REPORT LAPSE EXPERIENCE UNDER UNIVERSAL LIFE LEVEL COST OF INSURANCE POLICIES COMMITTEE ON EXPECTED EXPERIENCE INDIVIDUAL INSURANCE SECTION

Transcription

1 REPORT LAPSE EXPERIENCE UNDER UNIVERSAL LIFE LEVEL COST OF INSURANCE POLICIES COMMITTEE ON EXPECTED EXPERIENCE INDIVIDUAL INSURANCE SECTION JUNE Canadian Institute of Actuaries Document Ce document est disponible en français Canadian Institute of Actuaries Institut Canadien des Actuaires

2 TABLE OF CONTENTS INTRODUCTION... 4 PARTICIPATING COMPANIES... 5 COMPOSITE EXPERIENCE... 5 EXPERIENCE BY CALENDAR YEAR... 7 EXPERIENCE BY SEX EXPERIENCE BY SMOKING STATUS EXPERIENCE BY POLICY SIZE EXPERIENCE BY ISSUE AGE EXPERIENCE BY PREMIUM FREQUENCY APPENDIX Scope Methodology Calculation of Lapse Rates Premium Mode Handling of Purged Data

3 This report was prepared by: Lloyd Milani, FSA., FCIA, MAAA Nikolai Serykh, PhD, ASA The report was approved by the Subcommittee on Individual Life of the Committee on Expected Experience: Marc-André Belzil Roger Lumsden Scott McGaire Lloyd Milani Mary Simanikas, Chairperson of committee James W. Snell, Chairperson of subcommittee Marc Tardif Eng Kim Yeoh 3

4 LAPSE EXPERIENCE UNDER UNIVERSAL LIFE LEVEL COST OF INSURANCE POLICIES INTRODUCTION This is the first lapse experience study covering Universal Life Level Cost of Insurance Policies. Today, Universal Life (UL) sales represent a significant portion of the life insurance business being issued. In 2002, about 50% of all UL policies were sold using Level Cost of Insurance (COI). This percentage has decreased significantly in recent years. Five years ago, as much as 75% of UL sales were issued on a Level COI basis. As with the Term to 100 product, lapses have had a very significant impact on the financial implications of the UL product and with this came numerous debates with respect to the appropriate level of the ultimate lapse assumption to be used in pricing and valuation. We have limited the scope of this study only to guaranteed Level COI coverages. In addition, the analysis will be split along identical lines as the Term to 100 studies. Unfortunately, we were not able to include analysis by other UL-specific drivers (e.g., fund values, credited rates, interest environment, etc.). This could be an enhancement that may be included in future studies. Although it is the first study on lapse experience for Level COI business, this study already has 64% of the exposure by number and 113% of the exposure by amount contained in the last Term to 100 lapse study published in The UL study includes over 73,000 lapses. Of the 73,000 lapses included in the study, 29,000 lapses are for the first duration and 68,000 are for the first five durations. The study was arbitrarily limited to the 15 th duration. There were less than 3,000 policy exposures for duration greater than 15. Finally, there are data limitations that need to be taken into consideration. 1) Only a handful of companies were able to isolate and exclude business originally issued using the YRT COI coverage and subsequently changing to Level COI coverage. For the remaining companies, the issue date of the original policy was used to determine the duration for these types of policies. Therefore, lapse experience may be overstated in duration 6+. 2) Not every company contributed every year. Therefore, there are some discontinuities when the data are broken down too finely. 3) Care is required in interpreting the lapse rates for beyond duration 8 where the data have relatively low statistical credibility. For example, duration 9 has less than 500 lapses, duration 10 has just over 200 lapses, and duration 11 has just over 100 lapses. As well, the results of cells broken down along multiple criteria may have very few lapses associated with that given segment. 4

