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Evolution or Revolution

•Fazal Wadud, AVP Underwriting

Kim Montgomery, Sales Director

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Agenda – Trends in underwriting

Demographics – changing

Economics – changing

Reinsurance – changing

Service – changing – case study

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Demographics

� Epidemic of obesity in North America

� Obesity � diabetes epidemic

� Diabetes epidemic � cardiovascular diseases

� Stroke, heart attacks

� Cholesterol, glucose, blood pressure, sleep apnea

� Mortality rates improved

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Economics

Companies have changed their focus – Profitability driven

ROI – return on investment

Impacts:

� Reinsurance

� Need to reinsure more risk

� Little flexibility or underwriter discretion

� Mergers and acquisitions

� Consolidation to acquire a larger market share

� Few players, less capacity

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In simple terms

What does it all mean?

More questions?

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1990 Canadian life insurance companies

Companies A to H

Abbey Life Insurance Company Colonia Life Insurance Company

Aeterna-Vie Commercial Union Life Assurance

Aetna Life Insurance Co. Confederation Life Insurance

Aetna Life Insurance of Canada Co-operators Life Insurance Company

Allstate Life Insurance Crown Life Insurance Company

Allstate Life of Canada Empire Life Insurance Company

American Life Insurance Company Equitable Life of Canada

L’Assomption Mutuelle L’Excellence, Compagnie d’assurance-vie

Assurance-Vie Desjardins Financial Life of Canada

Canada Life Assurance Company Gerling Global Life

Canada General Life Great-West Life Assurance Company

Cigna Life Insurance of Canada Hartford Life Insurance Company

Citadel Life Assurance Company

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Companies I to N

Imperial Life Assurance Company Metropolitan Life of Canada

Industrial – Alliance Life Mutual Life of New York

IOF Mutual of Omaha Insurance Company

La Laurentienne Vie National Life of Canada

Laurier Life Insurance Company NN Financial

Life Insurance Company of N.A. New York Life Insurance Company

London Life Insurance Company New York Life of Canada

Lutheran Life of Canada North American Life Assurance

Manufacturers Life Insurance Co. North West Life Assurance

Maritime Life Insurance Company Norwich Union Life Insurance

Metropolitan Life Insurance Company

1990 Canadian life insurance companies

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Companies P to Z

Paul Revere Life Insurance Company Sun Life Assurance

Pioneer Life Assurance La Survivance Mutuelle

Province Unies Assurances Toronto Mutual Life Insurance

Prudential Assurance Gr. Transamerica Life of Canada

Prudential Insurance Company Transamerica Occidental

Reliable Life Insurance Company Travellers Insurance Company

Royal Life Canada L’Union Canadienne Assurance – Vie

La Sauvegarde, cie d'ass sur la vie L’Union – Vie Mutuelle

Seaboard Life Unum Life Insurance

Solidarité Cie D’Assurance Wawanesa Mutual Life Insurance

Sovereign Life Insurance Westbury Life Insurance

Standard Life Assurance Company Western Life Assurance

Sun Alliance & London (Canada) Zurich Life Insurance of Canada

1990 Canadian life insurance companies

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2006 – 2011 Canadian life insurance companies

AIG Life of Canada Manulife Financial

L’Assomption Mutuelle IOF (Foresters)

AXA Assurances Inc. MD Life

BMO Life RBC Life Insurance Company

Canadian Premier Life Insurance Company Reliable Life Insurance Company

Cigna Life Insurance of Canada Scotia Life

Co-operators Life Insurance Standard Life of Canada

CUMIS Sun Life

Desjardins Financial Security La Survivance Mutuelle

Empire Life Insurance Company TD Life

Equitable Life of Canada Transamerica

L’Excellence, Cie d’assurance-vie Union du Canada

Great West Life Union Vie Mutuelle

Industrial Alliance Unity Life

Faith Financial

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1990 Reinsurers

13 companies :

