Overview of Credit Insurance and Debt Cancellation Products

Overview of Credit Insurance

and Debt Cancellation

Products

SOA Spring Life Meeting May 10, 2007

Credit Insurance 101

Chris Hause, FSA, MAAA President, Hause Actuarial

Credit Insurance 101

• Products • Premiums • Markets • Reserves • Current Issues

Credit Insurance Products

• Life

• Disability

• Unemployment • Leave of Absence • Property

Credit Life

• Pays a scheduled face amount • Gross payoff

• Net Payoff

• Truncated coverage • Accelerated benefits • Accidental death only

Credit Disability

• Makes loan payments during disability • 7, 14, 30 day retroactive and

non-retroactive

• 90-day lump sum

• Critical period coverage

Credit Involuntary Unemployment

• P&C coverage in most states, can be sold in conjunction with disability in some

• Makes loan payments during unemployment

• Generally 30 day retroactive

• Almost all is limited period coverage

Credit Leave of Absence

• Makes loan payments during an employer-approved leave of absence

• Generally in conjunction with unemployment

Credit Property

• Personal Property

– Single or dual interest

• Creditor-placed – Auto – Homeowners • Additional coverages – Rental reimbursement – Displacement coverage

GAP Insurance

• Generally sold through automobile dealers • Pays difference between Actual Cash

Value (ACV) and loan balance on total loss

Premiums

• Established by state (usually regulation)

– Life – Disability

– Some unemployment – Some leave of absence – Some property

– A few GAP

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

– MOB life, disability and unemployment

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

• Some unemployment • GAP

• Mechanical breakdown (generally not considered credit)

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

• Unemployment • Property

Statutory Reserves

• Single premium

– Life = mortality reserve

– Disability = unearned premium

• Rule of 78, Pro-rata, Average

• Morbidity-based reserve is emerging

– All P&C use P&C principles

• Usually comes down to gross unearned premium • GAP is special case – consider claim incidence

• MOB = Pro-rata Unearned Premium

GAAP Reserves

• Single premium

– Life

• Unearned premium reserve proportional to risk • DAC based on percentage of unearned

– Disability

• Some blend of Rule of 78, Pro-rata • DAC based on percentage of unearned

– P&C

• Generally pro-rata UEP

• DAC based on percentage of unearned • MOB

Reserve Formulas

• Single Premium Mortality Reserve

– ∑Face_x+t x C_x+t/ D_x

• Single Premium Morbidity Reserve

– Net single premium for remaining coverage – Uses specialized daily functions

• Rule of 78

– (r x (r+1))/(n x (n+1))

• Pro-rata

– r / n

• Half-month approximations are common

Current Issues

• Gross vs. Net Coverage • Single premium prohibitions

• Debt cancellation and suspension • Reserving issues – Reserve basis – Morbidity reserves – GAP reserving – PBR • Predatory lending/HOEPA • Refund notification

Debt Cancellation &

Debt Suspension Products

SOA Phoenix Meeting

May 2007

Harvey Waite FSA, MAAA

Actuarial Risk Management Executive Bank of America

Topics Covered

• Product Overview

• OCC Regulation

• Product Design and Pricing

Product Overview

• Debt Cancellation and Debt Suspension

Products (collectively called Debt Protection) are banking products

• Debt Protection products are two party agreements between the lender and the borrower

• Lender agrees to cancel a specified amount of debt or suspend (waive finance charges) in the event of an occurrence of a specified event

Product Overview

• Specified events typically include:

– Death

– Disability (Dis)

– Involuntary Unemployment (IU) – Hospitalization (Hosp)

– Family Leave (FL) – Life Events

• Fees can be charged for the protection and generally are payable monthly

OCC Regulation

• OCC CFR 12 Part 37

– Standards for National Banks selling Debt Protection

o Product is optional

o Prohibits offering single fee debt protection contracts with residential mortgage loans

o Single fee contracts on installment loans still ok but must offer other payment options

o Safety and Soundness requirements

o Disclosure requirements both Oraland Written

Product Design & Pricing

• Debt Protection products today are sometimes offered to:

– Consumer and Small Business Cards (Cards) – Closed-End Loans

– Home Equity Lines of Credit (HELOCs) – Business Line of Credit (LOC)

Product Design & Pricing

• Benefit Structure More Canc More Canc More Canc Susp & Canc Suspension (Susp) vs. Cancellation (Canc) Offered Single Yes Yes Some – move to Blended Single and Joint

