Session 58 PD, Living Benefit Riders on Life & Annuity Products. Moderator: Joshua John Wolf, FSA

Transcription

1 Session 58 PD, Living Benefit Riders on Life & Annuity Products Moderator: Joshua John Wolf, FSA Presenters: Carl A. Friedrich, FSA, MAAA Susan J. Saip, FSA, MAAA Bonnie Elizabeth Wolf, FSA, MAAA

2 Living Benefit Riders on Life & Annuity Products Session 58 Carl Friedrich, Milliman Sue Saip, Milliman

3 2 Society of Actuaries Report on Life and Annuity Living Benefit Riders: Considerations for Insurers and Reinsurers SOA research report by Milliman on a wide range of living benefit riders with medically related triggers on life or annuity products, including a survey with responses from 34 direct writers covering 83 different living benefit plans, and interviews with 8 reinsurers Benefit Number of Riders Benefit Number of Riders Chronic Illness 23 Terminal illness 35 Life linked benefits 8 Critical illness 3 LTC accelerated benefits 8 Annuity linked benefits 6

4 Model Regulation 620 Plans Acceleration of life insurance benefits under conditions prescribed by a rider Four allowable qualifying events identified under the Model, which include clauses commonly used to define terminal illness, critical illness, or older forms of chronic illness (specifically, permanent confinement in an eligible institution) A fifth clause allowing for any other definition approved by the commissioner, which has allowed a more modern form of chronic illness trigger that is tied to the Internal Revenue Code (IRC) section 7702B definition of a chronically ill individual (2 of 6 ADL s or cognitive impairment), often with an expectation of permanence requirement Tax treatment under chronic illness and terminal illness designs covered under Section 101(g) of the IRC 3

5 Model Regulation 620 Plans Other Model Reg provisions Lump sum payout option required, commonly interpreted by regulators as annual lump sum, but not in all states No restriction on use of proceeds May not be marketed as LTCI Pricing methods include a dollar for dollar death benefit reduction approach with upfront charges, a discounted death benefit approach, and the lien approach Various filing and disclosure requirements Prescribed limits on interest discounts used under discounted DB approach, and on lien interest rates 4

6 Interstate Insurance Product Regulation Commission Includes a Standard for Accelerated Death Benefits Updated Standard effective 12/2014 Variations from Model Reg Terminal illness must be included if any other type of acceleration is sold Previously included an expectation of permanence requirement, but that provision is now allowed but no longer required under the updated Standard Incidental test requirement, where the premiums and present value of benefits of the rider must be no more than 10% of the corresponding base plan values for the product in aggregate 5

7 Direct Writer Survey Chronic Illness Sales reported for 21 plans in 2013 were $1,197M Attached to a variety of base plans, with the most common being UL (17), WL (10), IUL (8) and VL (6), and even 2 on term Triggers usually include LHCP cert, 2 of 6 ADLs or cognitive impairment, but 7 require permanent nursing home confinement 14 of 23 require expectation of permanence Chronic Illness Approach # of Companies Using Approach Lien approach, all charging 8 interest Dollar for dollar DB 6 Reduction (upfront charges) Discounted DB 9 (2 discount based on underwriting at time of claim, the rest based on age at claim or age and duration since claim) 6

8 Direct Writer Survey Chronic Illness Several state variations of benefit triggers, especially FL and CT Five plans indicate they do not pay for unbilled services or services provided by family members 12 of 21 allow benefits to exceed HIPAA limits Of those offering periodic payments: eight annual, 14 monthly, and others 7

9 Direct Writer Survey Chronic Illness 9 reinsurance deals pay at time of rider claims Three pay on acceleration only on newer business Two pay on acceleration only if 100% of DB is accelerated Required inclusion of terminal illness benefit in many states (and per the Interstate Compact) Very low recognition by direct writers of reduced utilization of chronic illness benefits (and lower mortality) 14 of 23 filed through the IIPRC IIPRC has removed the permanence requirement from their reg (but still allows) But few carriers indicate they expect to modify their triggers 8

10 Reinsurer Interviews Chronic Illness More reinsurers moving to pay benefits at time of rider claim, but various concerns were expressed Prior practices included paying their share at time of death based on NAR frozen at time of rider claim, or based on floating NAR between rider claim and death, or not paying at all Can create some disconnects between direct claim amounts and reinsurance amounts paid, but reinsurance amounts should be aligned with charges Some pay on surrender after a rider claim At lapse you have to figure out what to pay, e.g., what if the CV is greater than the accelerated benefit? 9

