session 10 pd, who pays your last credit card bill? final ... · higher premium per 1000 ... often...
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Session 10 PD, Who Pays Your Last Credit Card Bill? Final Expense Insurance 101
Moderator: Helen Colterman, FSA, CERA, ACIA
Presenters:
Jing Lang, ASA, ACIA Jeffrey Shaw, ChFC, CLU
Brian A. Sibley, FSA, MAAA
Final Expense Market in the US
Who Pays Your Last Credit Card Bill?Final Expense Insurance 101
SOA Life & Annuity MeetingNew York, NYMay 4, 2015
Brian Sibley FSA, MAAA
RGA Reinsurance CompanyVP Business Development
Final Expense Defined Target Market Market Size Typical Sale Product Design Pricing Considerations Applicant and Agent Characteristics Challenges Management Innovations
Final Expense Insurance 101 Final Expense Topics Covered
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Final Expense Insurance is: Life Insurance purchased to cover funeral expenses, burial costs,
medical and hospital bills, loan balances, and credit card debts Small face amounts Whole life (sometimes term) Simplified issue underwriting
Final Expense is not Pre-Need which is a different product sold a different way to pre-pay a funeral
Final Expense Defined What is final expense life insurance?
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Aging population in the US 10,000 Baby Boomers turn 65 every day. This will go on for at least
15 more years In 2015, there will be 100 million people between ages 50-80 36% have no savings, retirement or investments 35% live on social security alone Many of these people don’t have any life insurance
Sources: Social Security AdministrationUS Census Bureau Population projections
Final Expense US Market Size Why are companies targeting final expense?
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High premium volume Product line has growth Demographics support it Undersold market
Final Expense US Market Size Why are companies selling final expense?
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Year New Policies New Premium (000’s)2014 1,867,972 $1,250,0002015 1,876,806 $1,269,0002016 1,897,033 $1,294,0002017 1,919,570 $1,319,0002018 1,943,871 $1,345,000
Source: LIC/CSG Final Expense Survey Report 2013
Final Expense US Market Size Best Estimate Projection for new policies and premiums
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Year Inforce Policies Inforce Premium (000’s)2014 6,156,537 $3,779,0002015 6,279,897 $3,947,0002016 6,380,281 $4,090,0002017 6,473,570 $4,219,0002018 6,563,595 $4,388,000
Source: LIC/CSG Final Expense Survey Report 2013
Final Expense US Market Size Best Estimate Projection for inforce policies and premiums
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Small Face Amounts – Average size $10,900 Higher Premium per 1000 - Average annual premium $652 Written at older ages - Average issue age is 61 Mostly simplified issue underwriting
Limited application questions Ht./Wt. Chart (64%) Phone interview (59%) MIB Report (54%) Rx Check (46%).
Mostly sold by independent agents (82%), captive agents (17%) and Direct (<1%)
Mostly whole life coverage with some term
Source: LIC/CSG Final Expense Survey Report 2013
Final Expense Typical Sale What does a typical final expense sale look like?
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Whole Life Products – 3 main types1. Level Death Benefit – (tightest SI underwriting) 2. Graded Death Benefit – often 30% of level DB in first year and 70% in
year 2, moving to 100% by year 3. (looser underwriting than 1) 3. Modified Death Benefit – returns premium often at 10% interest if
death in the first two years. (looser underwriting than 1 and 2) Term Products1. Graded Death Benefit Term – 2 year grade in for death benefits and
decreasing term after the level period2. Term products can be 10, 20 and 30 year term
Note: Graded and Modified Products often pay full death benefits in the first two years on accidental death
Final Expense Product Design What life insurance product designs are normally used?
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Mortality Lapse Interest Expenses
Final Expense Pricing What are the key components of pricing for final expense products?
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Critical to having a profitable final expense product Cost is often 50% or less of the total retail premiums because
commissions are very high on agent sold products If pricing mortality is off by 10% it can swing your profit margin up to
50% Driven by distribution, the application, the underwriting screening,
and rescission rates Important to reflect a bump up in pricing mortality in year 3+ after the
contestable period Many products are unismoke (aggregate) (i.e.10/20/60) Reinsurers and consultants can help with mortality- ensure they have
the experience data to back up the mortality assumptions provided
Final Expense Pricing Mortality
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Fully UnderwrittenResidual StandardFace Amounts $100k - $250k100%
Non-MedicalStandardFace Amounts< $100k110% - 150%
Mortgage Term,Bank Sold Term, Worksite StandardFace Amounts< $250k170% - 390%
Final ExpenseLevel Death Benefit300% - 775%
Final Expense Pricing Mortality Spectrum RGA Mortality Experience by Market
Normalized to Fully Underwritten Residual Standard Non-smoker ExperienceRanges include variations by company, underwriting, target market, and issue age.
