2006 general meeting assemblée générale 2006 chicago, illinois
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Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois. IP-5: Anatomy of a Large Case. Moderator: Lisa Forbes, FSA, FCIA AVP & Actuarial Consultant Manulife Financial. - PowerPoint PPT PresentationTRANSCRIPT
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
IP-5: Anatomy of a Large Case
Moderator: Lisa Forbes, FSA, FCIA
AVP & Actuarial Consultant
Manulife Financial
Anatomy of a Large CaseAdvisor Perspective
Des Jardine, CLU, Merit Award Winner
Estate Planning Advisor
TD Waterhouse
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My background
• Estate planning specialist• 25 years of experience in the
insurance industry• Started with Sun Life (Montreal)• Variety of sales and marketing
roles• Joined TD when it acquired
Canada Trust
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My role
• Employed by Canadian bank to perform estate planning services for customers of its stock brokerage operation
• Insurance policy commissions form the bulk of my compensation
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My client
• Male, nonsmoker, in his mid 50’s
• Long-term investment client
• Wealthy
• Majority owner of a $15M company– Runs $1 Billion of funds for a major
mutual fund
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My client
• Taking a business trip to England
• His wife accompanying him for leisure
• Referred to me by Investment Advisor (Nov. 2000)– Update/revise wills– Power of attorneys
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My tasks
• Reviewed will and Powers of Attorney– Dual wills– Canada Trust as executor and/or
Power of Attorney
• Referred to lawyer and monitored progress & results– Needed to avoid large legal bills
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My tasks
• Clearly our client is concerned about estate planning
• Can we help him further?
• Meet to discuss personal and business goals
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My tasks
• Client owns 90% of a company worth $15,000,000
• Wants to get value out at retirement
• Wants to get value out at death
• Wants to be fair to minority partner
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My tasks
• Evaluated the alternatives available– Retirement Compensation Agreement
(RCA)?– Corporate Insured Retirement
Program?– Living Buyout/Share Redemption?
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Retirement Compensation Agreements (RCA’s)
• Employer promises retirement income; funds with a Trust set up to manage this promise
• 50% of every $1 paid into the Trust goes to CRA (a refundable tax)– Same penalty for taxable income earned– Use life insurance to sheltered income
• Tax is refunded (w/o interest) as taxable income is paid in retirement
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Corporate Insured Retirement Program (Corp. IRP)
• Company buys a max-funded life insurance policy
• Company borrows against that policy to fund retirement income for employee
• Different tax advantages & risks than the RCA
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2006Living Buyout
• Company buys a max-funded life insurance policy
• Company borrows against that policy to redeem shares from a shareholder while they are still active in the business
• Different timing, taxation & risks
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My Tasks
Living Buyout
My Client
90%
Partner
10%
Operating Company $15M FMV
---- 85% ---- 15%
$
80% ------------- 20% -----------
$
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My tasks
• Discussions with client’s professional advisors (auditors, lawyers, accountants)
• Facilitated discussions with Tax & Estate Planning Team– lawyers from insurer who specialize
in estate planning with life insurance– I take client’s viewpoint
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My Tasks
• Deciding on optimal go-forward strategy (living buyout funded by life insurance)
• Facilitated discussion with Actuarial Consultant– actuaries from insurer who specialize
in large case sales– I take client’s viewpoint
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My tasks
• Engage the Underwriting Consultant (field underwriter from insurer who specializes in large cases)– Educate client on need for both
financial and medical underwriting– Facilitate the financial underwriting
• Financial reports; Tax returns; Inspection reports
– Can be viewed as very invasive
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My tasks
• Work with underwriting consultant– Position client for medical tests
• Expectations
• Timing
• Things to avoid, etc.