11 Reinsurer Interviews Chronic Illness When the base policy is reinsured, but not the accelerated benefits, the reinsurer could collect premium on the life coverage with no payouts If the reinsurer pays at death only, there are questions about the correct charge for the mortality risk between rider claim and death Some reinsurers want to include examples in the treaties, but have encountered some resistance 10

12 Reinsurer Interviews Chronic Illness Many inforce treaties do not clearly address the details of the reinsurance premium and payout calculations Some reinsurers underwriters review direct writers standards to see if there is any need to adjust mortality for anti selection Reinsurers typically rely on the discounting done by the direct writer, but check the calculations before entering a treaty One problem is the discounted value is based on the PV future death benefits PV direct writer's premiums (not reinsurer's premium) Some reinsurers add an extra charge to their quotes in these cases to account for the disconnect 11

13 Reinsurer Interviews Chronic Illness The IIPRC requires that terminal illness must be included with the chronic illness rider, and this has adverse ramifications for the discounted death benefit approach Some reinsurers have expressed concerns about pricing implications Biggest Concern is the Discounted Death Benefit Method Market conduct considerations related to low percentage payouts; more of a concern on the direct side, since reinsurers are a little more protected In the past, very few people have taken a discounted death benefit offer, since the offers have not been viewed as attractive Some reinsurers question whether chronic illness discounted death benefits are ultimately viable without underwriting at the time of claim 12

14 Reinsurer Interviews Chronic Illness Elimination of the permanence requirement by the IIPRC will cause some reinsurers to be less comfortable with the chronic illness risk Some concern about certain riders being issued without what reinsurers consider to be best practice risk controls There is a big distinction between riders that charge a premium versus those that don't Companies charging a premium are now viewing this as a way to grow premium, and a way to provide value to the client No other meaningful issues identified in other rider categories other than to note that a number of reinsurers are not comfortable with assuming LTCI risks 13

15 Chronic Illness Summary Significant interest among direct writers in providing living benefits on life products Several product designs are available to provide those benefits Insurers need to carefully consider marketing and pricing issues for certain designs, notably discounted death benefit approaches Claims experience to date in terms of incidence rates has been favorable, but data is limited Reinsurers are becoming more active in fully participating in these risks 14

16 Direct Writer Survey ADB for Terminal Illness 25 companies provided responses for 35 plans Majority offered on multiple base life insurance product chassis. Base Product Benefit Payment Approach Single Life Only Single Life & Second to Die Single Life & First to Die Discounted Death Benefit Lien Approach No Response 15

17 Direct Writer Survey ADB for Terminal Illness Benefit Mode 3 Common benefit payment triggers Existence of medical condition that is reasonably expected to result in death in a certain number of months; and Written notice of claim LHCP certification 6 Eligibility Lump Sum Only Lump Sum plus additional Option Other Mode LE < 12 Months LE < 24 Months 28 LE <6 Months Varies by Plan 16

18 Direct Writer Survey ADB for Terminal Illness Administrative Expense Charges Among Plans with a Charge Number of Plans Average Median Minimum Maximum 19 $182 $150 $100 $300 Overall claims at or below expected levels 11 plans reinsured the ADB; 24 plans not reinsured Implications if not reinsured along with the base life plan Participants rarely hold additional reserves or target surplus for the terminal illness benefit 17

19 Direct Writer Survey ADB for Critical Illness Defined as the occurrence of a medical condition that, in the absence of extensive or extraordinary medical treatment, results in a drastically limited life span, such as cancer or stroke 3 participants offer the plan on multiple base product chassis which have recurring premiums, and automatically include it with the base policy 2 use the lien approach; 1 the discounted death benefit approach 18

20 Direct Writer Survey ADB for Critical Illness Critical Illness Triggers Cancer (excluding Skin Cancer) Heart Attack Stroke Organ Transplant Renal Failure Benefit amount does not vary by trigger Benefit paid as a lump sum payment Multiple benefits due to multiple triggers No re occurrence benefit No explicit charge 2 of 3 assess an administrative charge when death benefits accelerated 19

