1. Implications of Underwriting Decisions TWUC April 4, 2011 Doug Ingle, FALU, FLMI Vice President Underwriting Research

2. Underwriting Decision Implications The information provided in this presentation does in no way whatsoever constitute legal, accounting, tax or other professional advice. While Hannover Rückversicherung AG has endeavoured to include in this presentation information it believes to be reliable, complete and up-to-date, the company does not make any representation or warranty, express or implied, as to the accuracy, completeness or updated status of such information. Therefore, in no case whatsoever will Hannover Rückversicherung AG and its affiliate companies be liable to anyone for any decision made or action taken in conjunction with the information in this presentation or for any related damages. © Hannover Rückversicherung AG. All rights reserved. Hannover Re is the registered service mark of Hannover Rückversicherung AG. Disclaimer 2

3. We Look at the Trees Management the Forest  Underwriting is about reviewing individual cases and classifying risk  Your results produce global strategy and underwriting philosophy for your company  Each Company’s philosophy is unique 3Underwriting Decision Implications 3

4. Risk Classification Answer  There really is no one “Right” answer just as there is no one set of “Preferred” rules for the whole industry  Think About it: For each of our Companies our Best Preferred Class is Based on Our Own Underwriting Rules Unique to Our Company Our Competitor’s Best Preferred Class Has Different Rules Safe to Say: THERE IS NO ONE RIGHT ANSWER FOR WHAT A PREFERRED RISK IS  Then, How can we all succeed?  Underwriting is the process of “Aligning an Underwriting Philosophy with an Actuarial Pricing Philosophy” –When in sync, your company can be successful 4Underwriting Decision Implications 4

5. Underwriting is About the “Rare”  Most of the time We Don’t Find Anything!  Agent: Do you really need that ________(fill in the blank: blood, urine, APS, EKG) chances are you won’t find anything anyway! 5Underwriting Decision Implications 5

6. Premium 101  Premium is about the “Rare”  1,000 people all have $1,000 life insurance policies  1 out of 1,000 is expected to die next year  Question: How much money needs to be collected from each person to cover the payout? (Payout=$1,000) $1.00  Question: How many are expected to live? 999 6Underwriting Decision Implications 6

7. Premium 101  Prior Slide: 1 out of 1,000 expected to die “Double the mortality” means 2 out of 1,000 expected to die –In our world that’s 100 debits or 200% of standard  So, What Happens When you Double the Mortality?  Question: How much money needs to be collected from each person to cover the payout? (Payout = $2,000) $2.00  Question: How many are expected to live? 998 Underwriting Decision Implications 7

8. Underwriting: Rare is Important  If you don’t buy in to the philosophy that rare is important then……  To understand what we are entrusted to do Let’s assume no underwriting How many people are found by the underwriting process and avoided death claims 8Underwriting Decision Implications 8

9. Compare  Death Rate in the US Population 1999-2001 Decennial Life Tables 1  2001 VBT (Valuation Basic Table) 2 SOA Life Insurance Industry Table 9 1 Arias E, Curtin LR, Wei R, Anderson RN. United States decennial life tables for 1999–2001, United States life tables. National vital statistics reports; vol 57 no 1. Hyattsville, MD: National Center for Health Statistics. 2008. 2 http://www.soa.org/research/individual-life/final-report-life-insurance-valuation.aspx Underwriting Decision Implications 9

10. Comparison of Death Rates 10 3 The VBT 2001 displays duration 1 Male Composite ANB 4 1999-2001 Decennial Table 2 Males Underwriting Decision Implications 10

11. Deaths and Premium  Age 25 expect 0.39 deaths per 1,000 applicants  How much money need to collect from 1,000 people to pay for death? 39 ¢  How much would each person have to pay if there was no underwriting?* $1.33 11 *Assumes no antiselection and all must purchase insurance Underwriting Decision Implications 11

12. Convert that to a Rating (Age 25) 12  US Population = 1.33  Insured Population = 0.39 In other words, that would be like rating all 1,000 applicants ~ +250 (Table 10) Underwriting Decision Implications 12

13. Underwriting  Out of 1,000 applicants how much mortality is identified by the underwriting process? Death rate from 1.33 to 0.39 1.33 – 0.39 = 0.94 (less than one person per thousand) 13Underwriting Decision Implications 13

14. Survival Comparison  How many expected to survive one year in underwritten vs non-underwritten population? –If 0.39 per thousand die, that means 999.61 live –If 1.33 per thousand die, that means 998.67 live  The survival rate for the US population compared to the survival rate of the insured population is  Or a 0.09% lower survival rate 14Underwriting Decision Implications 14

15. What do the 2 Survival Curves Look Like? Underwriting Decision Implications 15 Note the Y-axis After 10 years out of 1,000 people; 994 of SOA people survive 986 of US Population survive

16. What’s Expected?  Have you ever heard this before? Most 65 year olds have high blood pressure A lot of 70 year olds have a history of a heart attack So, why would you rate what is normal for that age?  What percent of Applicants do we expect to issue without a Rating?  Does that vary by Age? Underwriting Decision Implications 16

17. Compare insured lives mortality to US Population Mortality  What percent of US population is insured lives mortality?  In other words: (VBT mortality) / (US Population mortality) –0.39 / 1.33 = 29% –0.35 / 1.80 = 19%  For mortality to be that much lower the insured lives health status cannot mirror the US general population Underwriting Decision Implications 17

18. Risk Class Distribution by Age 5 Underwriting Decision Implications 18 5 Woodman, Journal Ins Med1990:22(2);98-101

19. Why do we Get Requirements?  Requirements are used to find the rare  A hit (finding impairment) is just the starting point  Requirement value is based on “Magnitude”  Small hit –From Super Preferred to Preferred  Big hit –From Super Preferred to Decline 19Underwriting Decision Implications 19

20. MAGNITUDE Magnitude = Debits 20Underwriting Decision Implications 20

21. Question  Underwriting Budget for Requirements Scrutinized by many Easy to “see the money”  The rest of the equation pertains to the mortality impact the requirement has Often not studied Nor well understood 21Underwriting Decision Implications 21

22. The One Minute Requirement Study  The Value of Requirement ‘X’  Take a random sample of applicants (100) 6  Requirement has value when it is a “surprise finding” Surprise finding = Hit  Magnitude is based on number of debits found More debits = More value  For many companies 1 debit = 1% increase in mortality 22Underwriting Decision Implications 22 6 Mast,J Cost-Benefit Analysis of Underwriting Requirements Intermediate Non-Medical Life Insurance Underwriting ALU 202 1 st edition. 2006

23. The One Minute Requirement Study  Add up all the surprise debits found in the sample For example: That’s 6 “hits” and 800 debits Total number of people in sample = 100 Total debits/total number in study = 800/100 On average find 8 debits per application 23Underwriting Decision Implications 23

24. One Minute Requirement Study (Results)  If 1 debit = 1% increase in mortality then 8 debits means a 8% increase in mortality if that requirement no longer obtained  Done!  Caveats: Assumes –No Antiselection –The intentional focus on mortality side of the equation alone 24Underwriting Decision Implications 24

25. What’s That Mean?  Use Financial Underwriting Background to answer that question  Common Profit Margins for Corporations 5 – 10%  If Mortality increases by 8% erodes profits by that percent on the mortality component of the premium 25Underwriting Decision Implications 25

26. Take Homes  Not many people are found by underwriting especially at the younger ages  Yet the few deaths avoided have a major impact on what the remaining individuals would need to pay  Underwriting is about finding the “rare” 26Underwriting Decision Implications 26

27. Thank You