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Hot Concepts: Impact on Pricing & Design - CIA Annual Meeting

This presentation discusses the impact of hot concepts on pricing and design in the insurance business. It explores the history of concepts, their evolution into packages, and how they have become the sale. The presentation also examines the potential effects on assumptions, pricing, mortality rates, lapses, and coverage persistency. Additionally, it addresses the risks associated with hot concepts and the need to price and reserve accordingly.

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Hot Concepts: Impact on Pricing & Design - CIA Annual Meeting

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  1. CIA Annual MeetingAssemblée annuelle de l’ICA June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006 Ottawa, Ontario IND-3: Hot Concepts, How the Business is Sold

  2. What is the impact on pricing & design? Steve Krupicz, FSA, FCIA AVP Special Case Markets, Manulife Financial

  3. Brief history of concepts Summary of the concept sale Impact on pricing & design Agenda

  4. Late 1980’s & early 1990’s: DOS-based illustration systems Limited memory & processing power “Concepts” were a custom set of illustration columns Support = column definitions History

  5. Mid-1990’s until today: Windows, Internet, Adobe Faster processing speed Cheaper/faster memory & data transfer History

  6. Mid-1990’s until today: Concepts have become “packages” Colour brochures and marketing packages Trademarks, Branding Administration and “How-To” guides for advisors and clients Integrated PowerPoint presentations History

  7. 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 Summary

  8. “I own a …” Retirement plan Back-to-back R.C.A. Etc. … not an insurance policy. Summary

  9. Could affect many assumptions: The changes in sales techniques since the early 1980’s are already embedded in our inforce business Has it or will it affect experience? Impact on Pricing

  10. Could affect many assumptions: Lapse in near term Mortality Lapse in long term Premium persistency Coverage persistency Impact on Pricing

  11. 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: short term lapses

  12. Could mean lower mortality rates: Concepts provide an incentive for positive selection. More sales to affluent clients (better socio-economic factors) Is this material? How long before this materializes? Pricing: mortality

  13. May mean escalating long term lapses Concepts introduce more risks to clients Greater risks may lead to higher lapse rates in the long term Pricing: long term lapses

  14. 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

  15. Sample Case

  16. Sample Case

  17. 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? Added risks to client

  18. 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: premium persistency

  19. Some concepts rely on a serial reduction 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 Pricing: coverage persistency

  20. Sample Case

  21. 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? Pricing: coverage persistency

  22. Greater focus on illustrating well Competition measured less on COI rates & expenses Adding complexity to our products Impact on design

  23. We support 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 Design

  24. 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 Risks

  25. Questions &Discussion IND-3: Hot Concepts, How the Business is Sold

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