DISABILITY INCOME INSURANCE

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DISABILITY INCOME INSURANCE Where have we been
and where are we
going? Melissa Millan Vice President and Chief
Operating Officer, Disability Income MassMutual
Financial Group March 2004
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What Well Cover

• The industry
• Past
• Present
• Future
• Opportunities

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Baseline - Understanding The Product

• Income protection in the event the insured is
  unable to work due to illness or injury
• Most coverage is currently written is
  non-cancelable, premiums cannot ever be increased
• Benefit periods range from 2 years to age 67
• Risk management expertise is paramount, DI is
  not a volume game

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Baseline - Financial Characteristics

• DI is capital inefficient
• - High acquisition costs- underwriting
  distribution
• - Relatively risky-high regulatory capital
  charges
• - The IRS doesnt help
• - Breakeven doesnt occur for years/long tail
• Splitting the dollar-who gets what?

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Baseline - Statistics Driving Morbidity

• Incidence
• Terminations
• What are we really underwriting?

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The Past Non-Can Premiums
Source LIMRA
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The Past

• DI industry just emerging from a prolonged period
  of losses -12 years
• 2002 earnings on average 12
• Drop outs?
• New entrants?

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The Past
You get yourself into a fix you get yourself
out of it. Its that simple. There is no way to
run the sausage machine backward and get pigs
out of the other end.
Norman Augustine, Harvard Business Review
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What Have We Learned?

• In the 80s
• Market position drives actions
• - Risk management liberalization
• Pricing
• Compensation
• Focused on individually underwritten business

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The Present
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What Changed?

• Product/Benefits
• Eliminated or Curtailed
• Own occupation coverage
• Lifetime benefits
• To age 65 mental/nervous
• Cost of living increases
• Right to purchase options
• 30 day waiting period

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What Changed?

• Pricing
• Increased rates
• Increased utilization of sex distinct rates
  
• Surcharges for poor performing regions

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What Changed?

• Underwriting
• Stricter-more rules, fewer exceptions
• Expanded medical testing
• Expanded questioning of the application
• Increased staff training/increases to staff
• Changed occupation classes (generally lower)
• Issue and participation limits
• Replacement ratios

Less concentration of risk multilife
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The Environment

• Employer trends
• Health insurance costs rise
• More costs shifting to employees
• Voluntary worksite sales are increasing
• Consumer trends
• Available cash eroded
• Dual incomes at record levels
• Increased focus on preservation of assets
• Traditional markets saturated?

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The Future

• Conning Co study aggressive growth will limit
  long term success
• Companies with diversified portfolios looked upon
  with favor
• Innovation is critical products and services

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The Future

• Shift to multilife
• Enhanced risk management benefits
• More premium per work effort
• Ease of doing business critical
• The multilife marketplace
• Increasingly competitive-spread sheeting common
• Guaranteed Standard Issue (GSI) is everything
  or not

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The Future

• Will there be an opportunity for individual?
• Reach untapped markets
• 2010- 10M more jobs than workers
• 2012- Women and minorities will
• comprise 2/3 workforce
• Average age of working population 42

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Challenges for the Future

• Product is too expensive
• More value needs to be returned to the consumer
• - Benefits need to increase and dividends
• also play a role
• - Expenses need to decrease
• Increase capital efficiency
• Minimize upfront costs
• Carriers must become easier to do business
• with without compromising risk management
• principles

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What to Expect

• Product enhancements
• Critical illness
• Retirement vehicles
• Long Term Care options
• Less costly supplemental benefits
• Segment appeal

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What to Expect

• Service
• Electronic, electronic, electronic
• Enrollment,education,billing
• Customer transactions

• Underwriting
• Streamlined process
• Liberalization for most profitable segments
  

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The Value of DI to a Producer

• Is a financial plan complete without this
  coverage?
• Rich renewal stream
• - Value of sale to the agent is well above 100
  of premium
• Correlation between agent retention and cross
  selling
• Market opportunities

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What Do the Experts Predict?

• Modest premium growth
• Survivors who have focused on profit vs. market
  share will attract more business
• Profit will continue which will allow survivors
  to reinvest in business
• Successful companies will find means to better
  penetrate the middle class/emerging affluent
• Producer training and education paramount