Southeastern Actuaries Club Meeting Term Conversions June 2017 Jim Filmore, FSA, MAAA, Vice President & Actuary, Individual Life Pricing
Agenda 1. Definition of a term conversion option 2. Example: Impact of term conversions 3. SOA Sponsored Research on Term Conversions 4. Questions? June 2017 2
1 Definition of a Term Conversion Option
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 June 2017 4
2 Example: Impact of term conversions
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 June 2017 6
Sample impact of term conversions June 2017 7
3 SOA Sponsored Research on Term Conversions
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) June 2017 9
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 June 2017 10
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 9.5 15-year 13.8 20-year 17.5 25-year 21.0 30-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. June 2017 11
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; Only into a specific conversion product. Pre-RFP survey results Phase 1 survey results No Yes No Yes No Yes No Yes Phase 1 survey results from Report on the Survey of Conversion Assumptions and Product Features for Level Term Plans published May 2015 by the Society of Actuaries 12
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. June 2017 13
SOA Phase 1 Survey: Level conversion mortality multiple or graded multiple by duration? Source Report on the Survey of Conversion Assumptions and Product Features for Level Term Plans published May 2015 by the Society of Actuaries June 2017 14
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 June 2017 15
SOA Experience Study Results conversion utilization rates The conversion rates for 10-year products shows a distinct increase at the end of the level term period when the conversion option expires for most products. There is also a small spike at duration 5 as that is the point where the conversion option expired for some of the products in the experience study. Source: "Report on the Conversion Experience Study for Level Premium Term Plans" published June 2016 by the Society of Actuaries June 2017 16
SOA Experience Study Early/Mid/Late Definitions Source: "Report on the Conversion Experience Study for Level Premium Term Plans" published June 2016 by the Society of Actuaries June 2017 17
Time of Conversion Example June 2017 18
SOA Experience Study Results PISM The Point-In-Scale-Mortality (PISM) is a ratio of the mortality for converted policies relative to the corresponding level period mortality for non-converted policies. The experience shows anti-selection occurs immediately after conversion typically peaking in the second duration and then trends down over time. Those converting near the end of their conversion option and those with larger face amounts tend to be more anti-selective in their decision to convert their term policy to a permanent policy. Source: "Report on the Conversion Experience Study for Level Premium Term Plans" published June 2016 by the Society of Actuaries June 2017 19
The work of science is to substitute facts for appearances and demonstrations for impressions." The SOA Motto by John Ruskin
4 Questions?
Thank you!