1. 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. Preferred Products - 10 Years Later 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 An Underwriter’s Perspective Fraser Cutler June 29th, 2007

3. Page 3 Preferred Underwriting Primary Tenets of Risk Selection –Know the risk –Predictability 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

4. Page 4 Client Underwriting Audit Results 2002 – 2006 192 Audits Total Cases Reviewed25,897 Preferred Cases Reviewed12,500 Non-Preferred Cases Reviewed13,397 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

5. Page 5 Client Underwriting Audit Results 2002 – 2006 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Preferred Disagreements Top Five Build Total Cholesterol Medical History Waived Requirements Lab Findings Percentage %

6. Page 6 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 What Did We Agree On?

7. Page 7 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Based on the client’s manual of record – Reinsurers100%Yes – Direct writers 91%Yes Adherence to treaty guidelines – Reinsurers85%Extremely important – Direct writers70%Extremely important

8. Page 8 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Where Did We Disagree?

9. Page 9 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Adherence to Preferred Criteria – Reinsurers77% Extremely Important – Direct writers 46% Extremely Important

10. Page 10 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Adherence to Internal Guidelines – Reinsurers69% Extremely Important – Direct writers 32% Extremely Important

11. Page 11 Audit Survey Results 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Business Decision Justification – Reinsurers100% Extremely Important – Direct writers 46% Extremely Important

12. Page 12 What Did We Learn? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Business decisions allowed Survey Reinsurers92%2% or less Direct writers51%2% or less Audit Results Preferred5.3%Without offsets Non-Preferred4.2%Greater than four table deviation

13. Page 13 What Did We Learn? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Compliance with Age/Amount Requirements Audit Results Preferred13.6%Exceptions involved waived requirements Non-Preferred23.3%Exceptions involved waived requirements

14. Page 14 What Did We Learn? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Adherence to Preferred Criteria Survey Reinsurers 100%Extremely Important or Very Important Direct writers 89%Extremely Important or Very Important Audit Results Preferred Disagreements8.3%

15. Page 15 Exception Rates By Age Band 0% 5% 10% 15% 20% 25% 30% 35% 40% <3030-3940-4950-5960-6970-7980+ Policyholder Age Cumulative percentage of cases Major exceptions Minor exceptions Client Underwriting Exceptions by Age 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

16. Page 16 What Did We Learn? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Exceptions can be identified  Cholesterol and build are the primary preferred exceptions  The APS is waived more than any other requirement  Other medical history is sometimes ignored  Internal exception guidelines need to be shared at the time of pricing  Overall, underwriting error is minimal

17. Page 17 What Does It Cost? Premium Actual/Expected 1.0 0.751.25 $1.25$1.0075¢ Super Preferred Standard Preferred Distribution 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

18. Page 18 What Does It Cost? Premium Actual/Expected 1.0 0.751.25 $1.25$1.0075¢ Super Preferred Standard Distribution With Exceptions 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

19. Page 19 The Impact of Exceptions Assume a hypothetical set of 200 policies with an 8% exception rate Overall mortality increase 2.1% (3.1% + 1.1% ÷ 2) Policy CountExpected Mortality Class Before Exceptions After Exceptions Without Exceptions With Exceptions Relative Increase Preferred Residual 92 108 100 75.4% 121.0% 77.7% 122.3% 3.1% 1.1% 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

20. Page 20 The Impact of Exceptions Hypothetical Reinsurance Pricing Reinsurance Premium 80.0%To cover mortality 12.5%Expenses, cost of capital, reserves 7.5%Pre-tax profit Mortality 80% x 1.021 = An extra 1.7% of premium 1.7% ÷ 7.5%= 23.0% Profits Reduce by 23% YOUR COST…? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

21. Page 21 Why Does it Happen? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Pressures to make exceptions ▫ Producers ▫ Cycle times ▫ Cost ▫ Competition ▫ Shareholder premium goals

22. Page 22 What’s Next? 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Better understanding of pressures and perspectives  Is there a better way to underwrite?  Evolving preferred underwriting  Re-examining How We Underwrite the Elderly

