Session 176 PD, Winning Strategies for In-Force Management

Moderator:
Brock E. Robbins, FSA, FCIA, MAAA
Presenters:
Jean-Marc Fix, FSA, MAAA
Michael Lawrence Parker, FSA, MAAA
David J. Weinsier, FSA, MAAA

Extending In-force Management

Session 176 PD: Winning Strategies for
In-force Management
Presented by:
Michael Parker, FSA, MAAA
Vice President, Head of Life Product Management
Lincoln Financial Group
LCN1022023092514

In-force Management Opportunities

CoreCompetencies:ProductManagement
CurrentPractice
CreditedRateAdjustments
DividendAdjustments
AdjustotherNonGuaranteedProduct
Chargesasappropriate

Opportunities
PostLevelTermPremiumSetting

DevelopingPractices:CustomerManagement
Current Practice
ReactiveCustomerService
ReactiveRetentionTechniques
OrphanPolicyManagement

Opportunities
TargetedPolicyholderEducation
PolicyValue
OptimalFunding
PolicyBenefits

TargetedWellnessPrograms

TrulyInnovative:SalesManagement
CurrentPractice
LimitedCrossSell&UpSellPrograms
ContractualExchangesandConversions

Opportunities
TargetedUpgrades
ClientLifeCycleValueParadigm

2
LCN1022023092514

Customer Management
Extending In-force Management
Concept:Reengageinforcepolicyholderswithvaluableinformation
and/oradvicethatcanbenefittheirindividualfinancialfuture.
Example:EducatethepolicyholderaboutthevalueoftheirVUL
contract,particularlyasataxadvantagedaccumulationvehicle.
Policyholder
Value
Company
Value
Challenges

Moreknowledgeableassetmanagement
Potentiallybetterproductperformance
Improvedpersistency
Potentiallybetterpolicyprofitability
Policyholderloyalty,advocacy
Relationships
Unintendedconsequences

3
LCN1022023092514

Sales Management
Extending In-force Management
Concept:Throughtargetedupsell,crosssellandupgradecampaigns,
offerinforcepolicyholdersnewproductsthatmeettheiruniqueand
changingneeds.
Example:TargetedUpgradeOpportunity
Policyholder
Value

AnOption;AllOptionsAreGood!
PotentiallyABetterValueFit

Company
Value

CapitalRedeployment
ImprovedProfitDynamics
PolicyholderLoyalty&Advocacy

Challenges

Regulatory
InternalPriority
Relationships
Distribution

Compliance
Reputational
Reinsurance

4
LCN1022023092514

How to?
Extending In-force Management
LincolnsPath:
Supportfromthetop
Creatededicateddepartment
Allocatetoptalentandresources
Buildtheshorttermandthelongtermconcurrently
Bemindfulofallconcernedparties
5
LCN1022023092514

Thank You!

LFG is the marketing name for Lincoln National Corporation and its affiliates.

6
LCN1022023092514

Winning Strategies for Inforce Management

Session 176 PD
2014 SOA Annual Meeting
October 29, 2014

David J. Weinsier, FSA, MAAA

2013 OLIVER WYMAN

Many companies have taken action on inforce blocks of life insurance

Inforce management can take a number of forms depending on the business

Improve
investment
strategy
Implement
retention or buyback programs

Inforce
Management
For term, analyze
PLT premium
elasticity to
optimize retention

Oliver Wyman

For lifetime NLG,

options may
include external
sources, e.g.,
increased
reinsurance or
reserve financing

Lower credited
rates to
guaranteed rates
on interestsensitive
business

Increase COIs on
accumulation UL
contracts where
actual experience
has failed to meet
pricing
expectations

Term

Post-level term (PLT) rate optimization

PLT rate optimization is an advanced application of data analytics
Prescriptive analytics
(what should we do?)

Business value

Predictive analytics
(what will happen?)
Decide / optimize /
manage

Descriptive analytics
(what happened and why?)
Score / predict

PLT rate optimization

Analyze / understand

Describe / monitor

Scope of predictive modeling techniques

Data analytics literacy

Oliver Wyman

UL (accumulation)

COI management on UL
It is prudent to take a three-stage approach to understanding the feasibility and
impact of increasing COIs on inforce UL

Assess the risks:

is it worth it?

