Session 31 PD, Product Design & Policyholder Behavior. Moderator: Timothy S. Paris, FSA, MAAA

Transcription

1 Session 31 PD, Product Design & Policyholder Behavior Moderator: Timothy S. Paris, FSA, MAAA Presenters: Michael Anthony Cusumano, FSA Timothy S. Paris, FSA, MAAA

2 Product Design and Policyholder Behavior in Life Insurance Michael Cusumano FSA Session 31: Product Design and Policyholder Behavior SOA 2015 Life & Annuity Symposium May 4, 2015

3 Agenda Product Design and Policyholder Behavior Post Level Term Design & behavior Changing design to impact behavior Net Amount at Risk Indicative of premium payment pattern Results from economic environment ULSG Assumptions on behavior in the tail 2

4 Post-Level Term 3

5 10-Year Term: Sample Premium Structure Traditional Jump to ART 4

6 Lapse Experience (Jump to ART) T10 by Duration Lapse Rate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 1,000, ,000 10,000 1, Number of Lapses 0% Level Period Post-Level Period 1 Lapse Rate Median Lapse Rate Number of Lapses (right axis) Source: 5

7 Mortality Experience (Jump to ART) T10 by Duration 450% 10, % 350% 1,000 Mortality Relative to Durations % 250% 200% 150% 100% Number of Deaths 50% 0% Level Period Post-Level Period 1 A/E Mortality Median A/E Mortality Number of Deaths (right axis) Source: 6

8 Shock Lapse Experience (Jump to ART) T10 Duration 10 by Premium Jump Ratio 100% 100,000 90% 80% 10,000 Lapse Rate 70% 60% 50% 40% 30% 1, Number of Lapses 20% 10 10% 0% 1 Duration 11/10 Premium Jump Ratio Duration 10 Lapse Rate Count Duration 10 Lapses Source: 7

9 Mortality Experience (Jump to ART) T10 Duration 11 Mortality by Premium Jump 2000% 10, % 1600% 1400% 1,000 Mortality Relative to Durations % 1000% 800% 600% 400% Number of Deaths 200% 0% 1.01x - 2x 2.01x - 3x 3.01x - 4x 4.01x - 5x 5.01x - 6x 6.01x - 7x 7.01x - 8x 8.01x - 9x 9.01x - 12x 12.01x- 15x 15.01x- 18x 18.01x + 1 Duration 11/10 Premium Jump Ratio Relative Mortality Ratio Number of Deaths (right axis) Source: 8

10 Policyholder Behavior in the Tail Causes and Effects Higher Premium Jumps Increased Lapses Greater Anti-selection Elevated Mortality and Volatility 9

11 Alternatives to Cliff Premium Jump Term Tail Rescue Options Graded Approach Lower initial premium jumps Premium grades to ultimate scale over set period 10

12 10-Year Term: Sample Premium Structure Graded Approach 11

13 Cliff vs. Graded Premiums Cliff jump assumes post-level premiums are 200% of 2001 CSO Per Million of NAAR is immediately prior to the post-level period Discounted at 8%, assuming premiums and death benefit occur at same time Only fully underwritten business, face amounts over 100,000 12

14 Graded Approach Similar to traditional approach Most common approach Best risks still have motivation to lapse Little to no experience past the initial shock Early, but limited, experience is showing favorable results 13

15 Alternatives to Cliff Premium Jump Term Tail Rescue Options Graded Approach Lower initial premium jumps Premium grades to ultimate scale over set period Continued Class Approach Class structure continues into post-level period Alternative to using residual or undifferentiated rates 14

16 10-Year Term: Sample Premium Structure Continued Class Approach 15

17 Continued Class Approach A more fair approach Reward, rather than punish, best risk classes Lacking sufficient experience Best classes will have steeper increases after initial jump Anti-selection still a major concern Risk classes based on potentially stale information 16

18 Alternatives to Cliff Premium Jump Term Tail Rescue Options Graded Approach Lower initial premium jumps Premium grades to ultimate scale over set period Continued Class Approach Class structure continues into post-level period Alternative to using residual or undifferentiated rates Simplified Underwriting Approach Simplified UW application near end of level period Premium jump based on UW results 17

19 10-Year Term: Sample Premium Structure Simplified Underwriting Approach 18

20 Simplified Underwriting Approach Less arbitrary, more fair Learn more about the risk of those persisting May lead to the highest persistency of any option May cause best risks to lapse earlier May incent worse risks to utilize conversion privileges Implementation Legal compliance issue? 19

21 Other Options for Post-Level Term Conversion Programs Target best risks and promote conversion Discounts for early duration conversions Reduces business lost to competitors Doesn t directly address post-level concerns Reduced Face Amount Effectively reduces premium amount increase Improved persistency New Business only Upset PH/Beneficiary? Legal Issues? 20

22 Net Amount at Risk (NAAR) Patterns 21

23 Why care about NAAR pattern? Direct company What is the company on the hook for above and beyond the CV/reserve Different products have different patterns of risk that need to be properly tested Dictates what is shared with reinsurer Potentially exposed to more risk when patterns do not develop as expected Reinsurer NAAR is key component of pricing YRT reinsurance Outside of ULSG and term, products would ideally exhibit a decrease in NAAR Depending on the reinsurance arrangement, NAAR will Remove reinsurer from an excess layer Expose reinsurer to more risk when patterns do not develop as expected If NAAR is not behaving, need to find cause Interest rates Premium patterns 22

24 Premium Patterns SOA Premium Persistency Study (2012) Premium Patterns tested in products Single pay, pay, Level pay High, Medium, Low funding Endow, Target, Minimum (CV=0 at specific point in time) Companies have hard time linking illustration to payment received Many participants assume 100 percent premium persistency. This may seem surprising since researchers do not believe many companies are experiencing level premium patterns. Source: 23

