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Canadian L’Institut Canadian L’Institut Institute canadien Institute canadien of des of des Actuaries actuaires Actuaries actuaires 2008 Annual Meeting ● Assemblée annuelle 2008 2008 Annual Meeting ● Assemblée annuelle 2008 Québec Québec

Age and Amount Requirements - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ____________________________________ Did you think about everything? Dominic Hains, FCIA, FSA AVP, Development RGA Canada Ross Morton, FLMI Reassurer, Advisor, Mentor RGA Canada

Definition Good Underwriting Decision: categorizes risk in a fashion that is in keeping with the degree of aggressiveness in the actuaries forward looking pricing assumptions while reducing the cost of such categorization and increasing the speed of decision making and thus policy issue.

Expectation Consistently Good Underwriting Decisions will lead to good mortality or morbidity experience.

Gaining Competitive Advantage • Alternative sources • Reduce requirements • Stretch exceptions • Automate � Data collection � Risk categorization • Raise prices • Alternate product design

Alternative Sources (of information pertinent to risk categorization) Pricing View Underwriting View • Alternative sources to • Questionnaires generate the same • Prescription Databases expected result • Better trained advisors or • Technology • Finding something no one else has used before • Studies & research to support mortality expectation • Extrapolation is an art

Reduce Requirements (especially the costly and the hard to get) Pricing View Underwriting View • mortality impact • Treadmill, medical, even questions – less is more • Attending physicians • Cost benefit with report protective value analysis – Mandatory/prescribe d • Anti-selection cost – Reflexive • Financial justification

Mortality savings of fluid testing • The savings linked to lower underwriting costs can easily be estimated : – Lab tests – Handling fees – Admin and overhead costs • Other advantages are harder to estimate. – Quicker decisions & delivery – Lower not-taken ratio – Client more at ease • The mortality assumption set for pricing purposes needs to be aligned with the underwriting

Integration of results • Mortality costs: ∑ + − *( * *(1 )* ) PVEM R U R U L t t t t t t • t= condition (e.g. HIV, Cocaine, Cotinine) • PVEMt=Present value of Extra Mortality • Rt= Prevalence • Ut= Percentage of applicant unaware of their condition • L= Percent of applicant who lie on the application

Integration of results • Saliva testing: Extra Qx/ PVES 1000 policies Test cost (per 1000$) R U L Face=150k Face=150k HIV $344 0.03% 30.00% 10.00% $6,482 0.26 Cocaine $97 0.20% 0.00% 10.00% $2,875 0.11 Cotinine $34 23.70% 0.00% 10.00% $120,123 4.80 Total $129,480 5.18 •For an average Face Amount of $150,000, the return on investment is 518%.

Integration of results • Urine-testing specific: Mortality Cost PVES 1000 policies Extra Mort (per 1000$) R* A L Face=150k Renal dysfunction (Excluding diabetes) -0.31 to 0.5 g/l 50.00% $20 0.49% 50.00% 0.00% $7,306 -0.51 to 1.0 g/l 100.00% $40 0.33% 50.00% 0.00% $9,692 -1.01 to 2.0 g/l 150.00% $60 0.10% 50.00% 0.00% $4,473 -2.01 g/l or more 200.00% $80 0.09% 50.00% 0.00% $5,368 $26,838 Total Renal Dysfunction Diabetes -Male (0 to 44) 225.00% $69 0.65% 35.00% 10.00% $27,859 -Male (45 to 64) 100.00% $31 2.93% 35.00% 10.00% $55,865 -Male (65 +) 100.00% $31 0.61% 35.00% 10.00% $11,600 -Female (0 to 44) 250.00% $77 0.16% 35.00% 10.00% $7,603 -Female (45 to 64) 175.00% $54 0.72% 35.00% 10.00% $24,012 -Female (65+) 100.00% $31 0.15% 35.00% 10.00% $2,849 174.06% $53.28 5.22% 35.00% 10.00% $129,787 Total Diabetes Total $156,625 ROI (Excess Mort / Test Cost) 391.56%

Integration of results • These results are for indication only. They will vary depending on: – Actual market of the product – Economic factors – Distribution system – Size of company

