Combination Products

Transcription

1 Alternative Products Pi Pricing i Mechanics of Combination Products March 4, 2013 Dallas, Texas Moderator: Speakers: Missy Gordon, FSA, MAAA, Milliman Minneapolis Bruce Moon, ChFC, CLU, CASL, OneAmerica Mike Hamilton, FSA, MAAA, Lincoln Financial Group Linda Chow, FSA, MAAA, Milliman Chicago 1

2 Agenda Life Products with LTC or Chronic Illness Riders Background and Market Overview Bruce Moon Pricing Assumption Considerations Mike Hamilton Modeling Mechanics and Illustrations Linda Chow Questions 2

3 Alternative Products Life Combination Products Background and Market Overview Bruce Moon, ChFC, CLU, CASL Vice President, OneAmerica (317)

4 Two IRC Sections: 101(g) and 7702B Both were created as part of Public Law (also known as the Health Insurance Portability and Accountability Act of 1996) HIPAA Clarified definitions for both long-term care insurance and chronic illness benefits 4

5 101(g) 101(g) = defines accelerated death benefit for life insurance if insured is either Chronically Ill or Terminally Ill 101(g) benefits that are filed under the NAIC Accelerated Benefit Model Regulation 620 * are generally known as Chronic Illness riders Benefits under 101(g) are generally received federal income tax-free * 101(g) benefits can be filed under the NAIC Long-term Care Model Regulation 641 outside of the Compact, but these are not discussed in this session. All references to 101(g) relate to products filed under the NAIC Accelerated Benefit Model Regulation

6 7702B 7702B = established tax treatment of qualified long-term care insurance 7702B benefits are generally known as LTC riders These products may or may not have an Extension of LTC Benefits element Benefits under 7702B are generally received federal income tax-free 6

7 7702B Types of Coverage Accelerated Death Benefit only Pays out a specified portion of DB per month with proportional cash value reduction Acceleration + Extension of Benefits Accelerates DB first, then provides LTC only coverage beyond DB Example: = 2 year acceleration of death benefit, followed by 4 years of extended LTC coverage = 6 yrs total 7

8 Two IRC Sections Sharing One Definition Both 101(g) and 7702B benefits are based on the definition of Chronically Ill Individual (found in 7702B) Being unable to perform at tleast t2 of f6 activities iti of fdaily living, or Requiring substantial supervision due to severe cognitive impairment 8

9 Distinctions Between The Two Approaches 1. Benefit Triggers 101(g) riders pays only on permanent claims (i.e., insured should have a permanent inability to perform ADLs) 7702B riders do not require ADL permanent deficiency require physician i certification to inability to perform for at least 90 days 9

10 Distinctions 2. Description 101(g) riders cannot be marketed as long-term care coverage 7702B riders are considered LTC coverage and marketed as such 10

11 Distinctions 3. Claims Payment 101(g) products typically pay a cash amount or indemnity 7702B products typically pay reimbursement or indemnity 11

12 Other Distinctions 4. Producer Training 7702B products require LTC CE in most states: upfront and on-going training 101(g) products require no CE in any state 12

13 Benefit Distinctions 5. Enhanced Benefits 7702B products allow for LTC benefits beyond the life policy s death benefit called Extension of LTC Benefits or something similar 101(g) products typically allow some percentage (e.g. 75%) of the death benefit to be paid in advance of death -- but nothing beyond the death benefit 13

14 Final Distinctions 6. Underwriting 101(g) products are may or may not have supplemental l medical questions at time of application 7702B products typically have morbidity based medical questions on the application, and unique underwriting for the Life and Morbidity aspects 7. Age of Purchaser 7702B products typically y sold to older clients than 101(g) products 14

15 Why Consumers Buy 101(g) Chronic Illness Rider Purchasing recurring premium life insurance Focus is life insurance/cash accumulation 7702B LTC Rider Alternative to health-based LTCI or supplement to existing policy Purchasing generally with a single premium 15

16 Why Does a Company Choose to Be in the 101(g) Chronic Illness rider business? Avoid anything to do with long-term care insurance Focus more on life insurance with this benefit secondary Free producers from the requirements of LTCI Licensing/CE Sales process paperwork 16

