1. CIA Annual Meeting LOOKING BACK…focused on the future

2. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuaries in Distribution Brigitte Breton Pierre Vincent Scott Sadler

3. CIA Annual Meeting Session 2104 – Actuaries in Distribution An Actuary in Distribution Brigitte Breton, FSA Insurance Salesman woman

4. CIA Annual Meeting Session 2104 – Actuaries in Distribution Topics Career History Motivations Field/Market Observations Actuarial Advantages/Disadvantages

5. CIA Annual Meeting Session 2104 – Actuaries in Distribution A little History… SchoolInsurance/ReinsuranceDistribution Product Development Pricing/Marketing 12 yrs 4 yrs

6. CIA Annual Meeting Session 2104 – Actuaries in Distribution Personal Motivations for Switching into Distribution 1. Situation is different for women. 2. Time Flexibility Working less hours 3. Move to “La Belle Province”

7. CIA Annual Meeting Session 2104 – Actuaries in Distribution Market Motivations for Switching into Distribution 1.Shrinking # of insurance companies (reduced number of employers for actuaries) 2.Increased Average Age of Distributors (above 50) 3.Increased need for knowledgeable insurance brokers

8. CIA Annual Meeting Session 2104 – Actuaries in Distribution My “Path”… 1.Team up with a high end MGA (General Agency): packaging specific/individualized insurance concepts Objective: “how” to sell 2.Acquire a block of business: Objective: “I” sell 3.All of the above and offer consulting services to MGAs: Objective: “We” sell

9. CIA Annual Meeting Session 2104 – Actuaries in Distribution Field Observations (Actuaries in Action) Actuaries add credibility to the selling process Good results with Accountants and Lawyers Need to define our area of expertise vs tax lawyers/accountants (some confusion exists) In front of clients, our technical knowledge may become a handicap we need to simplify

10. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuary’s Challenge Summarize product while fully disclose all material factors/assumptions KEEP IT SIMPLE! Need to be comfortable with the label “insurance salesman” woman

11. CIA Annual Meeting Session 2104 – Actuaries in Distribution Field Observations (Brokers in Action) Two types of sales process Go InGo In Present One Concept Fact Finding Sell or don’t sell Extensive Analysis Get Out Sell or don’t sell Get Out

12. CIA Annual Meeting Session 2104 – Actuaries in Distribution Results More Clients/Less Clients/ Less Time EachMore Time Each

13. CIA Annual Meeting Session 2104 – Actuaries in Distribution Two types of Sales Brokers Deal with 1 or Deal with 2 CompaniesMultiple companies Go for Price …but willing to switch model for a “good deal”…

14. CIA Annual Meeting Session 2104 – Actuaries in Distribution “Good Deal” = Market Efficiency Basic Sales process/behavior will remain unless a product premium or commission is exceptionally outside the “level of comfort” (Mispriced? Loss Leader?) MARKET EFFICIENCY

15. CIA Annual Meeting Session 2104 – Actuaries in Distribution Field Observation (MGA in Action) Typical MGA is in their 60s Built a good business over the years (good service fees) Lonely Business (does not know how the others operate/what is good profits) Carry big potential liability Faced with succession planning

16. CIA Annual Meeting Session 2104 – Actuaries in Distribution Sales Support at the MGA level Why an Actuary? Support the Brokers (in sales situations) Support at the technical level (advanced concepts/conversion programs) Support the MGA at the management level

17. CIA Annual Meeting Session 2104 – Actuaries in Distribution MGA ACTUARIAL SUPPORT Expense Management Risk Management (chargeback exposure) Overhead/Profitability Ratios Agent Behavioral Projections Agency Valuation (Succession Planning)

18. CIA Annual Meeting Session 2104 – Actuaries in Distribution CONCLUSIONS Actuaries in SalesYES Actuaries bringKnowledge Expertise Credibility

19. CIA Annual Meeting Session 2104 – Actuaries in Distribution CONCLUSIONS Actuary’s basic training weak in the following: Communication (summarize, listen to client, keep it simple, selling techniques) Small business corporate taxation and challenges faced by shareholder/owner

20. CIA Annual Meeting Session 2104 – Actuaries in Distribution CONCLUSION Actuaries in sales can mean: Personal Sales Assist other agents in complex cases Assist MGA at the management level (liability exposure, succession planning)

