Session 10 PD, Who Pays Your Last Credit Card Bill? Final Expense Insurance 101
Moderator:
Helen Colterman, FSA, CERA, ACIA
Presenters:
Jing Lang, ASA, ACIA
Jeffrey Shaw, ChFC, CLU
Brian A. Sibley, FSA, MAAA
Who Pays Your Last Credit Card Bill?
Final Expense Insurance 101
Final Expense Market in the US
SOA Life & Annuity Meeting
New York, NY
May 4, 2015
Brian Sibley FSA, MAAA
RGA Reinsurance Company
VP Business Development
Final Expense Insurance 101
Final Expense Topics Covered










Final Expense Defined
Target Market
Market Size
Typical Sale
Product Design
Pricing Considerations
Applicant and Agent Characteristics
Challenges
Management
Innovations
2
Final Expense Defined
What is final expense life insurance?
 Final Expense Insurance is:
 Life Insurance purchased to cover funeral expenses, burial costs,
medical and hospital bills, loan balances, and credit card debts
 Small face amounts
 Whole life (sometimes term)
 Simplified issue underwriting
 Final Expense is not Pre-Need which is a different product sold a
different way to pre-pay a funeral
3
Final Expense US Market Size
Why are companies targeting final expense?
 Aging population in the US
 10,000 Baby Boomers turn 65 every day. This will go on for at least
15 more years
 In 2015, there will be 100 million people between ages 50-80
 36% have no savings, retirement or investments
 35% live on social security alone
 Many of these people don’t have any life insurance
Sources: Social Security Administration
US Census Bureau Population projections
4
Final Expense US Market Size
Why are companies selling final expense?




High premium volume
Product line has growth
Demographics support it
Undersold market
5
Final Expense US Market Size
Best Estimate Projection for new policies and premiums
Year
2014
2015
2016
2017
2018
New Policies
1,867,972
1,876,806
1,897,033
1,919,570
1,943,871
New Premium (000’s)
$1,250,000
$1,269,000
$1,294,000
$1,319,000
$1,345,000
Source: LIC/CSG Final Expense Survey Report 2013
6
Final Expense US Market Size
Best Estimate Projection for inforce policies and premiums
Year
2014
2015
2016
2017
2018
Inforce Policies
6,156,537
6,279,897
6,380,281
6,473,570
6,563,595
Inforce Premium (000’s)
$3,779,000
$3,947,000
$4,090,000
$4,219,000
$4,388,000
Source: LIC/CSG Final Expense Survey Report 2013
7
Final Expense Typical Sale
What does a typical final expense sale look like?




Small Face Amounts – Average size $10,900
Higher Premium per 1000 - Average annual premium $652
Written at older ages - Average issue age is 61
Mostly simplified issue underwriting





Limited application questions
Ht./Wt. Chart (64%)
Phone interview (59%)
MIB Report (54%)
Rx Check (46%).
 Mostly sold by independent agents (82%), captive agents (17%) and
Direct (<1%)
 Mostly whole life coverage with some term
Source: LIC/CSG Final Expense Survey Report 2013
8
Final Expense Product Design
What life insurance product designs are normally used?
Whole Life Products – 3 main types
1. Level Death Benefit – (tightest SI underwriting)
2. Graded Death Benefit – often 30% of level DB in first year and 70% in
year 2, moving to 100% by year 3. (looser underwriting than 1)
3. Modified Death Benefit – returns premium often at 10% interest if
death in the first two years. (looser underwriting than 1 and 2)
Term Products
1. Graded Death Benefit Term – 2 year grade in for death benefits and
decreasing term after the level period
2. Term products can be 10, 20 and 30 year term
Note: Graded and Modified Products often pay full death benefits in the
first two years on accidental death
9
Final Expense Pricing
What are the key components of pricing for final expense
products?




