Lotter Actuarial Partners 1 By: Johan L Lotter FIA ASA MAAA Managing Partner: Lotter Actuarial Partners Inc. October 2002 Web: lotteract.com Critical Illness

Lotter Actuarial Partners 2 Provides Lump Sum on Diagnosis of any of the following “Big Five” Cancer Heart Attack Stroke End Stage Renal Disease Organ Transplant What Does CI Insure?

Lotter Actuarial Partners 3 Many insurance companies cover other diseases too: Multiple Sclerosis, Alzheimer’s, Blindness, Coma, Diabetes, Liver Failure, Deafness, Loss of Speech, Motor Neuron Disease, Paraplegia, Rheumatoid Arthritis, Severe Burns, Systemic Lupus, Total and Permanent Disability. Partial Benefits are often provided in case of heart surgery: Bypass, Angioplasty, Valve Surgery, Aorta Graft What Does CI Insure?

Lotter Actuarial Partners 4 Product Design and Pricing Marketing and Distribution Valuation Regulation Critical Illness

Lotter Actuarial Partners 5 Product Invention Formulas Data Underwriting CI Product Design and Pricing

Lotter Actuarial Partners 6 Product Design: Binomial Similarity

Lotter Actuarial Partners 7 One To One Correspondence Life Policy And Critical Illness Policy Critical Illness Rider Unlimited Invention And Design Possibilities Product Design

Lotter Actuarial Partners 8 Pricing Issues Cost Of Raw Material Contract Terms Embedding Raw Material Pricing Issues

Lotter Actuarial Partners 9 Contract Terms Embedding Raw Material Term Whole Life Universal Life Rider To Life Policy Anything You Would Care To Invent Product Design

Lotter Actuarial Partners 10 Formulas Two Major Formulas. Stand-Alone Product Rider Benefit

Lotter Actuarial Partners 11 Formulas Stand-Alone Product. (Amount At Risk) * i x

Lotter Actuarial Partners 12 Acceleration Rider. (Amount At Risk) X (i x +q x –k x q x ) = (Amount At Risk) X {i x +(1 –kx)q x } Formulas

Lotter Actuarial Partners 13 Data Edmund Halley Born Died Astronomer (Halley’s Comet) Actuary (Mortality Tables City of Breslau) Deputy Controller (Royal Mint) Captain, Royal Navy HMS: Paramore Pink Professor Geometry Savilian (Oxford)

Lotter Actuarial Partners 14 Data Insured Lives Data Overseas No Insured Lives Data in USA Population Data

Lotter Actuarial Partners 15 Insured Lives Data Overseas South Africa United Kingdom Australia Canada

Lotter Actuarial Partners 16 Data “New” Product Everywhere Overseas Insured Data Too Thin No Insured Lives Data in USA Foreign Data Unsuitable Population Data Available Everywhere

Lotter Actuarial Partners 17 Data Use Population Data Population Data in USA –Cancer: SEER –Heart Attack: Framingham –Stroke: Framingham –End Stage Renal Failure: NIOH –Organ Transplant: UNOS

Lotter Actuarial Partners 18 Data Cancer: SEER Voluminous Data Incidence Rates On Base of Well and Sick Over 41 Separate Cancer Sites Covered Over 14% of US Population in Exposure

Lotter Actuarial Partners 19 Data Heart Attack, Stroke: Framingham Small Study Old Study First Class Data Dawber Analysis Flawless

Lotter Actuarial Partners 20 Data: ESRD Medicare Statistics University of Michigan

Lotter Actuarial Partners 21 Data: Organ Transplant –UNOS

Lotter Actuarial Partners 22 Key Techniques 1.Population Statistics 2.Converting SEER to Healthy Denominator: Pollard Methods 3.Converting Population Statistics to Insured Lives Statistics: Portfolio Calibration

Lotter Actuarial Partners 23 Pollard Methods People Get Critical Illnesses And Die. Gathering Statistics Model Interaction Of Illness And Death

Lotter Actuarial Partners 24 Population Model Of Critical Illness

Lotter Actuarial Partners 25 Formulas: Population Model Of Critical Illness

Lotter Actuarial Partners 26 Formulas: Population Model of Critical Illness

Lotter Actuarial Partners 27 Formulas: Population Model Of Critical Illness

Lotter Actuarial Partners 28 Rate Calibration Every Market Place Unique Every Underwriting Regimen Unique Population Incidence Rates Cannot be Used Without Calibration to Your Own Portfolio

Lotter Actuarial Partners 29 Calibration Technique If you have: Reliable population incidence rates Reliable population death by cause rates Reliable portfolio death by cause rates AND

Lotter Actuarial Partners 30 Calibration Technique If you know the Calibration formula THEN You can make accurate rates for any indigenous insurance portfolio

Lotter Actuarial Partners 31 Calibration Technique : Things We Know Population Critical Illness Incidence Rate Population Critical Illness Death Rate Proportions

Lotter Actuarial Partners 32 Calibration Technique : Things We Know

Lotter Actuarial Partners 33 Calibration Technique The Calibration Formula

Lotter Actuarial Partners 34 Calibration Technique

Lotter Actuarial Partners 35 Underwriting and Calibration Use the Calibration formula to transition from: Aggregate to smoker- non-smoker Standard to substandard Aggregate to Select and Ultimate

Lotter Actuarial Partners 36 Why Do All This Work? Why not just use rates already developed overseas?

