2006 General Meeting Assemblée générale 2006 Chicago, Illinois

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 General Meeting Assemblée générale 2006 Chicago, Illinois

2. IP-5: Anatomy of a Large Case Moderator: Lisa Forbes, FSA, FCIA AVP & Actuarial Consultant Manulife Financial

3. Anatomy of a Large CaseAdvisor Perspective Des Jardine, CLU, Merit Award Winner Estate Planning Advisor TD Waterhouse

4. 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

5. 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

6. 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

7. 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

8. 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

9. My tasks • Clearly our client is concerned about estate planning • Can we help him further? • Meet to discuss personal and business goals

10. 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

11. My tasks • Evaluated the alternatives available • Retirement Compensation Agreement (RCA)? • Corporate Insured Retirement Program? • Living Buyout/Share Redemption?

12. 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

13. 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

14. Living 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

15. My Tasks Living Buyout My Client 90% Partner 10% 80% ------------- 20% ----------- ---- 85% ---- 15% $ $ Operating Company $15M FMV

16. 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

17. 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

18. 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

19. 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)

20. 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

21. 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

22. 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

23. 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

24. 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

25. Anatomy of a Large CaseDirect Company Perspective Steve Krupicz, FSA, FCIA AVP Special Case Markets Manulife Financial

26. Agenda • Underwriting issues • Pricing & design issues • Profit considerations • Capacity • Compensation

27. Case Size What makes a case “Large”? • Premiums? • Face Amount? • Profile: • Of the advisor? • Of the client?

28. Underwriting Medical: • “Large case” requirements are the same as “big case” requirements • May have more trouble getting the client to take tests

29. Underwriting 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

30. Underwriting Financials: • Need more information to justify really large coverage • Often harder to obtain information from affluent or successful clients • Especially for private businesses

31. Underwriting 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

32. Pricing Issues Should we change pricing assumptions for large cases? • Mortality • Lapse • Interest • Expenses • Likely to be the outliers on any statistical studies

33. Pricing 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

34. Design Issues 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?

35. Design Issues 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

36. Design 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?

37. Pricing 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?

38. 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?

39. Compensation 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?

40. Compensation 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?

41. 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

42. Managing the Risk Who decides on any of these issues? Marketing Pricing Valuation Risk officer Underwriters Reinsurer Administration Tax Management Legal Financial Advisor

43. 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

44. Anatomy of a Large Case Reinsurance Perspective Sharad Mehra Manager, Actuarial Services Munich Re

45. Reinsurance Perspective • What do we need to know? • Understanding Reinsurance Treaties • Large Case Capacity • Financial Underwriting • Overview of the Large Case Market

46. 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?

47. 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?

48. Our Case • MNS in 50’s, rated Standard • Financial underwriting sound • Increasing NAAR with Ultimate of $25M • Performax Plan – non Treaty • Special Quote Required

49. 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

50. 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