Feasibility study
Review documents for any
limitations on the ability to take
action
Define the class

Perform experience
studies and
demonstrate the
need for change

Assess:
Veracity of the evidence
Reliability of existing models
Sufficiency of data
Completeness of existing
studies (with supporting
documentation)
Further studies and
information that may be
needed to support a change
in non-guaranteed elements
Perform experience studies to
support the revised COIs

Determine and
implement the new
non-guaranteed
elements

Develop a methodology to
calculate revised COIs
Methodology should be
consistent with documented redetermination policy (both
internal and ASOP#1)
Changes should result in
expected future profits
consistent with original pricing
expectations
Adequately notify, disclose,
and secure internal and
external approvals

Meticulous planning is essential!

Oliver Wyman

ULSG

The traditional approach to ULSG policyholder behavior modeling can lead to

a misaligned picture of the performance and risks of the business
The traditional approach assumes a single premium pattern and voluntary surrender rates that do not vary by funding cohort

Inadvertent drifts in mix of

business

Underestimated SG risks

Shortcomings of
traditional
approach
Poor model fit

No reflection of dynamic
behavior

Based on a 2012 SOA study1, only 50% of companies reflect multiple premium
patterns in their inforce models
1Report

on Premium Persistency Assumptions Study of Flexible Premium Universal Life Products

Oliver Wyman

ULSG

Benchmarking the range of current practices for ULSG inforce modeling

Traditional Practice
Single premium pattern
Surrender assumption
does not vary by premium
pattern or fundedness
Dynamic formula based
only on in-the-moneyness

Oliver Wyman

Emerging practice
3-5 premium patterns
modeled
Surrender and premium
suspension assumptions
based on refined
experience studies and
vary by premium cohort
Dynamic adjustment for inthe-money policies and
imminent lapsers

Best Practice
Premium buckets defined
by both fundedness and
premium pattern (typically
5+ buckets)
Policyholder behavior
assumptions reflect
additional predictive
modeling factors
Bifurcate fund lapses into
shock lapse and catch-up
premium (with antiselection)
Cease future premiums if
policy reaches paid-up
status
5

ULSG

A refined experience study will reveal behavior differences across a set of

pre-defined funding cohorts
Illustrative example

Aggregate
Assumption

2%

Single premium

4%

Level pay

1%

Min pay

0%

Imminent lapser

3.25%
An aggregate surrender
assumption will force the
model to lapse off
unprofitable cohorts faster
than experience suggests

In this example, by eliminating the subsidization impact of applying an aggregate surrender

assumption across funding cohorts, the model will produce a more reliable profitability/risk profile
Oliver Wyman

Indexed UL

Basis for indexed life inforce cap management

For indexed products, the basis for calculating option costs used for cap-setting varies
Basis for the option cost used for cap setting
52%

43%

5%

Current market conditions

Long term best estimate cost

Hybrid of current and long term

Source: Oliver Wyman Indexed UL Survey

2014 Oliver Wyman

Long-term care

Challenges to managing closed blocks of LTC business

Carriers often struggle with a number of common issues

Rate increases
Obtaining timely and sufficient state
approvals
Potential impact of proposed regulatory
changes
Inability to recoup past losses
Capping inforce rates at new business
rate levels
Inability to get a rate increase for low
interest rates
Time/cost/resources needed in
preparing/managing state filings

Experience monitoring & management

Limitations in claim data

Credibility of data where volume is lacking
Need for more robust dashboards
Managing the claim continuum (incidence,
utilization, continuance, mix of claims, cost
of claim, claim expenses)

Actuarial system & reporting/analytics

Model limitations that limit precision of
projection outcomes
Claim costs versus first principles
Active versus disabled life mortality
Oliver Wyman

