOR provides R&D support to companies implementing predictive analytics models and rules engines. For example, we worked with a carrier that decided to remove fluids from their underwriting pro-cess for standard and better risk classes. We performed analysis using our proprietary model to assess the mortality impact and redistribution of risks among the risk classes. Our model showed a higher mortality impact due to distribution shifts and loss of

sentinel effect than their proprietary model. Working together, we assisted in the revision of their assumptions and program parame-ters, which were introduced in early 2016. To date the program has performed as expected.

A Partner in Mortality Risk

When entering new markets and new product lines, or introducing different risk selection processes, companies expose themselves to new risks. As a reinsurer, an important part of our value proposition is helping client understand and manage new risks.

SCOR believes the future of life insurance depends heavily on suc-cessfully transforming the underwriting process. We have been a leader in this space for more than a dozen years and are well posi-tioned to continue playing a role in making the underwriting process faster, easier and less costly – for our clients and their clients, too.

The motivationThe motivation for entering the accelerated underwriting space varies from company to company. Surely, the ability to quickly approve the best risk is a big incentive, giving a company a competitive advantage while creating a more positive buying experience for the customer.

Other motivations are:• Growth in the millennial and middle markets• Cost savings by not gathering medical evidence• Expanded distribution – facilitating more sales and

getting commission checks to producers more quickly• Offsetting the growing shortage of experienced

underwriters• Fear of being left behind

SCOR believes the future of life insurance depends heavily on successfully transforming the underwriting process.

AUTOMATED UNDERWRITING

The Industry Turns a Corner Cont.

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Smoker Amnesia“Smoker amnesia” – or nondisclosure of smoking by applicants – is the biggest mortality risk that compa-nies face when introducing an accelerated underwri-ting program. Through industry reporting, we know that at least five to 15 percent of applicants who say they do not smoke actually test positive for cotinine, the chemical compound found in tobacco. Moreover, if applicants know that an insurer does not test for tobacco, it is likely than an even higher num-ber will experience “smoker amnesia.” Just knowing that an insurer tests for smoking creates a sentinel effect that will be lost when underwriting without fluids.Companies, including SCOR, are researching ways to screen for tobacco use without fluids. Technology around facial analytics is one of the approaches being studied.

Conclusion

What life insurers can accomplish digitally continues to become more far reaching, simpler and faster, so underwriting will increa-singly depend on algorithms and e-data. A number of insurers and reinsurers are on the march laying groundwork to adapt to new technologies and data sources that will change if not replace many existing underwriting systems and processes.

It’s easy to imagine a future where instant information on appli-cants enables underwriting decisions that are as good as, if not better than, ones made using conventional processes. A more com-plicated exercise is plotting the transitions we have to make over the next few years to get there. The path forward is likely to vary for each company as they consider their distribution, product needs and existing systems and processes. While some may develop and own all aspects of these new processes, the size and complexity of the endeavor will lead many carriers to look for one or even multiple partners. Having an alignment of parties will be key – distribution, insurer and (perhaps) a reinsurer with experience and know-how so the new underwriting paradigm can be successfully deployed.Underwriting will increasingly depend

on algorithms and e-data.

SCORviews | JANUARY 2017 | 8

PBR MODEL GOVERNANCE

New Checklist Addresses Broad Modeling Risks

When deciding upon the scope of the checklist, we cast a broad net across the actuarial modeling risk landscape. For example, risks associated with results consolidation and report generation have been addressed. Consequently, this checklist may elucidate areas of risk within an organization that may be overlooked in their existing model governance practices. And while recognizing that there will always be room for improvement, knowing where existing model governance gaps exist is often the necessary first step in risk mi-tigation.

As discussed in the checklist’s preface, it contains questions that are intended to foster awareness of potential model governance concerns. While these questions are not specifically directed towar-ds any actuary or group, they provide practicing actuaries with food for thought when evaluating their model governance processes. Note also that while this checklist may be a beneficial tool, it does not constitute a list of requirements.

The Model Governance Checklist questions are grouped into the following ten categories which I further discuss below. (Note that there is no “Documentation” section, as documentation issues are addressed within each category.)

A Governance Standards

B Modeling Process

C Assumptions Setting

D Input Data/Tables/Mapping

E Access Controls

F System/Model Changes

G Model Selection/Versioning

H Consolidation of Results

I Reporting

J Analysis/Validation

The American Academy of Actuaries recently released their “Model Governance Checklist” (dated August 2016). This checklist is the culmination of work that began one year ago with the formation of the Principle-Based Reserves Checklist Subgroup in which I am honored to chair. Our subgroup was charged with the creation of a model governance checklist in response to the need for good model governance as addressed in PBR regulation. However, while motivated by PBR, this checklist fulfills a more universal need as a resource applicable across most actuarial modeling endeavors. (Note that a working draft of this checklist has been previously shared and discussed at both of the American Academy of Actuaries PBR Boot Camps held earlier in 2016.)

