1. 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. Preferred Products - 10 Years Later A Direct Writer’s Perspective John Dark June 29 th, 2007 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

3. Page 3 Term R Us  Co-operator’s Life –Markets exclusively through Co-operators Group agents –450ish agencies, 875 licensed producers –65% of annual production (by #) is term –60% below $250,000 –Most competition is between the agents’ ears –Term is inventory for UL conversions 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

4. Page 4 Went preferred in 1998  We dragged our feet anticipating problems  Went when we had no choice (after Manu went public)  Large internal project  Needed NBS as much as actuarial department  Heavy reliance on reinsurance community  Term first, UL 2 years later 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

5. Page 5 What’s gone right?  Sales have tripled since going preferred –Many factors including expanding field force moving to a larger amount market –Focus on a competitive market position has increased field’s confidence leading to more sales –Universal Life has scared many of them 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

6. Page 6 What’s gone right?  Insisted on residual class quotes from day 1 – very few problems  No Business decisions  Preferred term prepared them for CI  Bundled Term, CI, DI product pitched at Mortgage market has proven very effective  Maintained at least acceptable profitability through declining market 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

7. Page 7 What’s gone right – ctd.?  Underwriting performance has been good  Satisfactory reinsurance audits  Agent satisfaction with term product is high 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

8. Page 8 What’s gone wrong?  Initial profitability not retained  High agent angst over underwriting delays  Increased volume has caused growing pains – rebuilt NBS department twice  Preferred classes make administrators’ lives hell  APS usage increasing drastically at the same time as the time service declines 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

9. Page 9 Administrators’ issues  Conversions –Old term is not preferred; what happens on conversion: Different reinsurers Different ceding percentages  Splits/Changes –Smoker/non smoker changes –Reductions in face –Splitting Joint policies 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

10. Page 10 Administrators’ issues - ctd  Reinsurance –90% Quota Share involved reinsurers more –Increased audits and demands for administration capacity from reinsurers –Matching reinsurers, treaty classes, ceding percentages etc. –Need to make new treaties friendly to old business 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

11. Page 11 Actuarial issues  Changing plans/rates more complicated now  Need to work through in force issues as well as future sales  Hard to switch number and criteria for classes  Interplan issues – UL vs Term vs CI  Moving initial preferred level up to 250,000 created a million questions 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

12. Page 12 Actuarial Issues  Heart Attack Renewals –Key to profitability –Persistency –Need to compensate on renewals? –Agents have 8 th year diarized –Need to get at least a few through the renewal –Renewals just starting – no trend –Anti-selection? –T25/20 and T75 are selling well probably due to fear of renewals 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

13. Page 13 Actuarial Issues – ctd.  High dependency on reinsurers  Proliferation of quotation services makes it more an more commodity like  Some replacement activity proved abusive – advantage of career shop – we shut it down  Reinsurance causing negative reserve issues – not the worst problem to have but contributes to volatility 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

14. Page 14 Actuarial Issues – ctd.  We are used to “creamers” in the P&C market – e.g. Grey Power this extends the trend  P&C products re-ratable annually  Life is a 30 – 40 year commitment  Many factors are “snapshot” and subject to change – our price isn’t  True for all life products but exacerbated with preferred underwriting 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

15. Page 15 Marketing Issues  How to explain in a few words  Started as a differentiator now market standard  Complicates a product which already has a lot of moving parts  Market demand increasing for simplified system but little price relief 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

16. Page 16 Would we do it again?  Went when we felt we had no choice but not sure now if that was true.  Went to too complicated a structure  7 classes in all : 4 non smoker 1 smoker masquerading as non-smoker 2 smoker  Did both Term and UL 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

17. Page 17 Would we do it again?  Yes as an answer to a changing market  No if we had the choice, more complicated than needed 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007

18. Page 18 What do we see coming  Preferred is here to stay – at least at larger amounts 2007 Annual Meeting Assemblée annuelle 2007 2007 Annual Meeting Assemblée annuelle 2007