2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

Session/séance : PD 35 How Insurance is SoldSpeaker(s)/conférencier(s) : Steve Krupicz, FSA, FCIA

Agenda - How Insurance is Sold

Impact on policy experience:– Financial planning– Sales concepts– Impact on pricing & design?

My (nontraditional) role

I support advisors is selling life insurance in the large case market:– Technical resource for detailed product

knowledge– Deal with financial advisor or other

advisors or directly with client

Financial Planning

Financial planning is a shift to selling wants, not just needs– This approach is not exclusive to the

bank-owned firms– More advisors are following a financial

planning/wants-based approach

Financial Planners - example

Financial Planners - example

Financial Planning - example

Financial Planning

Richard, Mark and professionals like them have changed the way our business is sold & used by clients– Helping clients with building and

executing their financial plans– Going beyond insurance needs to fulfill

client wants– Not an easy task!

Sales concepts

Insurers support a planning approach to insurance sales too:– Sales concepts in our marketing

materials and illustration software gives self-contained units that can be combined into a financial plan

Sales concepts

– Concepts have become “packages”– Colour brochures and marketing

packages– Trademarks, Branding– Administration and “How-To” guides for

advisors and clients– Integrated PowerPoint presentations

Sales concepts

Sales concepts

For a meaningful portion of our business, the concept has become the sale– Insurance is a key part of the value that

is delivered by the concept– But clients increasingly see the whole

package; not the components– More than just an insurance policy

Sales concepts

“I own a …”– Retirement plan– Back-to-back– R.C.A.– Etc.

… not an insurance policy.

Impact on Pricing

Could affect many assumptions:– The changes in sales techniques is

becoming embedded in our inforce business

– 80’s & 90’s approaches already affecting our experience metrics

– What will be the impact of the more recent approaches?

Impact on Pricing

Could affect many assumptions:– Lapse in near term– Mortality– Lapse in long term– Premium persistency– Coverage persistency

Pricing: short term lapses

Could mean lower short term lapse rates:– Life insurance can be viewed by some

clients as a commodity– Estate and Retirement Plans are more

long-term and stable– Is this already in industry short-term

lapse experience?

Pricing: mortality

Could affect mortality rates:– Financial planning means a better

matching of product to client needs, wants and risks

– Concepts & planning provide more incentive for positive selection

– Is there a shift in business mix by socio-economic factors?

Pricing: mortality

Could affect mortality rates:– Is this material?– How long before this materializes?

Pricing: long term lapses

May mean escalating long term lapses– Concepts introduce more risks to clients– Greater risks may lead to higher lapse

rates in the long term

Sample Case

Personal Leveraged Life Insurance– Male 45 Nonsmoker– Deposits $25,000/year for 15 years into

a UL policy (Level COI, Face + Fund)– Borrow from age 65 to augment

retirement income until life expectancy (age 81)

Sample Case

Interest Return

Bank Loan Rate

Annual Income

Position at age 81 with income of

$42,500/yr5% 7% $43,020 Loan = 75% of CSV

($1,283,000)5% 8% $39,200 Loan = 82% of CSV

4% 7% $32,620 Loan = 99% of CSV

Sample Case

Interest Return

Bank Loan Rate

Annual Income

5% 7% $43,020

4% 6% $35,760

5% 9% $35,700

Added risks to client

– Financing spread risk– Investment return risk

• Asymmetric >>> more sensitive to lower policy yields than higher borrowing costs

– More exposed to different tax risks– Will this increase long-term lapses?

Pricing: premium persistency

Concepts generally rely on limited premium durations– Is this reflected in our pricing models?– Will clients stop premiums when

planned?– Is this already appearing in industry

experience?– Will this impact long-term lapses?

Pricing: coverage persistency

Some concepts rely on serial reductions in face amount– “Hugging the MTAR line”– Consider our personal leveraged life

insurance example– Male; 45; nonsmoker; $25,000/year for

15 years into a UL policy; borrowing commences at age 65

Sample Case

Interest Return

Bank Loan Rate

Annual Income

5% 7% $43,020 if coverage is maintained throughout lifetime

(at $590,000)5% 7% $44,010 if “hug MTAR line”

after 15th premium (naar = $250,000 at life expectancy)

Pricing: coverage persistency

Planned serial lapsation:– Is this reflected in our pricing models?– Will clients follow this course as planned

or maintain their coverage?– Is this already appearing in industry

experience?– What will happen in the long-term?

Impact on design

Greater focus on illustrating well– Competition measured less on premium

or COI rates but the illustrated benefits– Adding complexity to our products

Design

Insurers support planning & concepts through other business practices too:

Financial Underwriting Limits– Annual premium = 4% of investible assets– Annual premium = 30% of after-tax income– plus Key Person Needs– plus Income Replacement Needs– plus Estate Conservation/Debt Repayment

Risks

We need to price & reserve for the risks that these concepts add to our book of business– Lapses, etc.– Administrative risk – Reputational risk– Litigation risk

Questions &Discussion