Offered Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Benefit Structure AD AD AD, some AC life All cause (AC)

life, accidental death (AD), sometimes Permanent & Total Disability (PTD) Entire Balance Protections Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Benefit Structure Core: Dis, Hosp, FL. Life Events. Small Biz prot’ns available Core: Dis, IU, Hosp, FL, CPL Core: Dis, IU, Hosp, FL, Critical Period Life (CPL) Core: Dis, IU, Hosp, FL. Life Events. Small biz prot’ns available Monthly Protections Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Underwriting None Some Some None Health U/Wing Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Some Common Limitations & Exclusions

Yes Yes Yes Yes OB Maximums Some Some Some Rare Age Expiry Yes Yes Yes Rare Monthly Benefit Maximums Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Some Common Limitations & Exclusions

Some Some Some Rare 6 and 6 Pre-X n/a Rare Rare Some Self-employed Yes Yes Yes Yes Standard Pre-X exclusions Bus LOC HELOCs Closed -End Loans Cards

Product Design & Pricing

• Some Common Limitations & Exclusions

Yes Yes Yes Yes Retro WPs n/a Rare Rare Some Eligibility Waiting Periods (WP) Bus LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Fee Structure % of min paym’t or per $100 of OB % of min paym’t or per $1,000 of OB % of min paym’t or per $1,000 of OB Per $100 of outstanding balance (OB) Fee Basis Business LOC HELOCs Closed-End Loans Cards

Product Design & Pricing

• Steps to Determine Pricing

– Identify Key Assumptions – Review Available Experience – Gather Competitive Information – Generate Claims Costs and Fees

– Document Assumptions and Methodology

Product Design & Pricing

• Sources of Data

– Company Experience – 2002 Credit Mortality Table – 1999 Credit Morbidity Table

– Involuntary Unemployment – Department of Labor data

– Employer Approved Leave of Absence – Department of Labor data

Customer Contract Data Database Validate Assumptions Pricing / Repricing

Analytics Reserve Reviews Reporting Modeling

Experience Monitoring Process

Loss Data

Experience Monitoring

• Immature Block (Non-Credible Claims Volumes)

– Contractual Liability Policy (CLP)

o One way of managing the claims risk until book becomes credible

– Manage the Risk Internally o Analytics/Reporting o Reserving

Experience Monitoring

• Mature Block (Credible Claims Volumes) – Analytics

o Claims Analyses

o Actual to Expected Claims Studies – Reserve Reviews

o Periodic reviews to quantify level of reserves o Determine appropriateness of future Reserve Rate – Reporting

– Modeling

o Loss Ratio/Reserve projection model

Closing Remarks

• Debt Protection Trends

• New Markets/Products

International Credit Insurance

Bob Butler, FSA, MAAA

Senior VP & International Actuary Assurant Solutions

Assurant

International

Creditor Business

• Where we are

• Expansion Plan Post 2003

Where Assurant Is

Entry Entry

Country Date Country Date

Argentina 1997 China 2007(?) Brazil 2001 Germany 2006 Canada 1978 Italy 2006 Denmark 1997 Mexico 2004 Ireland 1999 Spain 2007 Puerto Rico 1982 United Kingdom 1990 United States 1947 Pre 2003 Post 2002 10-15 prior-itized

• Prioritized market attractiveness

– Cultural issues

– Viability of both ESC and Credit – Cost, ease of entry

2003 International

Review

All Markets:

204 possible international markets

• All potential markets

Initial screen: 30-40 viable markets

• Initial screen focused on market profit potential – Quantitative data – GDP, # cards, etc. Secondary screen: 10-15 select markets

• Secondary screen based on profit and potential for a strong/sustainable position

– Quantitative and qualitative data – Competitors, market size, etc.