5 PARTICIPATING COMPANIES The following companies contributed data to our study. The table indicates the amount of exposure contributed by company and by experience year: Exposure by Number Split by Company and Experience Year Company Grand Total Canada Life - 2,477 13,099 21,330 33,166 70,071 Co-operators Life ,253 8,260 12,310 25,601 Desjardins Financial Security 34,835 41,806 48,542 49, ,203 Great-West Life 2,492 3,641 4,747 5,742-16,622 Industrial Alliance 33,047 60,385 86, , ,351 London Life 940 2,211 4,655 9,109-16,915 Manulife Financial 5,100 11,813 20,425 33,740 41, ,907 Maritime Life 20,031 26,218 31,761 35,132 80, ,480 National Life ,594 33,594 Standard Life 4,684 6,711 9,189 13,892 17,665 52,141 Sun Life 1,795 3,738 5,985 9,877 15,573 36,969 Transamerica Life 6,307 10,000 13, , , ,301 Grand Total 109, , , , ,913 1,276,155 COMPOSITE EXPERIENCE Table 1 Composite Lapse Rates Policy Year By Number of Policies By Amount of Sum Assured ($000) Number Lapse Amount Lapses # Lapses Lapse Rate Exposed Rate Exposed 1 340,221 29, % 51,529,549 2,344, % 2 262,909 17, % 41,340,768 1,725, % 3 194,107 11, % 31,179,127 1,209, % 4 140,013 6, % 23,411, , % 5 106,238 4, % 18,350, , % 6 79,445 2, % 13,804, , % 7 52,721 1, % 9,441, , % 8 37, % 6,641,024 95, % 9 26, % 4,512,377 51, % 10 14, % 2,337,390 23, % 11 7, % 911,668 11, % 12 4, % 498,839 6, % 13 3, % 339,195 5, % 14 2, % 234,470 2, % 15 2, % 160,970 2, % 5

6 Chart 1 Composite Lapse Rates 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% By Number of Policies By Amount of Sum Assured ($000) Policy Year 6

7 EXPERIENCE BY CALENDAR YEAR Table 2a Composite Lapse Rates and Exposure by Calendar Year (by Number of Policies) Policy Year Lapse Rates % 10.9% 9.0% 9.4% 5.0% 8.7% 2 6.5% 8.0% 7.1% 6.7% 4.8% 6.6% 3 5.0% 6.1% 5.3% 6.3% 5.1% 5.7% 4 4.6% 4.9% 4.8% 4.4% 4.4% 4.5% 5 3.0% 4.3% 3.9% 3.9% 3.6% 3.8% 6 1.4% 3.4% 3.1% 3.5% 2.8% 3.0% 7 1.4% 1.6% 2.6% 2.4% 2.2% 2.2% 8 0.6% 1.7% 1.8% 2.0% 2.0% 1.9% 9 0.5% 1.5% 2.2% 1.7% 1.4% 1.6% % 0.8% 1.6% 2.2% 1.2% 1.5% % 1.3% 1.4% 2.1% 1.2% 1.4% % 2.4% 1.3% 1.5% 1.9% 1.6% % 2.7% 0.9% 2.1% 1.4% 1.5% % 1.2% 0.9% 1.3% 2.0% 1.2% % 1.1% 2.0% 0.8% 5.5% 1.7% Exposure 1 44,020 62,615 79,923 96,497 57, , ,221 40,231 58,373 79,678 57, , ,919 25,884 38,823 64,534 48, , ,426 15,753 25,789 50,412 41, , ,740 7,038 15,543 41,997 37, , ,584 4,405 6,944 26,712 37,799 79, ,567 3,968 4,328 17,872 23,986 52, ,464 2,906 3,948 14,061 15,465 37, ,084 1,889 2,893 9,576 11,494 26, ,480 1,899 3,891 6,900 14, ,035 1,495 1,877 1,979 7, ,039 1, , , , , ,220 7

8 12% Chart 2a Composite Lapse Rates by Calendar Year (by Number of Policies) 10% 8% 6% % 2% 0% Policy Year 8

