The Quest for STP

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The Quest for STP Are Annuities Insurance Next?
BISA Technology Operations Conference November
12-14, 2006
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Agenda

• STP Defined
• NAVAs STP Initiative
• DTCC overview
• DTCC Insurance Services
• Retirement Income Standardization
• Where do we go next?

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The state of annuity STP

• Straight-Through Processing?
• or
• Still Touching Paper?
• Probably somewhere in between

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Annuities Today

• Sales relatively flat (at least new money)
• Confusing to consumers and those that sell them
• Still quite unautomated and paper-intensive
• Only 12-15 of sales goes through an electronic
  platform
• Baby boomers not viewing them as the retirement
  product of choice
• 1 annuitization

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STP Defined

• Mainstreaming insurance annuities
• Multi-carrier/Multi-product world
• No proprietary systems
• Seamless compliant electronic processing
• From submission to commission
• In-force policy management

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STP Defined

• Common process, automation standardization
  across multiple channels
• Regulatory acceptance/buy-in
• Cost savings to all parties and, ultimately,
  market growth

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National Associationof Variable Annuities
STP STANDARDS INITIATIVE
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NAVA STP Standards Initiative
March 2006, NAVA formed Executive Council and
launched Industry Standards Initiative around new
business. Mission To create a set of standards
establishing a common process for doing
electronic new business submission for annuities
that includes e-signature and standard
interpretations of all state and federal
regulations for which we get regulatory
acceptance.
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Scope

• All distribution channels
• All types of annuities
• Standards will address the most stringent
  requirements
• Demonstrate to regulators that industry has
  undertaken standards to address their concerns
• All electronic process for point-of-sale
  transactions

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Goals

• Define trusted operational processes
• Identify documents to be used
• Create compliance framework
• Define how E-Signatures will be provided
  applied
• Define how documents will be managed through the
  process
• Defines how legal records will be managed through
  their lifecycle

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Next Steps

• Socialization with other Trade Groups (Oct 06)
• Industry Review Approval of Standards (Dec 06)
• Formal Rollout to Regulators (Mar 07)
• Define Phased Implementation Strategies (Jan/Jun
  07)
• Define Certification Audit Process (Jun/Dec
  07)

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DTCCThe Depository Trust Clearing Corporation
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Our Purpose Mission

• Our purpose as a company is to further the
  development of low-cost, efficient capital in
  order to help grow the world economy.
• By 2010, to be the acknowledged world-class
  provider of servicing solutions to financial
  markets through leadership, innovation,
  technology, risk management and strategic
  alliances.

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Overview of DTCC

• The Depository Trust Clearing Corporation (DTCC)
  is a holding company for our depository and
  clearing corporations.
• All DTCC services are provided through its
  subsidiary organizations
• Depository Trust Company (DTC)
• National Securities Clearing Corporation (NSCC)
• Fixed Income Clearing Corporation (FICC)
• DTCC Solutions LLC (GCA)
• Deriv/SERV LLC
• Omgeo LLC

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Overview of DTCC (cond)

• DTCC serves as the principal post-trade
  infrastructure for the US Financial System,
  handling clearance, settlement and information
  services for equities, corporate and municipal
  bonds, government and mortgage-backed securities,
  and over-the-counter credit derivatives.
• DTCC provides safety and soundness to our capital
  markets by supporting the trading and settlement
  of more than 1.4 Quadrillion in securities
  transactions.

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Overview of DTCC (cond)

• Provides custody and asset servicing for more
  than two million securities issues from the U.S.
  and 100 other countries and territories.  
• Serves and is connected to a network of almost
  3,000 brokers-dealers, banks, clearing firms,
  mutual funds, insurance companies, service
  providers and vendors.

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Unique DTCC Characteristics

• Enormous infrastructure
• Business Continuity Capabilities
• A single network/community of users
• Money settlement
• Not-for-profit business model
• Trusted Industry Utility for over 30 years

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Unique DTCC Characteristics

• Extensive business continuity capabilities that
  ensure an unparalleled level of certainty and
  resiliency from our telecom network and data
  recoverability from multiple data centers.
• A common network that links virtually all key
  trading partners in the US (and many overseas).

