Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
L’Institut
canadien
des
actuaires
IP-5: Anatomy of a
Large Case
Moderator: Lisa Forbes, FSA, FCIA
AVP & Actuarial Consultant
Manulife Financial
Anatomy of a Large
Case
Advisor
Perspective
Des Jardine, CLU, Merit Award Winner
Estate Planning Advisor
TD Waterhouse
2006 General Meeting
Assemblée générale 2006
My background
• Estate planning specialist
• 25 years of experience in the
insurance industry
• Started with Sun Life (Montreal)
• Variety of sales and marketing
roles
• Joined TD when it acquired
Canada Trust
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Assemblée générale 2006
My role
• Employed by Canadian bank to
perform estate planning services
for customers of its stock
brokerage operation
• Insurance policy commissions
form the bulk of my compensation
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Assemblée générale 2006
My client
•
•
•
•
Male, nonsmoker, in his mid 50’s
Long-term investment client
Wealthy
Majority owner of a $15M company
– Runs $1 Billion of funds for a major
mutual fund
2006 General Meeting
Assemblée générale 2006
My client
• Taking a business trip to England
• His wife accompanying him for
leisure
• Referred to me by Investment
Advisor (Nov. 2000)
– Update/revise wills
– Power of attorneys
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Assemblée générale 2006
My tasks
• Reviewed will and Powers of
Attorney
– Dual wills
– Canada Trust as executor and/or
Power of Attorney
• Referred to lawyer and monitored
progress & results
– Needed to avoid large legal bills
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My tasks
• Clearly our client is concerned
about estate planning
• Can we help him further?
• Meet to discuss personal and
business goals
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My tasks
• Client owns 90% of a company
worth $15,000,000
• Wants to get value out at retirement
• Wants to get value out at death
• Wants to be fair to minority partner
My tasks
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• Evaluated the alternatives available
– Retirement Compensation Agreement
(RCA)?
– Corporate Insured Retirement
Program?
– Living Buyout/Share Redemption?
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Retirement Compensation
Agreements (RCA’s)
• Employer promises retirement income;
funds with a Trust set up to manage this
promise
• 50% of every $1 paid into the Trust
goes to CRA (a refundable tax)
– Same penalty for taxable income earned
– Use life insurance to sheltered income
• Tax is refunded (w/o interest) as taxable
income is paid in retirement
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Corporate Insured Retirement
Program (Corp. IRP)
• Company buys a max-funded life
insurance policy
• Company borrows against that
policy to fund retirement income
for employee
• Different tax advantages & risks
than the RCA
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Living Buyout
• Company buys a max-funded life
insurance policy
• Company borrows against that
policy to redeem shares from a
shareholder while they are still
active in the business
• Different timing, taxation & risks
My Tasks
2006 General Meeting
Assemblée générale 2006
Living Buyout
My Client
Partner
80% ---------------90% 85%
20% 10%
-------------- 15%
$
$
Operating Company
$15M FMV
2006 General Meeting
Assemblée générale 2006
My tasks
• Discussions with client’s
professional advisors (auditors,
lawyers, accountants)
• Facilitated discussions with Tax &
Estate Planning Team
– lawyers from insurer who specialize
in estate planning with life insurance
– I take client’s viewpoint
2006 General Meeting
Assemblée générale 2006
My Tasks
• Deciding on optimal go-forward
strategy (living buyout funded by
life insurance)
• Facilitated discussion with
Actuarial Consultant
– actuaries from insurer who specialize
in large case sales
– I take client’s viewpoint
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Assemblée générale 2006
My tasks
• Engage the Underwriting
Consultant (field underwriter from
insurer who specializes in large cases)
– Educate client on need for both
financial and medical underwriting
– Facilitate the financial underwriting
• Financial reports; Tax returns;
Inspection reports
– Can be viewed as very invasive
My tasks
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• Work with underwriting consultant
– Position client for medical tests
• Expectations
• Timing
• Things to avoid, etc.
– Hiccup with Stress EKG
– Needed Stress Thallium EKG (more
meetings/education)
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Assemblée générale 2006
My Tasks
• Stress Thallium EKG (Murphy’s
Law)
– Convince client of the need to proceed
for both personal and financial health
– Client arrives but no doctor
– Irate busy executive
– Arrange apology from president of lab
– Try again one week later
My Tasks
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• Standard offer from insurer
– February 2002
• $15,000,000 initial face amount
– Amount at risk grows to $25M within
20 years
• $1,000,000 annual premium
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Assemblée générale 2006
My Tasks
• Assist in financing for living
buyout program
• Assist in interviewing lawyers to
draft the partnership agreement
• Ongoing review of the policy and
the plan
• Currently working on beneficiary
planning
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Summary
A fairly typical large case:
• Educate client and other advisors
on the options available
• Fact finding & recommendations
• Manage & co-ordinate the
resources available and the process
to place the business
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Summary
A fairly typical large case:
• Manage & co-ordinate the
underwriting process
• Over 1 year to complete the
placement of the policy
• Ongoing review for several years
• Persistency comes from the quality
of the business and service
Anatomy of a
Large Case
Direct Company
Perspective
Steve Krupicz, FSA, FCIA
AVP Special Case Markets
Manulife Financial
2006 General Meeting
Assemblée générale 2006
Agenda
1.