21. CIA Annual Meeting Session 2104 – Actuaries in Distribution So, do you want to join the dark side…..?

22. CIA Annual Meeting Session 2104 – Actuaries in Distribution From the Insurance Company’s Employee Perspective Pierre Vincent Transamerica Life Canada

23. CIA Annual Meeting Session 2104 – Actuaries in Distribution Looking at the past… 2 years - Life insurance valuation 3 years - Product development & pricing for US Group Pension 11 years – Life Product Development & Marketing 2 years – Sales – Life insurance, segregated funds & mutual funds

24. CIA Annual Meeting Session 2104 – Actuaries in Distribution Observation The independent distribution market is very efficient... If products have flaws, distributors and brokers will find them & market these flaws

25. CIA Annual Meeting Session 2104 – Actuaries in Distribution The Product Selection Process at the Distributor Level (MGA, Brokers) Companies launch products & promote strong features The Product Analysts at Distributors: Review & compare product with competition Prepare recommended list of products based on competitive pricing & features Take advantage of product flaws to propose best solution to brokers and clients

26. CIA Annual Meeting Session 2104 – Actuaries in Distribution Product Analysts at distributors will find quickly what the pricing actuaries should have been concerned about…

27. CIA Annual Meeting Session 2104 – Actuaries in Distribution Examples of market efficiency Insurance on broker’s own life Impact of legal rebating Decreases in amount of insurance without penalty to broker or client Competitive pricing by age group Long term GIC rates in UL Segregated fund guarantees Impact of NCPI Back-to-back type concepts

28. CIA Annual Meeting Session 2104 – Actuaries in Distribution Insurance on broker’s own life A recent case … before the company changed its commission rules $2,500,000 of universal life with YRT cost of insurance $7,100 in premiums over a two year period $20,347 in commission and bonus (tax free) Net gain of $13,247 Two years of “free insurance” Too good to be true…it was changed recently!

29. CIA Annual Meeting Session 2104 – Actuaries in Distribution Insurance on broker’s own life Buys $1,500,000 of universal life with YRT cost of insurance Pays $15,276 in premium Insurance in force for three years Receives $26,809 in commission and bonus (tax free) Net gain of $11,533 This is still available with quite a few insurance companies in Canada today... A good deal for the broker!

30. CIA Annual Meeting Session 2104 – Actuaries in Distribution Impact of rebating In Alberta, rebating of commission is legal The client buys $1,500,000 insurance policy with a premium of $15,276 The broker receives $26,809 in commission and bonuses The broker rebates $15,276 to the client Gross income of $11,533 to the broker The client gets two years of insurance for free

31. CIA Annual Meeting Session 2104 – Actuaries in Distribution Insurance amount decreases without penalties Same case we just reviewed $1,500,000 of insurance, $15,276 of premium, $26,809 of commission & bonus If insurance is decreased to $100,000 in the third year, the client gets 13 years of coverage for free… What is the profitability of paying commission on $1,500,000 when insurance will be reduced to $100,000 after 2 year?

32. CIA Annual Meeting Session 2104 – Actuaries in Distribution Insurance amount decreases without penalties Approach often used for tax free accumulation in life insurance Broker proposes to accumulate money tax free $250,000 is deposited in the policy $4,000,000 of insurance is required to accept this deposit After 2 years, the insurance is reduced to $2,000,000 After 4 years, the insurance is then reduced to $1,000,000 All the money accumulates on a tax deferred basis The commissions paid are 3-4 times what should have been paid Who is making the money?

33. CIA Annual Meeting Session 2104 – Actuaries in Distribution Competitive pricing by age group The product analysts and brokers use comparison software to determine the best price by age For simple products, production can shift significantly between companies Clients are usually well served by independent agents for this type of product Direct writers should price each age profitably

34. CIA Annual Meeting Session 2104 – Actuaries in Distribution Segregated fund guarantees Older clients with significantly reduced life expectancy can invest in segregated funds with 100% death guarantees Stock brokers suggest to these clients and their family to invest a few millions in these funds. The price of these guarantees does not reflect this type of behavior

35. CIA Annual Meeting Session 2104 – Actuaries in Distribution Long term GICs in Universal Life Clients invest in long term GICs to earn higher interest rate Cost of insurance is deducted from this GIC Broker can offer clients long term GIC rates on short term investments