17 Why Does a Company Choose to Offer 7702B LTC riders? Provide LTC coverage with the opportunity to offer more guarantees Focus on older age (50+) market Complement LTCI offerings/give g LTCI producer options Offer significant LTC coverage 4, 6, 8 years or even Lifetime with built-in claims administration 17

18 Alternative Products Life Combination Products Pricing Assumption Considerations Mike Hamilton, FSA, MAAA Vice President, Lincoln Financial i Group (336) Michael.Hamilton@LFG.com com 18

19 Definitions Discussing Life/LTC combination products Life Insurance with riders that provide benefits for long- term care or chronic illness needs Acceleration Plus Extension Riders allow for acceleration of death benefit plus extended benefits 7702B (LTC rider) Acceleration e Only Rider allows for acceleration of death benefit 101(g) and 7702B (Chronic Illness rider and LTC rider, respectively) 19

20 Underwriting Acceleration Plus Extension Market currently offering simplified and full underwriting Who is the target t client? LTC risk larger than Death Benefit Cognitive Screen Rx Database 20

21 Underwriting Acceleration Only How is base product underwritten? LTC supplemental l questions APS review train underwriters to look for morbidity concerns Paramed add Cognitive screen and/or Get Up and Go test? 21

22 Morbidity All Combination Products Policyholder faces choice: Death Benefit now or later Can result in delayed d claim but more severely impairedi Rider Tax Code Qualification 7702B type only require certification of 90 days impairment 101(g) type require permanent impairment 22

23 Premium Funding Acceleration Plus Extension Most common is single premium Tied to asset repurposing Smaller Net Amount at Risk Multi-pay opens up new market opportunities Acceleration Only Most common is multi-pay Larger Net Amount at Risk 23

24 Persistency Acceleration Plus Extension High persistency, the LTC need doesn t go away Return of Premium feature adds potential ti of disintermediation risk Acceleration Only Does addition of the rider make the product stickier? 24

25 Commissions Acceleration Plus Extension Rate applied to asset, similar to annuity Acceleration Only Base product target t and excess Addition of rider increases target premium 25

26 Investment Strategy Acceleration Plus Extension Need to consider Return of Premium feature in cash flows Interest t rate spikes, competitor products Current low interest rate environment Acceleration Only Earlier cash flows due to accelerating the death benefit 26

27 Reserves All Combination Products Base Life Reserve Reflect any Return of Premium Feature Base product may have secondary guarantee Reserve for Riders Active Life Reserve Disabled Life Reserve 27

28 Claims Acceleration Plus Extension Generally reimbursement Monthly benefit determined d by dividing idi face amount by number of months of acceleration Acceleration Only Can be cash benefit or reimbursement depending on rider type Monthly benefit a percentage of death benefit Waiver when on claim? 28

29 Reinsurance Acceleration Plus Extension Death benefit typically fairly small LTC options very limitedit Acceleration Only Typically get reinsurance claim on death 29

30 Alternative Products Life Combination Products Modeling Mechanics and Illustrations Linda Chow, FSA, MAAA Consulting Actuary, Milliman Chicago (312)

31 Agenda Pricing and Modeling considerations for Life/LTC combination products (7702B) Chronic Illness Rider (101g) 31

32 Life/LTC Product Basics (7702B) Various base plans including single premium universal life, flexible premium UL, WL, and VUL First Generation - Accelerated Death Benefit LTC rider (ADB) Pays out a specified portion of DB per month with a proportionate reduction to CV s Charge structure typically YRT per thousand of NAR, but a growing number of states (at least 5 including FL, NC, OH, CO, and HI) are imposing level charge requirements Second generation - Adds Extension of benefit (EOB) Asset re-positioning: Return assets, a multiple of assets (DB), or a multiple of DB (EOB) Inflation option rounds out the coverage and addresses the comprehensive LTC need 32

33 Life/LTC Product Basics Life Insurance Values (Year 3 claim) $600,000 $500,000 Cumulative LTC Benefits (4 Year ADB + 4 Yr EOB) $400,000 EOB $300, IPR ADB $200,000 $100,000 $

34 Design Considerations Acceleration and Life Inflation benefits Monthly Maximum Lifetime Maximum Costly at younger ages Partial withdrawals and loans and impact on: LTC benefits ROP benefits 34

