2006 General Meeting

1
Canadian Institute of Actuaries
LInstitut canadien des actuaires

• 2006 General Meeting
• Assemblée générale 2006
• Chicago, Illinois

2
Long Term Care Learning from the Past Looking
to the Future Canadian Institute of
Actuaries General Meeting Chicago, October 19,
2006 Martin Fortier, FSA, FCIA AVP, Individual
Pricing Sun Life Financial
3
Canada - sales overview
Source LIMRA International
4
Manufacturers

• Number of carriers about 7
• 89 market-share from 2 carriers

Source LIMRA International
5
Distribution channels

• Career / exclusive
• advisors
• specialists
• Independent / brokers
• Affinity association

Source LIMRA International
6
Plan designs

• Three benefit types
• reimbursement
• indemnity
• income / disability
• comprehensive
• facility care
• Adjustable premiums
• some with maximums

7
Plan designs

• Inflation protection
• Guaranteed insurability option
• ROP on death
• Non-forfeiture options
• ETI, RPU

8
Policy characteristics
Source LIMRA International
9
Policy characteristics

• Average premium 1,360
• 84 unlimited (lifetime) benefit period
• 96 lt 90-day waiting period
• Average age
• 2004 59
• 2005 52
• Only 4 with more than 150 daily benefit.
  Average below 100.

Source LIMRA International
10
Cost of care

• Government-sponsored facilities
• Ontario
• private room 24,000
• semi-private 21,000
• ward 18,000
• Alberta
• private room 12,000
• Newfoundland
• up to 34,000

Source Ontario Health and Long Term Care
11
Cost of care

• Home care
• nursing care 50/hour
• personal care 22/hour
• In Ontario, reaches the cost of semi-private
  facility room by needing 2 hours per day for 3
  days per week of each type of care not covered.
  (52 hrs/month)
• Average recipient of home care needs 156 hours
  per month
• Ontario pays first 60-80 hours

Source Ontario Health and Long Term Care
12
Canadian challenges

• Underwriting claims
• in-house or outsourced
• evolving
• Key pricing risk drivers
• no Canadian insured population data
• lapse-supported
• interest
• expenses
• Market still developing. Need misunderstood
• One reinsurer

13
Canadian Institute of Actuaries
LInstitut canadien des actuaires

• 2006 General Meeting
• Assemblée générale 2006
• Chicago, Illinois

14
Long Term Care Learning from the Past Looking
to the Future Canadian Institute of
Actuaries General Meeting Chicago, October 19,
2006 Gary L. Corliss, FSA, MAAA, RHU, CSA Avon
Long Term Care Leaders, LLC President CEO
15
TOPICS
Evolution of LTC in U.S. Product Design US
Experience Distribution Issues Summary
16
Evolution of Long Term Care United States
17
THE OPPORTUNITYCompelling Demographics

• Baby Boomers are aging
• 78 Million strong between ages 42-60
• 8,000 turning 60 every day

75
72
67
52
41
35
Age 65 - 84
Age 85
Source Bureau of the Census, Elderly Population
Will More Than Double by 2040, January
2000. Source Long-Term Care. AHRQ Focus on
Research. AHRQ Pub. No. 02-M028, March 2002.
Agency for Healthcare. Research and Quality,
Rockville, MD. Graph
18
THE OPPORTUNITY Low Market Penetration for LTCI
Source Statistical Abstract of the U.S., U.S.
Census Bureau, ACLI, HIAA, Life Plans, Inc., JH
Analysis.
19
What Happened in the U.S.?
Industry sales peak at 1 Billion in 2002 and
drop to 661 in 2005.
LTC Industry Sales
1B
492M
Millions
193M
Source LIMRA
20
What Happened in the U.S.?