36. CIA Annual Meeting Session 2104 – Actuaries in Distribution Impact of NCPI For clients above age 70, NCPI are different by companies If an individual borrows to invest and the bank requires life insurance => the lower of (NCPI, Insurance Premium) can be deducted from income tax Broker will look for the company with the highest NCPI to maximize the tax deductions If the policy is owned personally, brokers will look for the lowest NCPI to have the highest ACB possible

37. CIA Annual Meeting Session 2104 – Actuaries in Distribution Back-to-back concept Creative brokers have found that clients 70+ can be declined for insurance in Canada and accepted standard in the US These clients often qualify for rated life annuities in Canada These programs are sold to investors who get the equivalent of 15+% return before tax

38. CIA Annual Meeting Session 2104 – Actuaries in Distribution Other proofs of efficiency of distribution Lapses on T100 Lapses on Joint-last-to-die T100 policies Popularity of return of premium options on CI policies

39. CIA Annual Meeting Session 2104 – Actuaries in Distribution Conclusion With the increased popularity of independent distributors, products selection is becoming very efficient Pricing / valuation actuaries should evaluate risks carefully They should be concerned with rapid sales increase It can be very expensive to wait until the experience study Pricing actuaries should talk often to product analysts to understand how their products are sold Good understanding of key drivers in certain markets can be very profitable for insurance companies Actuaries in sales – should they take advantage of product flaws to maximize sales results?

40. CIA Annual Meeting Session 2104 – Actuaries in Distribution From a Distributor Perspective Scott Sadler PAL Insurance Services Limited

41. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuaries have gone over to the dark side. Find out the real dirt on the sales process. Are agents worth all that cost?

42. CIA Annual Meeting Session 2104 – Actuaries in Distribution The Sales Process at Pal Insurance Fact Find / Needs Analysis Integration with existing structures Strategy Inventory Program architecture Implementation Servicing The Sales Process at Pal Insurance Fact Find / Needs Analysis Integration with existing structures Strategy Inventory Program architecture Implementation Servicing

43. CIA Annual Meeting Session 2104 – Actuaries in Distribution Fact Find Client details (DoB, smoking status, etc.) Asset ownership Corporate structure Tax liability Limited actuarial involvement Fact Find Client details (DoB, smoking status, etc.) Asset ownership Corporate structure Tax liability Limited actuarial involvement

44. CIA Annual Meeting Session 2104 – Actuaries in Distribution Integration with existing structures Working with the client and their “other” advisors (tax, legal, etc.) Understand what planning has already been done Building a consensus for the role life insurance can play Educating the decision makers as to the types of life insurance in the market Actuaries enhance the credibility of the process Integration with existing structures Working with the client and their “other” advisors (tax, legal, etc.) Understand what planning has already been done Building a consensus for the role life insurance can play Educating the decision makers as to the types of life insurance in the market Actuaries enhance the credibility of the process

45. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial Issues Participants focus on their area of expertise Educating the decision makers in language they understand Advanced tax planning teams established by some insurance companies Actuarial Issues Participants focus on their area of expertise Educating the decision makers in language they understand Advanced tax planning teams established by some insurance companies

46. CIA Annual Meeting Session 2104 – Actuaries in Distribution Strategy inventory Insurance is one solution, there are others Insurance is not “free” Work with other advisors to document cost / benefit analysis of the options Strategy inventory Insurance is one solution, there are others Insurance is not “free” Work with other advisors to document cost / benefit analysis of the options

47. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial Issues Insurance is not for traditional income replacement purposes Financial underwriting as well as medical Ownership / beneficiary designations Does historical lapse experience apply? Whose pricing mortality do you use, direct writers or reinsurers? Actuarial Issues Insurance is not for traditional income replacement purposes Financial underwriting as well as medical Ownership / beneficiary designations Does historical lapse experience apply? Whose pricing mortality do you use, direct writers or reinsurers?