BMA (Business Men Assurance)

Canadian Re (Swiss Re)

Cologne Re

Crown Re

ERC Re

General Re

Gerling Global (Revios Re)

Lincoln National

Mercantile & General

National Re (RGA Re)

Munich Re

St-Lawrence Re (Optimum Re)

Storebrand

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2006 – 2011 Reinsurers

6 companies:

Munich Re

Optimum Re

RGA Re

SCOR Re / (Revios)

Swiss Re

Aurigen

…Conséquences…

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Reinsurance impacts

So if I understand:

� Fewer reinsurers

� Pricing rates – preferred, etc

� Fight for market share – capacity

� Less risk to assume by the companies

� Changes in reinsurance agreements

� Account audit – claim review

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Why consider the reinsurers?

Asset-liability management:

� New business financing

� Capital cost reduction –corporations seek return on equity (ROE)

� Enhanced profits

� More aggressive pricing

� e.g., mortality rates improvement

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Mortality rate improvement is generally good for life insurance products…

If clients live longer:

� More premiums are paid

� Death benefit is paid later

� More profitable

Irène can you explain some example of exceptions:

� Large percentage of face amount reinsured

� Reinsured amount is level

� Reinsurance rate higher than mortality statistics

� Improved mortality = increased liabilities

� Less profitable

Life annuities…a different story

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Reinsurance approaches – Overview

Base Reinsurance

Reinsurance Structure

Reinsurers Choice

or or

or

or

ART

Coinsurance

100% to one reinsurerShare

Share of surplus

% to several reinsurers

Alphabetical share

% per life

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Other reinsurance aspects

Please explain:

� Retention

� “Shopping”

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Retention

� Over 70% of new business face amount is reinsured

� 2005 new business on first dollar Q/S reinsurance

Source: Munich Re’s 2005 Pricing Survey.

Average Retention

Preferred Non-Preferred

Term 14% 23%

UL Level COI 27% 21%

UL ART COI 27% 16%

Whole Life Participating Insurance N/A 20%

Other Permanent Insurance 38% 13%

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The effect of “shopping” optional reinsurance

� Study completed by TLC

� Why “shopping”?

� Is it worth the cost and delays?

� Shopping risks?

� Results:

� All declined cases were also declined

� 50% TLC had a better offer

� 50% reinsurer had a better decision

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What does all this mean?

� Different underwriting reality

� Less flexibility

� More requirements

� Less capacity overall

� Less underwriting diversity among underwriters and insurance companies

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Actuarial, selection and reinsurance

Selection controls three key elements in pricing:

� Risks quality:

� Good selection at better mortality/morbidity

� Good experience at lower reinsurance costs

� Good judgment at appropriate premium

� An effective selection reduces the cost price:

� Ordering too many tests is expensive and causes delays

� Ordering even more reduces the investment rate and increases the unit cost

� Credibility and consistency:

� Following the selection and actuarial guidelines is critical

� Good habits reduce reinsurance costs

� Exceptions without the support of the reinsurers is too expensive, and we can’t afford them

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Now let’s review our typical cases…

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Case study #1

A svelte preferred risk?

T10 – $750,000

Male, 55, non-smoker

Build : 5’ 8”/202 lbs.

Blood pressure Tx.

Cholesterol Tx.

No driving while under influence (DWI), two speeding tickets (in 2009 and 2011)

Family history: father died of an infarct at age 60

Smoking: quit two years ago

Finance: Businessman – income: $75,000

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Case study #1 – Call from broker to obtain some tips to present to his client (Alain)

� Avoid strenuous exercise before paramedical exam

� Do not smoke prior to the exam

� Recommended to drink water

� Blood test on an empty stomach, if possible

� Details, details, details and more details

� How can I help?

