2. DISABILITY INCOME INSURANCE
Where have we been and where are we going?
Melissa Millan
Vice President and Chief Operating Officer, Disability Income
MassMutual Financial Group
March 2004

4. What We’ll Cover
The industry
Past
Present
Future
Opportunities

5. Baseline - Understanding The Product
Income protection in the event the insured is unable to work due to illness or injury
Most coverage is currently written is non- cancelable, premiums cannot ever be increased
Benefit periods range from 2 years to age 67
Risk management expertise is paramount, DI is not a volume game

6. Baseline - Financial Characteristics
DI is capital inefficient
- High acquisition costs- underwriting distribution
- Relatively risky-high regulatory capital charges
- The IRS doesn’t help
- Breakeven doesn’t occur for years/long tail
Splitting the dollar-who gets what?

7. Baseline - Statistics Driving Morbidity
Incidence
Terminations
What are we really underwriting?

8. The Past – Non-Can Premiums
1992
$546,673,000
1993
$492,202,000
1994
$465,820,000
1995
$409,365,000
1996
$311,608,000
1997
$286,243,000
1998
$275,292,000
1999
$279,543,000
2000
$269,756,000
2001
$298,413,000
2002
$282,146,000
Source: LIMRA

9. The Past
DI industry just emerging from a prolonged period of losses -12 years
2002 earnings on average 12%
Drop outs?
New entrants?

10. The Past “You get yourself into a fix; you get
yourself out of it. It’s that simple.
There is no way to run the sausage
machine backward and get pigs
out of the other end.”
Norman Augustine, Harvard Business Review

11. What Have We Learned? In the 80s Market position drives actions
- Risk management liberalization
Pricing
Compensation
Focused on individually underwritten business

12. The Present

13. What Changed? Product/Benefits Eliminated or Curtailed
Own occupation coverage
Lifetime benefits
To age 65 mental/nervous
Cost of living increases
Right to purchase options
30 day waiting period

14. What Changed? Pricing Increased rates
Increased utilization of sex distinct rates
Surcharges for poor performing regions

15. What Changed? Underwriting Stricter-more rules, fewer exceptions
Expanded medical testing
Expanded questioning of the application
Increased staff training/increases to staff
Changed occupation classes (generally lower)
Issue and participation limits
Replacement ratios
Less concentration of risk – multilife

16. The Environment Employer trends Health insurance costs rise
More costs shifting to employees
Voluntary worksite sales are increasing
Consumer trends
Available cash eroded
Dual incomes at record levels
Increased focus on preservation of assets
“Traditional” markets saturated?

17. The Future
Conning & Co study – aggressive growth will limit long term success
Companies with diversified portfolios looked upon with favor
Innovation is critical – products and services

18. The Future Shift to multilife Enhanced risk management benefits
More premium per work effort
Ease of doing business critical
The multilife marketplace
Increasingly competitive-spread sheeting common
Guaranteed Standard Issue (GSI) is everything – or not

19. The Future Will there be an opportunity for individual?
Reach untapped markets
M more jobs than workers
Women and minorities will
comprise 2/3 workforce
Average age of working population 42

20. Challenges for the Future
Product is too expensive
More value needs to be returned to the consumer
- Benefits need to increase and dividends
also play a role
- Expenses need to decrease
Increase capital efficiency
Minimize upfront costs
Carriers must become easier to do business
with – without compromising risk management
principles

21. What to Expect Product enhancements Critical illness
Retirement vehicles
Long Term Care options
Less costly supplemental benefits
Segment appeal

22. What to Expect Service Electronic, electronic, electronic
Enrollment,education,billing
Customer transactions
Underwriting
Streamlined process
Liberalization for most profitable segments

23. The Value of DI to a Producer
Is a financial plan complete without this coverage?
Rich renewal stream
- Value of sale to the agent is well above 100% of premium
Correlation between agent retention and cross selling
Market opportunities

24. What Do the Experts Predict?
Modest premium growth
Survivors who have focused on profit vs. market share will attract more business
Profit will continue which will allow survivors to reinvest in business
Successful companies will find means to better penetrate the middle class/emerging affluent
Producer training and education paramount