Underwriting Trends in Canada

1. Specialty Track: Individual Session # D1-PD General Meeting Montreal Wednesday, November 17, 2004 Underwriting Trends in Canada Moderator: Mary Forrest, Munich Re Panellists: Nazir Damji, Sun Life Dr. Robert Snihura, RBC Life Brenda Buckingham, Swiss Re

2. Introduction … Mary Forrest Senior Vice President, Individual Life Munich Reinsurance

3. From an Underwriter’s Perspective … Nazir Damji Individual Underwriting Vice President Sun Life Assurance Company of Canada

4. Placements • 76% Placed Standard • 20% Not Placed *Source Munich Re Pricing Survey 2004

5. Cost of Wastage $13,750,000 *Source Munich Re Pricing Survey 2004

6. Tele-Underwriting Data Collection • More disclosure • More details • Less APS’s • Mixed feelings amongst advisors and clients

7. Non-Invasive Lab Tests Oral • Cotinine • Cocaine • HIV anti-bodies Skin Sterol

8. Prudent Underwriting Reward or Penalty?

9. From a Medical Director’s Perspective … Robert Snihura MD FRCPC VP & Chief Medical Director RBC Insurance

10. Any Changes Since 1848? • Prompt reply from MD—one day turn around! • NOTE: “he/his” and “she/her” option in some questions • Is he generally healthy? • Habits of & mode of life (regular & temperate)? • Alcohol, tobacco, exercise, avocations • Past health history? • Immune to disease (of the day)? • Arthritis? • Seizures? • Brain, viscera (chest & abd. organs) healthy? • Any predisposition to genetic/inherited disease? • Family history? • How long will he live?…as long as any 36 y.o. male

11. Changes in Past 25 Years • HIV (1981)…revolutionized medical underwriting/lab tests • Now have urine, blood, oral fluid, hair analysis and… • Home HIV tests (potential for anti-selection) • Technology…faster, easier, safer diagnosis & Rx • Ultrasound: echocardiography (incl. transesophageal or TEE), breast, abdominal, pelvic, transrectal (prostate) • Computerized Axial Tomography CT Scan (CAT Scan) • Positron Emission Tomography (PET Scan) • Single Photon Emission Computerized Tomography (SPECT Scan) • Magnetic Resonance Imaging (MRI)

12. Changes in Past 25 Years cont’d. • Procedures: • Fine Needle Aspiration Biopsy (FNAB) • Laparoscopic surgery • Endoscopic technology & treatment • Catheter technology: • Angiography • Angioplasty • Stent • Radiofrequency ablation • Laser treatment: corneal, skin, palatal • New Medications +++

13. Changes in Past 10 Years • Rapid expansion of medical knowledge & information almost faster than underwriters and medical directors can learn…information bombardment • Human Genome has been mapped…therefore, public access to new (and poorly understood) genetic data • Pressure on researchers to produce new medications quickly…therefore, what can we believe? …..…. • Conflicting information now appearing, e.g., Vioxx, HRT, beta-carotene; PSA vs uPM3; SSRI’s & bone loss, etc. • Faster, bigger, better tests…“Ultra Fast CT Scan” • “Self-serve Strip Mall Medicine”..can buy a CT Scan report • Huge expansion in imaging, catheter, stent, laparoscopic, fine needle technology…surgery faster, safer, easier

14. Changes in Past 10 Years cont’d. • New sophisticated treatments for cardiac disease, HBP, lipid control, chronic hepatitis C, MS, transplants, cancer • Huge expansion in micro-technology (e.g., swallowed video camera), imaging, catheter, laparoscopic, stent, fine needle technology and treatments • Novel fertility, cloning technology • Surgery is faster, easier, safer…but bed shortages and long waiting times now • Fewer doctors; busier doctors • More non-traditional medicine and self-care

15. Medical Underwriting in Next 10 Years New Medications in Future: • Molecular technology allows for genetically engineered and targeted medication (e.g., specific antiviral agents (Hep. B, C, etc.) • For acquired disease (arteriosclerosis, cancer, DM, obesity, hypertension, etc.) • For inherited disease (e.g., cystic fibrosis, muscular dystrophies, polycystic kidneys, etc.)