23. Page 23 Typical Preferred Criteria 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 1.Smoking status? 2.Parents survived to age 60? 3.At or below average weight? 4.Low cholesterol 5.“Normal” lab values 6.Normal blood pressure =<140/80 7.No aviation 8.No hazardous sports 9.Less than 4 moving violations 10.No risky travel

24. Page 24 Society of Actuaries 1997 and 2002 Preferred Surveys Preferred criteria1997 response ranges (average) 2002 response ranges Participating companies 5454 (26 responded in prior surveys) Build: BMI (kg/m 2 ), example 45 y male 24 to 3724 to 32 Cholesterol (mg/dL//mmol/L) Cholesterol/HDL ratio 200/5.2 to 400 /10.4 (249/6.4) 3 - 10 (5.8) 200/5.2 to 274/7.1 4.0 to 6.5 Blood pressure (mmHg) 125/80 to 165/95120/80 to 150/90 ExceptionsUnderwriter (UW) judgment 90% No exceptions 18%, Most common: build & cholesterol, UW judgment 72%, 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

25. Page 25 Underwriting Facts 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  The vast majority of deaths come from vascular disease or cancer.  Accidental death rates have a barbell shape. Younger people are most affected followed by older people.  Independently verifiable data has increased value. Questions are great but nothing beats a test or report.  Applicants always know more than we do. This is why early cancer deaths continue to be a difficult problem to underwriter.

26. Page 26 Underwriting Myths  We can’t underwrite the cancer risk. 1.What if no one qualified for preferred with one year of smoking abstinence. It should be a minimum of three for preferred and five for best preferred. 2.Family history requirement should move up in age as the applicant moves up in age. 3.After certain key ages preferred should require regular established medical care. Annual exams and cancer screening such as colon exams and mammography. 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

27. Page 27 Underwriting Myths 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  An acceptable driving record should contain no more than three violations in the past three years.  More accurately… No moving violations is the appropriate number.

28. Page 28 Underwriting By Age Apparently healthy Suspect impairment Known Impairment Age 35 Age 70 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

29. Page 29 Causes of Death by Age AgeCause of Death (U.S. 2003) Incidence LifestyleCancer Environmental Cardiovascular 20-39Accident Suicide Assaults 70%15% 40-55Heart disease Cancer Accidents 25%40%35% 56-70Cancer Heart disease Lung disease 10%42%48% > 70Cancer Heart disease Stroke 8%30%62% 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

30. Page 30 Cause of Death: Age 70 and Up Ages 60-79Ages 80+ RankingMaleFemaleMaleFemale 1Cancer Heart Diseases 2 Cancer 3Chronic Respiratory Diseases Cerebrovascular Diseases 4 Chronic Respiratory Diseases Alzheimer’s Disease 5Diabetes InfluenzaChronic Respiratory Diseases 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

31. Page 31 Mortality in the Elderly Typical preferred exclusions: High cholesterol Elevated blood pressure Overweight Hazardous activities AgeCause of Death (U.S. 2003) 20-39Accident Suicide Assaults 40-55Heart disease Cancer Accidents 56-70Cancer Heart disease Lung disease > 70Cancer Heart disease Stroke Dementia Influenza Family history of longevity Health maintenance - screening Function testing – pulmonary, cardiac Cognitive testing 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