Mortality
Lapse
Interest
Expenses
10
Final Expense Pricing
Mortality
 Critical to having a profitable final expense product
 Cost is often 50% or less of the total retail premiums because
commissions are very high on agent sold products
 If pricing mortality is off by 10% it can swing your profit margin up to
50%
 Driven by distribution, the application, the underwriting screening,
and rescission rates
 Important to reflect a bump up in pricing mortality in year 3+ after the
contestable period
 Many products are unismoke (aggregate) (i.e.10/20/60)
 Reinsurers and consultants can help with mortality- ensure they have
the experience data to back up the mortality assumptions provided
11
Final Expense Pricing
Mortality Spectrum
RGA Mortality Experience by Market
Final Expense
Fully
Underwritten
Residual Standard
Face Amounts
$100k - $250k
100%
Non-Medical
Standard
Face Amounts
< $100k
110% - 150%
Mortgage Term,
Bank Sold Term,
Worksite
Standard
Face Amounts
< $250k
170% - 390%
Level Death Benefit
300% - 775%
Normalized to Fully Underwritten Residual Standard Non-smoker Experience
Ranges include variations by company, underwriting, target market, and issue age.
12
Final Expense Pricing
Mortality Assumption – Rescission Rates Critical
Rescission Experience
* Level Death Benefit only
13
Final Expense Pricing
Lapses
 Key in pricing because you need policies to persist to make up for
high first year commissions and acquisition costs
 According to the LIC/CSG survey, on average after 4 years only 50
percent of issued policies are still in force
 Many people can’t afford the coverage or have been sold too much
coverage and therefore lapse
 According to the LIC/CSG survey, the few companies that take credit
card payments have experienced worse persistency
 Watch for lapse skewness as policies tend to lapse early in the policy
year even for monthly mode
 Watch for churning of the business which causes problems for final
expense writers
14
Final Expense Pricing
Interest Rates
 Important in whole life pricing
 Low interest environment typically means low earned rates in pricing
 Drives up your retail premiums
 Low interest rates can also require higher cash values according to
Standard Non-forfeiture Law
 Also drives up your retail premiums
 Be prudent in your approach
15
Final Expense Pricing
Expenses
 Expenses are also very important in pricing
 High first year and renewal commissions including commission
related expenses are big expenses to cover in pricing
 Consider the cost of capital to fund the high commissions paid for
selling the final expense product
 Factor in the cost of all your underwriting evidence, Rx checks and
MIB
 Include the costs to manage this business
 Make sure to include claims adjudication costs to reflect the cost of
contestable claim rescissions
16
Final Expense Applicant Characteristics
What are the characteristics of a typical applicant?







Monthly incomes of $2000 or less
Education level – High school or less
Single, divorced, never been married or widowed
More females applicants than males
May live in their original home
Often have or had blue collar careers
Often have children with similar characteristics sometimes living at
home
17
Final Expense Agent Characteristics
What are the characteristics of a typical agent?
 Often have the same characteristics as the people they sell to
 Many agents live pay check to pay check, but have higher incomes
 Agents need to keep selling final expense to have income from future
commissions to pay their costs
 Agents go out and pay for leads, gas and hotel bills so more
pressure to make sales
 Agents often pay between $22 and $45 per lead
 Agents paying more than $40 usually won’t be successful
 Agents under high pressure to sell the customer something
 Like to qualify for final expense companies’ lavish trips/conference
18
Final Expense Challenges
Challenges of the Final Expense Market
“ANTI-SELECTION”
 Agent misconduct can steer the process for their benefit only
 Applicants can “forget” things when disclosing on the application
 Non-disclosure by the agent or applicant causes problems in this
market
19
Final Expense Challenges
Agent examples of anti-selection or not writing good business:
 Agents know the companies that don’t do Rx, MIB, or do Teleinterviews or that have “holes” in their application. Sell to clients
based on this knowledge
 Company advanced large commissions to the agents and agents
don’t pay the company for chargebacks
 Non-disclosure or coaching applicant to get the insurance which
means policy often rescinded at claim time. Can lead to reputation
risk for the writing company
 Sell too high of premium the customer can’t afford leads to not taken
policies and high lapses
20
Final Expense Challenges
Applicants Anti-selection
 Applicants will lie about medications they are on or conditions they
have
 Can stack policies if passed underwriting before and can afford more
coverage
21
Final Expense Management
Management of Final Expense Business is Critical for its success
for a company
1.
2.
3.
4.
5.
6.
7.
8.
Agents Contracted
Agent Commissions
Application
Underwriting Used
Underwriting Process
Billing for Final Expense
Claims Adjudication
Administration and Tracking
22
Final Expense Innovations
Are there any innovations coming to this market?
 The predictive nature of credit data is coming to the life insurance
market including final expense
 In our recent company studies, we have determined FCRA compliant
credit data is highly predictive of mortality and lapse
 The TransUnion TrueRisk Life credit data can be used in the following
ways:




Improve mortality results
Improve persistency results
Improve leads
Make more appropriate offers of level death benefit versus modified
23
Final Expense Takeways for the US Market
Conclusions and Key TakeAways
 Final Expense business is a growing life insurance market
 Final Expense business requires close monitoring of your experience
to ensure you meet your pricing assumptions and hit profit targets
 Most companies who enter the market write unprofitable business at
the beginning before they learn to adjust or tweak their program for
improvement
 Many companies underestimate mortality for this market when they
enter and fail. Seek advice if you are newer to this market
 The producers are key to getting a good block of final expense
business. Non-disclosure is a big problem in this market
 With 100 million people in the US, age 50-80, and 10,000 people
turning 65 every day for 15 more years, Final Expense Life Insurance
fills a growing need for life insurance in our society
24
So, we haven’t talked you out of it yet?
10 Key Steps to Getting Started!
Jeffrey S. Shaw, CLU, ChFC
Executive Director
Life Insurers Council
1). Know your distribution
 You need a partnership – even if it’s not 50 – 50
 Communicate and agree upfront about pricing
assumptions and performance expectations
 Understand your place in their briefcase – it may not be
the reason you think (or the one they tell you)
2). Know your product’s place in the
final expense universe
 Spreadsheet your product BEFORE they do
 Distribution and competition is changing all the time –
your position will change, too
 Even good agents (especially good agents) can antiselect
3). You won’t get it right the first time
 And fixing it won’t be as simple as tweaking rates and
comp
4). Grow Slowly
 Fast growth is easy – controlled growth is hard
 It takes time for problems to become apparent – do you
prefer big problems or small problems?
 Manage your capital proactively
5). Monthly monitoring meetings even
before data is conclusive
 Include everyone
 Everything can be improved through management
 Lapse Management
– A lapse notice can be considered a lead
– Re-date versus reinstate
 Mortality Management
– Contestible claims are a forensic treasure trove
– Rescission ratios can be managed downward
– May need to extract blocks from terminated agents to determine
if efforts are paying off
– Don’t underestimate the power of the sentinel effect
6). Monthly field management
meetings
 Field Management
– Actual to Expected results on an agent, GA, and IMO level
– Bad agents are rarely black and white – need clearly defined
standards and stick to them
– But ratios alone can also be misleading
– Identifying good agents is just as important as the bad
 Agents Guide – they won’t read it but you can refer to it
– What’s the definition of treatment?
 Watch your contracting costs -- Lots of agents do not
equal lots of sales but they do equal lots of expense
 Spend time in the field with agents – their world is NOT
your world
7). Don’t reinvent the wheel
 Start where everyone is moving to/has moved to
–
–
–
–
–
Phone interviews
RX database
Paperless
Voice/e-signature
Direct express/nth day billing
8). Take advantage of available
resources





