Session 84 PD, SOA Research Topic: Conversion Mortality Experience. Moderator: James M. Filmore, FSA, MAAA. Presenters: Minyu Cao, FSA, CERA

Transcription

1 Session 84 PD, SOA Research Topic: Conversion Mortality Experience Moderator: James M. Filmore, FSA, MAAA Presenters: Minyu Cao, FSA, CERA James M. Filmore, FSA, MAAA Hezhong (Mark) Ma, FSA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 October 2016 SOA Annual Meeting Session 084PD: SOA Research on Term Conversions October 25, 2016 Jim Filmore, FSA, MAAA, Vice President & Actuary, Individual Life Pricing

3 Agenda 1. Definition of a term conversion option 2. Example: Impact of term conversions 3. SOA Sponsored Research on Term Conversions 4. Questions? Nov 25,

4 1 Definition of a Term Conversion Option

5 Definition of a term conversion Contractual right offered on most term policies sold in the United States Gives option to convert existing term policy into a permanent policy without providing evidence of insurability Up to existing term face amount Decision made during the conversion period Define eligible policies into which the policyholder can convert Nov 25,

6 2 Example: Impact of term conversions

7 Sample impact of term conversions Assumptions Term new business is double perm new business 1% term conversion rate in typical year 3% term conversion rate at end of conversion period Mortality on term conversions is x% higher than non-conversions Impact on mortality in perm block 1/10 th of x% by duration 5 1/5 th of x% by duration 10 1/3 rd of x% by duration 20 Nov 25,

8 Sample impact of term conversions Nov 25,

9 3 SOA Sponsored Research on Term Conversions

10 SOA sponsored research on Term Conversions Co-sponsored by: Product Development Section Reinsurance Section Committee on Life Insurance Research (CLIR) SOA Project Oversight Group (POG) POG conducted an initial survey in 2014 to gauge interest before RFP Research recently completed: Phase 1: Survey of term conversion practices (published in May 2015) Phase 2: Mortality study on term conversions (published June 2016) Nov 25,

11 Project Participation and Background Pre-RFP Survey (28 companies responded) Gauge interest in a study Designed to be answered quickly Phase 1 Survey (21 companies responded) Building on the pre-rfp survey Conversion option parameters Assumptions Administration Phase 2 Experience Study (17 companies responded) Conversion utilization rates Mortality and lapse experience on converted policies Nov 25,

12 Pre-RFP survey result Where does your company limit conversions relative to the term level period? Level Term Period Average Conversion Cap (Duration)* 10-year year year year year 24.7 The most common response was to end the conversion right at the end of the level term period along with an attained age cap. However, some companies ended the conversion right prior to the end of the level term period. Note: This information is publicly available. Nov 25,

13 Do you limit term conversions into certain products? In the Pre-RFP survey, 15 of the 25 respondents stated that their company does not restrict the term conversions into certain products. In the detailed Phase 1 survey, 16 of the 21 respondents stated that their company does restrict the products into which the term policies can convert. Ex: Only into Whole Life; Not into ULSG; Not with certain acceleration riders; into a conversion only product. Pre-RFP survey results Phase 1 survey results No Yes No Yes No Yes No Yes Nov 25,

14 Point-In-Scale-Mortality (PISM) Mortality post conversion relative to the comparable non-conversion experience. Typically, the comparison would be made to a permanent policy at the same duration since issue. The proxy used in the SOA research was the non-conversion term experience at the same duration. 100% PISM = No mortality anti-selection observed after conversion. 125% PISM = 25% mortality anti-selection observed after conversion. PISM is essentially a ratio of the A/E for converted policies as compared to non-converted policies. Nov 25,

15 Phase 1 Survey: Level conversion mortality multiple or graded multiple by duration? Nov 25,

16 Anticipated factors impacting conversion experience Intent by agent and policyholder at time of sale for original term policy. Such as purchase term now and convert to perm when you can afford the higher premiums Term conversion option parameters Duration compared to level term period. Attained age cap Opportunity for a change in health status since original underwriting 30-year term vs. 10-year term Ongoing encouragement of conversions by writing company and/or distribution Conversion credits offered (especially for early converters)? Time when conversion occurs relative to end of option period Products available for converters Nov 25,

17 Time of Conversion Example Nov 25,

18 The work of science is to substitute facts for appearances and demonstrations for impressions." The SOA Motto by John Ruskin

19 4 Questions?