2.
3.
4.
5.
Underwriting issues
Pricing & design issues
Profit considerations
Capacity
Compensation
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Assemblée générale 2006
Case Size
What makes a case “Large”?
• Premiums?
• Face Amount?
• Profile:
– Of the advisor?
– Of the client?
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Underwriting
Medical:
• “Large case” requirements are the
same as “big case” requirements
• May have more trouble getting the
client to take tests
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Underwriting
Medical:
• May receive more information than
you typically get
– Mayo clinic, full body scans, etc.
– What do we do with unusual
recommendations on tests/treatments
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Assemblée générale 2006
Underwriting
Financials:
• Need more information to justify
really large coverage
• Often harder to obtain information
from affluent or successful clients
– Especially for private businesses
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Underwriting
General:
• Travel more often an issue
• Avocation more often an issue
• Sometimes the insured is not the
driving force behind the insurance
• Clients often less receptive to
adverse decisions
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Pricing Issues
Should we change pricing assumptions
for large cases?
• Mortality
• Lapse
• Interest
• Expenses
– Likely to be the outliers on any
statistical studies
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Pricing Issues
How do you treat any cross-subsidies
inherent in the product?
• Investment options
• COI options
• Premium durations and levels
• Actual versus average product
configuration
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Design Issues
Do we alter product terms or features?
• Limits on indexation riders?
• Mandate premium durations or size
to control net amount at risk?
• Surrender charges?
– Higher or lower?
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Assemblée générale 2006
Design Issues
Do we alter product terms or features?
• Different ESA’s for joint policies?
• Limit access to investment options?
• New or customized features?
• Who decides?
– Marketing, pricing, valuation,
management
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Assemblée générale 2006
Design Issues
Do we alter product terms or features?
• Do we pass through to clients any
extra costs?
– Appropriate for pricing/profit targets
– But is it a nuisance to client or advisor
– How do you define nuisance
$1,000/year?
$10,000/year?
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Assemblée générale 2006
Pricing Issues
Should you use the same profit targets?
• Do you need the same profit on the
second $25M of coverage as on the
first $25M?
–
–
–
–
Embedded value?
PVFP?
Premium margin?
ROE?
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Assemblée générale 2006
Capacity
• How much coverage do you issue?
• How big can the policy grow; in
what timeframe?
• What limits are imposed by
reinsurers & pools?
– What happens if you exceed these
limits?
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Assemblée générale 2006
Compensation
Should we lower compensation?
• Should we pay the same
compensation on the second $25M
of coverage as on the first $25M?
• Mandatory or optional?
• How will advisors interpret this
action?
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Assemblée générale 2006
Compensation
Higher compensation?
• Could be justified by lower
placement ratios
• Funding for client costs?
Levelize or spread compensation?
• Advisor shares early-lapse risk
• Can advisors bear this risk?
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Timing
Time is usually too short to allow
debates on many of these issues
• Medical evidence is aging
– Oldest information can become stale
when ink not yet dry on newest
• Clients rarely willing to wait
• Indecision can be a decision
Managing the Risk
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Assemblée générale 2006
Who decides on any of these issues?
Marketing
Pricing
Valuation
Risk officer
Underwriters
Reinsurer
Administration
Tax
Management
Legal
Financial Advisor
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Assemblée générale 2006
Conclusion
• Many issues to consider
• Easier if you contemplate and plan
for these issues before you pursue
this market
• You will need to react to whatever
arises
Anatomy of a
Large Case
Reinsurance
Perspective
Sharad Mehra
Manager, Actuarial Services
Munich Re
2006 General Meeting
Assemblée générale 2006
Reinsurance Perspective
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•
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•
•
What do we need to know?
Understanding Reinsurance Treaties
Large Case Capacity
Financial Underwriting
Overview of the Large Case Market
2006 General Meeting
Assemblée générale 2006
What do we need to know?
• Do I have a name and date of birth?
• How much is being applied for? How
much is inforce?
• Is this a growth plan? Can we get an
illustration?
• Is this a treaty plan?
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Assemblée générale 2006
What do we need to know?
• What is the underwriting assessment?
• Is this a special risk?
• Do I need to cede this to the
retrocessionaires?
• Do I have enough capacity in my retro
pool?
• Any other special considerations?
