5Baseline - Understanding The Product Income protection in the event the insured is unable to work due to illness or injuryMost coverage is currently written is non- cancelable, premiums cannot ever be increasedBenefit periods range from 2 years to age 67Risk management expertise is paramount, DI is not a volume game
6Baseline - 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 tailSplitting the dollar-who gets what?
7Baseline - Statistics Driving Morbidity IncidenceTerminationsWhat are we really underwriting?
8The Past – Non-Can Premiums 1992$546,673,0001993$492,202,0001994$465,820,0001995$409,365,0001996$311,608,0001997$286,243,0001998$275,292,0001999$279,543,0002000$269,756,0002001$298,413,0002002$282,146,000Source: LIMRA
9The PastDI industry just emerging from a prolonged period of losses -12 years2002 earnings on average 12%Drop outs?New entrants?
10The Past “You get yourself into a fix; you get yourself out of it. It’s that simple.There is no way to run the sausagemachine backward and get pigsout of the other end.”Norman Augustine, Harvard Business Review
11What Have We Learned? In the 80s Market position drives actions - Risk management liberalizationPricingCompensationFocused on individually underwritten business
13What Changed? Product/Benefits Eliminated or Curtailed Own occupation coverageLifetime benefitsTo age 65 mental/nervousCost of living increasesRight to purchase options30 day waiting period
14What Changed? Pricing Increased rates Increased utilization of sex distinct ratesSurcharges for poor performing regions
15What Changed? Underwriting Stricter-more rules, fewer exceptions Expanded medical testingExpanded questioning of the applicationIncreased staff training/increases to staffChanged occupation classes (generally lower)Issue and participation limitsReplacement ratiosLess concentration of risk – multilife
16The Environment Employer trends Health insurance costs rise More costs shifting to employeesVoluntary worksite sales are increasingConsumer trendsAvailable cash erodedDual incomes at record levelsIncreased focus on preservation of assets“Traditional” markets saturated?
17The FutureConning & Co study – aggressive growth will limit long term successCompanies with diversified portfolios looked upon with favorInnovation is critical – products and services
18The Future Shift to multilife Enhanced risk management benefits More premium per work effortEase of doing business criticalThe multilife marketplaceIncreasingly competitive-spread sheeting commonGuaranteed Standard Issue (GSI) is everything – or not
19The Future Will there be an opportunity for individual? Reach untapped marketsM more jobs than workersWomen and minorities willcomprise 2/3 workforceAverage age of working population 42
20Challenges for the Future Product is too expensiveMore value needs to be returned to the consumer- Benefits need to increase and dividendsalso play a role- Expenses need to decreaseIncrease capital efficiencyMinimize upfront costsCarriers must become easier to do businesswith – without compromising risk managementprinciples
21What to Expect Product enhancements Critical illness Retirement vehiclesLong Term Care optionsLess costly supplemental benefitsSegment appeal
22What to Expect Service Electronic, electronic, electronic Enrollment,education,billingCustomer transactionsUnderwritingStreamlined processLiberalization for most profitable segments
23The 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 premiumCorrelation between agent retention and cross sellingMarket opportunities
24What Do the Experts Predict? Modest premium growthSurvivors who have focused on profit vs. market share will attract more businessProfit will continue which will allow survivors to reinvest in businessSuccessful companies will find means to better penetrate the middle class/emerging affluentProducer training and education paramount