Michael Failor, Actuary mfailor@scor.com

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The above listed categories are each briefly discussed below to better understand the nature of the corresponding model governance issues. Realize, however, that these brief high-level synopses may not fully encapsulate the scope of questions in a given category.

Governance Standards

Questions under this category address an organization’s formal, documented model governance policies. Issues pertaining to orga-nizational structure, including specific roles and responsibilities can be found in this section.

Modeling Process

The modeling process section includes questions pertaining to mo-del management processes and procedures. High-level model ma-nagement “documentation” protocols are also included.

Assumptions Setting

Questions in this section surround the development, management, and documentation of modeling assumptions. Also touched upon in this section is the general use of experience studies and correspon-ding credibility.

Input Data/Tables/Mapping

After modeling assumptions have been determined and approved, they still need to accurately make their way into actuarial projec-tion models. Questions in this section cover the input of asset and liability model assumptions, tables and model settings. This would include: seriatim policy inforce files, rate tables (i.e., premiums, mortality, interest, asset default, etc.), and model point policy map-pings, etc.

Access Controls

The adage that “If it is not locked down, it is not under control.” holds true for the many modeling components that comprise an organization’s modeling infrastructure. Input data, models, mo-deling systems, modeling output repositories and reports should each have their respective access controls evaluated. The half-do-zen questions which constitute this smaller category address these concerns, but only at a high level. However, to expound deeper into these issues would invariably depend upon the specific modeling environments encountered within an organization.

System/Model Changes

Model changes and actuarial system modifications require spe-cial consideration in an organization’s model governance plan. The value of a robust formal system change control process becomes clearer upon the realization that model input validation and output testing alone could miss many system coding and modeling errors. The nature and extent of actuarial system governance within an organization will depend upon the type of actuarial projection sys-tem in use. For example, open code systems may require specific code management processes, whereas closed systems may need to rely more on software version testing. The breadth of questions in this category cover these issues in more specific detail and provide plenty of material in which to consider incorporating into a model governance plan.

Continued

SCORviews | JANUARY 2017 | 10

PBR is designed to maintain strong solvency oversight by regulators while helping ensure that companies will fulfill obligations to policyholders.

2009: The NAIC adoption of the Standard Valuation Law (SVL) introduced a new method for calculating life insurance policy reserves which we now know as principle-based reserving (PBR).

June 10, 2016: NAIC agreed that the threshold to make the Valuation Manual operative was met -- at least 42 states representing at least 75% of total U.S. premium have adopted revisions to the Standard Valuation Law using substantially similar terms and provision. The NAIC adopted a recommendation for states with the revised SVL to activate PBR on January 1, 2017.

The American Academy of Actuaries has recently announced the release of the Model Governance Checklist as a tool for practicing actuaries. But, if you missed this Academy Alert, the Model Governance Checklist can be downloaded directly from the following American Academy of Actuaries website: http://www.actuary.org/files/publications/PBRChecklist_Fi-nal.pdf

DOWNLOAD YOUR COPY

PBR MODEL GOVERNANCE

New Checklist Addresses Broad Modeling Risks

Cont.

Model Selection/Versioning

When evaluating the suitability of a potential model, it is important that the selected model and its underpinning theories/concepts align well with the desired purpose. Questions in this section touch upon this and other issues related to transparency of model inputs and versioning of modeling components.

Consolidation of Results

After actuarial models have completed their executions, their re-sults are typically consolidated and stored in repositories for fur-ther analysis and reporting. The associated processes involved in these consolidations may be inadvertently overlooked or inade-quately addressed in many model governance plans. Questions in this section cover various consolidation concerns, including issues surrounding late adjustments.

Reporting

Controlling how modeled data makes its way into reports should be within the purview of model governance. In fact, reporting should be one of the main focal points of an organization’s approach to model governance. Similar to assuring that actuarial models use correct input, actuaries also take part in assuring that modeled

results are correctly interpreted and appropriately integrated into the many downstream reports. This section contains universal questions that are not restricted to any specific reporting or ac-counting basis. Questions cover issues such as interpretation of modeling results, report clarity, and transparency.