9 Table 2b Composite Lapse Rates and Exposure by Calendar Year (by Amount of Sum Assured ($000)) Policy Year Lapse Rates % 5.7% 4.7% 4.9% 3.2% 4.5% 2 4.1% 4.7% 4.5% 4.7% 3.2% 4.2% 3 3.8% 4.1% 3.5% 4.2% 3.7% 3.9% 4 2.9% 3.9% 3.6% 3.2% 3.4% 3.4% 5 1.9% 2.7% 2.9% 2.7% 2.7% 2.7% 6 1.5% 1.7% 1.8% 2.5% 1.9% 2.1% 7 1.0% 0.8% 1.7% 1.5% 1.8% 1.6% 8 0.5% 1.2% 1.3% 1.4% 1.6% 1.4% 9 0.5% 1.0% 1.6% 1.2% 1.1% 1.1% % 0.7% 1.2% 1.5% 0.8% 1.0% % 1.4% 1.0% 2.6% 0.6% 1.3% % 1.8% 2.2% 1.4% 0.9% 1.4% % 2.4% 1.0% 2.7% 1.1% 1.6% % 1.9% 0.6% 1.6% 0.7% 1.2% % 0.7% 1.3% 0.5% 5.3% 1.4% Exposure 1 5,778,137 7,661,453 10,825,855 13,957,304 13,306,799 51,529, ,159,029 5,509,734 7,639,381 11,395,314 12,637,311 41,340, ,340,610 4,032,894 5,546,685 8,840,514 10,418,424 31,179, ,126 2,345,853 4,095,739 7,515,905 8,456,982 23,411, ,937 1,100,862 2,399,676 6,865,608 7,449,642 18,350, , ,612 1,176,801 4,452,697 7,165,012 13,804, , , ,915 3,314,553 4,766,414 9,441, , , ,232 2,596,823 3,120,182 6,641, , , ,442 1,611,581 2,241,990 4,512, , , , ,237 1,334,973 2,337, , , , , , , ,684 56, , , , , ,916 33,801 58, , , , ,899 38,969 44,453 57,950 61, , ,249 34,849 51,352 44,170 19, ,970 9

10 7% Chart 2b - Composite Lapse Rates by Calendar Year (by Amount of Sum Assured) 6% 5% 4% % 2% 1% 0% Policy Year 10

11 EXPERIENCE BY SEX Table 3a Lapse Rates and Exposure by Sex (by Number of Policies) Policy Year Lapse Rates Male Female Joint 1st Joint 2nd Composite 1 8.7% 9.5% 8.9% 1.5% 8.7% 2 6.8% 6.8% 7.6% 1.8% 6.6% 3 5.8% 5.8% 7.5% 1.6% 5.7% 4 4.6% 4.7% 5.6% 1.5% 4.5% 5 3.8% 3.9% 4.7% 1.2% 3.8% 6 3.0% 3.3% 3.4% 1.1% 3.0% 7 2.2% 2.4% 2.0% 1.1% 2.2% 8 1.7% 2.4% 2.1% 0.7% 1.9% 9 1.5% 1.8% 1.4% 0.0% 1.6% % 1.7% 0.7% 0.0% 1.5% % 1.4% 0.0% 0.0% 1.4% % 1.5% 0.0% 0.0% 1.6% % 1.9% 0.0% 0.0% 1.5% % 1.1% 0.0% N/A 1.2% % 1.3% N/A N/A 1.7% Exposure 1 170, ,077 9,891 15, , , ,322 7,682 12, , ,650 77,101 6,441 8, , ,630 53,037 5,896 6, , ,170 38,100 6,228 4, , ,142 27,811 5,371 3,120 79, ,562 17,756 3,668 1,734 52, ,414 12,676 2,729 1,026 37, ,626 8,995 1, , ,947 5, , ,359 2, , ,895 1, , ,291 1, , ,752 1, , , ,220 11

12 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Chart 3a Lapse Rates by Sex (by Number of Policies) Policy Year Male Female Joint 1st Joint 2nd 12

13 Table 3b Lapse Rates and Exposure by Sex (by Amount of Sum Assured ($000)) Policy Year Lapse Rates Male Female Joint 1st Joint 2nd Composite 1 4.9% 6.1% 5.3% 1.1% 4.5% 2 4.6% 5.1% 5.0% 1.3% 4.2% 3 4.3% 4.6% 6.1% 1.0% 3.9% 4 3.6% 3.8% 4.5% 1.6% 3.4% 5 2.8% 3.2% 3.8% 1.1% 2.7% 6 2.0% 2.4% 2.7% 1.2% 2.1% 7 1.6% 1.9% 1.7% 0.8% 1.6% 8 1.3% 1.8% 1.5% 1.3% 1.4% 9 1.1% 1.6% 1.0% 0.0% 1.1% % 1.5% 0.3% 0.0% 1.0% % 1.1% 0.0% 0.0% 1.3% % 1.5% 0.0% 0.0% 1.4% % 1.7% 0.0% 0.0% 1.6% % 0.8% 0.0% N/A 1.2% % 1.2% N/A N/A 1.4% Exposure 1 25,803,596 14,794,975 1,451,408 9,479,569 51,529, ,492,025 11,313,801 1,184,291 7,350,651 41,340, ,688,687 8,118, ,991 5,387,467 31,179, ,065,045 5,866, ,456 3,649,036 23,411, ,420,040 4,409, ,155 2,698,323 18,350, ,006,159 3,284, ,900 1,798,382 13,804, ,718,547 2,216, , ,179 9,441, ,003,557 1,598, , ,548 6,641, ,792,178 1,084, , ,502 4,512, ,502, , ,872 47,410 2,337, , ,885 21,483 5, , , , , , ,109 88, , ,380 56, , ,773 37, ,970 13