21 Direct Writer Survey ADB for Critical Illness 2 of 3 reported claims close to expected levels 1 plan reinsured the ADB; 2 plans not reinsured No additional active life reserve, no claim reserve, and no additional target surplus held for the ADB for critical illness plan 20

22 LTCI Riders: Part 1, LTC ADB only Riders to address long term care needs may be attached to a range of life products Not governed by Model Reg 620, but rather Model Reg 641 and Model Act 640 (LTC) LTC regulations generally apply, with the following exemptions: No inflation protection requirement No LTC nonforfeiture requirement Loss ratio standards do not apply No Shopper s Guide requirement LTC suitability requirements do not apply No requirements regarding availability of new providers, or rights to reduce coverage and lower premiums 21

23 LTCI Riders: Part 1, LTC ADB only Accelerated Death Benefit rider (ADB) Typically pays out a specified portion of Death Benefit per month with a proportionate reduction to Cash Values when traditional LTC triggers are met (2 of 6 ADL s or cognitive impairment) Benefit structures include the dollar for dollar death benefit reduction approach, or the lien approach Expense reimbursement, indemnity, or disability model designs all allowed (vs. chronic illness, which requires a disability model since Model Reg 620 allows no restrictions on use of proceeds) Can qualify as tax qualified LTC under IRC 7702B 22

24 Direct Writer Survey Life/LTC ADB Responses only include plans where an ADB rider is available but no Extension of Benefit rider is available Sales reported for 8 plans in 2013 were $239M 53% of sales were for an approximate 2 year ADB period Average issue age was 56 Most are filed under Section 7702B of the Internal Revenue Code (2 of 10 were filed only under 101g) 23

25 Direct Writer Survey LTC ADB UL is the most common chassis 5 of 8 reported use an indemnity structure, 2 use a disability model (under the latter, no formal billable care is required), and one uses expense reimbursement Several use additional underwriting tools beyond those used in life underwriting including: Prescription Drug Screen Supplemental App Also used by a few: Pre screening questionnaires Phone interviews Cognitive Screens 24

26 Direct Writer Survey LTC ADB A variety of charge structures in use For companies primarily using YRT charges, there are a number of states where level charges are used, but the list of those states vary from company to company All eight plans using current and guaranteed LTC charge schedules Little impact seen relative to policyholder optionality when rider is attached, although expected profits increase for 5 companies Conservation of mortality principle only assumed by 2 of the companies Only four of the plans are priced using an integrated rider/base plan approach 25

27 Direct Writer Survey LTC ADB Both active life and disabled life reserves are typically generated for the rider using LTC reserving principles, but methodologies and results vary and are dependent on the charge structure Surprisingly, for two of the plans it was reported that only a life license was required For the rest, requirements included both a life license and some form of health or LTC license, with variations by state Responses to the applicability of LTCI training requirements were evenly split Six of the eight plans reflect significant filing variations, with the most variations reported for the state of NY 26

28 27 LTCI Riders: Part 2, Life/LTC or Annuity/LTC These include both an accelerated LTC benefit and additional benefits independent of the base plan ( Extension of Benefits or EOB provisions) All LTC regulations apply to EOB provisions/riders Various charge structures allowed, typically including YRT or level charges per thousand of NAR on life hybrids, and either level bp charges or per thousand of NAR on annuity combos Requirements for offer of 5% compound inflation benefit and LTC nonforfeiture benefit apply Poses some challenges in keeping premium levels within acceptable parameters for some designs (IRC 7702 issues, premiums exceeding $1000 per unit of life face amount, etc.)

29 Direct Writer Survey Life/ LTC Linked Benefits 4 attached to single premium products only, one attached to both single and recurring premium plans, and two attached to recurring premium products only Life/LTC Linked Benefit Approach # of Plans Using Approach Expense Reimbursement 5 Disability/Cash 2 Indemnity 0 Maximum Lifetime LTC benefit is linked to the life insurance face amount for all 7 plans Most plans have a 90 day elimination period that does not need to be consecutive, and that is satisfied once in a lifetime 28

30 Direct Writer Survey Life/ LTC Linked Benefits Return of Premium Benefit # of Plans 100% ROP 4 90% (2 years), 100% (years 3+) 1 80% OR 80% grading to 100% 1 None 1 Inflation Protection % Simple Interest Compound Interest #of Plans 3% X 4 5% X 2 3% X 2 5% X 6 29

