Rate Guarantees CIA 2008 Annual Meeting IP-18 Group Hot Topics

1. Rate GuaranteesCIA 2008 Annual MeetingIP-18 Group Hot Topics Cindy Lau AVP, Disability Financial Management Sun Life Financial

2. Agenda • Prevalence of Rate Guarantees on New Sales • Distribution of Requests for Rate Guarantee • Prevalence of Rate Guarantees on Renewals • Why Rate Guarantees? • Concerns around Rate Guarantees • Factors Considered in Pricing for Rate Guarantees • Costs of Rate Guarantees

3. Prevalence of Rate Guarantees on New Sales 1. Guarantee Period Life & LTD : • 2-year guarantees very prevalent on new sales; • trend to longer guarantee periods (3 and 4 years) Health & Dental : • usually 12–18 months; • have started to see requests for longer guarantee period in the East Rate guarantees :- • are more prevalent on larger cases; • have been moving from East to West over the last few years; • longer than12 months were rare on life and Ltd new sales a few years ago.

4. Prevalence of Rate Guarantee on New Sales (cont’d) 2. Cap on Rates • Guaranteed maximum trend factor in Health & Dental is not uncommon • Have seen requests for guaranteed maximum rate increase on life and LTD 3. Retention Charges • In Ontario, 3 year guarantee is becoming more prevalent on ASO policies.

5. Distribution of Requests for Life and LTD Rate Guarantee

6. Prevalence of Rate Guarantees on Renewals • In general, rate guarantees only happen on clients going to market • Have seen request for bi-annual renewal

7. Why Rate Guarantee? • Client doesn’t want a surprise • Client wants to reduce effort spent on renewal negotiation • Plan sponsors with FLEX plans would like to have the rates locked in between FLEX plan enrollments • Plans involving unions may request for rate guarantee period to coincide with the union agreement period.

8. Concerns around Rate Guarantees • Offer of guarantee would be OK if it is priced properly. In reality, it might not happen due to market pressure. • Lose the option of re-pricing annually • Challenges the principle of group insurance “YRT”. Should it be priced as a 3-yr or even 5-yr term? • If clients go to market at the end of each guarantee period, never be able to recover the experience loss and new sales discount during the guarantee period • Lessons learned from the past: • segregated fund guarantees • reinsurance recapture options

9. Factors Considered in Pricing for Rate Guarantees • Additional discount as a result of longer guarantee period • Option cost for the opportunity to adjust the price • Additional cost of capital (MCCSR) • Reserve impacts • Demographic / aging of the group • Morbidity trend • Health and dental cost trend • Forecast of economy /interest rates • Plan sponsor organizational changes (e.g. HR, union, M&A, etc.) • Inflation rate for retention charge guarantee

10. 0 Cost Considerations First Lets Consider a “Typical” Sale of LTD policy • Contains a modest discount that works off over time • Unrestricted ability to reset price

11. 0 Cost Considerations - 2 What are impacts of a 3-year Guarantee? • Extends the initial discount • Increases cost of capital

12. 0 Cost Considerations - 3 What are impacts of a 3 year Guarantee? • Extends the initial discount • Increases cost of capital • Restricts future required rate increases where otherwise required

13. 0 Cost Considerations - 4 What are impacts of a 3-year Guarantee? • Extends the initial discount • Increases cost of capital • Restricts future required rate increases where otherwise required • May encourage continual cycle of guarantees