Lotter Actuarial Partners 37 Why Do All This Work? “Fabric” of Foreign CI Experience Is Different Climate and Environment Diagnostic Practice and Equipment Integrity of Statistical Research Availability of Treatments –Bypass Surgery –Organ Transplant Expertise

Lotter Actuarial Partners 38 Special Considerations For Reinsurers Diversity of Definitions Diversity of Elimination Periods Diversity of Benefit Structures Diversity of Portfolios

Lotter Actuarial Partners 39 Special Considerations For Reinsurers Diversity of Underwriting Considerations Anti-Selection in Large Policies No Catastrophic Exposure No “Suicide Risk”

Lotter Actuarial Partners 40 Marketing Considerations Stand-Alone Rider

Lotter Actuarial Partners 41 Marketing Considerations: Standalone Affordability Elimination Periods Unpopular Health Insurance Filing Loss Ratio Requirement Benefits Lost on Death

Lotter Actuarial Partners 42 Marketing Considerations. Rider Affordability Similarity to Acceleration on Diagnosis of Only 12 or 24 Months to Live-”CI Light” Closes Apparent “Holes” Elimination Period Not Needed

Lotter Actuarial Partners 43 Marketing Considerations. Successes and Failures South Africa Acceleration Rider Affluent Policyholders Usually Rider to Whole Life or Endowment Policy

Lotter Actuarial Partners 44 Marketing Considerations. Successes and Failures UK Great Success to Date Acceleration Rider 86% of UK sales 14% Of UK Sales Standalone 70 Companies Offer CI $80 Billion Of In Force Business Twice Size of Disability Market

Lotter Actuarial Partners 45 Marketing Considerations. Successes and Failures UK 3%-4% Of Population has Benefit Parsimonious UK Social Medicine System Rider Products Usually Rider to Mortgage Endowment

Lotter Actuarial Partners 46 Marketing Considerations. Successes and Failures Australia Acceleration Rider Affluent Policyholders Usually Rider to Whole Life or Endowment Policy

Lotter Actuarial Partners 47 Marketing Considerations. Successes and Failures Australia Essential to Sales of Life Insurance 31 of 33 Companies Offer CI 2% Of Population has Benefit

Lotter Actuarial Partners 48 Marketing Considerations. Successes and Failures Japan Very Popular 4% Of Population Has Benefit

Lotter Actuarial Partners 49 Marketing Considerations. Successes and Failures Europe Standalone To Date No Big Success Social Security Lessens Needs For Private Insurance European Conservatism Only German and Swiss Leadership

Lotter Actuarial Partners 50 Marketing Considerations. Successes and Failures USA Standalone Usually Worksite Marketing Moderate Success to Date Optimistic Projections $3 Billion to $5 Billion Premium (to date) by 2010 Product Too Revolutionary?

Lotter Actuarial Partners 51 Marketing Considerations. Successes and Failures USA PROBLEMS Hard For Life Agents to Understand? There Are Few Individual Health Agents. Falls Between “Cracks” of Product Development.

Lotter Actuarial Partners 52 Marketing Considerations. USA: What Will Work? Rider Approach Present as Acceleration Benefit “Heavy” Train Life Agents Price Realistically Underwrite Sensibly Brand Benefit Under Name Company

Lotter Actuarial Partners 53 Marketing Considerations. USA: What Will Work? Standalone Approach Present as Voluntary Health Insurance Find Niches in Employee Situations Worksite Marketing Voluntary Benefits Price Realistically Underwrite Sensibly Brand Benefit Under Name Company

Lotter Actuarial Partners 54 US Regulatory Constraints Standalone Product Approved in 46 States Holdouts (Sandy Meltzer) –Connecticut –Iowa –Pennsylvania –Utah

Lotter Actuarial Partners 55 US Regulatory Constraints Acceleration Rider Product Approved in 50 States (Sandy Meltzer) Product Ready for Nationwide Branding

Lotter Actuarial Partners 56 US Regulatory Constraints Six States Object to Waiting Period 15 States Object to Elimination Period Insured Must have Other Health Insurance (CA) Loss Ratios Vary From One State to Next ( 55% to 60%) Not All States Allow Return Of Premium

Lotter Actuarial Partners 57 US Regulatory Constraints Nationwide Introduction May Imply Some 30 State Variations

Lotter Actuarial Partners 58 US Regulatory Constraints Internal Revenue Code IRC Section 7702 Compliance Acceleration Rider Section 104(a)(3) –Acceleration Rider –Standalone or Health Insurance Rider

Lotter Actuarial Partners 59 Foreign Critical Illness Experience (South Africa) South Africa ( Investigation) Largest Exposure To Date Over 1.2MM Years Of Exposure Three Companies In High End Of Market Cause Of Claim Not Analyzed Female Experience Better Than Male

Lotter Actuarial Partners 60 Foreign Critical Illness Experience (South Africa) South Africa Confirms Select Period Rates Lower Large Policy Claims Worse Than Smaller Policies Non-Medical Marginally Better Than Medical

Lotter Actuarial Partners 61 Foreign Critical Illness Experience (South Africa)

Lotter Actuarial Partners 62 CI Valuation Principles Not addressed separately by SVL Standalone Consistent with Health Regulation Workable Rider Basis –Consistency with Commissioner’s Life Basis –Consistency with Rate Guarantees