Society of Actuaries Life & Health Insurance Spring Meetings 2003

1
Society of Actuaries Life Health
Insurance Spring Meetings2003

Individual Disability Insurance Opportunities for
Life Insurers
Steve Miller Vice President Disability Management
Services, Inc.
2
IDI MARKET HISTORICAL REVIEW

• What Went Wrong? (1985 - 1995)
• Irrational Competitive Practices
• Non-Diversified Risk Spread/Chaos in Health
• Care System
• Overly Complex Product and Process
• Lack of Risk Management Focus

Margins after Dividends

• Industry Response? (1996 - Present)
• Consolidated Marketplace (i.e. reduced
• competition)
• Multi-Life Sales Focus
• Increased premiums
• Improved Risk Management Focus
• More appropriate benefits

Source Milliman USA Newsletter
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IDI MARKET SUMMARY WHERE ARE WE TODAY?

• Profit margins restored
• Reserves stabilized
• Claim incidence improved
• Double digit sales growth
• Significant and growing need for DI

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SIGNIFICANT AND GROWING NEED FOR DISABILITY
INSURANCE

Limited Market Penetration
Group LTD Penetration by Employer Size

of Employees Covered by LTD
1-49 15
50-99 23
100-499 29
500-999 36
1000-2,499 37
2,500 60
IDI
Source Bureau of Labor Statistics
Source UnumProvident January 2001
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SIGNIFICANT AND GROWING NEED FOR DISABILITY
INSURANCE
Limited Carriers Offering IDI
IDI of Total New Premium Life of Total New Premium
Top 5 71 29
Top 10 90 48
Top Carriers
Source LIMRA U.S. Sales Survey
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SIGNIFICANT AND GROWING NEED FOR DISABILITY
INSURANCE

Increasing Consumer Vulnerability to Loss of
Income Increasing Volatility of
Income - Emphasis on performance based
compensation (i.e. bonuses and stock
options not typically covered by Group LTD)

Decreased Liquidity of
Assets
Increased Debt
Distribution of Household Financial Assets
1980 1990 2000 Bank Deposits 18.2 16.5 9.
6 Stocks 13.2 12.0 19.5
Ratio of Household Debt to Personal Disposable
Income 1980 1990 2000 12.5 13.4
14.3

Source Federal Reserve
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SIGNIFICANT AND GROWING NEED FOR DISABILITY
INSURANCE
Demographics and Employment Changes - Aging
workforce with depleted assets from stock market,
unwilling to rely on Social Security
and Medicare - Longer life
expectancies - Working longer
to reach retirement goals -
Increased mobility of workforce and importance of
coverage portability -
Average American worker has 3 careers and 10
different jobs
Age Distribution of Working Age
Americans 1990
2000 2010
Under 50 73.2 70.3
61.7
Age 50 26.8 29.7
38.3
Source U.S. Census Bureau
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SIGNIFICANT AND GROWING NEED FOR DISABILITY
INSURANCE
Employee Benefits moving to Voluntary
Choices - Rising cost of Employee Benefits
driven largely by Group Health Care
Employee Benefit Costs as of Compensation
1970 1980 1990
2000
Costs 10.7 16.6 19.3
27.4 - Employers shifting risk and cost to
their employees - Voluntary
benefits replacing employer paid coverage
- When Group LTD is not Employer
paid, portability and superior
coverage of IDI become increasingly attractive.


Source Employee Benefit Research Institute,
Bureau of Labor Statistics.
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CHARACTERISTICS OF BEST MARKETS FOR NEW ENTRANTS

• Good spread of occupations
• Low acquisition expenses
• Reduced motivation for anti-selection
• Limited competition
• Limited market penetration

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POTENTIAL MARKETS TO CONSIDER

• Transactional Markets
• - Mortgage IDI
• - DI rider with Life Insurance
• - Retirement plan completion
• Middle Income Market
• - Integrate DI within financial needs analysis
• - Simplified product design
• Voluntary Benefits
• - Executive carve-out or Group LTD supplement
• - Worksite marketing

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BENEFITS TO NEW ENTRANT

• Diversifies sources of revenue and profit
• Enhances recruiting and retention of Sales force
• Completes Financial Planning process
• Facilitates cross-selling of other products
• Good economics today-but some risk

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CHALLENGES FOR NEW ENTRANTS

• Limited experienced Risk Management resource
• - Claims
• - Underwriting
• - Actuarial
• Unique systems requirements
• - Integrated Administration
  and Claims
• - Full range of experience
  tracking and ad hoc reporting
• Achieving critical mass needed to justify
  investments

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CHALLENGES FOR IDI INDUSTRY

• Raise consumer awareness
• Todays Need ? Demand
• Broaden appeal by creating affordable product
  options
• Raise interest among producers
• - Simplify product design and
  features
• - Improve efficiency of
  underwriting
• - Enhance training and education
• Increase activity among carriers, fostering
  innovation and elevating service standards
• Create new markets
• Maintain profitability