CSG Actuarial
Competiscan
Life Insurers Council (LIC)
Milliman
Trans Union Credit/Mortality Prediction
9). Consider some differentiating
options
 Riders/Alternative products
 Cross selling inforce block directly
– Michael Edwards Direct
 Lead management
– Reduce anti-selection
 Creative lead generation
– Home Security customers
10). You get what you pay for
 Who will be the first to blink?
– Compensation influences activity more than any other factor
Session 10: Final Expense Insurance 101
International Trends
Jing Lang
UK & Ireland
UK & Ireland


Age at issue: 50 to 75 or 85
Min/max premium: GBP4/GBP100 per month


Max cover: GBP25k



Many insurers limit the premium to GBP50 per plan with
an overall max of GBP100
May apply per plan or to all plans
Irish max: EUR65k
Inflation protection (or lack thereof)
UK & Ireland


Moratorium period: 1 or 2 years
Cover during moratorium:


Full face amount on accidental death and 100% to 150% ROP
on non accidental death
Cover after moratorium:

Full face amount with increase of up to 2X cover on
accidental death
UK & Ireland

Premium payment




Sex and/or smoking status distinct rates
Level premium based on age at issue
Payable WL or limited to a max term (i.e. 30) and/or a
max age (i.e. 90)
WL premium have been criticized as some lives will pay
significantly more in premium than the benefit
UK & Ireland

Distribution:




Telephone, online, direct mail
Tesco, post offices
Newspaper/magazine adverts
Marketing: mostly direct through TV and internet

Use of popular and well respected figures


Sir Michael Parkinson (AXA Sun Life)
Cillia Black (Liverpool Victoria)
UK & Ireland
UK & Ireland

Additional options:



Funeral Benefit Option
Protected Payout Option
Accidental Serious Injury Rider
UK & Ireland

Reinsurance:



Net premium or YRT basis
Reinsurance premium can follow the office premium
payment pattern or cease reinsurance cover when the office
premium ceases
Can be structured so reinsurer is not on risk for the ROP
during moratorium period
Australia
Australia


Age at issue: 18 to 79, some specify 50 to 75
Max coverage: AUD30k


Coverage period: life


Lower limit if choose level premium
Some pay cover at a certain age (90) if still alive
Forms of plan:


Single, joint, or family
Max benefit applies
Australia

Accidental death period (ADP)


Cover during ADP:


Mostly 1 year, certain plans offer choice to be 2 years
Full face amount on accidental death and ROP otherwise
Cover after ADP:

Full face amount with increase of up to 2X cover on
accidental death
Australia

Automatic indexation





Cover increases by 5% to 10% each year
Up to a certain age (say 80)
Premium will increase accordingly
Automatic increase if do not decline
Premium



Age-based or level
Payable until age 85 or 90
Payable annual, monthly, fortnightly
Australia



30 day money back guarantee
Value promise
Marketing

Much more aggressive advertising than UK
Australia
Australia

Additional options:






Early Payment Benefit
Premium Pause Benefit
10% Cash Back Benefit
Premium Freeze Benefit
Paid Up Value feature
Accidental Serious Injury Rider
Canada
Canada






Age at issue: 40 to 85
Range of coverage: CAD1k to 50k
Simplified underwriting with no medical exams
Many claim to have no waiting period
Accidental death provide 4X cover
Premium


Guaranteed and payable till age 100 (for life)
Payable annual or monthly
Canada

Indexation is optional


Additional features




Subject to a lower cover limit
Living benefit at no additional cost
Accidental fracture rider
Dividend and/or cash value
Distribution: similar to US, mostly sold by agents
Summary

Similarities and differences between markets:





underwriting
premium
coverage & indexation
additional benefits and/or options
distribution and marketing
End of session
Q&A