Analysis/Validation

Broadly traversing the spectrum of modeling activities, questions in this section cover the validation of: assumptions, model inputs, systems and models, results consolidation and reporting. Due to the inherent technical subject matter, many questions may require the reader to be familiar with common systems validation and tes-ting methods.

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STRONG MOMENTUM

2010-2013

BACK ON TRACK

2002-2004

MOVING FORWARD

2004-2007

OPTIMAL DYNAMICS

2013-2016

DYNAMIC LIFT

2007-2010

2016-2019

scor.com

VISIONACTION

2016–2019 TARGETS

HIGH RETURN ON EQUITY

ROE ≥ 800 basis points above the five-year risk-free rate over the cycle(2)

OPTIMAL SOLVENCY RATIO

Between 185% and 220% of the SCR(3)

SCOR LAUNCHES ITS NEW STRATEGIC PLANThanks to its accelerated development in Life and P&C reinsurance, SCOR now belongs to the top tier of global reinsurers. The Group’s premium income will reach around EUR 13.7 billion in 2016, an increase of 34% since 2013. Shareholders’ equity reached EUR 6.3 billion at 30 June 2016, up 33% over the strategic plan, after the distribution of EUR 781 million in dividends. SCOR’s development has focused on the twofold objectives of profi tability and solvency. All the targets of the “Optimal Dynamics” plan, which has come to an end, have been achieved. With the upgrade of its rating in 2015, SCOR is now rated AA–(1). Plan after plan, the SCOR group demonstrates its ability to fi nd solutions to all the challenges posed by a diffi cult and shifting economic and fi nancial environment. SCOR absorbs loss event shocks thanks to its active, state-of-the-art risk management policy. Today, SCOR launches its new three-year strategic plan, “Vision In Action,” which is fully aligned with “Optimal Dynamics.”

Over the next three years, SCOR will pursue its dynamic combination of growth, profitability and solvency with ambition and determination, serving its clients and benefi tting its shareholders.

(1) Standard & Poor’s and Fitch Ratings. (2) Based on a 5-year rolling average of 5-year risk-free rates. (3) Solvency Capital Requirement.

SCORviews | JANUARY 2017 | 12

The information conveyed and the views expressed in this newsletter are provided for informational purposes only and are based on opinions and interpretations made by SCOR Global Life Americas (formerly SCOR Global Life US Re Insurance Company). The opinions and interpretations expressed by SCOR Global Life Americas may not be the only interpretation available. This publication should not be copied or shared with any other company, reinsurer or consultant without obtaining prior approval from SCOR Global Life Americas.

FOCUS

SCOR Enters Medical Health Reinsurance Market

One team offering multiple product solutions

SCOR offers the medical market a portfolio of customized solutions to manage medical risk and complex claims. Our initial product lines include reinsurance coverage for HMOs and insurance companies. As we obtain necessary regulatory approval, we will offer provider excess insurance and employer stop loss insurance.

We are poised to make an immediate impact in the U.S. medical excess reinsurance market. Our team at SCOR looks forward to working with companies in the medical market and welcomes the opportunity to quote.

For more information, please contact Adam Gottesman at agottesman@scor.com or visit www.SCORGlobalLifeAmericas.com.

CHARLOTTE101 South Tryon Street - Suite 3200Charlotte, NC 28280

KANSAS CITY11625 Rosewood Street Suite 300Leawood, KS 66211

MINNEAPOLIS901 Marquette Avenue Suite 1500 Minneapolis, MN 55402

EditorPam Granzin704.344.2725 pgranzin@scor.com www.scor.com/SGL

SCOR Global Life Americas Reinsurance Company, a division of SCOR.

Printed in USA © 2017

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TORONTO199 Bay Street, Suite 2800 Toronto, ON M5L 1G1 Canada

MEXICOOficina de Representación en México Edificio Torre del Angel Paseo de la Reforma 350, piso 6 Col. Juárez - CP 06600 México DF

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SAO PAULOSCOR Global Life U.S. Re Escritorio de Representação no Brasil LtdaR.Luigi Galvani 70, suite 121 04575-020 São Paulo - SP Brazil

SCOR is excited to be entering the excess medical reinsurance market. We have assembled an experienced team of healthcare professional who understand the changes occurring in the market and will work with clients to customize medical reinsurance programs.

rk

Kelly Munger SVP, Group Reinsurance

Adam Gottesman VP, Sales – Group Health

Travis Brendan VP, Underwriting – Group Health

Tracy Hastings VP, Operations – Group Reinsurance

Julaine NovakVP, Group Health

Mike Rieth VP, Actuary – Group Reinsurance

Deb Mreen Director, Claims – Group Reinsurance