INTRODUCING PREFERRED RISK UNDERWRITING INTO A MARKET James Kelly, SVP

Transcription

1 Reinsurance Solutions KNOWLEDGE. EXPERIENCE. RESULTS. THE POWER OF INSIGHT. sm INTRODUCING PREFERRED RISK UNDERWRITING INTO A MARKET James Kelly, SVP 1

2 Background Definition Evaluation Insurer s Perspective Broker Perspective Consumer Perspective Mortality Experience AGENDA 2

3 WHAT IF I TOLD YOU THAT YOU COULD Substantially increase sales Make agents / brokers happy with increased commission Improve company mortality Offer substantial discounts to your clients 3

4 WHERE DO I SIGN? 4

5 PREFERRED RISK UNDERWRITING 5

6 Standard margins are good WHY SPOIL A GOOD THING Why charge less for the same amount of coverage 6

7 COMPANIES CONSTANTLY LOOK FOR COMPETITIVE ADVANTAGE We constantly hear from clients What is the latest product in the U.S. Outside of the U.S. companies are reluctant to view underwriting as a means of providing that advantage 7

8 1940s ADVANCES IN RISK CLASSIFICATION - US Male / female distinction was first introduced Late 1960s and early 1970s Insurance companies begin to offer nonsmoker discounts after report suggested mortality differences between smokers and nonsmokers Late 1970s Applicants who exercised regularly received discounts 1980s Preferred definition develops as a result of competitive pressure and advances in medical information exchange Family history Personal history Lifestyle Source: On the Risk - V. 6, N. 4, Preferred Risk Underwriting. ING Reinsurance - June Term & Preferred Risk Classes. 8

9 ADVANCES IN RISK CLASSIFICATION US (cont d) 1990s Highly specialized preferred risk of up to eight classes Mid 1990s 51 Respondents 6% Number of Risk Classes Ten-year Level Premium Term Product 15% Late 1990s 61 Respondents 41% 43% 51% 44% 1 Preferred Class 2 Preferred Classes 3+ Preferred Classes Source: SOA. Report of the Society of Actuaries Task Force on Preferred Underwriting, June 1996 & September

10 PREFERRED UNDERWRITING A special program designed to more accurately asses the mortality risk of an individual applicant Distinguishes the standard aggregate class into two or more classes Designed to select the very best applicants out of the old standard class Exhibits lower mortality, thus, allows the insurance company to charge lower premiums Source: Allen M. Klein. Pricing Actuary of CAN insurance Companies. 10

11 THE RISE OF PREFERRED PRODUCTS Three factors have contributed to the rise in popularity of preferred products in the U.S. and subsequently in other markets: 1. A competitive term insurance market 2. AIDS forced companies to increase their underwriting requirements, which in turn provided them with a lot more information, which in turn allowed them to be more precise in differentiating risks 3. As preferred products began to sell, no company wanted to be left out 11

12 EVALUATION FROM INSURERS PERSPECTIVE Players Marketing advantage First company capitalizes on marketshare Increasing sales & premiums 70.4% experienced increased sales after the introduction of preferred risk class Better equity and more accurate risk selection Attracts higher face amounts and healthier individuals Targets specific market Attracts and retains better agents Observers Structural shift in applicant quality: Better risks migrate Applicants who do not qualify for the competitor s preferred classification seek insurance elsewhere Higher overall mortality in residual standard class Attracts a disproportionate share of standard risks leading to higher than expected mortality results Decreasing sales and market share Source: SOA. Report of the Society of Actuaries Task Force on Preferred Underwriting, September

13 EVALUATION FROM INSURERS PERSPECTIVE (cont d) Due to better understandings of the risk, insurers are able to extend and attract higher face amount policies* Average-Sized Policies in Force in 1995 and 1996 Risk Class Nonsmoker Male Nonsmoker Female Smoker Male Smoker Female Preferred (Overall) Amount in US$ 294, , , ,000 Standard (Residual) Amount in US$ 67,000 42, , ,000 * TARe s product wholesaling exhibits average face amount of US$ 1 million for preferred underwriting products. Source: SOA. Report of the Society of Actuaries Task Force on Preferred Underwriting, September