20 Thank you!

21 Hezhong (Mark) Ma VP & Actuary - RGA 10/24/2016

22 SOCIETY OF ACTUARIES Antitrust Notice for Meetings Active participation in the Society of Actuaries is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities: DON T discuss your own, your firm s, or others prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins. DON T stay at a meeting where any such price talk occurs. DON T make public announcements or statements about your own or your firm s prices or fees, or those of competitors, at any SOA meeting or activity. DON T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. DON T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so. DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section. DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information. DO be alert to improper activities, and don t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel or from the SOA s Executive Director or legal counsel. 2

23 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 3

24 Term Conversion - Experience 4

25 Aggregate Observations 5

26 10 Year Term Conversion Rates Duration Conversion Rate (Count) Table 4.2 T10 Conversion Rate (Amount) Conversion Count 1 0.6% 0.5% 11, % 0.7% 19, % 0.7% 16, % 0.6% 14, % 1.0% 20, % 0.6% 9, % 0.6% 8, % 0.7% 7, % 0.7% 6, % 5.1% 33, % 5.2% 7, % 1.7% 2, % 1.3% 1, % 1.8% 1, % 1.3% 937

27 Post Conversion PISM By Duration Since Conversion

28 Post Conversion PISM By Duration Since Conversion, T10

29 Post Conversion PISM By Duration Since Conversion And Conversion Group

30 Phase 1: Survey Assumption Results Variety of Assumptions declining or flat multiples used for assumptions

31 Post Conversion PISM Phase 1 Assumption vs Phase 2 Experience

32 Post Conversion Lapse Rates By Duration Since Conversion, Conversion Group

33 Experience by Policy Characteristics 13

34 10 Year Term Conversion Rates By Gender

35 Post Conversion PISM By Duration Since Conversion and Gender

36 Post Conversion Lapse Rates By Duration Since Conversion, Conversion Group and Gender

37 10 Year Term Conversion Rates By Smoking Status

38 Post Conversion Mortality and PISM By Duration Since Conversion and Smoking Status

39 Post Conversion Lapse Rates By Duration Since Conversion, Conversion Group and Smoking Status

40 10 Year Term Conversion Rates By Issue Age

41 Post Conversion PISM By Duration Since Conversion and Issue Age

42 Underwriting Classes 6 Non Smoker Classes, 3 Smoker Classes, 1 Aggregate Class

43 10 Year Term Conversion Rates By Risk Class

44 Post Conversion PISM By Risk Class

45 Post Conversion Lapse Rates By Risk Class

46 10 Year Term Conversion Rates By Face Amount Band

47 Post Conversion PISM By Duration Since Conversion and Face Amount

48 Post Conversion Lapse Rates By Conversion Group and Face Amount

49 10 Year Term Conversion Rates By Premium Frequency

50 Post Conversion Lapse Rates By Duration Since Conversion and Premium Frequency

51 Pricing and Reserving 31

52 Which product funds the option?

53 Which product should funds the option? If the option has no value Perm policy is perfectly priced -> no extra charge needed If the experience is not changing Perm takes extra mortality -> price is built in Realistically? Term matching revenue with risk

54 Two Staged Model Model 1 - Perm side Claim cost per Conv. By Conv. Excessive mortality conversion reserve Model 2 - Term side Premium charge Claim Cost per policy in force Premium Reserve

55 Perm Side Baseline Table 1 - Permanent Life Single Premium Continuous Attained Base Mortality Perm Const. Force Death Benefit EOY Dur_Since_CV Duration Age (lapse) q x bar per $1,000 PVFB Mortality Multiple Mortality q x (total) p x a bar x1 (1) (2) (3) (4) (5) (6) (7) (8) (9)

56 Perm Side Converted Policy Table 2 - Conversion Single Premium Continuous Attained Conversion Conversion Const Force Death Benefit EOY Reserve Dur_Since_CV Duration Age Multiple Mortality q x (lapse) q x (total) p x a bar x1 bar per $1,000 PVFB per CV (1) (2) (3) (4) (5) (6) (7) (8) (9)

57 Perm Side Claim Costs per Conv. Smoking Status Class Single Prm -... Chart 1 - Claim Costs per $1,000 Converted Face Amount Issue Age of Term Po... Sex 55 - M 55 - F 35 - M 35 - F Duration at Conversions Dur of...

58 Perm Side Reserve Pattern Chart 2 - Permanent Reserves for Conversions Dur of CV 1 Dur of CV 5 Dur of CV Durations since Conversion

59 Term Side Projection Table 3 - Term Life Projection Attained Base Mortality Select Term Const Force Duration Age Mortality Multiple Factor Mortality (lapse) q x (conversion) q x (total) q x p x a bar bar x1 (1) (2) (3) (4) (5) (6) (7) (8) (9)

60 Term Side - Continued Table 4 - Term Life Projection - Continued per $1,000 Converted Gross Prem Attained Single Prem undecrmted EOY to Amort CV EOY Net Lvl Prm Terminal Duration Age Due to Conv. Claim Costs PVFB BOY PVFP($1) Factor Reserve (10) (11) (12) (13) (14) (15) (16) %

61 0.350 Term Side Premium for Convertibility Sum of Pre... Chart 3 - Convertability Net Premium Sex Class F - 1 F - 2 F - 3 M - 1 M - 2 M N U S Smoking... Issue...

62 Term Side Reserve Pattern Chart 4 - Term Reserve for Convertions Policy Durations F 35 F 45 F 55 M 35 M 45 M 55

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