2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario)

1. L’Institut canadien des actuaires Canadian Institute of Actuaries 2009 General Meeting ●Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) Session/séance : PD 35 How Insurance is Sold Speaker(s)/conférencier(s) : Steve Krupicz, FSA, FCIA

2. Impact on policy experience: Financial planning Sales concepts Impact on pricing & design? Agenda - How Insurance is Sold

3. I support advisors is selling life insurance in the large case market: Technical resource for detailed product knowledge Deal with financial advisor or other advisors or directly with client My (nontraditional) role

4. Financial planning is a shift to selling wants, not just needs This approach is not exclusive to the bank-owned firms More advisors are following a financial planning/wants-based approach Financial Planning

5. Financial Planners - example

6. Financial Planners - example

7. Financial Planning - example

8. Financial Planning • Richard, Mark and professionals like them have changed the way our business is sold & used by clients • Helping clients with building and executing their financial plans • Going beyond insurance needs to fulfill client wants • Not an easy task!

9. Insurers support a planning approach to insurance sales too: Sales concepts in our marketing materials and illustration software gives self-contained units that can be combined into a financial plan Sales concepts

10. Concepts have become “packages” Colour brochures and marketing packages Trademarks, Branding Administration and “How-To” guides for advisors and clients Integrated PowerPoint presentations Sales concepts

11. Sales concepts

13. For a meaningful portion of our business, the concept has become the sale Insurance is a key part of the value that is delivered by the concept But clients increasingly see the whole package; not the components More than just an insurance policy Sales concepts

14. “I own a …” Retirement plan Back-to-back R.C.A. Etc. … not an insurance policy. Sales concepts

15. Could affect many assumptions: The changes in sales techniques is becoming embedded in our inforce business 80’s & 90’s approaches already affecting our experience metrics What will be the impact of the more recent approaches? Impact on Pricing

16. Could affect many assumptions: Lapse in near term Mortality Lapse in long term Premium persistency Coverage persistency Impact on Pricing

17. Could mean lower short term lapse rates: Life insurance can be viewed by some clients as a commodity Estate and Retirement Plans are more long-term and stable Is this already in industry short-term lapse experience? Pricing: short term lapses

18. Could affect mortality rates: Financial planning means a better matching of product to client needs, wants and risks Concepts & planning provide more incentive for positive selection Is there a shift in business mix by socio-economic factors? Pricing: mortality

19. Could affect mortality rates: Is this material? How long before this materializes? Pricing: mortality

20. May mean escalating long term lapses Concepts introduce more risks to clients Greater risks may lead to higher lapse rates in the long term Pricing: long term lapses

21. Personal Leveraged Life Insurance Male 45 Nonsmoker Deposits $25,000/year for 15 years into a UL policy (Level COI, Face + Fund) Borrow from age 65 to augment retirement income until life expectancy (age 81) Sample Case

22. Sample Case

23. Sample Case

24. Financing spread risk Investment return risk Asymmetric >>> more sensitive to lower policy yields than higher borrowing costs More exposed to different tax risks Will this increase long-term lapses? Added risks to client

25. Concepts generally rely on limited premium durations Is this reflected in our pricing models? Will clients stop premiums when planned? Is this already appearing in industry experience? Will this impact long-term lapses? Pricing: premium persistency

26. Some concepts rely on serial reductions in face amount “Hugging the MTAR line” Consider our personal leveraged life insurance example Male; 45; nonsmoker; $25,000/year for 15 years into a UL policy; borrowing commences at age 65 Pricing: coverage persistency

27. Sample Case

28. Planned serial lapsation: Is this reflected in our pricing models? Will clients follow this course as planned or maintain their coverage? Is this already appearing in industry experience? What will happen in the long-term? Pricing: coverage persistency

29. Greater focus on illustrating well Competition measured less on premium or COI rates but the illustrated benefits Adding complexity to our products Impact on design

30. Insurers support planning & concepts through other business practices too: Financial Underwriting Limits Annual premium = 4% of investible assets Annual premium = 30% of after-tax income plus Key Person Needs plus Income Replacement Needs plus Estate Conservation/Debt Repayment Design

31. We need to price & reserve for the risks that these concepts add to our book of business Lapses, etc. Administrative risk Reputational risk Litigation risk Risks

32. Questions &Discussion