Society of Actuaries Life & Health Insurance Spring Meetings 2003 Individual Disability Insurance Opportunities for Life Insurers Steve Miller Vice President Disability Management Services, Inc.

2 IDI MARKET: HISTORICAL REVIEW What Went Wrong? ( ) Irrational Competitive Practices Non-Diversified Risk Spread/Chaos in Health Care System Overly Complex Product and Process Lack of Risk Management Focus Industry Response? ( Present) Consolidated Marketplace (i.e. reduced competition) Multi-Life Sales Focus Increased premiums Improved Risk Management Focus More appropriate benefits Source: Milliman USA Newsletter Margins after Dividends

3 IDI MARKET SUMMARY WHERE ARE WE TODAY? Profit margins restored Reserves stabilized Claim incidence improved Double digit sales growth Significant and growing need for DI

4 SIGNIFICANT AND GROWING NEED FOR DISABILITY INSURANCE Limited Market Penetration # of Employees% Covered by LTD % % % % ,49937% 2,500+60% Group LTD Penetration by Employer Size IDI Source: Bureau of Labor Statistics Source: UnumProvident; January 2001

5 SIGNIFICANT AND GROWING NEED FOR DISABILITY INSURANCE Limited Carriers Offering IDI IDI % of Total New Premium Life % of Total New Premium Top 571%29% Top 1090%48% Top Carriers Source: LIMRA U.S. Sales Survey

6 SIGNIFICANT AND GROWING NEED FOR DISABILITY INSURANCE Increasing Consumer Vulnerability to Loss of Income Increasing Volatility of Income - Emphasis on performance based compensation (i.e. bonuses and stock options not typically covered by Group LTD) Decreased Liquidity of Assets Distribution of Household Financial Assets Distribution of Household Financial Assets Bank Deposits18.2%16.5%9.6% Stocks13.2%12.0% 19.5% Source: Federal Reserve Increased Debt Ratio of Household Debt to Personal Disposable Income % 13.4% 14.3%

7 SIGNIFICANT AND GROWING NEED FOR DISABILITY INSURANCE Source: U.S. Census Bureau Demographics and Employment Changes - Aging workforce with depleted assets from stock market, unwilling to rely on Social Security and Medicare - Longer life expectancies - Working longer to reach retirement goals - Increased mobility of workforce and importance of coverage portability - Average American worker has 3 careers and 10 different jobs Age Distribution of Working Age Americans Under % 70.3% 61.7% Age % 29.7% 38.3%

8 Source: Employee Benefit Research Institute, Bureau of Labor Statistics. SIGNIFICANT AND GROWING NEED FOR DISABILITY INSURANCE Employee Benefits moving to Voluntary Choices - Rising cost of Employee Benefits driven largely by Group Health Care Employee Benefit Costs as % of Compensation Costs: 10.7% 16.6% 19.3% 27.4% - Employers shifting risk and cost to their employees - Voluntary benefits replacing employer paid coverage - When Group LTD is not Employer paid, portability and superior coverage of IDI become increasingly attractive.

9 CHARACTERISTICS OF BEST MARKETS FOR NEW ENTRANTS Good spread of occupations Low acquisition expenses Reduced motivation for anti-selection Limited competition Limited market penetration

10 POTENTIAL MARKETS TO CONSIDER Transactional Markets - Mortgage IDI - DI rider with Life Insurance - Retirement plan completion Middle Income Market - Integrate DI within financial needs analysis - Simplified product design Voluntary Benefits - Executive carve-out or Group LTD supplement - Worksite marketing

11 BENEFITS TO NEW ENTRANT Diversifies sources of revenue and profit Enhances recruiting and retention of Sales force Completes Financial Planning process Facilitates cross-selling of other products Good economics today-but some risk

12 CHALLENGES FOR NEW ENTRANTS Limited experienced Risk Management resource - Claims - Underwriting - Actuarial Unique systems requirements - Integrated Administration and Claims - Full range of experience tracking and ad hoc reporting Achieving critical mass needed to justify investments

13 CHALLENGES FOR IDI INDUSTRY Raise consumer awareness Todays Need Demand Broaden appeal by creating affordable product options Raise interest among producers - Simplify product design and features - Improve efficiency of underwriting - Enhance training and education Increase activity among carriers, fostering innovation and elevating service standards Create new markets Maintain profitability