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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
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Agenda - How Insurance is Sold
Impact on policy experience:– Financial planning– Sales concepts– Impact on pricing & design?
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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
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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
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Financial Planners - example
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Financial Planners - example
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Financial Planning - example
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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!
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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
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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
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Sales concepts
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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
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Sales concepts
“I own a …”– Retirement plan– Back-to-back– R.C.A.– Etc.
… not an insurance policy.
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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?
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Impact on Pricing
Could affect many assumptions:– Lapse in near term– Mortality– Lapse in long term– Premium persistency– Coverage persistency
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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?
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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?
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Pricing: mortality
Could affect mortality rates:– Is this material?– How long before this materializes?
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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
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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)
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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
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Sample Case
Interest Return
Bank Loan Rate
Annual Income
5% 7% $43,020
4% 6% $35,760
5% 9% $35,700
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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?
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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?
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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
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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)
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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?
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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
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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
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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
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Questions &Discussion