14 7% Chart 3b - Lapse Rates by Sex (by Amount of Sum Assured) 6% 5% 4% 3% Male Female Joint 1st Joint 2nd 2% 1% 0% Policy Year 14

15 EXPERIENCE BY SMOKING STATUS Table 4a Lapse Rates and Exposure by Smoking Status (by Number of Policies) Policy Lapse Rates Exposure Year Non-Smoker Smoker Aggregate Composite Non-Smoker Smoker Aggregate Composite 1 6.1% 14.7% 4.1% 8.7% 230, ,083 5, , % 10.1% 5.6% 6.6% 184,196 74,462 4, , % 8.5% 5.4% 5.7% 140,065 50,720 3, , % 6.6% 4.3% 4.5% 104,342 32,888 2, , % 5.4% 4.1% 3.8% 81,601 22,753 1, , % 4.7% 3.5% 3.0% 62,491 15,685 1,269 79, % 3.5% 1.0% 2.2% 42,707 9, , % 2.9% 1.9% 1.9% 30,991 6, , % 2.1% 3.3% 1.6% 22,220 4, , % 2.4% 0.0% 1.5% 12,297 2, , % 2.4% 0.0% 1.4% 5,696 1, , % 2.4% 0.0% 1.6% 3,713 1, , % 2.0% 0.0% 1.5% 2, , % 1.5% 0.0% 1.2% 2, , % 2.5% N/A 1.7% 1, ,220 Chart 4a - Lapse Rates by Smoking Status 16% 14% 12% 10% 8% 6% 4% 2% 0% (by Number of Policies) Policy Year Non-Smoker Smoker Aggregate 15

16 Table 4b Lapse Rates and Exposure by Smoking Status (by Amount of Sum Assured ($000)) Policy Year Non- Smoker Lapse Rates Exposure Smoker Aggregate Composite Non-Smoker Smoker Aggregate Composite 1 3.6% 10.5% 1.5% 4.5% 41,445,568 8,033,329 2,050,651 51,529, % 8.6% 2.6% 4.2% 34,079,639 5,881,472 1,379,657 41,340, % 7.6% 3.0% 3.9% 26,201,398 4,119, ,190 31,179, % 6.2% 2.5% 3.4% 19,861,202 2,911, ,630 23,411, % 4.6% 1.7% 2.7% 15,754,860 2,210, ,094 18,350, % 3.9% 1.6% 2.1% 11,989,060 1,581, ,949 13,804, % 2.9% 0.9% 1.6% 8,214,865 1,059, ,617 9,441, % 2.7% 0.3% 1.4% 5,798, ,857 80,856 6,641, % 1.9% 1.2% 1.1% 3,984, ,748 8,021 4,512, % 1.8% 0.0% 1.0% 2,070, ,406 1,878 2,337, % 2.9% 0.0% 1.3% 807, ,598 1, , % 3.7% 0.0% 1.4% 440,558 56,506 1, , % 1.7% 0.0% 1.6% 298,456 40, , % 1.8% 0.0% 1.2% 204,479 29, , % 3.1% N/A 1.4% 139,534 21, ,970 Chart 4b Lapse Rates by Smoking Status 12% by Amount of Sum Assured) 10% 8% 6% Non-Smoker Smoker Aggregate 4% 2% 0% Policy Year 16

