2007 SOA Spring Meeting

2007 SOA Spring Meeting

The Many Ways of Selling Insurance Through Banks

October 17 Presented by: Keith Dall, FSA, MAAA - Milliman, Inc. Chris Hause – Hause Actuarial Solutions, Inc. Tim Neumann – BankWest Investment Services

Agenda

A Global Perspective

10% 10%

70%

Brazil Chile Mexico

Bancassurance Market Share:

Latin America

2 0 % 2 6 % 5 9 % 6 2 % 7 1 % S p a i n F r a n c e I t a l y G e r m a n y U K

Bancassurance Market Share:

Europe

Source: LIMRA’s 2006 Bancassurance Study

1 0 % 2 0 % 2 4 % 2 5 % 4 0 % 4 5 % 4 7 % 5 0 % T a i w a n * * K o r e a * M a l a y s i a * H o n g K o n g * * C h i n a * S i n g a p o r e * T h a i l a n d * * I n d i a * *

Bancassurance Market Share:

Back to the States

Bancassurance Sales in the US

(billions)

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

fixed annuities variable annuities

mutual funds life insurance

total bancassurance products

$78.4 $43.1 $34.6 $33.4 $50.2 $61.2 $65.1 $72.1 $74.4 $70.8 $80.3 $83.4 $80.9 $30.8 $29.6 $36.5 $32.4 $31.3 $43.1 $46.3 $45.5 $32.0 $33.0 $41.0 $19.2 $16.5 $18.0 $18.1 $18.2 $12.5 $6.9 $9.6 $10.8 $14.1 $15.6 $10.9 $2.8 $3.4 $3.5 $0.3 $0.5 $0.6 $0.9 $1.3 $1.2 $30.3 $10.7 $14.7 $10.7 $10.3 $10.6 $8.0 $12.5 $27.4 $36.4 $32.0 _$22.5

$ 1 9 2 $ 1 4 6 $ 3 2 8 $ 1 2 4 $ 4 8 4 $ 1 5 9 $ 7 6 0 $ 1 6 6 $ 1 , 1 1 8 $ 1 7 6 $ 9 8 6 $ 1 8 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 s i n g l e p r e m i u m r e c u r r i n g p r e m i u m

Deconstructing Bank Life Sales

(millions in first year premium)

25% 54% _51% 71% 100% Community (less than $4) Super Community ($4-14) Regional ($14-24) Super Regional ($24-60) Mega (over $60)

The Larger the Bank, the More Likely

It Offers Bancassurance

8,765 129 27 38 15 Community (less than $4) Super Community ($4-14) Regional ($14-24) Super Regional ($24-60) Mega (over $60) assets in billions

But We are Still a Nation of

Small Banks

Source: FDIC

30% 5% 70% 8% 14% 5% 23% licensed bankers retail agents FCs stand-alone agency advanced agents referrals to outside agency direct response

percent of banks surveyed

Life Insurance Distribution Methods

Source: Kehrer-LIMRA Bank Life Insurance Sales Study, 2006

Growth of Bancassurance

Sales Forces

Revenue Penetration:

Investment vs. Life Insurance Sales

$1.92

Investment Sales Life Insurance Sales

Sales revenue per bank customer household

2 6 %

3 0 %

L e s s t h a n $ 7 b illio n M o r e t h a n $ 7 b illio n N e t i n c o m e a s a p e r c e n t o f c o n s u m e r i n v e s t m e n t p r o g r a m r e v e n u e

Profit Margin by Size of Bank

(retail deposits)

Bank Distribution:

Many Considerations

Compatible Distribution Strategy for

a Bank

Bank Branches Other Distribution Distribution Category

Distribution Channel

Target Market •_•Low Income_{Middle Income} ••Low IncomeMiddle Income

•Emerging Affluent

•Middle Income

•Emerging Affluent

•Affluent

•Affluent

5 methods 5% 4 methods 8% 3 methods 13% 2 methods 20% 1 method 54%

But More than Half of Banks Use Only

One Method

Source: Kehrer-LIMRA Bank Life Insurance Sales Study, 2006

US Banks Have Barely Penetrated Their

Customer Bancassurance Opportunity

ÀTypical bank has captured some investment business from only 8.1% of its customer

households

ÀOn average, banks have been selling investments for 12.8 years

ÀBanks are capturing only 26% of the financial assets of the customers who do invest through them

Key Challenges

ÀGetting buy-in from

bank management

ÀEncouraging financial

consultants and platform reps to sell

ÀConsumer awareness

Likely to Buy?

