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
Who Pays Your Last Credit Card Bill? Final Expense Insurance 101 Final Expense Market in the US SOA Life & Annuity Meeting New York, NY May 4, 2015 Brian Sibley FSA, MAAA RGA Reinsurance Company VP Business Development
Final Expense Insurance 101 Final Expense Topics Covered Final Expense Defined Target Market Market Size Typical Sale Product Design Pricing Considerations Applicant and Agent Characteristics Challenges Management Innovations 2
Final Expense Defined What is final expense life insurance? 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 3
Final Expense US Market Size Why are companies targeting final expense? 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 Administration US Census Bureau Population projections 4
Final Expense US Market Size Why are companies selling final expense? High premium volume Product line has growth Demographics support it Undersold market 5
Final Expense US Market Size Best Estimate Projection for new policies and premiums Year New Policies New Premium (000 s) 2014 1,867,972 $1,250,000 2015 1,876,806 $1,269,000 2016 1,897,033 $1,294,000 2017 1,919,570 $1,319,000 2018 1,943,871 $1,345,000 Source: LIC/CSG Final Expense Survey Report 2013 6
Final Expense US Market Size Best Estimate Projection for inforce policies and premiums Year Inforce Policies Inforce Premium (000 s) 2014 6,156,537 $3,779,000 2015 6,279,897 $3,947,000 2016 6,380,281 $4,090,000 2017 6,473,570 $4,219,000 2018 6,563,595 $4,388,000 Source: LIC/CSG Final Expense Survey Report 2013 7
Final Expense Typical Sale What does a typical final expense sale look like? 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 8
Final Expense Product Design What life insurance product designs are normally used? Whole Life Products 3 main types 1. 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 Products 1. Graded Death Benefit Term 2 year grade in for death benefits and decreasing term after the level period 2. 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 9
Final Expense Pricing What are the key components of pricing for final expense products? Mortality Lapse Interest Expenses 10
Final Expense Pricing Mortality 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 11
Final Expense Pricing Mortality Spectrum RGA Mortality Experience by Market Fully Underwritten Residual Standard Face Amounts $100k - $250k 100% Non-Medical Standard Face Amounts < $100k 110% - 150% Mortgage Term, Bank Sold Term, Worksite Standard Face Amounts < $250k 170% - 390% Final Expense Level Death Benefit 300% - 775% Normalized to Fully Underwritten Residual Standard Non-smoker Experience Ranges include variations by company, underwriting, target market, and issue age. 12
Final Expense Pricing Mortality Assumption Rescission Rates Critical Rescission Experience * Level Death Benefit only 13
Final Expense Pricing Lapses 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 14
Final Expense Pricing Interest Rates 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 15
Final Expense Pricing Expenses 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 16
Final Expense Applicant Characteristics What are the characteristics of a typical applicant? 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 17
Final Expense Agent Characteristics What are the characteristics of a typical agent? 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 18
Final Expense Challenges Challenges of the Final Expense Market 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 19
Final Expense Challenges Agent examples of anti-selection or not writing good business: Agents know the companies that don t do Rx, MIB, or do Teleinterviews 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 20
Final Expense Challenges Applicants Anti-selection Applicants will lie about medications they are on or conditions they have Can stack policies if passed underwriting before and can afford more coverage 21
Final Expense Management Management of Final Expense Business is Critical for its success for a company 1. Agents Contracted 2. Agent Commissions 3. Application 4. Underwriting Used 5. Underwriting Process 6. Billing for Final Expense 7. Claims Adjudication 8. Administration and Tracking 22
Final Expense Innovations Are there any innovations coming to this market? 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 23
Final Expense Takeways for the US Market Conclusions and Key TakeAways 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 24
So, we haven t talked you out of it yet? 10 Key Steps to Getting Started! Jeffrey S. Shaw, CLU, ChFC Executive 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 antiselect
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
Session 10: Final Expense Insurance 101 International Trends Jing Lang
UK & Ireland
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
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
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
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
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
End of session Q&A