• Lapse rates very low - lt1
• Interest rates dropped - lt6
• Mortality extremely low
• Morbidity claims quite close

21

What Happened in the U.S.?
Some Carriers Exit
IDS Life
Penn Treaty
22
PRODUCT DESIGN

• Benefit Eligibility
• Benefit Payment Models
• Care Coordination

23
BENEFIT ELIGIBILITY Brief History
1965 Skilled Nursing, 3 Day Prehospital,
Physician Certified 1985 Medically
Necessary, Remove Step- Down 1990 ADL
Cognitive Impairments 1996 Federally Tax
Qualified Care Management

24
BENEFIT ELIGIBILITY

• Loss of ability to perform Activities of Daily
  Living
• Bathing Dressing - Transferring
• Toileting Continence - Eating
• Cognitive Impairment
• Requires substantial supervision
• Deficiency in memory, reasoning, time, place

25
CARE COORDINATION

• Determination of incapacity
• Preparation of a Plan of Care
• Assistance in locating service provider(s)
• Anecdote 1
• Anecdote 2

26
OTHER PRODUCT FEATURES

• Bed Reservation (38)
• Care Management (34)
• Waiver of Premium for Home Care (34)
• Caregiver Training (31)
• Alternate Plan of Care (30)
• Equipment (30)
• Restoration of Benefits (30)
• Endorsement Group Discounts (25)
• Return of Premium on Death (20)
• Return of Premium with NFO or Cash (7)

27
Actual Experience United States
28
U.S. Experience- Lapse
Policy Duration 1984-2000
Source SOA/LIMA Persistency Study
29
U.S. Experience-Incidence Rates
Attained Age Per Hundred Combined lt40
.01 40-49 .03 50-59 .05 60-64
.14 65-69 .28 70-74 .53 75-79
.98 80-84 1.62 85-89 1.97 90 1.61 .69
Source SOA LTC Intercompany Study
30
U.S. Experience-Cause of Claim
Nursing Home
Home Care Alzheimers 25 15 Stroke 13 1
1 Circulatory 11 8 Injury 10 12 Arthrit
is 9 16 Cancer 8 17 Nervous System
5 6 Respiratory 5 4 Other 14 12
Source SOA LTC Intercompany Experience Study
31
U.S. Experience-Length of Claim
Nursing
Home Home Care Alzheimers 683
days Stroke 440 Circulatory 421 Injury
331 Arthritis 440 Cancer 179 Nervous
System 550 Respiratory 336
Total 493
Source SOA LTC Intercompany Study - Closed Claims
32
BENEFIT PAYMENT MODEL
Incidence Rates One Company
Actual Charges 1.49 Indemnity 3.82 Disabili
ty 3.22 Total 2.09
Source AUL Long Term Care Solutions 1984 -1998
33
CARE COORDINATION
Average Length Of Claim Nursing Home
Home Care Yes 336 days 149
days No 385
157 Difference -13 - 5
Source AUL Long Term Care Solutions 1984 - 1998
34
Distribution Issues
35
WHAT THE POPULATION THINKS

• 85 The need for LTC could adversely
  affect my retirement
• 42 LTC insurance is the best way to
  solve the problem of LTC
• 17 Have purchased LTC insurance

Source 2006 Survey by Greenwald Associates
Conducted for John Hancock Life Insurance Co
36
CRACK THE CONSUMER CODE
More education needed to overcome barriers to
purchase
COST Ive heard its prohibitively expensive.
DONT KNOW WHERE TO GO I wouldnt even know who
to call to learn about it.
WILLINGNESS TO GAMBLE My parents lived to a ripe
old age and never needed care.
MISTRUST I dont trust insurance
companiesFine print Senior scams.
MISCONCEPTIONS I associate LTC with one foot in
the grave in some kind of home.
DENIAL Im not ready to process the thought of
getting older. (61 year old)
Source Hill,Holliday Consumer Research Study,
January 2005
37
TURN CLIENTS INTO SALES

• 89 Do not want to be a BURDEN
• 83 Way to cover high COST of care
• 80 Way to CONTROL type of care
• 79 Way to CONTROL place of care
• 76 PRESERVE ASSETS for spouse

Source 2006 Survey by Greenwald Associates
for John Hancock Life Ins Co
38
SUCCESSFUL PRODUCERS

• Use needs analysis
• Are comfortable discussing LTC issues
• Discuss often the topic of LTCi
• More policies sold - larger the premium
• Bring sense to chaos of products
• Use clients/referrals/centers of influence
• Consider LTCi a core product for themselves

