Financial Underwriting ABC Co. Case Study

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Financial UnderwritingABC Co. Case Study

• Isabelle Dailly, FALU
• Regional Underwriting Consultant

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Important Information
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REPSOURCE!
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Financial Underwriting Guidelines

• Page 1 personal needs driven
• Page 2 - business insurance
• Page 3 insurance for tax planning purposes
  (insurance as an investment)

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Why do we underwrite financially?

• Large case mortality studies
• Relationship between amount and need for
  insurance
• Avoid bad claims
• Follow published guidelines

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Case Presentation

• Male 61 non-smoker
• Medically standard
• Cover letter included
• T10 4,000,000
• Corporate owner/beneficiary

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Open Envelop 1

• Read the cover letter
• Read the inspection report
• Read the financial statements
• Consider your financial underwriting guidelines
• Discuss are you going to approve this application
  for 4 million

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What did you come up with?

• Approve?
• Decline?
• Ask for more information?

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My notes

• Insurance in force 2 Million Bus. Insurance
  with Canada Life, to be replaced
• 163,000 Norwich Union - personal
• Annual Income 200,000
• Personal net worth gt 2 million
• New coverage 4 Million T10
• Owner ABC Inc.
• Beneficiary 85 ABC Inc. (3,400,000), 15
  spouse (600,000)
• Purpose of insurance Loan Protection and Growth
  of company. In 2005 insured increased his
  ownership to 85 by repurchasing shares from
  Venture Capital company
• Insured is 85 (application) or 80 (IR ) owner

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My notes (2)

• Purpose of insurance Loan Protection and Growth
  of company. In 2005 insured increased his
  ownership to 85 by repurchasing shares from
  Venture Capital company
• Insured is 85 (application) or 80 (IR) . Mr.
  Smart, please confirm whether this means buy-sell
  coverage, is there a buy-sell agreement in place,
  the other partners have coverage you state, is
  this for buy-sell coverage, or is this keyman
  coverage? Is his percentage 80 or 85?
• Other partners have insurance in force (no
  details on amounts) Mr. Smart, what amounts are
  inforce on partners?

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My notes (3)

• Additional information building for the
  business (blind manufacturer, 220 employees) is
  being purchased by insured on personal basis.
• Discussed with Dereka Thibault, TEPG, it is not
  unusual for a business to separate out real
  estate holdings from operating company. Having
  personal ownership of the building and leasing it
  back to business can make good business sense,
  particularly if life insurance is not required by
  financial institution and no deductibility
  issues. Most real estate would not require
  mortgage coverage as the property backs the loan.
  

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My notes (4)

• Mr. Smart, the inspection report states the
  company is buying the building, but you told us
  he is buying the building. If he is buying it
  personally and leasing back to company, is some
  of the insurance coverage to cover this mortgage?
  will the policy be collaterally assigned to the
  bank to cover the outstanding mortgage in case of
  death, or is there a shareholders agreement or
  board resolution that directs the outstanding
  amount of the mortgage to be paid off. What is
  the purchase price of building and what is the
  loan amount (if this is what we are underwriting
  for)?
• Jan 31, 2005 Financial Statements ABC Inc.
  (started in 1978)
• 2005 gross sales 18 million, 2004 gross sales
  16 million
• 2005 niat 916,689, 2004 niat 908,617
• bank indebtedness at Jan 31, 2005 1.9 million
  Mr. Smart, do we have a feel for the current bank
  indebtedness? one year later

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My notes (5)

• Rough business valuation using our BVP method
  about 9 million, accountant estimates business
  values to be between 4 and 8 million (no formal
  valuation done)
• We would consider coverage for buysell at 80 or
  85 of FMV conservatively estimated at 4
  million. Mr. Smart, if this is what is required
  here, we just need to confirm the other 2
  partners are insured equally (i.e. for their
  percentage of ownership) - although really
  considering the amounts it is quite possible that
  this client is the only one that really requires
  the insurance i.e. he could buy-out the other
  partners' minor interest fairly easily without
  coverage.
• If that is not the case, and it is keyman please
  advise.

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We now have the full FS with notes

• Review notes to financial statement
• Where are you now?
• Decision?

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My underwriting notes

• income / net worth?
• Purpose of insurance?
• Other partners?
• 80/85?
• Collateral assignment?
• Business valuation?
• The agents reply ..

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The solution

• Hi David,
•  I spoke with the insured, Wayne this afternoon
  (604 123 4567) as requested by the agent, Mr.
  Smart.
•  Client advises that his partners have 500,000
  and 1,000,000 of coverage in force.
• There is a shareholder agreement in place.
• The insurance coverage is required for buy-sell
  coverage.
• He increased his percentage ownership to 80 of
  the company in 2005 and therefore needs the
  increased coverage.
• Yes, he is purchasing a building, but the
  insurance is not for that,it is to fund the
  buy-sell agreement.
•  Based on the most conservative value of 4
  million X 80 3,200,000
• The coverage requested in 3,600,000 and I would
  recommend approving the coverage as requested.  
• Isabelle Dailly, FALU

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Always Communicate

• Existing coverage and any planned replacement
• Purpose of the proposed coverage
• How the amount of coverage was determined and
  sales concept used
• Rationale behind owner and beneficiary
  designations, if not evident
• Include supporting documentation such as
  financial/net worth statements

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Always keep in mind

• The underwriter has not been a part of the sales
  process, has not met the client and is only aware
  of the details presented on the application and
  attachments
• The underwriter must establish the purpose of the
  insurance and justify the amount, based solely on
  the application and supporting information you
  have provided

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Understand

• Financial requirements financial statements,
  personal net worth statements, financial
  questionnaires, copies of investment statements,
  T1s, Inspection Reports, Third Party Verification

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BE ABLE TO EXPLAIN

• Do not tell your client/his accountant I dont
  know why the insurance company wants this Ill
  see if they will waive these requirements
• Explain rationally the need for financial
  underwriting and third party verification
• Clients can and will understand financial
  underwriting
• Provide privacy guidelines

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Always keep in mind

• If the underwriter is concerned about the
  financial justification on a case or suspects
  potential fraud or anti-selection, an unscheduled
  inspection report or other discretionary
  requirements may be requested, complicating and
  perhaps jeopardizing the sale
• It is always advisable to be proactive and
  provide the financial documentation the
  underwriter requires to approve the risk
  overkill!!!

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Questions?
Email isabelle_dailly_at_manulife.com