General Agent Orientation

1
Debt Protection Prepared for March 7,
2002 May, 2004
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Debt Protection Products (DPP)

• Also Known As
• Debt Cancellation Agreement (DCA)
• Debt Deferment Agreement (DDA)
• Debt Forgiveness Agreement (DFA)
• Debt Freeze Agreement (DFA)
• Payment Holiday Agreement (PHA)

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Debt Protection Appears

• March 1964, OCC Issues 12 CFR 7.7495
• ...debt cancellation contracts are a lawful
  exercise of the powers of a national bank and
  necessary to the business of banking.

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What Is Debt Protection?

• A program designed to forgive (cancel), defer, or
  suspend all or part of the amount due under an
  extension of credit from a bank upon activation
  of benefits for a covered event.
• A covered event could include death
  (illness/accident), disability (illness/accident),
  involuntary unemployment, family leave,
  hospitalization, and more.

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Who Can Sell?

• National Banks
• State Banks in parity states
• Parity - allows State chartered banks to compete
  with National banks (not yet challenged for Debt
  Cancellation)
• Federal Credit Unions

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Debt Protection vs. Credit Insurance

• Insurance
• benefit
• claim
• coverage
• credit
• insurance
• insurer
• insured
• life Insurance
• certificate
• premium
• pay

• Debt Protection
• protection
• activation of protection
• protection, feature
• debt
• protection
• bank, creditor
• protected debtor
• death protection
• addendum, contract, agreement
• fee
• cancel, waive

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Advantages

• NOT Insurance
• Countrywide program - no state variations
• No agent licensing requirements
• Write Your Own form
• Do not need to file forms
• Select your own rate - no prima facie
• One set of formulas and rates across all states
• Simpler marketing forms

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Advantages (cont.)

• No premium taxes
• No insurance company required
• Incentive flexibility

9
Disadvantages

• Bank capital at risk (if bank retains risk)
• Reserves need to be established
• Taxable event? IRS private letter says no, but
  still not part of tax code
• Potential regulation, although it appears to be
  minimal for now
• No age limits?
• No health questions?
• We anticipate the OCCs final rulings will
  address these issues. Until such time the bank
  will need to determine if they will use age
  limitations or health questions.

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No Insurance Company Required

• Advantage or Disadvantage
• How do we as Insurers add value

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What We Provide

• Product development consulting
• Pricing recommendations
• Reserve calculations
• Sales training
• Marketing services
• Enrollment processing
• Benefit summary development
• Addendum to contract fulfillment
• In force file maintenance

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What We Provide (cont.)

• Benefit activation (claim) adjudication
• Benefit activation (claim) status by protection
  type
• Customer service inquiries
• Monthly management reports
• Portfolio profitability analysis
• Optional internet access (in development)
• Periodic experience analysis
• Contractual Liability Policy

13
Risk Retention/Risk Transfer

• (Financial risk resides at Bank)
• Two-party agreement between Bank and the Debtor

Debtor
Lending Agreement with debt protection provision
Bank
Debtor
Debtor
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Risk Retention/Risk Transfer (AIG/American
General Retains the Risk)

• Creditor may transfer risk to an Insurance
  Company through a Contractual Liability Policy
  (CLP)
• Two-party agreement between the Creditor and
  American General Indemnity

Contractual Liability Policy
American General Indemnity
Bank
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Contractual Liability Policy (CLP)

• Contractual arrangement between the Bank and
  American General Indemnity
• U.S. CLP is issued to the Bank in your state of
  incorporation filed in that state only
• Bank charges the debtor a fee
• Bank retains a portion of the fee
• Bank remits the remainder of fees to American
  General Indemnity as CLP premium
• American General Indemnity reimburses Bank for
  all cancellations or deferments

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How can the operating system help

• TPA
• Insurer to the Bank
• Reinsure to Bank owned Captive