16. Medical Underwriting in Next 10 Years New Diagnostic and Therapeutic Technology in Future: • Improved tissue-specific imaging (adeno. vs squamous) • Micro-surgical technology (brain, eye, ears, vascular) • Minimally invasive cardiac repairs • Robotic/remote surgery • Endoscopic vascular repairs • Transplant (growth of organs in animal donors) • Genetically engineered cell growth (e.g., new heart cells after an acute myocardial infarction, new neurologic tissue after a stroke or spinal injury, etc.)

17. Medical Underwriting in Next 10 Years New Laboratory Technology in Future: • More sensitive/specific tests to predict cancer, cardiovascular & other risks (better mortality assessment) • More oral fluid, transcutaneous testing • Home testing for e.g., infections, CVS risk, etc. (nondisclosure risk) • Detailed, specific/targeted genetic testing esp. for personal/home use (non-disclosure risk) • More detailed prenatal screening

18. Medical Underwriting in Next 10 Years Increased Information Availability in Future: • Unsupervised, uncensored, unedited Internet provides people with both real knowledge and pseudo-knowledge about medicine and insurance products…Internet is like an intellectual Flea Market: mainly junk, lots of marginally useful things, and an occasional item of value • Busier MD’s…less time for patients…more self-directed care by patients (non-disclosure risk) • More non-traditional medical treatment, e.g., OTC naturopathic meds (non-disclosure risk) • Direct to patient advertising of drugs • More OTC medication (GI meds, NSAID’s)

19. Medical Underwriting in Next 10 Years New Problems in Future: • Exposure to unusual/resistant organisms: • Travel abroad (TB, malaria, new viruses, animals, birds) • Hospitals (MRSA, vancomycin-resistant enterococci, E-coli, C. difficile, pneumococcus, STD’s, HIV) • Pandemics and new diseases (e.g., SARS, Avian flu, etc.) • New environmental problems & diseases, e.g., respiratory & cardiac disease associated with pollution (traffic, industrial waste; human waste, etc.) • Affordability of expensive new treatments and technology… “haves & have nots” • Increasing cost of public health care system • Fewer MD’s and greater privacy concerns: • Therefore, less medical information about clients…need other means to assess risks

20. Doctor’s Typical Day What is a doctor’s typical day to day activity? • History • Examination • Investigation • Prescribe treatment

21. The 21st Century Insurance Applicant • Knows his/her own history and family history • Can read about his/her symptoms on Internet • Can get full exam from private clinic in Canada or USA • Can “buy” genetic testing • Has access to self-directed USA style strip mall imaging • Can get many meds OTC or from the USA • The typical APS may not reveal any of the above information

22. What to do? • Look for other means of gathering medical risk - data from patients/clients, e.g.: • Health card data in Canada • Stricter requirements: • More detailed blood/fluid analysis (= more cost) • More focused lab analysis (e.g., CAD markers) • Obtain info. from all practitioners; all Rx even OTC Rx • Novel ways to price group/population risks • Fewer preferred categories/cases • Continued close scrutiny of medical literature • Close watch for self-directed health care esp. genetic tests

23. From a Reinsurer’s Perspective … Brenda Buckingham President and CEO Swiss Re Life and Health, Canada

24. Canadian Underwriting Trends – Are You Aware? Expected mortality results can only be realized when actuaries and underwriters work together to achieve a full understanding of each others expectations, and business environments

25. Underwriting Business Environment 1. Competitive market 2. Underwriting guideline liberalizations 3. Capacity limitations, reduced auto/jumbo limits

26. Competitive Market • Canadian individual insurance market is very concentrated • The competition for new business is largely occurring on the underwriting front • Reduce cycle time • Reduce expenses • Emphasis on MGA/Broker relationships

27. Competitive Market • Increased number of business decisions (relationships) • Reduced compliance with age/amount requirements (cycle time, expense, relationships) • Reduced adherence to preferred criteria (relationships, expense)