25 Universal Life (UL) & Variable Universal Life (VUL) NAAR from reinsurer view Noticing a flatter NAAR decrease Particularly since the financial crisis Lower decreases at later durations Economic environment does not affect all policyholders equally Flexibility of VUL leads to more volatility in NAAR patterns Hit even harder by the financial crisis than UL Overall, appears to be more funded than UL Are policyholders relying on Cash Values to support COIs? Preliminary evidence seems to show policyholders pay the same premium no matter the environment Could we see wave of lapses when these Cash Values run out? Or will policyholders begin to fund again? 24

26 Universal Life NAAR Experience Option A, by Issue Year & Duration 25

27 VUL NAAR Experience Option A, by Issue Year & Calendar Year 26

28 Universal Life with Secondary Guarantees (ULSG) 27

29 UL with Secondary Guarantees (ULSG) Little experience to date from NAAR study Products are sold with intent of letting SG carry the policy at some point, not the account value Would expect an increasing then constant NAAR pattern From SOA premium persistency study, a significant percentage of ULSG participants reported adjusting the premium persistency assumption in pricing to ensure the policy doesn t lapse. The adjustments reported primarily fall into one of three categories: Assume minimum premiums are paid Assume 100 percent premium persistency Force a catch-up premium 28

30 ULSG Many companies have removed ULSG from being an illustrated product Too early to tell if change is impacting policyholder behavior If most are paying minimum premium, lapse risk may not be impacted Companies have been pulling away from ULSG, but still need to deal with inforce block 29

31 SOA ULSG Survey (2014) Policyholder Behavior in the Tail Policyholder Behavior in the Tail (PBITT) committee distributed a survey to insurers and asked for information on assumptions used in their modeling of ULSG Goal of the survey was to gain insight into companies assumptions in the tail of a stochastic capital calculation. Tail scenario is defined as the scenario which gives the largest present value of the death benefits paid in all years where no COI is collected. 30 Source:

32 SOA ULSG Survey Lapse assumption in tail by duration Decrease in lapse rate assumption as the end of the surrender charge period approaches Lapse rates very low, but not zero, when the guarantee is in-the-money 31 Source:

33 SOA ULSG Survey Who is kept inforce by the guarantee? 32 Source:

34 Thank you for your attention. 33

35 Product Design and Policyholder Behavior Timothy Paris Ruark Insurance Advisors, Inc. May 4, :00-4:15pm

36 Annuity Industry Experience

37 VA Mortality Actual / Expected Less rich Death benefits Living benefits Aggregate More rich

38 VA Partial Withdrawal Frequency Withdrawal Frequency < Attained Age GLWB Non-Qual GLWB Qual No LB Non-Qual No LB Qual

39 VA Partial Withdrawal Frequency Withdrawal Frequency Duration

40 VA Partial Withdrawal Frequency Withdrawal Frequency < Attained Age Commencement Non-Qual Commencement Qual Continuation Non-Qual Continuation Qual

41 VA Partial Withdrawal Amounts Annual Withdrawal as % of Account Value < Attained Age GLWB No Living Benefits

42 VA Partial Withdrawal Amounts Excess Less Than Full Full

43 VA Partial Withdrawal Amounts Younger Ages Less Than Full Excess Full

44 VA Partial Withdrawal Amounts Older Ages Excess Less Than Full Full

45 VA Surrenders Surrender Rate 7 or more or more Years Remaining in Surrender Charge Period

46 VA Surrenders by Company Surrender Rate Years Remaining in Surrender Charge Period

47 VA Surrenders Surrender Rate Years Remaining in Surrender Charge Period

48 VA Surrenders Surrender Rate 7 or more or more Years Remaining in Surrender Charge Period GMIB GLWB GMWB GMAB None

49 VA and FIA Surrenders Surrender Rate 7 or more or more Years Remaining in Surrender Charge Period VA GLWB VA No LB FIA GLWB FIA No LB

50 VA Surrenders ITM 100+% ITM % ITM 25-50% Surrender Rate ITM 5-25% ATM OTM 5-25% OTM 25+% 7 or more or more Years Remaining in Surrender Charge Period

51 VA Surrenders GMIB Shock Lapse Surrender Rate 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 Calendar Quarter <25% ITM 25%-50% ITM 50%-100% ITM

52 VA Surrenders and Partial Withdrawals Interaction Surrender Rate 7 or more or more Years Remaining in Surrender Charge Period No Prior WDs LT Full WDs Full WDs Excess WDs

53 The Market Price of Policyholder Behavior Risk

54 The Challenge

55 21 Assumptions Principles- Based Framework Experience

56 Advantages Ceding Company Reinsurance Company Mitigate non-core risks More predictable financials Improve transparency Growth market Avoid capital markets exposure Manage from first principles Competitive edge Diversified portfolio

57 Bespoke

58 Policyholder Behavior Reinsurance Understand Your Risk Profile Analyze Behavior Design and Place Reinsurance

59 Example 1 Mortality 25

60 26

61 27 180% 160% Claims Premiums 140% 120% 100% 80% 60% 40% 20% Expected

62 28 Example 1 - Mortality In-the-money death benefit guarantees Fluctuations around stable trend Long-term first dollar cover

63 Example 2 Surrenders 29

64 Behavior Cohort Benchmark

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68 34 Example 2 - Surrenders Surrenders for living benefit guarantees Repeated adverse deviation Cat cover for assumption changes

69 Timothy Paris Chief Executive Officer Ruark Insurance Advisors, Inc