1 / 65

2006 General Meeting Assemblée générale 2006 Chicago, Illinois

Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois. IP-5: Anatomy of a Large Case. Moderator: Lisa Forbes, FSA, FCIA AVP & Actuarial Consultant Manulife Financial.

Download Presentation

2006 General Meeting Assemblée générale 2006 Chicago, Illinois

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.


Presentation Transcript

  1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 General Meeting Assemblée générale 2006 Chicago, Illinois

  2. IP-5: Anatomy of a Large Case Moderator: Lisa Forbes, FSA, FCIA AVP & Actuarial Consultant Manulife Financial

  3. Anatomy of a Large CaseAdvisor Perspective Des Jardine, CLU, Merit Award Winner Estate Planning Advisor TD Waterhouse

  4. My background • Estate planning specialist • 25 years of experience in the insurance industry • Started with Sun Life (Montreal) • Variety of sales and marketing roles • Joined TD when it acquired Canada Trust

  5. My role • Employed by Canadian bank to perform estate planning services for customers of its stock brokerage operation • Insurance policy commissions form the bulk of my compensation

  6. My client • Male, nonsmoker, in his mid 50’s • Long-term investment client • Wealthy • Majority owner of a $15M company • Runs $1 Billion of funds for a major mutual fund

  7. My client • Taking a business trip to England • His wife accompanying him for leisure • Referred to me by Investment Advisor (Nov. 2000) • Update/revise wills • Power of attorneys

  8. My tasks • Reviewed will and Powers of Attorney • Dual wills • Canada Trust as executor and/or Power of Attorney • Referred to lawyer and monitored progress & results • Needed to avoid large legal bills

  9. My tasks • Clearly our client is concerned about estate planning • Can we help him further? • Meet to discuss personal and business goals

  10. My tasks • Client owns 90% of a company worth $15,000,000 • Wants to get value out at retirement • Wants to get value out at death • Wants to be fair to minority partner

  11. My tasks • Evaluated the alternatives available • Retirement Compensation Agreement (RCA)? • Corporate Insured Retirement Program? • Living Buyout/Share Redemption?

  12. Retirement Compensation Agreements (RCA’s) • Employer promises retirement income; funds with a Trust set up to manage this promise • 50% of every $1 paid into the Trust goes to CRA (a refundable tax) • Same penalty for taxable income earned • Use life insurance to sheltered income • Tax is refunded (w/o interest) as taxable income is paid in retirement

  13. Corporate Insured Retirement Program (Corp. IRP) • Company buys a max-funded life insurance policy • Company borrows against that policy to fund retirement income for employee • Different tax advantages & risks than the RCA

  14. Living Buyout • Company buys a max-funded life insurance policy • Company borrows against that policy to redeem shares from a shareholder while they are still active in the business • Different timing, taxation & risks

  15. My Tasks Living Buyout My Client 90% Partner 10% 80% ------------- 20% ----------- ---- 85% ---- 15% $ $ Operating Company $15M FMV

  16. My tasks • Discussions with client’s professional advisors (auditors, lawyers, accountants) • Facilitated discussions with Tax & Estate Planning Team • lawyers from insurer who specialize in estate planning with life insurance • I take client’s viewpoint

  17. My Tasks • Deciding on optimal go-forward strategy (living buyout funded by life insurance) • Facilitated discussion with Actuarial Consultant • actuaries from insurer who specialize in large case sales • I take client’s viewpoint

  18. My tasks • Engage the Underwriting Consultant (field underwriter from insurer who specializes in large cases) • Educate client on need for both financial and medical underwriting • Facilitate the financial underwriting • Financial reports; Tax returns; Inspection reports • Can be viewed as very invasive

  19. My tasks • Work with underwriting consultant • Position client for medical tests • Expectations • Timing • Things to avoid, etc. • Hiccup with Stress EKG • Needed Stress Thallium EKG (more meetings/education)

  20. My Tasks • Stress Thallium EKG (Murphy’s Law) • Convince client of the need to proceed for both personal and financial health • Client arrives but no doctor • Irate busy executive • Arrange apology from president of lab • Try again one week later

  21. My Tasks • Standard offer from insurer • February 2002 • $15,000,000 initial face amount • Amount at risk grows to $25M within 20 years • $1,000,000 annual premium

  22. My Tasks • Assist in financing for living buyout program • Assist in interviewing lawyers to draft the partnership agreement • Ongoing review of the policy and the plan • Currently working on beneficiary planning

  23. Summary A fairly typical large case: • Educate client and other advisors on the options available • Fact finding & recommendations • Manage & co-ordinate the resources available and the process to place the business