31 Direct Writer Survey Life/ LTC Linked Benefits All 7 plans include nonforfeiture option in the base coverage, rather than offer as an optional benefit For most plans, the base plan and rider compensation are intertwined, with separable commissionable target premiums defined for the base plan and riders 4 of the 7 plans use in house underwriters to underwrite the benefit Majority of the plans (6 of 7) link the LTC underwriting classes to the life underwriting classes 5 of the 7 plans use in house claims administration Claims experience from 2010 through 2013 has been close to or better than expected for all plans 3 life/ltc linked benefit plans are reinsured: YRT (2), Coinsurance (1) Reinsurer pays share of benefits at time of claim 30

32 Direct Writer Survey Life/ LTC Linked Benefits Most calculate a separate additional active life reserve for the ADB, EBR, and IPR using standard LTC reserving methods When the insured is receiving LTC benefits, most plans hold an additional disabled life reserve for the ADB, EBR, and IPR calculated using standard LTC claim reserving methods 31

33 Direct Writer Survey Annuity/LTC Linked Benefit Basic designs Pot of money (2) LTC lifetime benefit is a fixed multiple of initial premium Tail design (2) LTC lifetime benefit is a fixed multiple of AV at time of claim, claims paid first from AV Coinsurance (0) As tail, but monthly benefits come partly from AV and partly from insurance until AV used up Target markets are those seeking insurance and tax leverage on funds to cover LTC needs Sales reported for 6 plans in 2013 were $320M Authors have information indicating 2014 sales are likely over $500M 32

34 Direct Writer Survey Annuity/LTC Linked Benefit Base plan chassis Number of plans Book Value Annuity 3 Market Value Adjusted 2 Annuity Variable Annuity 1 Premium for base Number of plans Single Premium 4 Recurring Premium 1 (very limited renewals) 33

35 Direct Writer Survey Annuity/LTC Linked Benefit Benefit Structure Number of plans Expense Reimbursement 3 Indemnity 2 Maturity Provision for LTC Number of plans Policyholder can extend maturity date by one year on a year by year basis 2 Ends at base plan maturity date 2 LTC paid up at base plan maturity date 1 34

36 Direct Writer Survey Annuity/LTC Linked Benefit Underwriting Supplemental or expanded app Prescription Drug DB screen Number of plans 5 4 PHI 3 Cognitive screen 3 Face to face exam 2 Medical records 1 35

37 Direct Writer Survey Annuity/LTC Linked Benefit LTC ADB/ EBR charge structure Charges based on level bps assessed against AV (2) Charges based on COI assessed against NAR (1) Charge against the remaining guaranteed amount (2) All charge structures are currently unisex Only one plan is reinsured (coinsurance) 36

38 Direct Writer Survey Annuity/LTC Linked Benefit Charge for Inflation rider Level bps against AV with annual pour in requirement Bps charge against the initial guaranteed amount less withdrawals other than for LTC benefits Number of plans Single charge at issue

39 Annuity Enhanced Payout Benefits Triggered by a Health Condition Not clear what NAIC Regulations apply Often treated as an incidental benefit Interstate Compact has no Standards applicable and will not currently approve Despite being a feature offered by more than a few in the market, no direct writers responded to the survey questions for this product 38

40 39 Annuity Enhanced Payout Benefits Triggered by a Health Condition Typically included with variable annuity or fixed indexed annuity Guaranteed Lifetime Withdrawal Benefits (GLWB) Often referred to as LTC kicker, nursing home enhancement, or doubler benefit Increases withdrawal amount to help pay for LTC costs Amount of increase varies by rider (50%, double, or even triple) Increase may be effective for life or for a limited period, such as 5 years Single and joint life options Fee in addition to base fee charged for GLWB No underwriting

41 Annuity Enhanced Payout Benefits Triggered by a Health Condition Requirements that may be imposed to be eligible to elect: Annuitant cannot already be confined in a nursing home May not already be unable to perform 2 of 6 ADLs Age limits at rider purchase Eligibility for Enhanced Payout: Waiting period (Most riders include; 1, 2, 5 years after rider issued) Age requirement (e.g., over 50) Elimination period (confinement in a qualifying facility for a certain time period (e.g., 90 days, or 180 days of the last 365 days) Confinement in a qualified nursing facility (several require; definitions vary by rider); Alternatively, may use 2 of 6 ADLs for eligibility 40