Criteria Scoring

Criteria Criteria • PPP market • DFS market • Strength of competitors • Profit Margin • Propensity to insure • Presence of existing clients • Minimum capital required • Other regulatory requirements • Synergy with existing

Assurant operations

Primary

PrimaryDataData ScoringScoring WeightingWeighting

• Brown & white good sales, # of mobile phones

• # of credit/debit cards, spend per card, personal loans

• Market maturity and product pricing (PPP/DFS) • Life insurance market

maturity • Minimum capital

required

• Licensing requirements, time to acquire license, solvency requirements

1-5 Various

Calculate overall score for market profit potential

Low High Low High Germany Canada Italy Spain UK Taiwan Poland Norway Ireland Greece Switzerland Finland Netherlands France Brazil Sweden Portugal Mexico Austria Czech Belgium Japan Argentina S. Korea Chile Hong Kong China ‘03 Australia Turkey Thailand Indonesia Luxembourg Russia Philippines Israel India Saudi Arabia UAE M A RK ET P R O F IT SIZ E P O TEN TIA L

How To Prioritize

* China ‘07

Argentina

• Bought shell company

• Regulator Superintendencia de Seguros de la Nacion (SSN)

• File and use • ALM - None

• Economic crisis 2001-2002

• Unemployment offered to commercial

employees, disability for self employed and government workers and hospital for retired (common also in Brazil and Italy)

• Past hyper inflation made lending difficult

“Riding The Wave”

Argentina - Credit Card Outstanding Balance Growth

0 1 2 3 4 5 6 7 2003 2004 2005 2006 Arg e n ti na P e so s ( B il lio ns ) CAGR = 6 0%

Brazil

• Bought a shell

• Regulator Superintendencia de Suguros Privados (SUSEP)

• ALM – None

• Consórcio, lottery pool for buying cars. We insure payment like credit insurance. Also in Argentina 24 17 13 0 5 10 15 20 25 30 Bil lio ns o f R e al s

Brazil - Credit card Outstanding Balance Growth

CAGR = 3

6%

Canada

• Formed branches of USA companies • Regulator Office of the Superintendent of

Financial Institutions (OSFI) • No product filing requirements

• ALM required since mid 90’s (DCAT)

Denmark

• Started as TPA in extended warranty business

• Operating under FOS through our UK companies

• Will become a branch of UK under “FOE” • Will expand into credit insurance and to

other Scandinavian countries under “FOS” from Denmark

Ireland

• Started as a TPA, a claim operation for USA creditor business

• We were given cash incentives

• Will also operate under “FOS” from UK

Mexico

• Formed new life and P&C companies

• Regulator Comision Nacional de Surguros y Fianz

• Added exam to Actuarial requirements • ALM similar to Canada, 2004

• File and use

• 2nd attempt,. We were caught in the 1994 crisis when all lending stopped

“Riding The Wave”

Mexico - Number of Credit Cards

0 5 10 15 20 25 30 35 40 45 50 2002 2003 2004 2005 2006 Mi lli o n s CAGR = 2 3%

Puerto Rico

• Started new companies

• Regulator is Oficina del Comisionado de Suguros

• Member of the NAIC

• Credit life regulation including prima facie rate

• File for approval

United Kingdom

• Formed new companies

• Regulator is Financial Services Authority (FSA) • Filing is open, principle based

• ALM since 2005, used to determine risk capital • Can operate in other European countries under

Freedom of Service or Freedom of Establishment

• Mature market now under attack from Consumerists

Post 2002 Expansion

GDP

Purchasing Creditor Power Parity Premiums

Country (in billions) (in millions) Ratio China 10,000 1,000 0.01% Germany 2,600 1,000 0.04% Italy 1,727 600 0.03% Spain 1,100 600 0.05% United Kingdom 1,900 5,500 0.29% Canada 1,165 2,000 0.17%

Germany

• Regulator Bundesbank and German Financial Supervisory Authority (BaFin) • Prior to EU there were rigid filing

requirements for getting approval • Today you file for information only • We operate from UK under “FOE”

• Mostly debit cards with credit extension • Quote,“Depression ended with soccer

playoffs, people now spending”

Italy

• We operate from UK under “FOE”

• Difficult market to penetrate. We are finding large banks have ownership associations with insurers

• Unemployment insurance is cheaper despite 7% unemployment:

– Must have permission to dismiss employee – Employers reluctant to hire in growing economy – We only cover currently employed

Spain

• We operate from UK under “FOS” but will switch to “FOE”

• Single premium creditor business market is quite mature

• Opportunity is in credit card market

China

• Will operate as TPA for extended warranty business later this year under a joint venture • Must have representative office for 2 years

before getting insurance company license • Can only own 49% of life company

• Licensed by city with separate capital requirements

• National Regulator is CIRC but Provincial regulator has say

• Western banks encouraged to enter retail market

Summary

• Only USA and PR have specific credit insurance regulations

• Credit cards are relatively new market in many countries. Market is expanding rapidly and we will ride the wave