Non-Traditional Insurance & Reinsurance The Caribbean Actuarial Association 2007 Annual Meeting 6-7 December 2007 Nassau, The Bahamas Stéphane Lévesque, FCIA, FSA Member of the Caribbean Actuarial Association
Agenda Non-Traditional Insurance & Reinsurance Thinking Outside the Box!!! 2
Agenda Non-Traditional Insurance & Reinsurance Life Settlements Takaful & Retakaful Micro-insurance 3
Life Settlements What is it? A life settlement is a financial transaction in which a policyowner possessing an unneeded or unwanted life insurance policy sells his policy to a third party for more than the cash value offered by the life insurance company. The buyer becomes the new beneficiary and is responsible for all subsequent premiums. 4
Life Settlements What is it? Life settlement market evolved in the late 1990s as an extension of the viatical market Viatical industry was developed in the mid-1980s to provide cash to needy AIDS patients Viatical industry received well-earned bad press Many cases of fraud and abuse => There are significant differences between the previous viatical industry and the current life settlement market 5
Life Settlements vs. Viatical Life Settlement Viatical Period Late 90's Mid-80's Policyholders Senior citizens over age 65 With / without a medical impairment Terminally ill patients Mostly AIDS patients Life Expectancy Longer > 2 years Usually between 6 to 10 years Short < 2 years Usually 12 months or less Policy Size > $100,000 Usually over $250,000 < $100,000 Usually between $25,000 to $50,000 Long-term and portfolio-based Short-term and opportunistic Investors Large institutional transactions Small private transactions Structured pricing (Probabilistic) Unsophisticated pricing (Deterministic) Regulations Developing regulations Very little regulations 6
Life Settlements vs. Viatical Vs. 7
Life Settlements - U.S. Market Overview Fastest growing insurance market Grown from $0 in mid-90 s to $12-$15 billion today A study by Conning & Co. found that: Senior citizens owned approx. $500 billion worth of life insurance (2003) About 20% of policies owned by seniors have life settlement values in excess of their CSV Aging population and increase in life insurance sales at older issue ages will increase market By 2030, the U.S. population over age 65 will double from 37 million to 72 million 8
Life Settlements - When & Why? The policy is no longer needed or wanted Insured have outlived the risk insured or beneficiaries Business partnership / key employee insurance Premiums have become too expensive Relative to income level Opportunity to obtain a better insurance policy New underwriting requirements Change in estate planning needs When lapsing the policy is the only option A study by Milliman USA found that 89% of UL policies issued do not pay a death claim 9
Life Settlements - Issues to Consider Still a relatively young and inefficient market Most policyholders are not aware of this option Policyholders may not get the maximum value High transaction costs Need more regulations NAIC Viatical Settlement Act enacted in many states Lack of contract disclosure (Commission / fees) Questionable sales practices STOLI : Stranger-owned Life Insurance Financial and tax impact 10
Life Settlements - Parties to a Transaction Policyholder Financial Advisor Provider "A" Investors "X" Life Settlement Brokers Provider "B" Investors "Y" Provider "C" Investors "Z" 11
Life Settlements - Industry Implications Policyholders Provide a secondary market for life insurance policy May get a better fair market value than just lapsing the policy for its cash value Insurance Company Strong lobbying against Life Settlement May have to provide better value / options to consumers May have to review some pricing assumptions (Lapse) Regulators Need legislation to prevent fraud and abuse 12
Life Settlements - Other Markets What about the Caribbean & Latin America? Natural evolution of the life insurance market? It is happening elsewhere > United States > Starting in Canada in some provinces and in Europe Potential development of new markets will depend on the local regulatory environment > Insurability interest requirement > Transferability right 13
Life Settlements Role of the Actuary Advisory Role Provide actuarial services to specific individual > Personal Actuary role Individual Pricing Getting more sophisticated Probabilistic & stochastic pricing Portfolio Modeling Life settlement-backed securities Portfolio / securities stochastic modelling 14
Agenda Non-Traditional Insurance & Reinsurance Life Settlements Takaful & Retakaful Micro-insurance 15
Takaful - What is it? Insurance contract in compliance with the Islamic law (Shari ah Law) Family Takaful: Life insurance General Takaful: P&C Insurance Shari ah Law - combination of 3 sources Qur an: Central Islamic text Sunnah: Prophet Muhammad explained and defined in practice Interpretations by Islamic Scholars > Reflect current circumstances and economic realities > Results in wide variations 16
Takaful vs. Conventional Insurance Conventional Insurance (Life, Health and P&C) Not compatible with the Shari ah Law Non-permissible elements: > Uncertainty: Timing of payment, amount, or whether made or not > Gambling: Premiums could be small when compared to potential payout > Usury: Interest is not permitted => Must make structural changes to conventional insurance structure as we know it 17
Takaful vs. Conventional Insurance Some structural solutions: Uncertainty: Ensure that some payments are made in one form or another Gambling: Provide some guarantees and / or return of premiums benefit Usury: Use Shari ah compliant investment funds > Capital gains are allowed > More investment funds become available 18