42 Report on Life and Annuity Living Benefits: Considerations for Insurers and Reinsurers Widespread interest and participation by both direct writers and reinsurers on the topic A wide variety of regulations may apply, and regulatory standards have evolved as these products have emerged Reinsurers are working more with direct writers to provide complete reinsurance mechanisms to support this business Sales information gathered from the survey was fragmented From data gathered for 2013, plus other sources, the authors estimate chronic illness sales (total policy premium) to be $1.2B in first year premium, sales with LTCI riders to life to be over $2B in first year premium equivalence, and annuity hybrid business to be over $300M and climbing Report available on SOA website in April,

43 Session 58 Living Benefit Riders on Life and Annuity Products Bonnie Wolf, FSA, MAAA

44 Should we update our rider? Considerations for: Chronic Illness Riders with dollar for dollar reduction (upfront charge) Life / LTC Combination Products (ABR + EBR) 43

45 Opportunities: Client need Adds value to the base policy by allowing the policyholder to access benefits while alive Generates additional premium Living benefits without being Stand alone LTCI Combination of mortality and morbidity risks result in a natural hedge providing a degree of embedded risk management versus stand alone LTCI Competitive positioning 44

46 Challenges: Administration Monthly claim payments Claims management Underwriting Assumptions / Modeling / Pricing Multi decrement modeling Lack of data Reinsurance 45

47 We are moving forward! Let s revisit some of the challenges listed previously Administration Underwriting Assumptions / Modeling / Pricing Reinsurance 46

48 Underwriting Risk Pool Should there be additional underwriting requirements and questions on the application due to the addition of the rider? (cognitive testing, prescription drug checks, motor vehicle reports, etc.) What impact does this have on the mortality profile of the base product? Will the maximum issue age of the product change? Single Premium Combination Products can you make a case for less underwriting? Is there a maximum face amount for policies with the rider? Will the addition of the rider attract a different population to the base product (i.e. Sex, Socio Economic, etc.)? What impact does this have on the mortality profile of the base product? 47

49 Assumptions No publicly available morbidity experience data for these riders May need to enlist the help of a consultant or reinsurer to set morbidity assumptions Benchmarking on Stand Alone Experience: SOA Long Term Care Experience Committee Reports: Intercompany Study Report 6; ; June 2011 Intercompany Experience Study Aggregate Database; ; January

50 Assumptions Mortality How will the active & disabled life mortality be developed? In theory, the combination of the two assumptions should roll up to the expectation of total deaths from the insured population In practice, conservation of deaths is easier said than done What are your anchor assumptions? Total Mortality Active Life Mortality Disabled Life Mortality 49

51 Assumptions Lapse How does the rider impact the base product lapse rates and deterioration? Will on claim policies be expected to lapse? Is there a return of premium feature in the product design that will affect lapse rates? How are the premiums paid and how does that affect the timing of lapses? 50

52 Assumptions Morbidity Incidence and Termination Will the incidence rate be lower on a Chronic Illness Rider or Life/LTC Combo Product vs. a Stand Alone LTC Product? Not a use it or lose it product Trading LTC benefits for death benefits Policyholder using their own money Will disabled lives stay on claim longer on a Chronic Illness Rider or Life/LTC Combo Product vs. a Stand Alone LTC Product? If they expect to die soon they may choose to preserve the death benefit If they have a long duration (cognitive) claim, they may choose to accelerate the benefits 51

53 Modeling Active Deceased Disabled Lapsed t = 0 t = 1 t = 2 t = 3 Duration 1 Duration 2 52

54 Pricing Techniques Active and Disabled Populations Male 65 NS Model Population Over time, the disabled population makes up a significant portion of the total population, shifting ultimate mortality benefits from the base policy to acceleration morbidity benefits of the rider Total Population % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 70% 60% 50% 40% 30% 20% 10% % of Total Population Disabled 0% Disabled Population Healthy Population % of Population Disabled Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations. 0% 53