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Final Expense Pricing Mortality Assumption – Rescission Rates CriticalRescission Experience
* Level Death Benefit only
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Key in pricing because you need policies to persist to make up for high first year commissions and acquisition costs
According to the LIC/CSG survey, on average after 4 years only 50 percent of issued policies are still in force
Many people can’t afford the coverage or have been sold too much coverage and therefore lapse
According to the LIC/CSG survey, the few companies that take credit card payments have experienced worse persistency
Watch for lapse skewness as policies tend to lapse early in the policy year even for monthly mode
Watch for churning of the business which causes problems for final expense writers
Final Expense Pricing Lapses
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Important in whole life pricing Low interest environment typically means low earned rates in pricing
Drives up your retail premiums
Low interest rates can also require higher cash values according to Standard Non-forfeiture Law Also drives up your retail premiums
Be prudent in your approach
Final Expense Pricing Interest Rates
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Expenses are also very important in pricing High first year and renewal commissions including commission
related expenses are big expenses to cover in pricing Consider the cost of capital to fund the high commissions paid for
selling the final expense product Factor in the cost of all your underwriting evidence, Rx checks and
MIB Include the costs to manage this business Make sure to include claims adjudication costs to reflect the cost of
contestable claim rescissions
Final Expense Pricing Expenses
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Monthly incomes of $2000 or less Education level – High school or less Single, divorced, never been married or widowed More females applicants than males May live in their original home Often have or had blue collar careers Often have children with similar characteristics sometimes living at
home
Final Expense Applicant CharacteristicsWhat are the characteristics of a typical applicant?
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Often have the same characteristics as the people they sell to Many agents live pay check to pay check, but have higher incomes Agents need to keep selling final expense to have income from future
commissions to pay their costs Agents go out and pay for leads, gas and hotel bills so more
pressure to make sales Agents often pay between $22 and $45 per lead Agents paying more than $40 usually won’t be successful Agents under high pressure to sell the customer something
Like to qualify for final expense companies’ lavish trips/conference
Final Expense Agent Characteristics What are the characteristics of a typical agent?
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“ANTI-SELECTION” Agent misconduct can steer the process for their benefit only Applicants can “forget” things when disclosing on the application Non-disclosure by the agent or applicant causes problems in this
market
Final Expense Challenges Challenges of the Final Expense Market
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Agents know the companies that don’t do Rx, MIB, or do Tele-interviews or that have “holes” in their application. Sell to clients based on this knowledge
Company advanced large commissions to the agents and agents don’t pay the company for chargebacks
Non-disclosure or coaching applicant to get the insurance which means policy often rescinded at claim time. Can lead to reputation risk for the writing company
Sell too high of premium the customer can’t afford leads to not taken policies and high lapses
Final Expense Challenges Agent examples of anti-selection or not writing good business:
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Applicants will lie about medications they are on or conditions they have
Can stack policies if passed underwriting before and can afford more coverage
Final Expense ChallengesApplicants Anti-selection
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1. Agents Contracted2. Agent Commissions3. Application4. Underwriting Used5. Underwriting Process6. Billing for Final Expense7. Claims Adjudication 8. Administration and Tracking
Final Expense Management Management of Final Expense Business is Critical for its success for a company
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The predictive nature of credit data is coming to the life insurance market including final expense In our recent company studies, we have determined FCRA compliant
credit data is highly predictive of mortality and lapse The TransUnion TrueRisk Life credit data can be used in the following
ways: Improve mortality results Improve persistency results Improve leads Make more appropriate offers of level death benefit versus modified
Final Expense Innovations Are there any innovations coming to this market?
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Final Expense business is a growing life insurance market Final Expense business requires close monitoring of your experience
to ensure you meet your pricing assumptions and hit profit targets Most companies who enter the market write unprofitable business at
the beginning before they learn to adjust or tweak their program for improvement
Many companies underestimate mortality for this market when they enter and fail. Seek advice if you are newer to this market
The producers are key to getting a good block of final expense business. Non-disclosure is a big problem in this market
With 100 million people in the US, age 50-80, and 10,000 people turning 65 every day for 15 more years, Final Expense Life Insurance fills a growing need for life insurance in our society
Final Expense Takeways for the US Market Conclusions and Key TakeAways
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So, we haven’t talked you out of it yet?10 Key Steps to Getting Started!