35 Modeling Considerations Important to capture the interactions of benefits and track the different cohorts of policyholders moving on and off ADB claims Modeling the effects of LTC payments on an underlying Life contract Keep track of the policy values for the different cohorts Disabled lives Recovered lives Active lives 35

36 Modeling Considerations (cont d) Best approach to model incremental returns on ADB is to examine cash flows for life plus ADB, then for life only, and use the differences The net effect will reflect ADB charges, ADB benefits, ADB reserves, reductions to future life benefits and charges, etc. Premium income and benefits in later durations for life plus ADB will be less than premium income and benefits for life only, because of ADB claims Incremental returns can show multiple sign changes and IRR anomalies, even with Becker method 36

37 Modeling Considerations (cont d) Extension of Benefit/Inflation benefits Payment of these benefits does not directly affect underlying policy values Usually layered on top as another increment Can be priced in separate model but will complicate presenting an integrated picture of the cash flows and doing additional analysis Residual Death Benefits need to be captured under either approach Charge Structure YRT charge structure Level charge structure t 37

38 Modeling Considerations (cont d) Active Life Reserves and Disabled Life Reserves There are variations in the calculation, especially for acceleration benefits Reserve approaches for Life and LTC types of calculation may be integrated into a single multi-decrement model per NAIC Model Reg Use of separate model can be problematic due to the need to account for interaction between LTC and Life insurance cash flows 38

39 Modeling Considerations Illustration Examples Life Only Income Statement Life Only Income Product Base Issue Age 65 Present 5.25% Lifetime 10 Years 20 Years 30 Years Premium $ $ $ $ Investment Income TOTAL $ $ $ $ Net Surrender Benefits $ $94.57 $ $ Total Death Claims $ $43.30 $ $ Cash payments for Base ADB Rider $ $ $ $ Cash payments for Base EOB Rider $0.00 $0.00 $0.00 $0.00 Commissions net of chargebacks $39.19 $39.19 $39.19 $39.19 Expenses $45.71 $41.80 $44.59 $45.56 Total Increase in reserve $ $ $ $ TOTAL BENEFITS AND EXPENSES $ $ $ $ PRE-TAX 5.25% $78.35 $27.81 $64.96 $76.80 The numbers are based on the SOA study titled "Quantification of the Natural Hedge Characteristics of Combination Life or Annuity Products Linked to Long-Term Care Insurance Model is based on a single premium whole life product. 39

40 Modeling Considerations Illustration Examples Life/LTC combination Income Statement Life/LTC Combination Income 2-Yr Acceleration + 4-Yr Extension Product Non-Inflationary Issue Age Present 5.25% Lifetime 10 Years 20 Years 30 Years Premium Investment Income TOTAL $ $1, $ $ $ $ $ $1, Net Surrender Benefits $93.80 $58.33 $85.45 $93.17 Total Death Claims $ $43.17 $ $ Cash payments for Base ADB Rider $71.51 $11.28 $39.00 $66.82 Cash payments for Base EOB Rider $47.53 $4.34 $19.72 $39.56 Commissions net of chargebacks $47.29 $47.29 $47.29 $47.29 Expenses $67.00 $51.79 $58.78 $65.07 Total Increase in reserve $ $ $ $ TOTAL BENEFITS AND EXPENSES $ $ $ $ PRE-TAX 5.25% $92.88 $44.44 $83.84 $93.08 The numbers are based on the SOA study titled "Quantification of the Natural Hedge Characteristics of Combination Life or Annuity Products Linked to Long-Term Care Insurance Model is based on a single premium whole life product. 40

41 Modeling Considerations Illustration Examples Incremental Cash Flows Incremental Cash Flows (Life/LTC Combo less Life Only) Product Incremental Issue Age 65 Present 5.25% Lifetime 10 Years 20 Years 30 Years Premium $ $ $ $ Investment Income TOTAL $ $ $ $ Surrender Benefits ($59.04) ($36.24) ($52.59) ($58.04) Total Death Claims ($5.58) ($0.13) $3.43 $0.13 Cash payments for Base ADB Rider $71.51 $11.28 $39.00 $66.82 Cash payments for Base EOB Rider $47.53 $4.34 $19.72 $39.56 Commissions net of chargebacks $8.10 $8.10 $8.10 $8.10 Expenses $21.30 $9.99 $14.20 $19.51 Total Increase in reserve $88.77 $ $ $94.14 TOTAL BENEFITS AND EXPENSES $ $ $ $ PRE-TAX 5.25% $14.53 $16.63 $18.88 $16.28 The numbers are based on the SOA study titled "Quantification of the Natural Hedge Characteristics of Combination Life or Annuity Products Linked to Long-Term Care Insurance Model is based on a single premium whole life product. 41