17 EXPERIENCE BY POLICY SIZE Table 5a Lapse Rates and Exposure by Policy Size (by Number of Policies) Policy Year Below $100,000 Exactly $100,000 Lapse Rates Above $100,000 Composite Average Size($) Below $100,000 Exactly $100,000 Exposure Above $100,000 Composite % 7.5% 4.1% 8.7% 151, ,268 78,672 93, , % 6.5% 4.2% 6.6% 157, ,716 60,991 78, , % 5.7% 4.1% 5.7% 160,629 87,828 46,131 60, , % 4.5% 3.5% 4.5% 167,210 58,038 35,352 46, , % 4.0% 2.7% 3.8% 172,733 39,512 29,513 37, , % 3.0% 2.0% 3.0% 173,766 25,293 25,516 28,636 79, % 2.1% 1.8% 2.2% 179,077 12,647 20,632 19,442 52, % 1.8% 1.6% 1.9% 175,482 7,967 16,470 13,407 37, % 1.4% 1.3% 1.6% 167,524 6,060 11,629 9,247 26, % 1.7% 0.9% 1.5% 156,857 4,529 5,483 4,889 14, % 1.6% 1.4% 1.4% 128,812 3,455 1,700 1,922 7, % 1.6% 1.1% 1.6% 105,316 2, ,046 4, % 1.2% 1.8% 1.5% 89,231 2, , % 0.6% 1.3% 1.2% 78,554 2, , % 1.9% 1.7% 1.7% 72,510 1, ,220 14% Chart 5a - Lapse Rates by Policy Size (by Number of Policies) 12% 10% 8% 6% 4% Below $100,000 Exactly $100,000 Above $100,000 Composite 2% 0% Policy Year 17

18 Table 5b Lapse Rates and Exposure by Policy Size (by Amount of Sum Assured ($000)) Policy Year Lapse Rates Average Below Exactly Above $100,000 $100,000 $100,000 Composite Size ($) Below $100,000 Exactly $100,000 Exposure Above $100,000 Composite % 7.5% 2.9% 4.5% 151,459 6,180,040 7,867,249 37,482,259 51,529, % 6.5% 3.2% 4.2% 157,244 4,704,785 6,099,067 30,536,916 41,340, % 5.7% 3.1% 3.9% 160,629 3,479,116 4,613,113 23,086,898 31,179, % 4.5% 2.9% 3.4% 167,210 2,441,681 3,535,201 17,434,723 23,411, % 4.0% 2.2% 2.7% 172,733 1,745,676 2,951,285 13,653,764 18,350, % 3.0% 1.6% 2.1% 173,766 1,141,949 2,551,601 10,111,287 13,804, % 2.1% 1.4% 1.6% 179, ,965 2,063,188 6,800,016 9,441, % 1.8% 1.2% 1.4% 175, ,382 1,646,970 4,630,673 6,641, % 1.4% 0.9% 1.1% 167, ,363 1,162,882 3,074,132 4,512, % 1.7% 0.7% 1.0% 156, , ,332 1,584,780 2,337, % 1.6% 1.1% 1.3% 128, , , , , % 1.6% 1.2% 1.4% 105, ,623 82, , , % 1.2% 1.8% 1.6% 89,231 93,694 65, , , % 0.6% 1.2% 1.2% 78,554 73,665 47, , , % 1.9% 1.1% 1.4% 72,510 52,838 37,754 70, ,970 Chart 5b - Lapse Rates by Policy Size 12% (by Amount of Sum Assured) 10% 8% 6% 4% Below $100,000 Exactly $100,000 Above $100,000 Composite 2% 0% Policy Year 18

19 EXPERIENCE BY ISSUE AGE Table 6a - Lapse Rates and Exposure by Issue Age (by Number of Policies) Policy Lapse Rates Year < Composite % 10.0% 7.7% 5.8% 3.6% 2.9% 8.7% 2 8.9% 8.0% 6.0% 4.6% 3.3% 2.4% 6.6% 3 7.7% 6.8% 5.2% 4.2% 2.7% 2.4% 5.7% 4 6.0% 5.7% 4.1% 3.2% 2.5% 1.6% 4.5% 5 5.4% 4.5% 3.4% 2.8% 2.0% 1.1% 3.8% 6 4.9% 3.5% 2.6% 2.3% 1.5% 1.0% 3.0% 7 3.5% 2.5% 1.9% 1.8% 1.1% 0.7% 2.2% 8 3.3% 2.2% 1.5% 1.5% 0.9% 1.0% 1.9% 9 2.4% 1.7% 1.5% 1.0% 0.6% 0.4% 1.6% % 1.5% 1.0% 1.4% 0.5% 1.6% 1.5% % 1.6% 1.5% 1.0% 0.6% 0.0% 1.4% % 1.4% 1.4% 2.4% 0.9% 0.0% 1.6% % 1.4% 1.5% 1.4% 1.4% 0.0% 1.5% % 1.5% 1.3% 0.8% 4.6% 0.0% 1.2% % 1.1% 2.1% 1.5% 0.0% 0.0% 1.7% Exposure 1 79,867 82,401 84,726 55,666 25,621 11, , ,762 64,333 67,581 44,380 19,828 9, , ,608 48,710 51,640 33,394 14,307 6, , ,418 36,510 39,088 24,372 10,213 4, , ,267 28,919 31,396 18,541 7,288 2, , ,802 22,839 24,753 13,507 4,835 1,709 79, ,283 16,507 16,934 8,265 2, , ,332 12,956 12,156 5,189 1, , ,818 9,549 8,463 3,603 1, , ,163 5,153 4,579 2, , ,101 2,305 2,144 1, , ,478 1, , ,170 1, , , ,220 19