55 Pricing Techniques Expected Benefits Total benefits paid over the lifetime of the policy will not change, but the characterization and the timing of the benefits will be different $4,000 $3,500 $3,000 $2,500 Expected Total Benefits For a sample UL product, more than 25% of the total benefits paid will shift from mortality benefits to acceleration benefits by the addition of the rider On a present value basis, the shifting of benefits forward has a pronounced impact (+18.8%) $2,000 $1,500 $1,000 $500 $ Annual Acceleration Benefits w/ Acceleration Rider Annual Death Benefits w/ Acceleration Rider Annual Total Benefits w/o Acceleration Rider Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations. 54

56 Pricing Techniques Policy Dynamics As the face amount of the policy is accelerated, a reduction to the policy account value will also be required For example, if the monthly claim amount for the sample policy is $4,167, there will be changes that occur to the policy s Face Amount, Account Value and Net Amount at Risk Insurance Component Pre Claim Post Claim Change Due to Claim Payment Claim Amount(t) $4,167 Face Amount(t) $100,000 $95,833 $4,167 Account Value(t) $13,959 $13,377 $582 Net Amount at Risk(t) $86,041 $82,456 $3,585 Claim Amount Paid from Net Amount at Risk(t) Claim Amount Paid from Account Value Reduction(t) $3,585 $ Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations.

57 Pricing Techniques Policy Dynamics Due to the acceleration claim activity, there is a significant difference in the inforce face amount in the model population remaining after 20 years 100% 90% 80% 70% Inforce Face Amount 23% Difference in Face Amount The combination of adjustments to the policy face amount and account value from the acceleration claims also impacts the policy s net amount at risk By the end of duration 20, there is an 8% reduction in net amount at risk growing to 43% by the end of duration 30 when compared to the base policy without the rider 60% 50% 40% 30% 20% 10% 0% Face Inforce Percentage w/o Rider Face Inforce Percentage w/ Rider Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations. 56

58 Pricing Techniques Impact to Profitability Present Values Discounted at 10% Profit Metrics Total Benefit Payments Claim Amounts Paid from Net Amount at Risk Insurance Charges Collected* Insurance Profit Insurance Margin Benefit to Insurance Charge Ratio (1) (2) (3) (4)=(3) (2) (5)=(4)/(3) (6)=(2)/(3) Base Policy Only $10,863 $7,535 $8,665 $1, % 87.0% Base Policy and Acceleration Rider $12,910 $9,179 $7,979 $1, % 115.0% Difference ($) +$2,047 +$1,664 $686 $2,330 Difference (%) +18.8% +21.8% 7.9% 206.2% Changes to the universal life policy net amount at risk from the acceleration claim payments are what will ultimately drive the changes to profitability 57 Sample base policy insurance charges are set to 115% of the net amount risk portion of the base policy expected death benefits as a proxy for COI Charges.

59 Pricing Techniques Impact to Profitability The combination of the increase in the present value of benefit payments and reduction in insurance charges causes a significant reduction in the overall profitability level of the policy When the acceleration rider is attached to the policy, there may be a mismatch between the current cost of insurance charges and the level and new shape of benefits $400 $300 $200 $100 $0 $100 $200 $300 $400 Annual Insurance Profit $ Base Policy Profit Profit w/o Additional Charge for Rider Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations. 58

60 Pricing Techniques Impact to Profitability An additional $2,572 (32.2%) of insurance charges would be required to restore profitability The increase of 32.2% over the base policy is significantly more than the 18.8% increase in the total benefit payments. $400 $300 $200 $100 $0 Annual Insurance Profit Simply increasing the insurance charges by the percentage increase in the total benefits will not be sufficient to offset the cost of the acceleration due to the reduction in net amount at risk over time. $100 $200 $300 $400 $ Base Policy Profit Profit w/o Additional Charge for Rider Profit w/ Add'l Charge for Rider Sample UL Product with $100,000 face amount and premiums to fund positive cash value at age 100. Chronic Illness Acceleration Rider pays 1/24 th of the Face Amount each month over a 24 month period. Policy Death Benefit equals Face Amount in all Durations. 59

61 Conclusions These products can help an insurance company grow the top and bottom lines while effectively managing their overall risk profile The major risks underlying the products can be mitigated by solid policy / product design, underwriting, claims management processes, and newly designed reinsurance structures Assumption Development is Non Trivial; Spend Time Asking Questions Building an integrated rider / base policy model is an essential tool in understanding the cash flow dynamics 60