Actuarial Insights: Transition to Distribution in the Insurance Market

1. CIA Annual Meeting LOOKING BACK…focused on the future

2. Actuaries in Distribution Brigitte Breton Pierre Vincent Scott Sadler

3. An Actuary in Distribution Brigitte Breton, FSA Insurance Salesman woman

4. Topics • Career History • Motivations • Field/Market Observations • Actuarial Advantages/Disadvantages

5. A little History… SchoolInsurance/Reinsurance Distribution Product Development Pricing/Marketing 12 yrs 4 yrs

6. Personal Motivations for Switching into Distribution • 1. Situation is different for women. • 2. Time Flexibility Working less hours • 3. Move to “La Belle Province”

7. Market Motivations for Switching into Distribution • Shrinking # of insurance companies(reduced number of employers for actuaries) • Increased Average Age of Distributors (above 50) • Increased need for knowledgeable insurance brokers

8. My “Path”… 1. Team up with a high end MGA (General Agency): packaging specific/individualized insurance concepts Objective: “how” to sell 2. Acquire a block of business: Objective: “I” sell 3. All of the above and offer consulting services to MGAs: Objective: “We” sell

9. Field Observations (Actuaries in Action) • Actuaries add credibility to the selling process Good results with Accountants and Lawyers • Need to define our area of expertise vs tax lawyers/accountants (some confusion exists) • In front of clients, our technical knowledge may become a handicap we need to simplify

10. Actuary’s Challenge • Summarize product while fully disclose all material factors/assumptions KEEP IT SIMPLE! • Need to be comfortable with the label “insurance salesman” woman

11. Field Observations (Brokers in Action) Two types of sales process Go In Go In Present One Concept Fact Finding Sell or don’t sell Extensive Analysis Get Out Sell or don’t sell Get Out

12. Results More Clients/ Less Clients/ Less Time Each More Time Each

13. Two types of Sales Brokers Deal with 1 or Deal with 2 Companies Multiple companies Go for Price …but willing to switch model for a “good deal”…

14. “Good Deal” = Market Efficiency Basic Sales process/behavior will remain unless a product premium or commission is exceptionally outside the “level of comfort” (Mispriced? Loss Leader?) MARKET EFFICIENCY

15. Field Observation (MGA in Action) • Typical MGA is in their 60s • Built a good business over the years (good service fees) • Lonely Business (does not know how the others operate/what is good profits) • Carry big potential liability • Faced with succession planning

16. Sales Support at the MGA level Why an Actuary? • Support the Brokers (in sales situations) • Support at the technical level (advanced concepts/conversion programs) • Support the MGA at the management level

17. MGA ACTUARIAL SUPPORT • Expense Management • Risk Management (chargeback exposure) • Overhead/Profitability Ratios • Agent Behavioral Projections • Agency Valuation (Succession Planning)

18. CONCLUSIONS Actuaries in Sales YES Actuaries bring Knowledge Expertise Credibility

19. CONCLUSIONS Actuary’s basic training weak in the following: • Communication (summarize, listen to client, keep it simple, selling techniques) • Small business corporate taxation and challenges faced by shareholder/owner

20. CONCLUSION Actuaries in sales can mean: • Personal Sales • Assist other agents in complex cases • Assist MGA at the management level (liability exposure, succession planning)

21. So, do you want to join the dark side…..?

22. From the Insurance Company’s Employee Perspective Pierre Vincent Transamerica Life Canada

23. Looking at the past… • 2 years - Life insurance valuation • 3 years - Product development & pricing for US Group Pension • 11 years – Life Product Development & Marketing • 2 years – Sales – Life insurance, segregated funds & mutual funds

24. Observation The independent distribution market is very efficient ... If products have flaws, distributors and brokers will find them & market these flaws

25. The Product Selection Process at the Distributor Level (MGA, Brokers) • Companies launch products & promote strong features • The Product Analysts at Distributors: • Review & compare product with competition • Prepare recommended list of products based on competitive pricing & features • Take advantage of product flaws to propose best solution to brokers and clients

26. Product Analysts at distributors will find quickly what the pricing actuaries should have been concerned about…

27. Examples of market efficiency • Insurance on broker’s own life • Impact of legal rebating • Decreases in amount of insurance without penalty to broker or client • Competitive pricing by age group • Long term GIC rates in UL • Segregated fund guarantees • Impact of NCPI • Back-to-back type concepts

28. Insurance on broker’s own life • A recent case … before the company changed its commission rules • $2,500,000 of universal life with YRT cost of insurance • $7,100 in premiums over a two year period • $20,347 in commission and bonus (tax free) • Net gain of $13,247 • Two years of “free insurance” Too good to be true…it was changed recently!

29. Insurance on broker’s own life • Buys $1,500,000 of universal life with YRT cost of insurance • Pays $15,276 in premium • Insurance in force for three years • Receives $26,809 in commission and bonus (tax free) • Net gain of $11,533 • This is still available with quite a few insurance companies in Canada today... A good deal for the broker!