Integration of results • This type of analysis can be performed for any underwriting test. • For example, RGA analyzed the full blood chemistry profile. • This type of analysis can be used for standard and preferred product. • Enables the company to make an informed business decision. • (To know when less might be more)

Stretch Exceptions (but with written and approved procedures) Pricing View Underwriting View • Classes shifting who • Waive requirements fits where. All classes • APS too costly and increase. time consuming • Overlaps expected to • Preferred is just a go both ways state of mind • What’s a table or a pound or a mmol/litre

Segmenting the Risk CREDITS DEBITS 60% 70% 80% 90% 100% 110% 120% 130% 140% MORTALITY 80% Difference in Mortality Same Rate

Segmenting the Risk Class 1 Class 2 Residual 60% 70% 80% 90% 100% 110% 120% 130% 140% MORTALITY 80% Difference in Mortality Same Rate

Segmenting the Risk - Preferred CREDITS DEBITS Residual Class 2 Class 1 60% 70% 80% 90% 100% 110% 120% 130% 140% MORTALITY

Segmenting the Risk - Preferred CREDITS DEBITS Residual Class 2 Class 1 60% 70% 80% 90% 100% 110% 120% 130% 140% MORTALITY

Segmenting the Risk - impact of exceptions CREDITS DEBITS Residual Class 2 Class 1 60% 70% 80% 90% 100% 110% 120% 130% 140% MORTALITY

Automation ( A reality strategy but takes the empowered) Pricing View Underwriting View • Less errors • It works • Consistency in • Its cheap categories • It’s the solution • More confidence in mortality • What about the edges? • It could be the solution IF no manual intervention.

16.0% 14.0% 12.0% 10.0% Residual 8.0% Preferred Super 6.0% 4.0% 2.0% 0.0% 50% 70% 90% 110% 130% 150% 170% Mortality Assessment Mortality Assessment Seen first at AH Seen fi rst at AHOU Toront OU Toronto 2007 in o 2007 in Presentation by Chris Shanahan, FSA Presentation by Chris Shanahan, FSA and Doug and Douglas I las Ingle, FL gle, FLMI, FA , FALU LU

16.0% 14.0% 12.0% 10.0% Residual 8.0% Preferred Super 6.0% 4.0% 2.0% 0.0% 50% 70% 90% 110% 130% 150% 170% Mortality Assessment Mortality Assessment

Category Super Preferred Abdul Andre Jens Preferred The Super Preferred Residual Standard Preferred Blood 133/7 138/8 115/7 135/80 140/85 Pressure 8 4 5 Cholester 219 233 185 220 235 ol Chol/HDL 4.9 5.8 3.8 5.0 6.0 ratio Driving 1 2 0 1 in 3 2 in 3 yrs yrs 6”4” 233 244 251 234 245 The “Knockout” The “Knockout” System --- System --- because its simple! because its simple!

16.0% 14.0% 12.0% 10.0% Residual 8.0% Preferred Super 6.0% 4.0% 2.0% 0.0% 50% 70% 90% 110% 130% 150% 170% Mortality Assessment Mortality Assessment Individual Assessment On Overall Factors

16.0% 14.0% 12.0% 10.0% Residual 8.0% Preferred Super 6.0% 4.0% 2.0% 0.0% 50% 70% 90% 110% 130% 150% 170% Mortality Assessment Mortality Assessment The “Knockout” The “Knockout” System System --- --- because its simple! because its simple!

Raise Prices (Advisors would like it and hate it at same time) Underwriting View Pricing View • Yes please and let me • More profit or more use the $$$ to pay for expense & benefits requirements, • Competitiveness? automation and better • More effective uw staff means better selection that leads to better expected mortality to offset expense – prove it first

Alternative Product Design (duration has a lot to do with risk exposure) Underwriting View Pricing View • Liberal requirements • Unknowns require more margins • “Aggressive” ratings or no ratings • Volatility • HIV+ market • Time will tell • Politically correct, • Exposure to anti- financially sound selection

Summary The combined view. • Next to automation there is no panacea • Price has to reflect more than wishful thinking • Answer is not where you think

Age and Amount Requirements - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ____________________________________ Did you think about everything? Dominic Hains, FCIA, FSA AVP, Development RGA Canada Ross Morton, FLMI Reassurer, Advisor, Mentor RGA Canada