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Case study #1Results received – Para/blood profile

Male, 55

Build: 5’ 8” / 298 lbs

Blood pressure: 150/95

Cholesterol 206, ratio 6.5

Driving record: no driving history

Family history: mother died from stroke at 59, father died from infarct following a stroke at age 60

Non-smoker

Blood Profile

GGT (a liver enzyme) elevated at 185 (normal to 65), cholesterol 206

ECG

Widespread minor T wave

changes consistent with mild

ischemia

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Case study #1

Underwriter’s dilemma:

� Case appears to be rateable 150 –175% for cardiac risk profile (family history, cholesterol, build and BP)

� ECG is abnormal

� Is the APS requested?

� Large case

� Shop for reinsurers or don’t shop?

� Is the alcohol questionnaire requested?

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Case study #1 – Discussion with broker

� “Here is what we have, and here are some of the things we could do.”

� Under PIPEDA, the underwriter is under some constraints as to what he/she can disclose to the advisor

A good underwriter indicates

options instead of dictating the

course of events

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Case study #1

Underwriter’s recommendation:

� Face amount as requested (i.e., with no APS) with 200% rating without reinsurance

� With a favourable APS, rating could be 150%

� With a favourable APS and a favourable current stress test at the client’s/provincial health’s expense, could be borderline standard

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Case study #2

Angela, 39, non-smoker

UL face amount: $2,800,000

Investor

Income: $160,000

Net worth: $2,000,000

No insurance in force

Premium $80,000

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Case study #2Results received and discussion with broker

� Build 5’ 6”/145 lbs

� Good BP 120/85

� No cholesterol problem: ratio 5.2

� No driving history

� Family history: in good health

� Urine test positive for nicotine

� Tips/questions:

� What do her assets consist of?

� Statement of investment income

� Where does the premium come from?

� What about her smoker status declaration?

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Study case #2Response from broker

� Angela immigrated to Canada with her son as an investor

� Asset amount declared to Canada Immigration = $4,000,000; funds already wired to Canada $2,000,000. Market value of her home $750,000.

� Insurance coverage is necessary for income replacement, personal needs and investment

� Spouse still lives and works in China. Spouse is the manager of an industrial company

� Angela lives off her investment income from China – formerly a bank manager. ‘07 income $80,000, ‘08 income $90,000. Canadian net worth $800,000.

� Exception request for non-smoker rates:

� 1 cigarette on rare occasions only < 3 cigarettes in the last year

� Does not smoke cigars, marijuana or anything else (does not even inhale when used). Only had a couple of puffs during a celebration last year.

� Retest?

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Investors & immigration;Smoker vs. non = smoker

� The Canadian Immigrant Investor Program states that investors must

� Show that they have business experience

� Have a minimum net worth of $800,000 that was obtained legally

� Make a C$400,000 investment

� Consider the value of Canadian assets, final expenses and her young son

� For case #2, we offer the requested coverage at smoker rates

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Case study #3

Julien, male, 13 years old, $1,000,000

Family is shareholder of a holding company

Julien has an existing coverage : $50,000

Broker note – his mother owns a chain of fast food restaurants. Her income is $1,300,000

Father owns another chain of restaurants and has a life insurance policy of $3,000,000 in force

They have 7 children, ages 13-25

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Case study #3 – Broker’s explanations

� Family net worth is $10,000,000

� Insurance objective: savings plan

� Parents want to purchase an insurance policy on the life of their children. However, an additional $1,000,000 on Julien is necessary, as he is the only son (cultural issue) total coverage of $2,000,000.

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Case study #3

Broker confirms through third party:

� Disclosure of information related to the financial affairs of the mother

� Accountant confirms that he was named trustee to manage the property bequeathed to the children

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Case study #3

� We completed an in-house search on all family members and had information on both parents. We were comfortable that their businesses were profitable and all siblings were being treated equally, except for the request for the additional $1,000,000 on the life of their son.

� We requested an APS, medical exam, HOS and a copy of the final illustration to ensure this policy is not a minimum funded UL

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Case study #3

� We felt $1,000,000 should be sufficient and that Julien should be treated in an equitable manner with his sisters

� We would also consider this case if the premiums paid on all children were the same amounts, though the face amounts would be different. This is still considered equitable treatment.

