Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC Naples, Florida February

2  Note: The title of this session is directed at the future of product development, not the future of products.  The process of developing life insurance products and annuity products has certainly undergone changes in the last five to ten years.  Indeed, the process of product development is interwoven with the kinds of products that are being developed.  The last half of this presentation will focus on the industry product path over the next ten years.

3 NUMBER 1 The Product Development Cycle will Shorten State filing efficiencies Competitors are speeding up Field expectations Impatience Improved technology Must exceed, not just meet peer products Product A Product A–1

4 NUMBER 2 True Creativity will be Challenged by Multiple Factors Regulators/ regulation Systems is still generally the critical path Producers, despite outward appearances, want familiarity Insurers’ cultures are conditioned to avoid risk of spectacular failure “ME–TOO” “GAME CHANGER” “AN IMPROVEMENT ON SUCCESS

5 NUMBER 3 Pricing and Product will Give Way to Process Efficient market comparisons Common pricing parameters “More money than time” Pricing Harder to differentiate Too easy to copy Complexity of products Product Simplified issue Non-invasive underwriting E-apps and e-issue Process

6 NUMBER 4 Intensify Quest for Game Changers Higher Interest Rates Medical Breakthroughs Technology External Flatter Commissions Reasonable reserves and capital Management of Inforce Business Internal

7 NUMBER 5 A Full Product Suite is No Longer Necessary Carriers feeling that certain products do not play to strengths Variable annuities and no-lapse UL out of favor Many resources exist to compare competitiveness Buyers seeking pricing mistakes? Captive distribution more likely to demand full range of products Less price-sensitive within a range

8 NUMBER 6 Adoption of Marketing/Promotional Elements from Other Industries Multi-Phase Marketing Market Segmentation 2 for 1 First Month Free Loyalty Rewards On-Line Discounts Reward Points Cross Selling with Unrelated Business Partners

9 Increase in No-Lapse UL Prices, and More Exits from Market WHY? Regulatory Crack Down on AG38 Delays in PBR Low Interest Rates Re-trenchment of Pacesetting Carriers

10 Emergence of Indexed UL as a Swiss Army Universal Life Product WHY? Uses for accumulation, income, and protection Expansion of crediting formulas, indices Relative advantage in low interest rates Rise of limited pay, modest underwriting varietals

11 Mild Awakening Low interest rates Modest guarantee features For sophisticated buyers Still a shadow of former self Variable UL What About: Higher Prices Lack of reinsurance leverage Underwriting pullback Low interest/no PBR Mortality flattening 20 year Term: linchpin Term Continued Strength Low interest rates gives relative boost Strength of carriers writing Portfolio yields will support Par WL PLUS: Life Settlements Survivorship Guaranteed Issue

12 Market Value Adjusted Annuities (MVA) Highly correlated to yield curve Fear of negative MVAs ANNUITIES Which lines will struggle? Declared Fixed Rate Annuities (DRFA) New sales not biggest problem Inforce renewal guarantees are for some carriers Deferred Income Annuities (Fixed) Liquidity concerns No interest leverage

13 ANNUITIES Which lines will thrive? Indexed Annuities Continuing GLWB focus Indexed SPIAs S&P variations until interest rates rise Commission and bonus reduction – new channels Variable Annuities Carrier control of investments Litigation risk Deferred income VA with guarantees Pressure on fees SPIAs Growth despite low rates Current under-pricing Demographics undeniable, especially with captive producers Liquidity thrusts

Timothy C. Pfeifer, FSA, MAAA