14 EVALUATION FROM BROKERS PERSPECTIVE Competitive rates create greater sales opportunities Higher face amount sales produced higher commissions 14

15 EVALUATION FROM CONSUMERS PERSPECTIVE Lower premium rates Rewards positive health attributes with extremely competitive premium rates Insurers are able to grant premium discounts to individuals who are exceptions to standard mortality Average premium discount of 25% Rate discounts are most dramatic for middle age applicants; young and old age are still relatively significant Improved self-image as being thought as preferred customer Source: Best s Review, June Preferred Risk Plans Grow in Popularity. National Underwriter - March 22, Preferred Rate Study Finds Rating Hold Up in Later Years. 15

16 ACTUAL MORTALITY EXPERIENCE According to the SOA 2003 Underwriting Survey 88% of applicants are now smokers 62.5% of the non-smoker qualify for preferred 16

17 ACTUAL MORTALITY EXPERIENCE US Preferred Mortality Experience* Data Experience Years Risk Classificati on Exposed Amount US$ 000,000 Deaths Number Deaths Amount US$ 000 Crude 1,000q (by amount) P-NSM 515,137 1, , S-NSM 1,085,633 21,672 1,516, P-SM 20, , S-SM 11, , P-NSM = Preferred Nonsmoker, Male, Overall S-NSM = Standard (residual) Nonsmoker, Male P-SM = Preferred Smoker Male, Overall S-SM = Standard (residual) Smoker, Male * No substandard data are included. Data used in all cases were for the 15-year select period. Source: Bragg Associates. New Bragg Preferred/Standard Life Tables and Guides to Underwriting. 17

18 ACTUAL MORTALITY EXPERIENCE (cont d) Mortality Experience - Standard vs. Preferred Male, Nonsmoker Age Age 35 Mortality Rate per 1, Mortality Rate per 1, Duration Duration 8 7 Age Age 55 Mortality Rate per 1, Mortality Rate per 1, Duration Standard Nonsmoking Preferred Nonsmoking Duration Source: Bragg Associates. New Bragg Preferred/Standard Life Tables and Guides to Underwriting. 18

19 US MARKET PENETRATION Today, virtually all insurance companies in the US offer preferred underwriting products Preferred underwriting risk classifications is extensively applied in product portfolios Preferred Risk Classes on Other Products 61 Respondents Late 90 s 47 Respondents Percentage with 2005 Percentage w/ Product Type Preferred Risk Class Preferred Risk Universal Life 74% 88% ART Whole Life Second-to-Die Variable Life Decreasing Term First-to-Die Source: SOA. Report of the Society of Actuaries Task Force on Preferred Underwriting, September Underwriting Research, Allen Klein, Towers Perrin Presentation for Life Insurance Council, April 4,

20 Preferred risk underwriting is not a new concept What value does Transamerica Reinsurance add? 20

21 WHAT VALUE DOES TRANSAMERICA REINSURANCE ADD? Largest reinsurer of preferred term business in U.S. Through product consulting and development activities placed companies in the preferred term market on a turn key basis First hand experience bringing preferred risk underwriting to international clients 21

22 THE BRAZIL STORY Chosen by the IRB to introduce preferred risk underwriting to the Brazilian market Created training programs for underwriters Developed applications Established preferred criteria Negotiated rates with labs Advised on workflow / process mapping Assisted companies in obtaining regulatory product approval Trained brokers Provide underwriting oversight for 6 months 22

23 THE BRAZIL STORY Early signs promising 3 companies now selling 2 companies plan to introduce before year end Anticipate applications per month by year end 23

24 Preferred risk underwriting introduced in Hong Kong in the late 90s Limited success Technically sound Execution is key Broker training, confidence and support cornerstones for success 24

25 Next wave Slicing the pie yet again Expanded standard Repricing standard to include risks up to Table 4 (200%) Offers standard rate to a broader class Underwriting adherence to rules as critical as with preferred Read more about this program in the Transamerica Reinsurance newsletter The Messenger 25