DISABILITY INCOME INSURANCE

Where have we been and where are we going?

Melissa Millan

Vice President and Chief Operating Officer, Disability Income

MassMutual Financial Group

March 2004

What We’ll Cover

• The industry

Past

Present

Future

• Opportunities

Baseline - Understanding The Product

• Income protection in the event the insured is unable to work due to illness or injury

• Most coverage is currently written is non-cancelable, premiums cannot ever be increased

• Benefit periods range from 2 years to age 67

• Risk management expertise is paramount, DI is not a volume game

Baseline - Financial Characteristics

• DI is capital inefficient - High acquisition costs- underwriting distribution

- Relatively risky-high regulatory capital charges

- The IRS doesn’t help

- Breakeven doesn’t occur for years/long tail

• Splitting the dollar-who gets what?

Baseline - Statistics Driving Morbidity

• Incidence

• Terminations

• What are we really underwriting?

The Past – Non-Can Premiums1992 $546,673,000

1993 $492,202,000

1994 $465,820,000

1995 $409,365,000

1996 $311,608,000

1997 $286,243,000

1998 $275,292,000

1999 $279,543,000

2000 $269,756,000

2001 $298,413,000

2002 $282,146,000

Source: LIMRA

The Past

• DI industry just emerging from a prolonged period of losses -12 years

• 2002 earnings on average 12%

• Drop outs?

• New entrants?

The Past

“You get yourself into a fix; you get yourself out of it. It’s that simple. There is no way to run the sausage machine backward and get pigs out of the other end.”

Norman Augustine, Harvard Business Review

What Have We Learned?

In the 80s

• Market position drives actions

- Risk management liberalization

• Pricing

• Compensation

• Focused on individually underwritten business

The Present Company Number of Policies Annualized Premium

UNUMProvident 50,054 $50,473,015Berkshire Life 14,398 $30,027,609MassMutual 25,254 $28,792,190Northwestern Mutual 22,981 $27,348,413Met Life / NEF 11,676 $18,769,903Principal Life 8,919 $15,529,972IDS Life 13,669 $15,153,540The Standard 6,383 $10,970,635

Total Industry 210,382 $234,731,254

Source: LIMA 2003 3rd Quarter Sales Results

What Changed?

Product/Benefits• Eliminated or Curtailed

• Own occupation coverage• Lifetime benefits• To age 65 mental/nervous• Cost of living increases• Right to purchase options• 30 day waiting period

What Changed?

Pricing

• Increased rates

• Increased utilization of sex distinct rates

• Surcharges for poor performing regions

What Changed?Underwriting

• Stricter-more rules, fewer exceptions

• Expanded medical testing

• Expanded questioning of the application

• Increased staff training/increases to staff

• Changed occupation classes (generally lower)

• Issue and participation limits

• Replacement ratios

Less concentration of risk – multilife

The EnvironmentEmployer trends

• Health insurance costs rise• More costs shifting to employees• Voluntary worksite sales are increasing

Consumer trends• Available cash eroded• Dual incomes at record levels• Increased focus on preservation of assets

“Traditional” markets saturated?

The Future

• Conning & Co study – aggressive growth will limit long term success

• Companies with diversified portfolios looked upon with favor

• Innovation is critical – products and services

The Future

Shift to multilife• Enhanced risk management benefits• More premium per work effort• Ease of doing business critical

The multilife marketplace• Increasingly competitive-spread sheeting

common• Guaranteed Standard Issue (GSI) is

everything – or not

• Will there be an opportunity for individual?

• Reach untapped markets

2010- 10M more jobs than workers

2012- Women and minorities will

comprise 2/3 workforce

Average age of working population 42

The Future

Product is too expensive• More value needs to be returned to the

consumer

- Benefits need to increase and dividends

also play a role

- Expenses need to decrease

• Increase capital efficiency

• Minimize upfront costs

Carriers must become easier to do business with – without compromising risk managementprinciples

Challenges for the Future

What to Expect

Product enhancements• Critical illness• Retirement vehicles• Long Term Care options• Less costly supplemental benefits• Segment appeal

What to Expect

Service • Electronic, electronic, electronic• Enrollment,education,billing• Customer transactions

Underwriting• Streamlined process• Liberalization for most profitable segments

The Value of DI to a Producer

• Is a financial plan complete without this coverage?

• Rich renewal stream

- Value of sale to the agent is well above 100% of premium

• Correlation between agent retention and cross selling

• Market opportunities

What Do the Experts Predict?

• Modest premium growth• Survivors who have focused on profit vs.

market share will attract more business• Profit will continue which will allow survivors

to reinvest in business• Successful companies will find means to

better penetrate the middle class/emerging affluent

• Producer training and education paramount