� The face amounts should not be rounded up, but should be an odd number

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Children’s insurance

� Amounts must be consistent with total family income and net worth

� Parents’ insurance needs should be covered first

� All children must be treated equitably

� Cover letters and illustrations must be obtained should the face amount be $1,000,000 and more

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Case study #4

Mario, 61

Face amount: $4,000,000

Farmer

Reported income for tax purposes: $40,000

Farm value $5,000,000

Loan of $3,000,000 with his credit union

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Case study #4

� $4,300,000 business insurance in force, no replacement

� Has 4 children

� Based on 2010 financial statements:

Net income before tax (NIBT):

$1,241,686

Retained earnings: $1,912,759

Shareholder’s equity: $2,422,029

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Case study #4

Broker’s financial justification:

� Son Jake will inherit the farm valued at $4,000,000. He has played a key role on the farm for several years

� Farm’s FMV is $7,000,000

� Insurance is required for his 3 daughters for estate equalization at $1,300,000 each

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Case study #4

� Thank you for all these explications and justifications, to date all seem in order

� But there is a comment to get an additional policy to increase the face amount to $5,000,000 – a new FMV calculation was completed which showed the farm is now worth $6,000,000

� Would you approve the additional $1,000,000?

� What should we do?

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Case study #4

� At $4,000,000, his 3 daughters will each inherit $1,300,000

� If face amount increased to $5,000,000, each daughter will inherit $1,600,000

� Did the FMV change due to the current state of the economy?

� What will be the total amount in force?

� What further explanation can we provide?

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Estate equalization

� Treat all inheritors equitably if not equally

� Three options:

� Provide alternative estate assets of equal value

� Insure parents for an amount equal to family business

� Establish a buy/sell agreement among all siblings funded by insurance

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Case study #5 – Driving offense and risk

Male 28, smoker

Term 20 – Face Amount: $750,000 – mechanic

DWI: in 2005 and 2006, 3-year suspension, 3 days in a treatment centre, driver’s licence recovered in 2009

One trip each year to Israel, for one month

2001 to 2006: 48 beers/week, 1 bottle of wine/week

Currently, 1 to 2 beers/day and 2 to 3 glasses of wine on weekends

Moved from the country to the city. Is married, has one child and another on the way within 5 months. Owner with his father-in-law of the family business. Never wanted to drink seriously, it was a youthful mistake and an error of judgment. This is why he willingly went to the treatment centre to get his driver’s licence back.

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Case study #5 – Driving offense and risk

� Blood Profil: normal.

� Balance of the file: no medical history.

� Myth : Underwriters don’t understand that everyone does some kind of speeding while driving and only a small number of people get caught.

� Reality : Underwriters understand that the risk of accident increase while speeding and the majority of motor vehicle accident is a major cause of death in North America.

� Stastitics are showing that people with the greater risk of motor vehicle accident are :

� Male 30 yrs old or less;

� People doing other avocation sports or lifestyle;

� People with less experience;

� People that tend to drive after drinking;

� The kind of offence also is an indicator of the risk of accident;

� DWI is one of the greatest risk.

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Case study #5 – Driving related problems

� To evaluate the automobile driving with no other risk factors:� Each offence is assigned a point system according to the Motor Vehicle Report and is measured

on the type of offence and the time elapsed since the offence. The total points will determine the decision: either an extra premium, regular rate or postponement.

� The client’s complete risk must be considered

� Participation in a risky sport activity will have a negative impact on the overall risk

� The breathalyzer test resulted in paying particular attention to alcohol use

� Generally, speeding tickets or minor offenses (3 – 4) with no other risk will be considered standard

� Several breathalyzer test – will be considered non-insurable risk if the last offense happened within 2 years

� Alcohol use and abnormal liver function could also be considered as a decline or postponement

What is the decision?