  24. Summary A fairly typical large case: • Manage & co-ordinate the underwriting process • Over 1 year to complete the placement of the policy • Ongoing review for several years • Persistency comes from the quality of the business and service

  25. Anatomy of a Large CaseDirect Company Perspective Steve Krupicz, FSA, FCIA AVP Special Case Markets Manulife Financial

  26. Agenda • Underwriting issues • Pricing & design issues • Profit considerations • Capacity • Compensation

  27. Case Size What makes a case “Large”? • Premiums? • Face Amount? • Profile: • Of the advisor? • Of the client?

  28. Underwriting Medical: • “Large case” requirements are the same as “big case” requirements • May have more trouble getting the client to take tests

  29. Underwriting Medical: • May receive more information than you typically get • Mayo clinic, full body scans, etc. • What do we do with unusual recommendations on tests/treatments

  30. Underwriting Financials: • Need more information to justify really large coverage • Often harder to obtain information from affluent or successful clients • Especially for private businesses

  31. Underwriting General: • Travel more often an issue • Avocation more often an issue • Sometimes the insured is not the driving force behind the insurance • Clients often less receptive to adverse decisions

  32. Pricing Issues Should we change pricing assumptions for large cases? • Mortality • Lapse • Interest • Expenses • Likely to be the outliers on any statistical studies

  33. Pricing Issues How do you treat any cross-subsidies inherent in the product? • Investment options • COI options • Premium durations and levels • Actual versus average product configuration

  34. Design Issues Do we alter product terms or features? • Limits on indexation riders? • Mandate premium durations or size to control net amount at risk? • Surrender charges? • Higher or lower?

  35. Design Issues Do we alter product terms or features? • Different ESA’s for joint policies? • Limit access to investment options? • New or customized features? • Who decides? • Marketing, pricing, valuation, management

  36. Design Issues Do we alter product terms or features? • Do we pass through to clients any extra costs? • Appropriate for pricing/profit targets • But is it a nuisance to client or advisor • How do you define nuisance $1,000/year? $10,000/year?

  37. Pricing Issues Should you use the same profit targets? • Do you need the same profit on the second $25M of coverage as on the first $25M? • Embedded value? • PVFP? • Premium margin? • ROE?

  38. Capacity • How much coverage do you issue? • How big can the policy grow; in what timeframe? • What limits are imposed by reinsurers & pools? • What happens if you exceed these limits?

  39. Compensation Should we lower compensation? • Should we pay the same compensation on the second $25M of coverage as on the first $25M? • Mandatory or optional? • How will advisors interpret this action?

  40. Compensation Higher compensation? • Could be justified by lower placement ratios • Funding for client costs? Levelize or spread compensation? • Advisor shares early-lapse risk • Can advisors bear this risk?

  41. Timing Time is usually too short to allow debates on many of these issues • Medical evidence is aging • Oldest information can become stale when ink not yet dry on newest • Clients rarely willing to wait • Indecision can be a decision

  42. Managing the Risk Who decides on any of these issues? Marketing Pricing Valuation Risk officer Underwriters Reinsurer Administration Tax Management Legal Financial Advisor

  43. Conclusion • Many issues to consider • Easier if you contemplate and plan for these issues before you pursue this market • You will need to react to whatever arises

  44. Anatomy of a Large Case Reinsurance Perspective Sharad Mehra Manager, Actuarial Services Munich Re

  45. Reinsurance Perspective • What do we need to know? • Understanding Reinsurance Treaties • Large Case Capacity • Financial Underwriting • Overview of the Large Case Market

  46. What do we need to know? • Do I have a name and date of birth? • How much is being applied for? How much is inforce? • Is this a growth plan? Can we get an illustration? • Is this a treaty plan?

  47. What do we need to know? • What is the underwriting assessment? • Is this a special risk? • Do I need to cede this to the retrocessionaires? • Do I have enough capacity in my retro pool? • Any other special considerations?

  48. Our Case • MNS in 50’s, rated Standard • Financial underwriting sound • Increasing NAAR with Ultimate of $25M • Performax Plan – non Treaty • Special Quote Required

  49. Understanding Reinsurance Treaties – The Easy Part • Auto limit = amount direct company allowed to bind reinsurer automatically • Treaty capacity = amount that reinsurance rates are guaranteed up to • Both can vary by age, amount and substandard rating • Different for each insurer

  50. Understanding Reinsurance Treaties – The Hard Part • Jumbo Limit = Insurance in force plus current insurance amount to be placed • Amount is based on ultimate if increasing plan • If jumbo limit is exceeded, reinsurers and retrocessionnaires may not accept the cession • Jumbo is NOT net of replacement unless absolute assignment

More Related