32. Page 32 Preferred Criteria Underwriting Criteria 20-3940-4950-5960-69> 70 Tobacco No tobacco products past 5 years No tobacco products past 10 years Physical Examination Acceptable physical exam within 5 years No recent unexplained weight loss Acceptable physical examination within 2 years, including ECG and cancer screening No recent unexplained weight loss Annual physical examinations, including ECG and cancer screening No recent unexplained weight loss Nutritional/ Metabolic Albumin >3.6 Creatinine 13 (males) Hb >12 (females) Blood Pressure (not under treatment) ≤130/80≤140/80≤145/85≤150/90 Build BMI ≤27BMI ≤28BMI ≤29BMI ≤30BMI >22 ≤30 Cholesterol (not under treatment) Total cholesterol < 220 Tchol/HDL ratio ≤5.0 Total cholesterol < 230 Tchol/HDL ratio ≤5.0 Total >100 and < 250 Tchol/HDL ratio ≤5.0 Total >100 and < 260 Tchol/HDL ratio ≤5.0 Total >100 and < 280 Tchol/HDL ratio ≤6.5 PSA Level < 2.5 if available <3.5 *<4.5 *<6.5* Family History (include grandparents where data available) No family history of cardiovascular, cancer, or diabetes occurrence or death prior to age 65 No family history of cardiovascular, cancer, or diabetes death prior to age 65 At least one parent survived to age 70 Mental Illness/Drug Abuse No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence past 10 years New Criteria Age Specific 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

33. Page 33 Preferred Criteria (Continued) New Criteria Age Specific 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Criteria 20-39 40-4950-5960-69> 70 Hazardous Activities No ratable occupations No hazardous activities including aviation (commercial aviation excluded), scuba diving, extreme sports, auto racing No ratable occupations or avocations including aviation (commercial aviation excluded) Driving No moving violations past 5 years No DUI past 5 years No more than 1 moving violation past 5 years No DUI past 5 years No moving violation past 5 years No DUI past 5 years Financial/Miscell aneous Underwriting Credit check clear No bankruptcy past 7 years No felony conviction/probation last 7 years Financially justified Credit check clear Financially justified Financially justified with clear insurable interest Employment Verifiable employment records without frequent job changes Verifiable employment records if appropriate Physical/Social Activities Physically active including travel, exercise, social activities Personal History No ratable medical impairments No personal history of cancer (except for non- melanoma skin cancer) No evidence of cognitive impairment No ratable medical impairments No personal history of cancer (except for non- melanoma skin cancer)

34. Page 34 Parental Longevity and Mortality SexOdds Ratio Males0.63 Females0.42 Odds Ratio for mortality in 2370 middle-aged patients with both parents still alive after 25 years of follow-up American J of Epidemiology 1984 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

35. Page 35 Cancer Screening in the Elderly 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Smoking cessation  Underweight and/or recent weight loss  Decreased serum albumin  Anemia  Hematuria

36. Page 36 Activity and Mortality in the Elderly ActivitiesHazard Ratio SocialChurch attendance, travel, movies and restaurants 0.81 FitnessWalking, sports or swimming 0.85 ProductiveGardening, shopping, community work, employment 0.57 Glass BMJ 1999 2,700 elderly residents of New Haven, CT Hazard Ratio greater than 1.0 = increased mortality 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

37. Page 37 Mobility and Mortality ElementOdds Ratio Difficulty in dressing2.08 Difficulty in getting about1.69 History of falls1.43 Abnormal gait1.61 Abnormal motor strength1.51 Chronic Diseases in Canada 2000 950 elderly with cognitive impairment Odds ratio for death within 2 years Odds Ratio greater than 1.0 = increased mortality 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

38. Page 38 Underwriting Surveys Old Age Underwriting August 200548 respondents  80% indicated business over age 80 was less than 2%  One-third have no special elderly underwriting guidelines  Three-quarters have no special preferred criteria over 60  Over one-half felt placement and persistency were average  Over age 70, one-half had no limit on how high a policy could be rated 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

39. Page 39 Underwriting Older Ages in 2007 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007  Things we do right ▫Elderly questionnaire ▫Lipid profiling ▫Renal function ▫ECG ▫Exercise testing

40. Page 40 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Older Ages in 2007  Things we would like to consider: ▫Family history: longevity credits ▫PFT Screening ▫History of depression ▫Labs –Albumin –Complete blood count

41. Page 41 Conclusions 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007 1.Our studies indicate an opportunity to evolve preferred criteria. 2.Age matters in underwriting. 3.We need a better understanding of our underwriting tools.