Term Insurance Market Update

1
Term Insurance Market Update
Kevin J. Borchert, CFA, FSA, MAAA VP, Life
Reinsurance Pricing
2
Agenda

• Environment and Market News
• Retail Market
• Sales Results
• Reinsurance placement
• Rate trends
• Reinsurance Market
• Market
• LOC
• 2001 CSO
• State Adoption
• Impact Illustration Reinsurance example

3
Our Environment

• Volatile equity markets
• Low interest rates
• Economic uncertainty / unemployment
• Threat of terrorist activity
• Retail market consolidation
• Reinsurance market shrinking

4
Market News MA / Player Exits

• AXA buys Mutual of NY (1.5B) 9/03
• Manulife buys John Hancock (11B) 9/03
• Allianz exits life reinsurance market 9/03
• AL Re stops writing new business 2/03
• ERC exits life reinsurance market 11/03
• Scottish Re acquisition of ERC inforce (.2B)
  10/03
• Great West buys Canada Life (7.1B) 2/03

5
Market News MA / Player Exits

• Sun Life and Clarica merge 12/02
• Safeco Life to sell Life and Investment business
  9/03
• RGA buys Allianz life reinsurance unit (.3B)
  9/03
• Banc One acquires Zurich Life (.5B) 5/03
• October 2003 Insurance industry sheds 2,000
  jobs
• Expect continued consolidation

6
Retail Market Sales Results
US Individual Life Sales AM Best Aggregates
Averages

• Slight gains year-over-year until 2001
• 2002 AM Best new sales up slightly LIMRA up 14
  thru Q3, 2002

7
Retail Market

• What is your expected annual growth rate in term
  sales over the next 5 years?
• Average consensus is 8-10 from market
• Significant increase in 20 YT plans sales mix
  over the last 4 years (17 -gt 35)
• Short duration and ART plan share has fallen off
  (45-gt 26)
• Return of premium plans gaining share

8
Retail Market Pricing

• Top retail players pricing trends from 2001 -gt
  2003
• Premium Change Min / Max
• 10 YT -4 0 / -22
• 15 YT -5 3 / -18
• 20 YT -5 3 / -23
• 30 YT -7 0 / -30

9
Reinsurance Market

• Competitive Landscape Changing
• financials
• Ratings
• Market Exits
• Reinsurer exits and retro consolidation
• LOC Cost/ Capacity
• Inforce Market
• Increase in PCD/ Private Label Solutions

10
Reinsurance Market Sales Results
US Life Reinsurance Recurring New Business

• 2002 volume almost seven times 1992 volume
• 22 CAGR

11
New Business Utilizing Reinsurance
US Life Reinsurance Recurring New Business as
percent of Directly Written Business

• Percent reinsured continues to grow
• Growth rate slowed after 1998

12
Reinsurance Players
2002 ERC portfolio and recurring includes
significant volume assumed from AUL 2001
Ordinary portfolio amount includes 470,093
assumed from Lincoln Re
Source Munich Survey
13
Reinsurance Players

• Mid 1990s
• Nearly 30 companies active in US life reinsurance
  market.
• Top 6 players have 60 of market share
• Approximately 20 reinsurers had at least a 2
  share accounting for 90 of market
• By 2002 Reinsurance market tripled from 1995
• Less than 20 active reinsurers.
• Top 6 account for 75-80 of market share
• Top 10 companies account for 90 of market

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Why are firms exiting Life Reinsurance?

• Financial distress
• Lack of appropriate scale
• Capital relief
• Business considered non-core
• gt Becoming difficult to diversify reinsurance
  pool

15
Reinsurance Concerns

• Letter of credit costs rising (30) short term
• LOC capacity requirements
• Retro market consolidating
• Retail market delaying product re-pricing
• 8 reinsurance players from 5 years ago have
  either merged, exited, disappeared
• Decreased credit quality / ratings for remaining
  reinsurance players

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Reinsurer Ratings (As of 11/03)

• Reinsurer SP Rating
• General Cologne Re AAA
• Swiss Re AA
• Transamerica Re AA
• ING Re (US) AA
• Hanover AA-
• RGA Re AA-
• Munich Re A
• SCOR BBB-
• Scottish Re BBB-
• Several no longer rated such as Gerling, Max Re,
• Optimum Re

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Reinsurance Letter Of Credit Capacity Estimates
100
80
60
40
20
18
Reinsurance Opportunities

• Inforce block pricing more rational
• Increased activity in product consulting and
  private label solutions
• Market share open for many pools due to financial
  difficulties and market participant exits
• Limited capacity and reinsurance outlets
• Upward pressure on rates due to LOC costs, LOC
  capacity, interest rates, RBC, etc.

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Regulatory Issues

• 2001 CSO
• State Adoption (source ACLI)
• Adopted NM (1/04), OK (1/04), TX (5/1/03), UT
  (7/1/03)
• Proposed 1/1/04 AL, DE, ID, IN, IA, MD, MA, MD,
  NE, OH, PA, TN
• Proposed 1/1/05 ND
• Retail players planning 2001 plan introduction
• Impact Example

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2001 CSO Example

• Portfolio of 10/20/30 year level term with
  60/25/15 sales mix
• Reserve strain is reduced but not eliminated

21
2001 CSO Impact

• Reserve redundancy still significant
• Industry financing capacity still an issue
• Reserve pattern hump

22
2001 CSO Pricing Impact

• Overall portfolio allowance change minimal (lt1)
  using constant target ROIs
• Longer duration products result in more
  significant change
• Reserve credit impact
• Time value of cost savings
• Preferred classes absorb larger declines in
  allowances
• Improvement in nonsmoker mortality
• Shorter periods of deficiency reserves under 2001
  CSO