1. CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario IND-3: Hot Concepts, How the Business is Sold

2. What is the impact on pricing & design? Steve Krupicz, FSA, FCIA AVP Special Case Markets, Manulife Financial

3. Agenda Brief history of concepts Summary of the concept sale Impact on pricing & design

4. History Late 1980’s & early 1990’s: –DOS-based illustration systems –Limited memory & processing power –“Concepts” were a custom set of illustration columns –Support = column definitions

5. History Mid-1990’s until today: –Windows, Internet, Adobe –Faster processing speed –Cheaper/faster memory & data transfer

6. History Mid-1990’s until today: –Concepts have become “packages” –Colour brochures and marketing packages –Trademarks, Branding –Administration and “How-To” guides for advisors and clients –Integrated PowerPoint presentations

7. Summary The concept has become the sale –Insurance is a key part of the value that is delivered by the concept –But clients increasingly see the whole package; not the components –More than just an insurance policy

8. Summary “I own a …” –Retirement plan –Back-to-back –R.C.A. –Etc. … not an insurance policy.

9. Impact on Pricing Could affect many assumptions: –The changes in sales techniques since the early 1980’s are already embedded in our inforce business –Has it or will it affect experience?

10. Impact on Pricing Could affect many assumptions: –Lapse in near term –Mortality –Lapse in long term –Premium persistency –Coverage persistency

11. Pricing: short term lapses Could mean lower short term lapse rates: –Life insurance can be viewed by some clients as a commodity –Estate and Retirement Plans are more long- term and stable –Is this already in industry short-term lapse experience?

12. Pricing: mortality Could mean lower mortality rates: –Concepts provide an incentive for positive selection. –More sales to affluent clients (better socio-economic factors) –Is this material? –How long before this materializes?

13. Pricing: long term lapses May mean escalating long term lapses –Concepts introduce more risks to clients –Greater risks may lead to higher lapse rates in the long term

14. Sample Case Personal Leveraged Life Insurance –Male 45 Nonsmoker –Deposits $25,000/year for 15 years into a UL policy (Level COI, Face + Fund) –Borrow from age 65 to augment retirement income until life expectancy (age 81)

15. Sample Case Interest Return Bank Loan Rate Annual Income Position at age 81 with income of $42,500/yr 5%7%$42,500Loan = 75% of CSV ($1,269,000) 5%8%$38,741Loan = 82% of CSV ($1,393,000) 4%7%$32,225Loan = 99% of CSV ($1,269,000)

16. Sample Case Interest Return Bank Loan Rate Annual Income 5%7%$42,500 4%6%$35,350 5%9%$35,270

17. Added risks to client –Financing spread risk –Investment return risk Asymmetric >>> more sensitive to lower policy yields than higher borrowing costs –More exposed to different tax risks –Will this increase long-term lapses?

18. Pricing: premium persistency Concepts generally rely on limited premium durations –Is this reflected in our pricing models? –Will clients stop premiums when planned? –Is this already appearing in industry experience? –Will this impact long-term lapses?

19. Pricing: coverage persistency Some concepts rely on a serial reduction in face amount –“Hugging the MTAR line” –Consider our personal leveraged life insurance example –Male; 45; nonsmoker; $25,000/year for 15 years into a UL policy; borrowing commences at age 65

20. Sample Case Interest Return Bank Loan Rate Annual Income 5%7%$42,500 if coverage is maintained throughout lifetime (at $600,000) 5%7%$44,690 if “hug MTAR line” after 15 th premium (naar = $250,000 at life expectancy)

21. Pricing: coverage persistency Planned serial lapsation: –Is this reflected in our pricing models? –Will clients follow this course as planned or maintain their coverage? –Is this already appearing in industry experience? –What will happen in the long-term?

22. Impact on design Greater focus on illustrating well –Competition measured less on COI rates & expenses –Adding complexity to our products

23. Design We support concepts through other business practices too: Financial Underwriting Limits –Annual premium = 4% of investible assets –Annual premium = 30% of after-tax income – plus Key Person Needs – plus Income Replacement Needs – plus Estate Conservation/Debt Repayment

24. Risks We need to price & reserve for the risks that these concepts add to our book of business –Lapses, etc. –Administrative risk –Reputational risk –Litigation risk

25. Questions & Discussion IND-3: Hot Concepts, How the Business is Sold