Source: LIMRA’s Buying Life Insurance Through a Bank

US Bancassurance at a Crossroads

ÀTypical bancassurance

business contributes 2% to overall banking enterprise’s bottom line

ÀBancassurance is

highly profitable, but… ÀNeed to increase scale

25

Selling Insurance to Middle Markets

„ Product Type - Term Insurance - ROP Term - GI/SI Whole Life - ULSG

- UL with LTC Riders - SPIAs

- Simplified Indexed Products

Selling Insurance to Middle Markets

„ Simplify the Sale

- Fully Guarantee; No Illustration - Return of Premium

- Guarantee Issue - Instant Issue

- Simplify Underwriting

„ Tele-underwriting

The Effect of Debt

Cancellation on Credit

Insurance Products

SOA Annual Meeting October 17, 2007

Credit Insurance 101

Chris Hause, FSA, MAAA President, Hause Actuarial

Credit Insurance 101

• Products • Premiums • Markets

Credit Insurance Products

• Life

• Disability

Premiums

• Established by state (usually regulation)

– Life – Disability

– Some unemployment

Premium Payments

• Historically single premium, financed with the loan

• Monthly outstanding balance

– Open-end loans – Lines of credit – Credit unions

Markets

• Banks

• Credit Unions • Auto dealers

• Other dealers (furniture, electronics, jewelry)

• Finance companies

Bank Market

• Installment - not secured by real estate

– single premium life and disability

• Installment - secured by real estate

– MOB life and disability

• Business and Home equity loans

– MOB life and disability

• Credit cards

Credit Union Market

• Almost exclusively MOB life and disability • Composite rates for disability

• Experience rated

• Very few insurers in this market, majority is through a single carrier

Auto Dealer Market

• Single premium exclusively, due to loan sales

• Life

• Disability

Finance Company Market

• Single premium historically

• Some carriers have moved to MOB • Life

• Disability

• Some unemployment • Personal Property

Other Dealers

• Primarily single premium on installment sales

• MOB on revolving lines, proprietary credit cards

• Life

• Disability

Gramm-Leach-Bliley

• Enacted in 1999

• Legitimized debt protection products • Exempted from state insurance

department jurisdiction • No rate regulation

• No specified benefits • No licensing

Immediate Effect

• Credit card programs were replaced by debt protection

• New benefits were added • Installment was slower

– Bona fide monthly alternative – Dealer business

• Credit Unions are a natural fit, but tend to be risk-averse

Long Term Effect

• Some markets will probably survive

– Small bank

– Finance company – Small Credit Union – Dealer

• Credit property • GAP

• Creditor-placed coverage

HOEPA and “Predatory Lending”

• Home Owners Equity Protection Act • Enacted in 1994

• If fees (including CL&D) exceed $400

(indexed) or 8% of loan, a “High Cost” loan • Secondary market implications

• “Predatory lending” action is more on the local level

Immediate Effect

• Single premium was stopped • MOB programs were developed

– APR

– Level monthly

– Critical period Disability

• Total written premium took a hit • Closed-end MOB filling the void

Credit Life: Single Premium

500,000,000 1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 3,000,000,000 1992 1993 1994 1995 1996 1997 1998 1999 2000200120022003200420052006 Year P re m iu m A m ount s

Credit Life: Closed-End MOB 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 140,000,000 160,000,000 199 2 1993 1994 1995 1996 1997 199819992000200 1 200 2 200 3 2004 2005 2006 Year P re m iu m A m ou nt s

Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Credit Life: Open-End MOB

300,000,000 350,000,000 400,000,000 450,000,000 500,000,000 550,000,000 600,000,000 199219931994199519961997199819992000200120022003200420052006 Year P re m iu m A m ount s

Loss Ratio: Single Premium 33 34 35 36 37 38 39 40 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 Year Los s R a ti o %

Commission Ratio: Single Premium

25 30 35 40 45 50 55 199 2 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200 3 200 4 2005 200 6 Year Co m m is s ion Ra ti o % Credit Life

Loss Ratio: Closed-End MOB

30 35 40 45 50 55 60 65 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 Year Lo s s Ra ti o %