20 14% Chart 6a Lapse Rates by Issue Age (by Number of Policies) 12% 10% 8% 6% < Composite 4% 2% 0% Policy Year 20

21 Table 6b Lapse Rates and Exposure by Issue Age (by Amount of Sum Assured ($000)) Policy Lapse Rates Year < Composite 1 8.9% 6.5% 4.0% 3.0% 1.9% 1.6% 4.5% 2 6.9% 6.0% 4.0% 2.9% 2.0% 1.5% 4.2% 3 6.1% 5.4% 3.8% 3.0% 1.7% 1.6% 3.9% 4 5.1% 4.6% 3.2% 2.9% 1.9% 0.9% 3.4% 5 4.3% 3.4% 2.7% 2.0% 1.3% 2.0% 2.7% 6 3.7% 2.7% 1.9% 1.7% 0.7% 0.5% 2.1% 7 2.6% 1.9% 1.5% 1.5% 0.9% 0.6% 1.6% 8 3.0% 1.6% 1.2% 1.2% 0.8% 0.4% 1.4% 9 2.1% 1.5% 1.1% 0.6% 0.1% 0.0% 1.1% % 1.1% 0.9% 0.9% 0.2% 0.2% 1.0% % 1.8% 1.1% 0.7% 0.1% 0.0% 1.3% % 1.2% 1.6% 1.2% 0.9% 0.0% 1.4% % 2.2% 1.6% 1.1% 0.2% 0.0% 1.6% % 1.5% 1.4% 0.3% 1.8% 0.0% 1.2% % 1.7% 1.3% 0.8% 0.0% 0.0% 1.4% Exposure 1 5,563,546 11,620,173 15,550,718 10,354,479 5,691,107 2,749,525 51,529, ,081,349 9,349,850 12,704,648 8,592,393 4,498,196 2,114,333 41,340, ,886,841 7,141,924 9,750,899 6,593,826 3,311,903 1,493,734 31,179, ,025,388 5,526,517 7,563,960 4,907,728 2,388, ,016 23,411, ,517,535 4,521,484 6,121,974 3,798,911 1,727, ,738 18,350, ,111,266 3,553,265 4,769,012 2,778,286 1,198, ,929 13,804, ,045 2,574,456 3,425,604 1,769, , ,576 9,441, ,186 1,977,266 2,391,800 1,144, , ,995 6,641, ,121 1,418,004 1,587, , ,192 60,581 4,512, , , , , ,971 22,761 2,337, , , , ,355 59,583 7, , , , ,032 97,938 31,363 2, , , , ,836 64,550 17,394 1, , ,551 72,718 90,266 41,959 7, , ,935 52,605 68,821 19,822 4, ,970 21

22 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Chart 6b - Lapse Rates by Issue Age (by Amount of Sum Assured) Policy Year < Composite 22

23 EXPERIENCE BY PREMIUM FREQUENCY Table 7a - Lapse Rates and Exposure by Premium Frequency (by Number of Policies) Policy Lapse Rates Exposure Year Non-Monthly Monthly Composite Non-Monthly Monthly Composite 1 9.2% 8.6% 8.7% 83, , , % 5.4% 6.6% 68, , , % 4.6% 5.7% 48, , , % 3.5% 4.5% 33, , , % 3.1% 3.8% 24,830 81, , % 2.6% 3.0% 18,090 61,355 79, % 1.9% 2.2% 12,256 40,465 52, % 1.7% 1.9% 8,839 29,006 37, % 1.4% 1.6% 6,804 20,132 26, % 1.4% 1.5% 4,644 10,258 14, % 1.1% 1.4% 2,816 4,261 7, % 1.2% 1.6% 1,951 2,786 4, % 1.1% 1.5% 1,357 2,444 3, % 1.3% 1.2% 862 2,123 2, % 1.6% 1.7% 574 1,646 2,220 Chart 7a - Lapse Rates by Premium Frequency 12% (by Number of Policies) 10% 8% 6% 4% Non-Monthly Monthly Composite 2% 0% Policy Year 23

