final expense insurance - acsw · •agency and agent tracking is key to monitoring success...

General Public Release

Final Expense Insurance –A Path to Success in the Middle Market?

Mike Barnhart



Final Expense Insurance | Actuarial Club of the Southwest | November 13, 2015 2

Table of Contents / Agenda

• Market Overview

• Product Design

• Pricing Considerations

• Distribution

• Underwriting Considerations

• Administration

• Regulatory / Reputational Considerations

• Summary


Final Expense Insurance | Actuarial Club of the Southwest | November 13, 2015

Market Overview

3



Typical characteristics of final expense market

Solving for funeral and other death–related expenses

Low face amount WL policies

Ave., face: $11,000 Ave., AP: $700

Simplified Issue via agency distribution

Level DB and some limited DB

High prem per $k due to S/I

Target Middle Income market



Characteristics …..

5

source: LIC/CSG Final Expense Survey Report (2013 Data)

Aging population: BOOMERS

Historically low insurance ownership

(protection gap)

Relatively low market

penetration: Opportunity?

Some Barriers to entry. Capital partnerships?

Premium and policy growth is

expected.

Attractive average IRR



Product Design

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Product DesignDeath Benefit Structure

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Level Death Benefit – For "standard" risks

Graded Death Benefit – For applicants who provide somewhat

adverse answers to application questions

Return of Premium Death Benefit – For applicants who

provide significantly adverse answers, or for policies issued on a guaranteed issue basis



Product DesignRiders

Usually a very limited number of riders, if any, are offered

Accidental Death

Benefit Rider

Accelerated Benefit Rider

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Product DesignRisk Classes

Usually NS/SM, or NT/T; completely self-reported, so veracity issues

Preferred vs Standard:

Use of Prescription Profiles

ROP DB products often use uni-smoke rates, as smoking status is likely not the most dominant influence on mortality

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Product DesignIssue Age Ranges

Minimum issue ages are typically 45-50

Maximum ages generally around 80-85

May depend on benefit type

Some companies offer to younger ages, especially for Level DB products

Implications of selling to younger ages

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Pricing Considerations

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• Very limited underwriting > high levels of mortality

• Contestable Philosophy > A/E could be dampened in first two durations

• Underwriting Considerations > application is the key

• First year lapse experience tends to be extremely high, especially at relatively younger issue ages

• Relatively high lapse rates Yr 2, grades off to typical whole life lapse rates

• Need policies to persist in order to mitigate mortality anti-selection and to recoup the initial capital strain

Pricing ConsiderationsMajor Pricing Components

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MORTALITY LAPSE



• Important consideration given the persistent low interest environment

• Still shorter pricing horizon as compared to traditional whole life products

• First year commissions averages similar to other markets.

• Renewal commissions are higher than industry average

Pricing ConsiderationsMajor Pricing Components

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INTEREST RATES COMP AND CAPITAL



Final Expense Pricing

• finalexpenserate.com is a source for rates of market leaders, there are others.

• Need to be sure that comparisons among product types are "apples-to-apples"

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Distribution

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• There are a number of full service agencies (IMO's) that will represent different carriers' products to their sales force from lead generation

• Agencies typically provide end to end solutions which include call center and administrative support

• Direct marketing utilizing direct mail or national TV ads is targeted to an older demographic; online advertising is used for younger ages

• Use of direct advertising coupled with a call center (with licensed reps) to field calls is very efficient

• Allows for control of distribution, which is subject to less agent involvement in product design

AGENCY VS DTC

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• Commission motivated

• Differentiation in product design

• Companies that provide quality leads want to ensure that business is written with them

• Agency and agent tracking is key to monitoring success

• Transitory agent behavior creates potential for sales fluctuations

• Many "mouths to feed" concept drives commissions higher to cover numerous parties, i.e. producer, agency, lead generator, etc.

• High marketing costs w/ low placement rates

• Online advertising may not be as effective due to lower socioeconomic demographic of the typical consumer

• May require the need for a call center, or the use of outsourcing

• Need for tracking capabilities for the above and the ability to change / tweak quickly to increase effectiveness

AGENCY VS DTCPotential Issues

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Underwriting ConsiderationsFinal Expense Applications

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Underwriting Components Referenced

DECLINED

Rx Q

Dr. InfoHOSP/

TREATED

BUILD



Medical Conditions Referenced

Cancer Heart



Lifestyle Components Referenced

??

DWI/DUI

Felony/Parole



Additional Information Accessed

Prescription Profile

MIB

MVR



• Differential in mortality between those applications generating a MIN score from those generating a MAX score is about 10-20% at core issue ages (60+)

• This differential is even greater for younger issue ages, which further emphasizes the potential inadequacy of typical final expense application questions for younger individuals

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Swiss Re Final Expense Underwriting Assessment



Administration

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• High Policy Counts needs efficient systems.

• Small face amount policies will limit the ability to control fraudulent claims

• Need it NOW! most carriers committing to a 24-48 hour turn around claim payment from notification!

• Matching your client base income streams can yield improved persistency i.e., Social Security payments, credit cards, and ACH payments

• Capability to monitor agent performance

Administration

25



Regulatory and Reputational Risks and Concerns

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• Direct advertising

• Cultural distinctions relative to other traditional life insurance products

– Claim payments are required within 24-48 hours to facilitate the policy's primary purpose: the payment of funeral expenses

– Prompt payment of agents commission payments, or lack thereof, may affect behavior

• Careful what you ask for

• Unique selling entity:

– New Distribution channel, less conflict could be a plus

Regulatory and Reputational risks

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Summary

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• The Final Expense market is expected to grow at an increased rate over other traditional life products

• Administration of Final Expense business requires significant resources to ensure compliance and the ability to meet policyholder needs

• Per unit pricing, and therefore profit potential, is quite high; competitive success instead driven by compensation, service, and the ability to provide quality leads

– Need to recognize the unique underwriting and claims philosophy required for a low face SI product marketed to a lower socio-economic demographic

– Close management of results, and the ability to modify the product and processes, are keys to maintaining profitability metrics

• Potential brand risk as final expense may be considered inconsistent with existing/ future products, policyholders, and distribution partners

Final Expense InsuranceSummary items

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Thanks

30



Legal notice

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©2015 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.

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