– Hiccup with Stress EKG– Needed Stress Thallium EKG (more
meetings/education)
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My Tasks
• Stress Thallium EKG (Murphy’s Law)– Convince client of the need to proceed
for both personal and financial health– Client arrives but no doctor– Irate busy executive– Arrange apology from president of lab– Try again one week later
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My Tasks
• Standard offer from insurer– February 2002
• $15,000,000 initial face amount– Amount at risk grows to $25M within
20 years
• $1,000,000 annual premium
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My Tasks
• Assist in financing for living buyout program
• Assist in interviewing lawyers to draft the partnership agreement
• Ongoing review of the policy and the plan
• Currently working on beneficiary planning
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Summary
A fairly typical large case:
• Educate client and other advisors on the options available
• Fact finding & recommendations
• Manage & co-ordinate the resources available and the process to place the business
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Summary
A fairly typical large case:
• Manage & co-ordinate the underwriting process
• Over 1 year to complete the placement of the policy
• Ongoing review for several years
• Persistency comes from the quality of the business and service
Anatomy of a Large CaseDirect Company Perspective
Steve Krupicz, FSA, FCIA
AVP Special Case Markets
Manulife Financial
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Agenda
1. Underwriting issues
2. Pricing & design issues
3. Profit considerations
4. Capacity
5. Compensation
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Case Size
What makes a case “Large”?
• Premiums?
• Face Amount?
• Profile:– Of the advisor?– Of the client?
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Medical:
• “Large case” requirements are the same as “big case” requirements
• May have more trouble getting the client to take tests
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Medical:
• May receive more information than you typically get– Mayo clinic, full body scans, etc.– What do we do with unusual
recommendations on tests/treatments
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Financials:
• Need more information to justify really large coverage
• Often harder to obtain information from affluent or successful clients– Especially for private businesses
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General:
• Travel more often an issue
• Avocation more often an issue
• Sometimes the insured is not the driving force behind the insurance
• Clients often less receptive to adverse decisions
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2006Pricing Issues
Should we change pricing assumptions for large cases?
• Mortality• Lapse• Interest• Expenses
– Likely to be the outliers on any statistical studies
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2006Pricing Issues
How do you treat any cross-subsidies inherent in the product?
• Investment options
• COI options
• Premium durations and levels
• Actual versus average product configuration
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Do we alter product terms or features?
• Limits on indexation riders?
• Mandate premium durations or size to control net amount at risk?
• Surrender charges?– Higher or lower?
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Do we alter product terms or features?
• Different ESA’s for joint policies?
• Limit access to investment options?
• New or customized features?
• Who decides?– Marketing, pricing, valuation,
management
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2006Design Issues
Do we alter product terms or features?
• Do we pass through to clients any extra costs?– Appropriate for pricing/profit targets – But is it a nuisance to client or advisor– How do you define nuisance
$1,000/year? $10,000/year?
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2006Pricing Issues
Should you use the same profit targets?
• Do you need the same profit on the second $25M of coverage as on the first $25M?– Embedded value?– PVFP? – Premium margin?– ROE?
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Capacity
• How much coverage do you issue?
• How big can the policy grow; in what timeframe?
• What limits are imposed by reinsurers & pools?– What happens if you exceed these
limits?
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2006Compensation
Should we lower compensation?
• Should we pay the same compensation on the second $25M of coverage as on the first $25M?
• Mandatory or optional?
• How will advisors interpret this action?
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2006Compensation
Higher compensation?
• Could be justified by lower placement ratios
• Funding for client costs?
Levelize or spread compensation?
• Advisor shares early-lapse risk
• Can advisors bear this risk?
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Timing
Time is usually too short to allow debates on many of these issues
• Medical evidence is aging– Oldest information can become stale
when ink not yet dry on newest
• Clients rarely willing to wait
• Indecision can be a decision
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Managing the Risk
Who decides on any of these issues?Marketing Pricing
Valuation Risk officer
Underwriters Reinsurer
Administration Tax
Management Legal
Financial Advisor
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Conclusion
• Many issues to consider
• Easier if you contemplate and plan for these issues before you pursue this market
• You will need to react to whatever arises
Anatomy of a Large Case Reinsurance Perspective
Sharad Mehra
Manager, Actuarial Services
Munich Re
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Reinsurance Perspective
• What do we need to know?• Understanding Reinsurance Treaties• Large Case Capacity• Financial Underwriting• Overview of the Large Case Market
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What do we need to know?
• Do I have a name and date of birth?• How much is being applied for? How
much is inforce? • Is this a growth plan? Can we get an
illustration?• Is this a treaty plan?
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What do we need to know?
• What is the underwriting assessment?• Is this a special risk? • Do I need to cede this to the
retrocessionaires?• Do I have enough capacity in my retro
pool?• Any other special considerations?
