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DISABILITY INCOME INSURANCE Where have we been and where are we going?

DISABILITY INCOME INSURANCE Where have we been and where are we going? Melissa Millan Vice President and Chief Operating Officer, Disability Income MassMutual Financial Group March 2004. What We’ll Cover. The industry Past Present Future Opportunities.

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DISABILITY INCOME INSURANCE Where have we been and where are we going?

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  1. DISABILITY INCOME INSURANCE Where have we been and where are we going? Melissa Millan Vice President and Chief Operating Officer, Disability Income MassMutual Financial Group March 2004

  2. What We’ll Cover • The industry Past Present Future • Opportunities

  3. Baseline - Understanding The Product • Income protection in the event the insured is unable to work due to illness or injury • Most coverage is currently written is non-cancelable, premiums cannot ever be increased • Benefit periods range from 2 years to age 67 • Risk management expertise is paramount, DI is not a volume game

  4. Baseline - Financial Characteristics • DI is capital inefficient - High acquisition costs- underwriting distribution - Relatively risky-high regulatory capital charges - The IRS doesn’t help - Breakeven doesn’t occur for years/long tail • Splitting the dollar-who gets what?

  5. Baseline - Statistics Driving Morbidity • Incidence • Terminations • What are we really underwriting?

  6. The Past – Non-Can Premiums Source: LIMRA

  7. The Past • DI industry just emerging from a prolonged period of losses -12 years • 2002 earnings on average 12% • Drop outs? • New entrants?

  8. The Past “You get yourself into a fix; you get yourself out of it. It’s that simple. There is no way to run the sausage machine backward and get pigs out of the other end.” Norman Augustine, Harvard Business Review

  9. What Have We Learned? In the 80s • Market position drives actions - Risk management liberalization • Pricing • Compensation • Focused on individually underwritten business

  10. The Present

  11. What Changed? Product/Benefits • Eliminated or Curtailed • Own occupation coverage • Lifetime benefits • To age 65 mental/nervous • Cost of living increases • Right to purchase options • 30 day waiting period

  12. What Changed? Pricing • Increased rates • Increased utilization of sex distinct rates • Surcharges for poor performing regions

  13. What Changed? • Underwriting • Stricter-more rules, fewer exceptions • Expanded medical testing • Expanded questioning of the application • Increased staff training/increases to staff • Changed occupation classes (generally lower) • Issue and participation limits • Replacement ratios Less concentration of risk – multilife

  14. The Environment Employer trends • Health insurance costs rise • More costs shifting to employees • Voluntary worksite sales are increasing Consumer trends • Available cash eroded • Dual incomes at record levels • Increased focus on preservation of assets “Traditional” markets saturated?

  15. The Future • Conning & Co study – aggressive growth will limit long term success • Companies with diversified portfolios looked upon with favor • Innovation is critical – products and services

  16. The Future Shift to multilife • Enhanced risk management benefits • More premium per work effort • Ease of doing business critical The multilife marketplace • Increasingly competitive-spread sheeting common • Guaranteed Standard Issue (GSI) is everything – or not

  17. Will there be an opportunity for individual? Reach untapped markets 2010- 10M more jobs than workers 2012- Women and minorities will comprise 2/3 workforce Average age of working population 42 The Future

  18. Product is too expensive More value needs to be returned to the consumer - Benefits need to increase and dividends also play a role - Expenses need to decrease Increase capital efficiency Minimize upfront costs Carriers must become easier to do business with – without compromising risk management principles Challenges for the Future

  19. What to Expect • Product enhancements • Critical illness • Retirement vehicles • Long Term Care options • Less costly supplemental benefits • Segment appeal

  20. What to Expect • Service • Electronic, electronic, electronic • Enrollment,education,billing • Customer transactions • Underwriting • Streamlined process • Liberalization for most profitable segments

  21. The Value of DI to a Producer • Is a financial plan complete without this coverage? • Rich renewal stream - Value of sale to the agent is well above 100% of premium • Correlation between agent retention and cross selling • Market opportunities

  22. What Do the Experts Predict? • Modest premium growth • Survivors who have focused on profit vs. market share will attract more business • Profit will continue which will allow survivors to reinvest in business • Successful companies will find means to better penetrate the middle class/emerging affluent • Producer training and education paramount

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