Source LIMRA A 2005 Report The Producers
Perspective on Long Term Care Insurance
39
SUMMARY

• LEARN FROM THE PAST
• LTC insurance continues to grow in US
• Pricing knowledge has strengthened
• Products have become more sophisticated
• The largest of companies are in and winning
• LOOK TO THE FUTURE
• The need for LTC services is growing fast
• Prospects are recognizing the need
• Somebody is going to seize this market

40
Long Term Care Insurance
THE Product of the Future. Get onboard now. Dont
miss the boat !
41
Canadian Institute of Actuaries
LInstitut canadien des actuaires

• 2006 General Meeting
• Assemblée générale 2006
• Chicago, Illinois

42
Long Term Care Learning from the Past Looking
to the Future Canadian Institute of
Actuaries General Meeting Chicago, October 19,
2006 LTC Pricing Considerations Dawn E. Helwig,
F.S.A., M.A.A.A. Milliman, Inc.
Dawn E. Helwig, F.S.A., M.A.A.A Milliman, Inc.
71 S. Wacker Drive, 31st
Floor Chicago, IL 60606 [phone]
dawn.helwig_at_milliman.com
43
Economics of LTCI

• Lifetime loss ratio target of 55 - 60
• Level issue-age premium
• Steep morbidity curve similar to mortality
• Very deferred benefit much like whole life
• Heaped commissions
• First year cash flow drain
• Low lapse rates
• Conservative statutory reserve standards (revised
  in 2004)
• Required margins for conservatism in persistency
  (80 years 1-4 (max 6 year 1) 2004 standard
  max ultimate lapse of 2)
• 1 Year preliminary term
• 1994 GAM mortality
• No provision for morbidity improvement allowed
  (2004)
• Life valuation discount rate

44
Sources of Capital Strain

• Commission Pattern
• Active life reserve and tax reserve patterns
• Punitive capital requirements
• Past RBC
• C2 risk 5 of claim reserves plus 25 of 1st
  50 million of premium and 15 thereafter.
• New RBC (effective 2005)
• C2 risk 5 of claim reserves, plus 10 of 1st
  50 million of premium and 3 thereafter, plus
  25 of 1st 35 million of claims and 8
  thereafter.

45
Product RiskinessData Challenges

• 1985, 1995 National Nursing Home Surveys
• 1982, 1984, 1989 National LTC Surveys
• Population Data
• Fully mature insured experience limited based
  on older benefit triggers
• Current generation of products - insured
  experience heavily dependent on underwriting
• But experience database growing in credibility

46
Clue Life Insurance CompanyEffect of Various
Profit Criteria
90-day, 4 year option, 100/day NH, 100/day
HHC composite of risk classes marital
status Uses 2.0 RBC of 2 of claims
liability 15 of premium Reserve Standard
4.5 discount, 83 GAM
47
Clue Life Insurance CompanyEffect of Various
Profit Criteria
90-day, 4 year option, 100/day NH, 100/day
HHC composite of risk classes marital
status Uses 2.0 RBC of 2 of claims
liability 15 of premium Reserve Standard
4.5 discount, 83 GAM
48
Clue Life Insurance CompanyExpected Policy Year
Financials
Discounted at 6
49
Clue Life Insurance CompanyExpected Policy Year
Financials
50
2005 Broker World Survey 18 Comprehensive
Products100 Daily Benefit Lifetime Benefit
Period90-100 Day Elimination Period Inflation
Protection
51
2005 Broker World Survey 18 Comprehensive
Products100 Daily Benefit 3 Year Benefit
Period90-100 Day Elimination Period Inflation
Protection
52
Importance of Lapse Rates
Claims