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Assemblée générale 2006
Our Case
• MNS in 50’s, rated Standard
• Financial underwriting sound
• Increasing NAAR with Ultimate of
$25M
• Performax Plan – non Treaty
• Special Quote Required
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Assemblée générale 2006
Understanding Reinsurance
Treaties – The Easy Part
• Auto limit = amount direct company
allowed to bind reinsurer automatically
• Treaty capacity = amount that
reinsurance rates are guaranteed up to
• Both can vary by age, amount and
substandard rating
• Different for each insurer
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Assemblée générale 2006
Understanding Reinsurance
Treaties – The Hard Part
• Jumbo Limit = Insurance in force plus
current insurance amount to be placed
• Amount is based on ultimate if
increasing plan
• If jumbo limit is exceeded, reinsurers
and retrocessionnaires may not accept
the cession
• Jumbo is NOT net of replacement unless
absolute assignment
2006 General Meeting
Assemblée générale 2006
Process to Reserve Capacity
• Receive application and check for
experience
• Depending on jumbo, auto or fac to
retros
• Send decision up front indicating
available capacity
• First in gets capacity, others subject to
release of facilities
• Capacity is only open for 120 days
2006 General Meeting
Assemblée générale 2006
Large Case Capacity
• Available capacity is shrinking as retros
exit the market
• After 9/11, Euro retros have closed
capacity
• North American company mergers
• Existing retros appetite for large face
decreasing
2006 General Meeting
Assemblée générale 2006
Reinsurance Consolidation
Acquirer
Target
Date
Swiss Re
Scottish Re
RGA
ERC
Swiss Re
Munich Re
Swiss Re
Clarica Re
ERC
Swiss Re
Swiss Re
ERC*
ING Re
Allianz Re
AUL
Lincoln Re
CNA Re
CIGNA Re
Sun Life Re
Phoenix Home Re
Life Re
M&G
2006
2004
2003
2002
2001
2000
2000
2000
1999
1997
1997
*Except North American L&H business. Note that ERC exited North
American market in 2004.
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Assemblée générale 2006
Other Capacity Considerations
• Capacity reduces with age and mortality
• Capacity reduces for entertainers, pilots
and professional athletes
• Fac-obligatory for professional athletes
(team capacity limitations)
• Multiple applications
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Assemblée générale 2006
Multiple Applications
• One or two applications will be seen by all
reinsurers in Canada
• Competitive vs. Concurrent Apps
• On large cases, multiple shopping can tie
up capacity to the extent that no one can
cover risk entirely
2006 General Meeting
Assemblée générale 2006
The Retro Market
• 4 main players in Canada
• Each provides between $2 and $10M of
capacity
• $65M jumbo – at one time was unlimited
• Critical concern is late reporting and
terminations
2006 General Meeting
Assemblée générale 2006
So what is a Reasonable Amount
that can be placed?
• Depends on your retention, who your
reinsurers are and their retrocession pools
• Above $65M there will be limitations
• Cases can be placed up to $100M in rare
circumstances!
• Also need to consider Financial
Underwriting
2006 General Meeting
Assemblée générale 2006
What is Financial Underwriting?
• Financial underwriting relates the
potential economic loss to the face
amount via income multiples, net worth
calculation and business valuation.
• Ask yourself why this much coverage
and why now
2006 General Meeting
Assemblée générale 2006
Why Financially Underwrite?
• To rule out anti-selection
• To verify insurable interest
• To obtain third party verification of the
proposed insured’s financial position on
large amount cases
2006 General Meeting
Assemblée générale 2006
How Financial Underwriting has
Evolved
• What’s New
– More emphasis on financial planning
and investment.
– More complex data, illustrations and
financial u/w formulas
• What’s Unchanged
– Ability to pay the premium or lump
sum dump-in is not sufficient to
justify any and all face amounts
2006 General Meeting
Assemblée générale 2006
Sources of Financial Information
• Application
• Financial questionnaire
• Cover letters from agent, CA and/or
financial planners
• Inspection & Business Beneficiary
Reports
• Income Tax Returns
• Financial Statements
• Internet
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Assemblée générale 2006
Examples of Financial
Underwriting Tests
• Annual or single deposit should not
exceed 20% of net worth.
• (NW x multiplier ) + (Income x Income
factor)
• e.g. Age 50, NW $1,000,000, Income
$75,000
• ($1,000,000 x 3.3) + ($75,000 x 8) =
$3,900,000
• Income Replacement: 5 – 20 x personal
income, with younger applicants having
higher multiples
2006 General Meeting
Assemblée générale 2006
Overview of Large Case Market
Year
# Apps
>$10M
# Placed
>$10M
Placement % of
Ratio
Industry
Premium
2004
408
93
23%
5.0%
2005
391
178
46%
4.7%
Year
# Apps
>$50M
# Placed
>$50M
Placement % of
Ratio
Industry
Premium
2005
17
1
6%
Source: Munich Re Pricing Survey
0.1%
Overview of Large Case Market
2006 General Meeting
Assemblée générale 2006
Year
% of producers that generate 75% of new
business premium
2003
25%
2004
19%
2005
15%
• Increased reliance on a handful of
producers!
Source: Munich Re Pricing Survey
2006 General Meeting
Assemblée générale 2006
Keys to Success
• Get all required information
• Know your reinsurance treaty
arrangements
• Recognize capacity limitations
• Communication between all parties is
key