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Our Case
• MNS in 50’s, rated Standard• Financial underwriting sound• Increasing NAAR with Ultimate of
$25M• Performax Plan – non Treaty• Special Quote Required
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Understanding Reinsurance Treaties – The Easy Part
• Auto limit = amount direct company allowed to bind reinsurer automatically
• Treaty capacity = amount that reinsurance rates are guaranteed up to
• Both can vary by age, amount and substandard rating
• Different for each insurer
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Understanding Reinsurance Treaties – The Hard Part
• Jumbo Limit = Insurance in force plus current insurance amount to be placed
• Amount is based on ultimate if increasing plan
• If jumbo limit is exceeded, reinsurers and retrocessionnaires may not accept the cession
• Jumbo is NOT net of replacement unless absolute assignment
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Process to Reserve Capacity
• Receive application and check for experience
• Depending on jumbo, auto or fac to retros
• Send decision up front indicating available capacity
• First in gets capacity, others subject to release of facilities
• Capacity is only open for 120 days
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Large Case Capacity
• Available capacity is shrinking as retros exit the market
• After 9/11, Euro retros have closed capacity
• North American company mergers• Existing retros appetite for large face
decreasing
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Reinsurance Consolidation
Acquirer Target Date
Swiss Re ERC* 2006Scottish Re ING Re 2004RGA Allianz Re 2003ERC AUL 2002Swiss Re Lincoln Re 2001Munich Re CNA Re 2000Swiss Re CIGNA Re 2000Clarica Re Sun Life Re 2000ERC Phoenix Home Re 1999Swiss Re Life Re 1997Swiss Re M&G 1997
*Except North American L&H business. Note that ERC exited NorthAmerican market in 2004.
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Other Capacity Considerations
• Capacity reduces with age and mortality• Capacity reduces for entertainers, pilots
and professional athletes• Fac-obligatory for professional athletes
(team capacity limitations)• Multiple applications
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Multiple Applications
• One or two applications will be seen by all reinsurers in Canada
• Competitive vs. Concurrent Apps• On large cases, multiple shopping can tie
up capacity to the extent that no one can cover risk entirely
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The Retro Market
• 4 main players in Canada• Each provides between $2 and $10M of
capacity• $65M jumbo – at one time was unlimited• Critical concern is late reporting and
terminations
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So what is a Reasonable Amount that can be placed?
• Depends on your retention, who your reinsurers are and their retrocession pools
• Above $65M there will be limitations• Cases can be placed up to $100M in rare
circumstances!• Also need to consider Financial
Underwriting
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What is Financial Underwriting?
• Financial underwriting relates the potential economic loss to the face amount via income multiples, net worth calculation and business valuation.
• Ask yourself why this much coverage and why now
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Why Financially Underwrite?
• To rule out anti-selection• To verify insurable interest• To obtain third party verification of the
proposed insured’s financial position on large amount cases
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How Financial Underwriting has Evolved
• What’s New– More emphasis on financial planning
and investment.– More complex data, illustrations and
financial u/w formulas• What’s Unchanged
– Ability to pay the premium or lump sum dump-in is not sufficient to justify any and all face amounts
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Sources of Financial Information
• Application• Financial questionnaire• Cover letters from agent, CA and/or
financial planners• Inspection & Business Beneficiary
Reports• Income Tax Returns• Financial Statements• Internet
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Examples of Financial Underwriting Tests
• Annual or single deposit should not exceed 20% of net worth.
• (NW x multiplier ) + (Income x Income factor)
• e.g. Age 50, NW $1,000,000, Income $75,000
• ($1,000,000 x 3.3) + ($75,000 x 8) = $3,900,000
• Income Replacement: 5 – 20 x personal income, with younger applicants having higher multiples
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Overview of Large Case Market
Year # Apps >$10M
# Placed >$10M
Placement Ratio
% of Industry Premium
2004 408 93 23% 5.0%
2005 391 178 46% 4.7%
Year # Apps >$50M
# Placed >$50M
Placement Ratio
% of Industry Premium
2005 17 1 6% 0.1%
Source: Munich Re Pricing Survey
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Overview of Large Case Market
Year % of producers that generate 75% of new business premium
2003 25%
2004 19%
2005 15%
Source: Munich Re Pricing Survey
• Increased reliance on a handful of producers!
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Keys to Success
• Get all required information• Know your reinsurance treaty
arrangements• Recognize capacity limitations• Communication between all parties is
key