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Case study #6

Yves, 52, capital $2,500,000

This client submitted an application on three occasions, which were declined, as he owned a strip club as one of his businesses

All of his other businesses were hotels

In the current application, it was noted that he sold his nightclub in 2005

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Case study #6 – Broker’s explanations

� The applicant is involved in his church as a religious leader and is very active in fundraising for local charities

� Fair market value of his investment company: $7,000,000

� Net income before tax in 2007: $800,000

� He owns 50% of the investment company

� Detailed breakdown of the companies that he currently owns and his ownership

� He is President and CEO of all except for one

� No criminal history

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Case study # 6 Explanation and additional proofs

� He declared one driving infraction, which the MVR confirmed

� POI: Loan coverage from his credit union to purchase another reputable hotel

� He was replacing the same amount as applied for

� JNW $20,000,000

� Unable to contact the corporate lawyer to determine if there were any court decisions against him or his companies

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Case study #6 – Third party proof

� Name of his business partner and financial statements for all of his companies, as well as a draft copy of the loan from the credit union, were provided. Confirms loan amount of $5,000,000 and insurance was required on each partner

� He also provided T1s for his spouse and himself; their income is $400,000 each

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Case study #6 – Additional proofs

� A list of all the properties that he ever owned was provided, as well as the market value for each

� All properties were owned by him and either a family member (all names provided) or the business partner

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And you? What would you do with this case?Moral hazards

� Moral hazards are generally declined due to lifestyle and possible medical risks

� Caution is advised when the risk involves organized crime, even a very long time ago

� Would you counter-offer for a reduced face amount or just decline?

� Is it worthwhile to issue with a rating or flat extra on these types of risks?

� Should moral hazard cases be shopped?

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Moral hazard – Underwriting

� For case #6:

� We proceeded to check his statements on each application for the consistency of his answers

� We also completed Internet searches on all parties involved, all companies and the credit union

� There was a newspaper article on someone with the same name as his business partner who was trafficking counterfeit designer clothing. The RCMP was involved.

� What would you do?

� What do you think the company did?

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TIPS… How can we accelerate the underwriting process?

Do you follow this process?

� Did the broker provide a cover letter detailing:

� The purpose of the insurance

� The calculation of the amount

� The deposit source

� The concept used

� Was a presentation done at the time of sale? If so, is it attached to the application?

� Is the client aware of all requirements?

� Was a new business cover letter submitted?

� Was the case submitted to another insurer?

� What is the logic supporting the insurance application?

� Explanation of relevant details according to the client history

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What did we learn?

� Trends – obesity, diabetes, coronary disease, attending physician statements, mortality rates increase

� Fewer companies, increased competition, fewer reinsurers… they all want to maximize return of their capital

� Cover letters, how to present your case

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Conclusion

A good underwriter will tell you as much as he or she can about a case

A good underwriter will give you options instead of instructions

When you find a good underwriter, develop a close relationship –a relationship built on two-way trust will make both your lives easier!

Our sales team can help you!

Here’s what we offer you!

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Service

Underwriting

Communication

Three key elements to be considered when recommending TLC to your clients

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Partners

THANK YOU FOR YOUR BUSINESS!

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FOR ADVISOR USE ONLY

The information contained herein is intended for advisors as general information only and is compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy. All opinions contained in the presentation and/or commentaries and/or expressed Transamerica Life Canada are subject to change without notice and are provided in good faith without legal responsibility. This presentation and comments are (i) not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard, (ii) may be the opinion(s) of an individual only and are not necessarily those of Transamerica Life Canada and/or their affiliates, and (iii) do not constitute a specific offer to buy and/or sell insurance. You should not act or rely on this information without seeking the advice of a professional. Transamerica Life Canada and its affiliates cannot guarantee the accuracy or completeness of information presented and accept no responsibility for any loss arising from any use of or reliance on such information.