Premium
Duration
PV of Premiums PV of claims PV of
expenses (All with lapse assumption)
53
Lapse Rate TrendsPricing Assumptions Age 65-69
54
Recent Lapse Experience
55
Clue Life Insurance CompanyEffect of Lower Lapse
Rates
Item Age 42 Age 62 Age 82
TOTAL Pre-Tax Profit (No Inflation) -1.5
5.1 9.5
5.1 Premium Change Needed
17.9 8.0 0.9
8.1 _____________________________________________
_______ Pre-Tax Profit (with Inflation)
-7.8 2.9 9.2
0.5 Premium Change Needed 27.8 11.6
1.5 15.3
56
Clue Life Insurance CompanyEffect of Change in
Investment Income
Item Age 42 Age 62 Age 82
TOTAL Pre-tax Profit (No Inflation)
-1.8 4.2 8.6
4.4 Premium Change Needed
18.5 9.4 2.7
9.4 _________________________________________
____________ Pre-Tax Profit (with Inflation)
-7.5 2.1 8.3
0.2 Premium Change Needed 27.5
12.9 3.3 16.0
57
Clue Life Insurance CompanyOther Factors
Impacting Profits

• Male/female split assumed/where its applied
• Age distribution
• Distribution by BP/EP
• Percent of insureds that are married
• Spouse/preferred risk discounts
• Average policy size
• Expenses varying by age
• Reserve assumptions
• Margins for adverse deviation
• Salvage on maximum benefits

58
Benefit Models Reimbursement vs. Indemnity vs.
Disability

• Definitions
• Reimbursement pays actual charges, up to daily,
  weekly or monthly maximum
• Indemnity only pays for actual services
  received, but pays at fixed daily rate
  (regardless of actual charges)
• Disability/Cash pays fixed daily, weekly or
  monthly rate if person meets ADL/cognitive
  triggers (regardless of whether any paid services
  are received or not)

59
Reimbursement vs. Indemnity vs. Disability
Pricing Considerations

• On reimbursement policies
• 1. Not everyone who meets ADL/cognitive triggers
  gets paid services (usage factor)
• 2. Those who do receive services in the home
  generally get fewer than 7 days of care/week
  (days salvage factor)
• 3. Actual cost of services could be less than
  daily maximum (cost salvage factor)
• All of the above result in savings, compared to
• reimbursement or disability policies.

60
Indemnity Policies

• Usage factor (1) and days salvage factor (2)
  still
• apply
• Not everyone who meets ADL/cognitive triggers
  gets paid services
• Those who do receive services in the home
  generally get fewer than 7 days of care/week
• Cost salvage factor (3) does not apply
• Actual cost of services is irrelevant, as a fixed
  indemnity is paid.

61
Disability/Cash Policies

• None of the 3 factors apply
• Usage is 100, as there is no reason for a
  claimant to wait to start a claim (and the
  claim is measured from date of disability, not
  date of first service)
• The benefit is paid for 7 days/week, whether care
  is received or not (no days salvage)
• A fixed amount per day (week, month) is paid (no
  cost salvage)
• IN ADDITION
• Disability policies have been subject to
  increased utilization (anti-selection), compared
  to reimbursement policies.

62
Effect of Various Factors in Determining Cost
Differentials Between Policy Types
Average load for indemnity policy minimal (less
than 5). Average load for disability policy
approximately 60 to 70.
63
New Business Premium Trend Drivers

• Pressure to increase rates
• Lower interest rates
• Recognition of very low ultimate lapse rates
• Less competition
• Possible subsidization of existing business
• Rate stabilization requires higher profit margins

64
Rate Stabilization

• Removes initial loss ratio requirement, enabling
  LTCI carriers to charge higher initial rates
• Statement that initial premium rate schedule is
  sufficient to cover anticipated costs under
  moderately adverse experience and that the
  premium rate schedule is reasonably expected to
  be sustainable over the life of the form with no
  future premium increases anticipated

65
Average Premium Inforce
Source LIMRA 2005 Individual LTC and Medicare
Supplement Insurance Survey
66
Average New Business Premium
Source LIMRA 2005 Individual LTC and Medicare
Supplement Insurance Survey
67
In summary

• Premiums have increased, due to updated lapse
  assumptions and interest
• Rates have stabilized, but there are still
  significant differences in market premiums
• Less is known about disability product experience
• Product is capital intensive and still somewhat
  risky
• Butdemographics are hard to ignore, and
  possibility for profit does exist