30. Impact of rebating • In Alberta, rebating of commission is legal • The client buys $1,500,000 insurance policy with a premium of $15,276 • The broker receives $26,809 in commission and bonuses • The broker rebates $15,276 to the client • Gross income of $11,533 to the broker • The client gets two years of insurance for free

31. Insurance amount decreases without penalties • Same case we just reviewed • $1,500,000 of insurance, $15,276 of premium, $26,809 of commission & bonus • If insurance is decreased to $100,000 in the third year, the client gets 13 years of coverage for free… • What is the profitability of paying commission on $1,500,000 when insurance will be reduced to $100,000 after 2 year?

32. Insurance amount decreases without penalties • Approach often used for tax free accumulation in life insurance • Broker proposes to accumulate money tax free • $250,000 is deposited in the policy • $4,000,000 of insurance is required to accept this deposit • After 2 years, the insurance is reduced to $2,000,000 • After 4 years, the insurance is then reduced to $1,000,000 • All the money accumulates on a tax deferred basis • The commissions paid are 3-4 times what should have been paid • Who is making the money?

33. Competitive pricing by age group • The product analysts and brokers use comparison software to determine the best price by age • For simple products, production can shift significantly between companies • Clients are usually well served by independent agents for this type of product • Direct writers should price each age profitably

34. Segregated fund guarantees • Older clients with significantly reduced life expectancy can invest in segregated funds with 100% death guarantees • Stock brokers suggest to these clients and their family to invest a few millions in these funds. • The price of these guarantees does not reflect this type of behavior

35. Long term GICs in Universal Life • Clients invest in long term GICs to earn higher interest rate • Cost of insurance is deducted from this GIC • Broker can offer clients long term GIC rates on short term investments

36. Impact of NCPI • For clients above age 70, NCPI are different by companies • If an individual borrows to invest and the bank requires life insurance =>the lower of (NCPI, Insurance Premium) can be deducted from income tax • Broker will look for the company with the highest NCPI to maximize the tax deductions • If the policy is owned personally, brokers will look for the lowest NCPI to have the highest ACB possible

37. Back-to-back concept • Creative brokers have found that clients 70+ can be declined for insurance in Canada and accepted standard in the US • These clients often qualify for rated life annuities in Canada • These programs are sold to investors who get the equivalent of 15+% return before tax

38. Other proofs of efficiency of distribution • Lapses on T100 • Lapses on Joint-last-to-die T100 policies • Popularity of return of premium options on CI policies

39. Conclusion • With the increased popularity of independent distributors, products selection is becoming very efficient • Pricing / valuation actuaries should evaluate risks carefully • They should be concerned with rapid sales increase • It can be very expensive to wait until the experience study • Pricing actuaries should talk often to product analysts to understand how their products are sold • Good understanding of key drivers in certain markets can be very profitable for insurance companies Actuaries in sales – should they take advantage of product flaws to maximize sales results?

40. From a Distributor Perspective Scott Sadler PAL Insurance Services Limited

41. Actuaries have gone over to the dark side. Find out the real dirt on the sales process. Are agents worth all that cost?

42. The Sales Process at Pal Insurance • Fact Find / Needs Analysis • Integration with existing structures • Strategy Inventory • Program architecture • Implementation • Servicing

43. Fact Find • Client details (DoB, smoking status, etc.) • Asset ownership • Corporate structure • Tax liability • Limited actuarial involvement

44. Integration with existing structures • Working with the client and their “other” advisors (tax, legal, etc.) • Understand what planning has already been done • Building a consensus for the role life insurance can play • Educating the decision makers as to the types of life insurance in the market • Actuaries enhance the credibility of the process

45. Actuarial Issues • Participants focus on their area of expertise • Educating the decision makers in language they understand • Advanced tax planning teams established by some insurance companies

46. Strategy inventory • Insurance is one solution, there are others • Insurance is not “free” • Work with other advisors to document cost / benefit analysis of the options

47. Actuarial Issues • Insurance is not for traditional income replacement purposes • Financial underwriting as well as medical • Ownership / beneficiary designations • Does historical lapse experience apply? • Whose pricing mortality do you use, direct writers or reinsurers?

48. Strategy Inventory - an ExampleMNS 45 standard risk • $25M capital gain on death • $11.25M tax bill (45% tax rate) • Options to pay the tax include: • Sinking fund to accumulate needed $ • Borrow funds at death • Sell part of the company • Insurance to pay tax • Charitable gift to eliminate tax

49. Sinking Fund • Deposits for 10 years • 5% pre-tax rate of return • 45% annual tax on investment earnings • Target accumulation at attained age 85 • Annual deposit = $428K • Assumes • Death at life expectancy

50. Borrow funds at death • Amortize over 10 years • 6% interest rate • Annual Payment = $1.4M • Assumes • Company is able to borrow money when needed • Company is able to repay money when it is borrowed