24 Table 7b Lapse Rates and Exposure by Premium Frequency (by Amount of Sum Assured ($000)) Policy Lapse Rates Exposure Year Non-Monthly Monthly Composite Non-Monthly Monthly Composite 1 4.2% 4.8% 4.5% 20,407,681 31,121,867 51,529, % 3.8% 4.2% 16,701,817 24,638,951 41,340, % 3.4% 3.9% 12,501,253 18,677,874 31,179, % 2.7% 3.4% 9,129,927 14,281,678 23,411, % 2.5% 2.7% 6,837,535 11,513,189 18,350, % 1.9% 2.1% 4,796,640 9,008,196 13,804, % 1.4% 1.6% 3,146,657 6,294,513 9,441, % 1.3% 1.4% 2,203,601 4,437,424 6,641, % 1.1% 1.1% 1,529,120 2,983,257 4,512, % 1.0% 1.0% 862,589 1,474,801 2,337, % 1.0% 1.3% 396, , , % 1.3% 1.4% 238, , , % 1.0% 1.6% 153, , , % 1.3% 1.2% 94, , , % 1.6% 1.4% 56, , ,970 6% Chart 7b Lapse Rates by Premium Frequency (by Amount of Face Assured) 5% 4% 3% Non-Monthly Monthly Composite 2% 1% 0% Policy Year 24

25 APPENDIX Scope We asked the contributing companies to provide us with policy records for Universal Life plans where the policy was issued on a Level Cost of Insurance coverage basis. Note, that most companies were not able to exclude policies that converted from YRT COI to Level COI. In addition to not being able to exclude these policies, only the original issue date was provided for determining duration. Therefore, the lapse rates for durations 6+ may be somewhat overstated. As well, records that are related to the increases in coverage could not be identified by the majority of the participants. Policy Codes that were included in the study are as follows: Active, Death, Lapsed, and Surrendered. All other policy codes were excluded. Methodology Definition of Active Exposure Base: We conducted a calendar year study, where the study period was limited between January 1, 1997 to December 31, The reasons for conducting a calendar year study as opposed to a policy year study are as follows: 1. One company provided experience for one calendar year only; 2. The calendar year study generates slightly more exposure. The exposure provided by each company was determined in the following manner: Exposure Start Date = maximum of (January 1, 1997, Company Purge Date) Exposure End Date = minimum of (December 31, 2001, Company Extract Date) No further adjustment was made to account for late reported lapses given the time which had elapsed between December 31, 2001 and the date that the data were provided to us for the study. Calculation of Lapse Rates Exposure was calculated in the following manner: Case Exposure Calculation (in years) Policy years Policy inforce at BOY and EOY 1 Split over 2 policy years Policy issued after BOY, inforce EOY (EOY PYD) 1 policy year Policy inforce at BOY, lapse before PYD (PYD BOY) 1 policy year Policy inforce at BOY, lapse after PYD, and before EOY (PYD BOY)+1 Split over 2 policy years Policy issued after BOY, lapse before EOY 1 1 policy year Policy inforce at BOY, death before PYD (Date of death BOY) 1 policy year Policy inforce at BOY, death after PYD (Date of death BOY) Split over 2 policy years Policy issued after BOY, death before EOY (Death of death PYD) 1 policy year Definitions: BOY: Beginning of Calendar Year; EOY: End of Calendar Year; PYD: Anniversary date of the policy 25

26 Premium Mode Monthly premium payment mode was comprised of 75% of the total exposure by number and 61% by amount. The termination date of the policies with annual premium mode was not linked to policy anniversary date. The terminations were equally distributed during the policy year. Handling of Purged Data Any active exposure prior to the purge date of the file is excluded from the above exposure calculation. Lapses prior to the purge date will by definition be excluded from the file. In all cases, the contributing company had informed us if the data were purged, and if so, when they were purged. In addition, we reviewed the lapse rates by issue year as a test to confirm the purge dates. 26