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Unique DTCC Characteristics (cond)

• Streamlined, automated payment processing and the
  netting down of all trading obligations into a
  net money settlement free up trillions of dollars
  each year that our customers can then use for
  other investment purposes while providing
  unparallel risk mitigation.
• Is operated as a not-for-profit company.
  Economies of scale and critical mass bring
  transaction fees and reductions over time.

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Scale Savings to the Industry

• Value of total DTCC transactions settled in
  2005
• 1.4 quadrillion (5.7 trillion per day)
• Rebates paid to participants
• 528 million (historic high)
• Net Fee Reductions
• 161 million
• Average netting factor gt97

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NSCC Overview

• The NSCC subsidiary is a central counterparty
  that provides centralized clearance, settlement
  and information servicesregulated by the SEC
• Serves as major hub for the industrys mutual
  fund, annuity and life insurance transactions.
• Links funds and insurance carriers with their
  broker/dealer, bank and financial planner
  distribution channels.

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Insurance Services Overview

• Division of NSCC Established in 1997
• Links Insurance Carriers with Broker/Dealers,
  Banks, and other Distributors
• Provides automated, centralized and standardized
  framework for data exchange and money settlement
• Supports annuities, life insurance and LTC
  products
• Utilizes solution provider partners to offer
  front-end system and integration solutions

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Operational BenefitsSimplified, Automated
Processing

• DTCC Model
• Automated processing solution for applications
  and subsequent premiums, addressing the needs of
  both insurance carriers and distributors
• Central link
• Efficient

• Proprietary Model
• Distributors and carriers use their own direct
  lines with multiple trading partners
• Inefficient
• Time Consuming

DTCC
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Value Proposition

• Reduce operating costs by eliminating paper and
  manual processes (enabling STP)
• Automate, standardize and streamline insurance
  processing and information exchange between
  product manufacturers and distributors
• Help establish and automate compliance procedures
• Aggregate money settlement reconcile application
  premium dollars to commissions paid
• Help banks, broker-dealers and carriers grow
  revenue

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Current Business Profile

• 9th year in existence
• Vision is to mainstream insurance and annuities
  in the broker-dealer and bank market (as we did
  in Mutual Funds), really enabling STP
• Customer and Industry-driven business
• Aligned with key industry associations such as
  SIFMA, NAVA and ACORD

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Current Business Profile (contd)

• Historically focused servicing the large
  broker-dealer/wirehouse firms but rapidly
  expanding into the independent and bank
  distribution space
• Viewed by insurance carriers as the provider of
  choice for accessing and servicing this
  distribution channel
• Considered a staple in the variable annuity
  post-transaction space but also expanding into
  the pre-ticket space

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Current Business Profile (contd)

• Increasingly recognized as a key insurance
  compliance solutions provider
• Back-office product suite lends itself to
  complimentary strategic alliances with key
  solution providers
• Vendor-neutral approach (Switzerland)
• Finetre and Blue Frog Solutions
• Albridge, Investigo, EAI
• Kaplan

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Current Insurance Functionality

• Pre-Ticket
• Licensing Appointments (LNA)
• Applications/Premium (APP)
• Subsequent Premium (SUB)
• Post-Transaction
• Commissions (COM)
• Positions Valuations (POV)
• Financial Activity Reporting (FAR)
• Asset Pricing (AAP)
• Automated Customer Account Transfer (ACATS/IPS)

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Current Insurance Functionality
Is rep eligible to sell carriers product?
Pay the rep for selling carriers product.
ACATs
Licensing Appointments (LA)
Commissions (COM)
Initial Application Premium (APP)
Subsequent Premiums (SUB)
Money Settlement
Money Settlement
Money Settlement
Money Settlement
APP Confirm USA Patriot Act
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How are we doing?