42 Chronic Illness Rider (101g) Product Basics The maximum amount that a section 101(g) chronic illness rider can accelerate is the life policy s death benefit through an Acceleration Benefit rider The benefit payments received under the 101(g) riders are intended to be tax-free as life insurance The new riders on the market are gravitating toward definitions which reflect the ADL triggers or cognitive impairment as defined in 7702B, although many include an expectation of permanence requirement 42

43 Chronic Illness Rider Design and Pricing Approach Dollar for dollar death benefit reduction approach When an accelerated death benefit payment is made, the death benefit is reduced dollar-for-dollar and the cash value is reduced proportionally. An explicit charge is necessary. Premium or charges for the remaining insurance coverage are reduced. LTCI benefit payments are typically y reduced by loans on a proportional basis. The administrative fee is not normally applied at the time of the accelerated payment. 43

44 Chronic Illness Rider Design and Pricing Approach (Cont d) Lien Approach The payment of accelerated death benefit is considered a lien or offset against the death benefit of the policy Cash value and face amount are not reduced Charges for the rider are not affected Interest rate is prescribed on lien interest The lien amount in excess of cash value is considered non-admitted asset 44

45 Chronic Illness Rider Design and Pricing approaches (Cont d) Discounted Death Benefit Approach The insurer pays the owner a discounted percentage of the face amount reduction. There is no upfront charge for the rider. No constraint to the mortality assumption used for discounted death benefits. There is a wide range of mortality assumptions in the industry. There is constraint to the interest rate. Downside from a marketing perspective the discounted d death benefit can be huge. An administrative fee may apply at the time of the accelerated benefit payment. 45

46 Chronic Illness Rider Design and Pricing approaches (Cont d) Discounted Death Benefit Approach (cont d) Profit objective Disabled life mortality Overall population mortality when the rider is attached Reserving and capital requirement 46

47 Chronic Illness Rider Illustrated Example Dollar for Dollar Death Benefit Reduction Example Income Statement Life Only Life w CIR Premiums & Inv Income 24,917 26,772 Total Expense & Acq 3,136 3,706 Death Benefits 5,479 3,317 CIR Paid Claims 0 3,133 Surrender Benefits 2,275 2,100 Chg Reserves 11,482 11,902 Pre-Tax Income 2,545 2,614 47

48 Chronic Illness Rider Illustrated Example Lien Example Balance sheet Proj Year Invested Assets (end) Statutory Liability (end) Cumulative Lien Amount Taken Admitted Lien Amount Admitted Assets Nonadmitted Assets 0 15,000 15, , ,450 15,450 10,000 10,000 15, ,910 20,000 15,910 15,910 4, ,390 20,000 16,390 16,390 3,610 48

49 Chronic Illness Rider Illustrated Example Discounted Death Benefit Example A UL Policy for Male Issue Age 55 with $100,000 Face Amount at Issue NAAR Discount Factor (11) = [PV(NAAR) - PV (COIs)]/NAAR = 60.5% Policy Duration PV (NAAR) PV(COIs) NAAR CV Discount Factor 6 63,117 12, ,744 4, % 11 64,825 11,899 87,530 12, % 16 61,316 12,021 77,133 22, % 49

50 Chronic Illness Rider Illustrated Example Discounted Death Benefit Example (cont d) An initial Claim request at duration 11 for 50% acceleration of the face amount with incidence id rate 0.5% and disabled mortality 10% Total Claim Payment = % of Face Amount accelerated * (CV + NAAR*Discount Factor) Policy Duration Requested Face amount Per claim Per Claim Payment CV after Payment Per policy DB after Payment Per Policy Total Claims Paid w Incidence Disabled DB Paid w Disabled Mort 11 50,000 32,712 6,234 50,

51 Alternative Products Questions? 51