Commission Ratio: Closed-End MOB

10 15 20 25 30 35 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 Year Com m is s io n R a tio % Credit Life

Loss Ratio: Open-End MOB 50 55 60 65 70 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 Year Los s Ra ti o %

Commission Ratio: Open-End MOB

10 12 14 16 18 20 199 2 1993 1994 199 5 1996 1997 199 8 1999 2000 200 1 200 2 2003 200 4 200 5 2006 Year Co m m is s ion Ra ti o % Credit Life

Credit Disability: Single Premium

500,000,000 1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 19921993199419951996 19971998 19992000200120022003200420052006 Year P re m iu m A m o unt s

Credit Disability: Closed-End MOB 80,000,000 100,000,000 120,000,000 140,000,000 160,000,000 180,000,000 199 2 199 3 1994 199519961997 1998 199 9 200 0 2001 2002 200320042005 200 6 Year P re m iu m A m ou nt s

Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Credit Disability: Open-End MOB

400,000,000 500,000,000 600,000,000 700,000,000 800,000,000 900,000,000 199219931994199519961997199 8 199 9 200 0 200 1 200 2 200 3 200420052006 Year Pr e m iu m A m o u n ts

Loss Ratio: Single Premium 30 35 40 45 50 55 60 199 2 1993 199 4 1995 199 6 1997 199 8 1999 200 0 2001 200 2 2003 200 4 2005 200 6 Year L o s s R a io %

Commission Ratio: Single Premium

25 30 35 40 1992 1993 1994 1995 1996 1997 199 8 199 9 2000 2001 2002 2003 2004 2005 2006 Year Com m is s io n Ra ti o % Credit Disability

Loss Ratio: Closed-End MOB

50 55 60 65 70 75 1992 1993 1994 1995 199 6 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Lo s s R a ti o %

Commission Ratio: Closed-End MOB

10 12 14 16 18 20 22 Co m m is s ion R a ti o %

Loss Ratio: Open-End MOB 30 35 40 45 50 55 60 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200 3 2004 2005 2006 Year Los s R a ti o %

Commission Ratio: Open-End MOB

10 12 14 16 18 20 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Co m m is s ion R a ti o % Credit Disability

Credit IUI: Single Premium

-100,000,000 200,000,000 300,000,000 400,000,000 500,000,000 1992199 3 1994 1995 1996199 7 1998 19992000200 1 2002 20032004200 5 2006 Year P re m iu m A m ount

Credit IUI - All MOB -200,000,000 400,000,000 600,000,000 800,000,000 1,000,000,000 1,200,000,000 1992 19931994199519961997199 8 199 9 200 0 20012002 2003200420052006 Year P re m iu m A m ou nt

Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Consumer Debt In Billions

0 500 1000 1500 2000 2500 1999 2000 2001 2002 2003

Credit Insurance Net Written

Premium Penetration

P r emi um t o Debt P er c ent age

0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% 0.45% 1999 2000 2001 2002 2003

Credit Insurance MOB Premium Plus Debt Protection Income -500,000,000 1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 3,000,000,000 3,500,000,000 1998 1999 2000 2001 2002 2003

Credit Premium and Debt Fee Penetration on Revolving Debt

0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 1999 2000 2001 2002 2003

Earned premium Earned & Fee Income

Conclusions and Inferences

• Single Premium Credit Life and Disability premium has decreased

• Closed-End MOB has increased • Open-End MOB has decreased • Loss Experience is mixed

• Overall, the total pie has increased, but credit insurance accounts for a smaller

The Many Ways of Selling

Insurance Through Banks

Tim Neumann BancWest Investment Services

In-Bank Business Partners

zPrivate Banking zConstruction Bankers zBusiness Banking zCommercial Banking zNational Banking zWealth Management

Bank Customers

1. Small Business Owners

Business Continuation Planning:

1. Buy/Sell Agreement Funding 2. Key Man Coverage

Executive Bonus Plans:

1. REBA (restricted executive bonus arrangement)

2. 419 Single Employer Welfare Benefit Plan 3. 412i Defined Benefit Plan

2. High Net Worth Bank Clients

1. Estate Planning – Wealth Transfer

• Charitable Remainder Trusts

• Ideal Plan

• Estate Equalization (Agricultural & Business)

Bank Customers Cont