28. North American Underwriting Audit Survey 2002 • Importance of compliance with treaty guidelines (binding, plan, pool share, etc.): Extremely important • Reinsurers 85% • Direct writers 70% • Compliance with age/amount requirements: Extremely important • Reinsurers 62% • Direct writers 49%

29. North American Underwriting Audit Survey 2002 • Adherence to preferred criteria: Extremely important • Reinsurers 77% • Direct writers 44% • Business decision justification: Extremely important • Reinsurers 100% • Direct writers 47%

30. North American Underwriting Audit Survey 2002 • Percentage of business decisions allowed: Less than 2% • Reinsurers 92% • Direct writers 51%

31. Audits and Surveys– What we found • Underwriters stretch cholesterol and build in the preferred criteria • Overall underwriting error is minimal • Attending physician statements are waived more often than any other requirement • The underwriting of combinations of impairments should be strengthened • Benefits of financial underwriting are under appreciated

32. MVR Part 3 Part 2 Application Blood MIB APS Rx Profile Urine ECG 1 to 5% 6 to 10% 10 to 20% >20% 2002 Protective Value Study Proportional mortality cost of eliminating a requirement from underwriting model of study cohort Part 2: Self-reported medical history Part 3: Physical measures statistics Source: Swiss Re Note: Mortality costs were adjusted for issue age and frequency requirement was ordered.

33. Competitive Market – Auto/Fac Study • Received 24,535 automatic submissions from 6 Canadian Companies (covering 11 months) • Reviewed 2 groups of business from each of these 6 Companies Group A – cases ceded to Swiss Re automatically and seen facultatively from another Company - Swiss Re assessed higher or with added requirements Group B – cases submitted facultatively to Swiss Re and also received automatically from another Company at lower rating or with less evidence

34. Auto/Fac Study ResultsRatio of Findings to Total % A B

35. Auto Fac Study - What we found • Generally, customer appreciation for completing the study and taking action where required • Unacceptable levels of aggressive automatic underwriting • Evidence of market pressure. By amount results are considerably worse than by number of policies • Higher level of exceptions/more aggressive underwriting occurring on larger amount (high profile) cases

36. Competitive Market Heightened level of competition in the primary market is impacting reinsured block (automatic and facultative) How much room do we have in our pricing?

37. Underwriting Guideline Liberalizations • There is a trend towards liberalization of age/amount underwriting guidelines • Non-med, no fluids to $250,000 age 45 • Fewer medical exams, increased use of parameds and abbreviated paramed exams • Fewer inspection reports and financial statements • Fewer treadmills and higher EKG limits • Fewer APS’s, with increased use of teleunderwriting and questionnaires

38. Testing Limits Are Increasing -Why? • Reduce cycle time • Reduce expenses • Enhance customer experience • Pressure from the Distributors • Low risk - increasing share of related mortality risk has shifted to reinsurer

39. Non-Meds, No Fluids • Of particular concern is the upward movement of limits for non-meds and no fluids • This is a material sector of the market

40. Non-Meds, No Fluids • We are limiting our ability to select against risks that have the greatest impact on our expected mortality • Smoking • Aids • Obesity • Hypertension • Diabetes or other kidney impairments • Liver function tests

41. Non-Meds, No Fluids • Do our pricing mortality expectations accurately reflect the impact of these new underwriting guidelines? • Aggregate comparison scenario

42. Aggregate Comparison Scenario blend of 3 sets of reinsurance rates - 1984 blended rate with 2.4% annual mortality improvement to 2004 X CIA 86-92

43. Changes Impacting YRT Rates • Table shave programmes • Old business was typically XS, today QS • Introduction of Preferred – better risks go elsewhere • Lower interest rate environment • Capital requirements • Etc. So, where does the YRT rate for fluid free <45 really lie?

44. Capacity, Reduced Auto/Jumbo Limits • Capacity limited to $75 million in Canada • Auto/Jumbo limits coming down • At older ages, for additional underwriting scrutiny • Reporting delays cause retention issues for retrocessionares and reinsurers – they can be bound by multiple sources on the same risk

45. Be kind (but firm) with your underwriting brethren. Times are tough.

46. Questions?