• 40 CAGR in last 5 years
• Total Number of Customers 300
• Total Insurance Transactions Settled
• 45 million
• Total Value of Funds Settled 13 billion
• APP/SUB Dollars Settled 10 billion
• COM Dollars Settled 3 billion

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Automated Customer Account Transfer Service
(ACATS)Bank Update

• Rapid Expansion in Bank Space
• 28 Banks using ACATS today
• SEI (Trust 3000) to go live in November 2006
• Recent Meeting with regulators - OCC, FRB, NYSE,
  NASD, SEC
• Increasing BD Participation with Banks
• Merrill, Pershing

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Automated Customer Account Transfer Service
(ACATS)Bank Update (cond)

• New system to standardize correspondent
  conversion events
• Shorten ACATS Transfer Cycle (from 6-7 days down
  to 3-4)
• If a trade can settle in 3 days, why not a
  transfer?
• Investors demand it, Regulators support it
  Financial industry embraces it

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2007 Product Development

• Replacements
• Automate transfer of annuity life assets
  between carriers
• Include in money settlement
• Provide status to the BD/Bank
• Fund Transfers
• Compliance driven
• Capture broker/rep initiated transactions
• Automate the reallocation of funds within an
  annuity or insurance product
• Attachments

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Future Outlook/Direction

• Growth business
• Expect to recover investment and produce fee
  reductions in the next 2-3 years
• Expand to more products (life, LTC) and more
  channels (IBDs, Banks, agencies)

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Future Outlook/Direction

• Increased compliance and regulatory focus on
  annuities and insurance will drive existing and
  new participants to DTCC insurance solutions
• Uniquely positioned to facilitate retirement
  income standardization

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SIFMA/NAVA Joint Steering Committee
RETIREMENT INCOME STANDARDIZATION INITIATIVE
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Drivers
Retirement income market is now evolving at a
record pace To support boomers, insurance
carriers are creating new and innovative product
designs that need to integrate into a mainstream
retail distribution model Ongoing requests from
distributors to integrate traditional
annuitization and immediate annuity products into
existing interfaces for consolidated statements
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Obstacles

• Carriers have been reluctant as these products
  dont have liquid account values
• Immediate annuities have not been sufficiently
  represented in Annuity Order Entry platforms
• File formats and standard models have been
  enhanced for payout features, but there is no
  widely adopted standard usage model for how this
  information should be used

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Tentative Scope

• Order entry (including pre-sales integration)
• Commissions
• Client statements
• Customer service
• Income payments
• Money settlement

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Next Steps

• Formation of joint task force comprised of
  distributors, carriers, and vendors to assess the
  opportunity, define the scope, and recommend an
  approach on how to move forward with retirement
  income standards.

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A word about Life Insurance

• Still a significant challenge
• Sales flatter than annuities
• Transactional sales (term) have a good chance to
  be automated using a common front end
  (multi-carrier), an outsourced fulfillment
  platform (call centers) and a universal messaging
  hub for service provider integration and
  pending case status

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A word about Life Insurance (cond)

• Brokerage General Agencies will continue to play
  a big role as a back office outsourcer but
  primarily as a sales and marketing support tool.
• Some vendors will be successful in leveraging
  their annuity electronic platforms
• DTCCs insurance functionality fully supports
  life insurance (except applications)

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Some Parting Thoughts

• The opportunity is huge if we manage to work
  togethercarriers, distributors, service
  providers, regulators and trade associations
• It took the mutual fund world 20 years to get
  here but look at the results 9 trillion in
  assets, more than 600K trades per day at 11 cents
  each
• DTCC is eager to avail its infrastructure,
  expertise, track record and credibility in
  enabling STP for the insurance world
• So are you Still Touching Paper?

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Contact Information
John C. Ziambras Managing Director General
Manager DTCC Insurance Services (212)
855-5651 jziambras_at_dtcc.com http//insurance.dtcc.
com