Fixed annuities

Fixed deferred annuity inforce management

Reliable analytics and management dashboards must be in place to make
informed risk management and strategic decisions
Actuarial Analytics
Standard reports and
drill-down capabilities
to explain results and
confirm reasonableness
Tools to enhance and
automate the analysis of
results
Efficient, repeatable and
smart analytics tailored
to the product and
application

Examples of
Actuarial Analytics

Components of
Management
Dashboards

Dynamic validation

Awareness of trends

Static validation

Understanding financials

Key ratios

and attributing performance

Rollforwards

Planning

Attribution analysis

What if analyses

Dashboards

Sources of earnings

War gaming

Management-level
presentation of results
and Key Performance
Indicators (KPIs) that
explain business drivers
and variances
Presentation of results to
support informed
management decisions
Dashboards customized
to managements needs

Sensitivity testing

Oliver Wyman

Fixed annuities

Dashboards are customized to explain business drivers and variances

and inform management decisions
Embedded value results ($ MM)
Attribution analysis

New business contribution

300

14

250

12
10

200

150

100

50

0
2012 EV Mortality Lapse Expense Discount New
update update update
rate
business
update
value

Other

2013 EV

Term

Whole Life

UL/ISL

Fixed Deferred
Annuity

Immediate
Annuity

Sensitivity analyses
Discount rate sensitivity

Lapse rate sensitivity

Inforce management sensitivity

12.0%

Baseline

Baseline

10.0%

5% Reduction in Rates

Decrease Premium at
Year 10

8.0%

5% Increase in Rates

Enhanced Conversion Scenario 1

Oliver Wyman

200

400

600

200

220

240

260

280

230

250

270

290

310

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Indexed annuities

Drivers of accounting volatility for FIA with GLWBs

Hedging index credits

Volatility drivers

Statutory. Movement of the AG 33 (or AG 43) reserve is less sensitive to AV

credits than the asset hedges aimed to match AV credits
US GAAP. FAS 133 reserve doesnt always change dollar-for-dollar per unit of
AV credit

Possible solution

Refine hedging strategy to increase alignment

Oliver Wyman

11

Session 176
Winning Strategies for Inforce
Management - Reinsurers
Jean-Marc Fix FSA, MAA
Vice President, Research & Development

Optimum Re Insurance

Clarification & Caveat

Caveat: life insurance not LTC or annuity
From the direct insurance companys
perspective
NOT inforce management advice for
reinsurer

Outline
Know your blocks
No quality data, no quality decision

Decide: keeper or goner?

Manage your block
Sell your block?

Know your Blocks

Past

Present

Future

Mission

Metrics

Act

Keyblocks

Analysis

Followup

Keylevers

Decision

Monitor

Decide
Whatyou
have

Whatyou
know

Decide
Keep
5

Reinsure

Its a keeper!
Thebiggestenemy
togetto
whatyouneedtoknow
is
whatyoudontknowyoudontknow
Youcanbuy
expertisebutmay
beworthwhileto
startbyasking
questions
Whoismostlikely
towantwhatyouwant?
Yourreinsurer
6

What
you
have
What
you
know

What
youwant

Your Reinsurer
Multidisciplinary approach
Investment department
Claims department

Data and pattern monitoring

Benchmarking
Questioning
Management of
Risk and reserves
Earnings

Data and Pattern

Reinsurer may be able to identify patterns
that may look out of norms
Reinsurer may have good understanding
of its reinsurance data

Benchmarking

Compared to peer companies

Distribution pattern
Lapse pattern
Confidentiality is an issue in identifying
peer companies so precision may not be
as precise as hoped for as reinsurer need
to protect their clients identities

Questioning
If you do not have what you need, ask
your reinsurer
Odds are they are already looking at it
Are you willing to act?

10

Management of
Risks and reserves
Traditional reinsurance
Captive reinsurance
Securitization

Earnings
Managing GAAP volatility due to GAAP
unlocking

11

Its a goner
Sell
Key to success is maximizing value to buyer
=> finding the right buyer

Assumption reinsurance
Use traditional reinsurance as stop gap
until more final solution developed

12

Questions?

13