Takaful - Contract Transparency Full disclosure Contract terms Profit distribution between the participants and the operator Two most popular types of contracts: Mudharaba Model => equity participation Wakala Model => service agency But a good dozen models in total 19
Takaful - Mudharaba Contract Model 20
Takaful - Wakala Contract Model 21
Takaful - Shari ah Board Since Takaful is faith based Each company is required to have a Shari ah Board Variation Board composed of Islamic Scholars Usually 3 Recognized and respected in the community (local and international) Uphold Islamic Law 22
Takaful Potential Market Takaful is a relatively small market but it is growing rapidly Insurance penetration among Muslim is very low compared to non-muslim Estimated annual growth of 15% to 30% globally Huge potential market with 20% to 25% of the world population 23
Takaful Potential Market Takaful is a relatively small market but it is growing rapidly According to Eckler s 2007 study, the potential worldwide market by 2015, in terms of new annual premiums: > Approx. US$6.4 billion for Family Takaful > Approx. US$4.9 billion for General Takaful Moody's estimates total Takaful premiums > More than US$2 billion in 2005 > Predicts increase to US$7 billion by 2015 24
Takaful - Muslim Population 25
Takaful - Muslim Population Worldwide Between 20% and 25% of the world population Mainly Asia, Africa and Middle East North America One of the fastest growing segments > About 0.8 million Muslims in Canada > About 3.0 million Muslims in the US 26
Takaful - Muslim Population The Caribbean, Central & South America Potential to develop a Niche Market Approx. 3 million Muslims (source: www.islamicpopupation.com) Countries Muslim (%) Muslim Population Trinidad & Tobago 6% to 8% 110,000 Honduras up to 2% 140,000 Mexico ¼% 260,000 Panama up to 5% 150,000 Argentina up to 1% 500,000 Brazil --- 170,000 Guyana 10% 80,000 Suriname 20% 80,000 27
Takaful & Retakaful Until recently the absence of retakaful ( takaful reinsurance ) was limiting the growth of takaful Retakaful pools/arms/divisions now available through conventional reinsurers > Munich Re, Swiss Re, Converium > Hannover Re - 2007 expected global premium volume US$ 20 million Exclusive retakaful companies > Takaful Re (UAE) > Best Re (Tunisia) 28
Agenda Non-Traditional Insurance & Reinsurance Life Settlements Takaful & Retakaful Micro-insurance 29
Micro-insurance What is it? Definition Insurance for poor people in developing countries who are not covered by any social or commercial insurance schemes (source: Wikipedia) Natural evolution of the micro-credit market Remarkable success of Grameen Bank in Bangladesh The World Bank estimates that there are now more than 7,000 micro-finance institutions serving some 16 million poor people CGAP experts estimate that 500 million households benefit from these small loans 30
Micro-insurance - Poverty 1.3 billion live on less than $1 (Purchasing Power Parity ( PPP )) a day * Almost half of the world, approx. 3 billion, live on less than $2 (PPP) a day** Informal economy Unregulated, largely self-employed About 70% of developing countries * The Other Crisis, World Bank, 1998 ** Koffi Anan, speech, October 17th, 2000 31
Micro-insurance - Vulnerability Live and work in risky environments Higher risk of perils Illness and health care related expenses Death Accidental death and disability Loss of property Agricultural losses 32
Micro-insurance - Poverty & Vulnerability Compound each other The poor face Financial loss Continual fear > Less likely to pursue income generating opportunities Consultative Group to Assist the Poor ( CGAP ) Consortium of 33 public and private development agencies working to expand access of financial services to the poor 33
Micro - The Poor & Financial Services Having access to financial services Provides the means for making improvements > On their own terms > Sustainable way Ripple effects through improvements > Children s education > Health care services when needed > Better health practices 34
Micro-insurance Natural progression of the micro-credit industry Means to protect the gains that micro-credit clients have made > Protect the client s own income > Protect the integrity of their core lending group When not implemented correctly, leave clients unconvinced and unwilling to renew insurance 35
Micro-insurance - Products Most needed Life Health Demand driven Must fit the needs of the community Systematic product development Minimize product failure > Better perception of insurance > Greater renewals > Faster expansion of market 36
Micro-insurance - Business Models Number of delivery models experimented Partnership between insurer & microfinance intermediary > Most effective Community Based Organizations ( CBO ) Service providers, such as hospitals Government programs Retail chains 37
Micro-insurance - Key to Success Partner with local organization for distribution Brand name Clear communication, one page (pictorial) contract Target high participation Efficient premium collection Link with other services 38
Micro-insurance - Key to Success Clearly defined products Rapid service Community verification of claims Health > Appropriate treatment protocols > Health promotion and prevention Database to help manage Underwriting the community and insurance 39
Micro-insurance - Challenges High mortality and morbidity Assets at risk subject to more claims Low administrative margins Ability to pay small amounts Transforming their own traditional views Micro-insurance can be profitable with innovative approaches 40
Micro - Transformational Thinking Creating efficient organizations Creative solutions Understand real service issues Learning opportunity for staff Knowledge that can be transferred back to current market Transform our understanding of insurance and management 41
Eckler Ltd. - Thank You! Wherever your business takes you Stéphane Lévesque slevesque@eckler.ca +1-416-696-3090 42