Jeffrey S. Shaw, CLU, ChFCExecutive Director
Life Insurers Council
1). Know your distribution
You need a partnership – even if it’s not 50 – 50 Communicate and agree upfront about pricing
assumptions and performance expectations Understand your place in their briefcase – it may not be
the reason you think (or the one they tell you)
2). Know your product’s place in the final expense universe
Spreadsheet your product BEFORE they do Distribution and competition is changing all the time –
your position will change, too Even good agents (especially good agents) can anti-
select
3). You won’t get it right the first time
And fixing it won’t be as simple as tweaking rates and comp
4). Grow Slowly
Fast growth is easy – controlled growth is hard It takes time for problems to become apparent – do you
prefer big problems or small problems? Manage your capital proactively
5). Monthly monitoring meetings even before data is conclusive Include everyone Everything can be improved through management Lapse Management
– A lapse notice can be considered a lead– Re-date versus reinstate
Mortality Management– Contestible claims are a forensic treasure trove– Rescission ratios can be managed downward– May need to extract blocks from terminated agents to determine
if efforts are paying off– Don’t underestimate the power of the sentinel effect
6). Monthly field management meetings Field Management
– Actual to Expected results on an agent, GA, and IMO level– Bad agents are rarely black and white – need clearly defined
standards and stick to them– But ratios alone can also be misleading– Identifying good agents is just as important as the bad
Agents Guide – they won’t read it but you can refer to it– What’s the definition of treatment?
Watch your contracting costs -- Lots of agents do not equal lots of sales but they do equal lots of expense
Spend time in the field with agents – their world is NOT your world
7). Don’t reinvent the wheel
Start where everyone is moving to/has moved to– Phone interviews– RX database– Paperless– Voice/e-signature– Direct express/nth day billing
8). Take advantage of available resources
CSG Actuarial Competiscan Life Insurers Council (LIC) Milliman Trans Union Credit/Mortality Prediction
9). Consider some differentiating options
Riders/Alternative products Cross selling inforce block directly
– Michael Edwards Direct
Lead management– Reduce anti-selection
Creative lead generation– Home Security customers
10). You get what you pay for
Who will be the first to blink?– Compensation influences activity more than any other factor
UK & Ireland Age at issue: 50 to 75 or 85 Min/max premium: GBP4/GBP100 per month
Many insurers limit the premium to GBP50 per plan with an overall max of GBP100
Max cover: GBP25k May apply per plan or to all plans Irish max: EUR65k
Inflation protection (or lack thereof)
UK & Ireland Moratorium period: 1 or 2 years Cover during moratorium:
Full face amount on accidental death and 100% to 150% ROP on non accidental death
Cover after moratorium: Full face amount with increase of up to 2X cover on
accidental death
UK & Ireland Premium payment
Sex and/or smoking status distinct rates Level premium based on age at issue Payable WL or limited to a max term (i.e. 30) and/or a
max age (i.e. 90) WL premium have been criticized as some lives will pay
significantly more in premium than the benefit
UK & Ireland Distribution:
Telephone, online, direct mail Tesco, post offices Newspaper/magazine adverts
Marketing: mostly direct through TV and internet Use of popular and well respected figures
Sir Michael Parkinson (AXA Sun Life) Cillia Black (Liverpool Victoria)
UK & Ireland Additional options:
Funeral Benefit Option Protected Payout Option Accidental Serious Injury Rider
UK & Ireland Reinsurance:
Net premium or YRT basis Reinsurance premium can follow the office premium
payment pattern or cease reinsurance cover when the office premium ceases
Can be structured so reinsurer is not on risk for the ROP during moratorium period
Australia Age at issue: 18 to 79, some specify 50 to 75 Max coverage: AUD30k
Lower limit if choose level premium
Coverage period: life Some pay cover at a certain age (90) if still alive
Forms of plan: Single, joint, or family Max benefit applies
Australia Accidental death period (ADP)
Mostly 1 year, certain plans offer choice to be 2 years
Cover during ADP: Full face amount on accidental death and ROP otherwise
Cover after ADP: Full face amount with increase of up to 2X cover on
accidental death
Australia Automatic indexation
Cover increases by 5% to 10% each year Up to a certain age (say 80) Premium will increase accordingly Automatic increase if do not decline
Premium Age-based or level Payable until age 85 or 90 Payable annual, monthly, fortnightly
Australia 30 day money back guarantee Value promise Marketing
Much more aggressive advertising than UK
Australia Additional options:
Early Payment Benefit Premium Pause Benefit 10% Cash Back Benefit Premium Freeze Benefit Paid Up Value feature Accidental Serious Injury Rider
Canada Age at issue: 40 to 85 Range of coverage: CAD1k to 50k Simplified underwriting with no medical exams Many claim to have no waiting period Accidental death provide 4X cover Premium
Guaranteed and payable till age 100 (for life) Payable annual or monthly
Canada Indexation is optional
Subject to a lower cover limit
Additional features Living benefit at no additional cost Accidental fracture rider Dividend and/or cash value
Distribution: similar to US, mostly sold by agents
Summary Similarities and differences between markets:
underwriting premium coverage & indexation additional benefits and/or options distribution and marketing