48. CIA Annual Meeting Session 2104 – Actuaries in Distribution Strategy Inventory - an Example MNS 45 standard risk $25M capital gain on death $11.25M tax bill (45% tax rate) Options to pay the tax include: Sinking fund to accumulate needed $ Borrow funds at death Sell part of the company Insurance to pay tax Charitable gift to eliminate tax Strategy Inventory - an Example MNS 45 standard risk $25M capital gain on death $11.25M tax bill (45% tax rate) Options to pay the tax include: Sinking fund to accumulate needed $ Borrow funds at death Sell part of the company Insurance to pay tax Charitable gift to eliminate tax

49. CIA Annual Meeting Session 2104 – Actuaries in Distribution Sinking Fund Deposits for 10 years 5% pre-tax rate of return 45% annual tax on investment earnings Target accumulation at attained age 85 Annual deposit = $428K Assumes Death at life expectancy Sinking Fund Deposits for 10 years 5% pre-tax rate of return 45% annual tax on investment earnings Target accumulation at attained age 85 Annual deposit = $428K Assumes Death at life expectancy

50. CIA Annual Meeting Session 2104 – Actuaries in Distribution Borrow funds at death Amortize over 10 years 6% interest rate Annual Payment = $1.4M Assumes Company is able to borrow money when needed Company is able to repay money when it is borrowed Borrow funds at death Amortize over 10 years 6% interest rate Annual Payment = $1.4M Assumes Company is able to borrow money when needed Company is able to repay money when it is borrowed

51. CIA Annual Meeting Session 2104 – Actuaries in Distribution Sell part of the company Cost = $11.25M Assumes There is a market for the stock Share price can withstand the sell-off Sell part of the company Cost = $11.25M Assumes There is a market for the stock Share price can withstand the sell-off

52. CIA Annual Meeting Session 2104 – Actuaries in Distribution Life Insurance Solution Choices include Advisor Company Product Assumes Applicant can pass underwriting Life Insurance Solution Choices include Advisor Company Product Assumes Applicant can pass underwriting

53. CIA Annual Meeting Session 2104 – Actuaries in Distribution Plan Design How much coverage? $11.25M to pay the tax $25M to eliminate the tax How long do they need coverage? How will they pay for coverage? Plan Design How much coverage? $11.25M to pay the tax $25M to eliminate the tax How long do they need coverage? How will they pay for coverage?

54. CIA Annual Meeting Session 2104 – Actuaries in Distribution Plan Design 10 Year Term Insurance Lower initial rates Renewal features vary by company Conversion options vary by company No CSV, no exit strategy Plan Design 10 Year Term Insurance Lower initial rates Renewal features vary by company Conversion options vary by company No CSV, no exit strategy

55. CIA Annual Meeting Session 2104 – Actuaries in Distribution Company ACompany BCompany CCompany D Age 45$14,587$14,665$15,002$15,140 Age 55$92,325$74,852$76,765$87,702 Age 65$232,500$212,440$217,840$254,427 Age 75$612,040$627,677$623,315 Convertible to70N/A65 Renewable to7585 80 Total payment$3.4M$9.1M$9.3M$6.6M

56. CIA Annual Meeting Session 2104 – Actuaries in Distribution Plan Design Permanent Insurance Term to 100 Level premium Cash Value features vary by company Minimum Funded Level COI UL Level premium Ability to pre-fund future charges Plan Design Permanent Insurance Term to 100 Level premium Cash Value features vary by company Minimum Funded Level COI UL Level premium Ability to pre-fund future charges

57. CIA Annual Meeting Session 2104 – Actuaries in Distribution Permanent Insurance Options Term to 100 $77K annual premium Minimum Funded Level COI UL $85K minimum premium Same Company Is the ability to increase funding at some future time “worth” $8K annually? Permanent Insurance Options Term to 100 $77K annual premium Minimum Funded Level COI UL $85K minimum premium Same Company Is the ability to increase funding at some future time “worth” $8K annually?

58. CIA Annual Meeting Session 2104 – Actuaries in Distribution Plan Design Permanent Insurance, with CSV Maximum Funded UL $446K premium for 10 years “self-funding” thereafter 3.5% interest assumption Participating Life 20 Pay, high early CSV plan design $446K premium for 10 years “Self-funding” thereafter Current dividend scale Plan Design Permanent Insurance, with CSV Maximum Funded UL $446K premium for 10 years “self-funding” thereafter 3.5% interest assumption Participating Life 20 Pay, high early CSV plan design $446K premium for 10 years “Self-funding” thereafter Current dividend scale

59. CIA Annual Meeting Session 2104 – Actuaries in Distribution ULPar Death Benefit Age 55 Age 65 Age 75 Age 85 $ 16.7M $ 17.2M $ 20.0M $ 25.0M $ 17.1M $ 14.0M $ 20.3M $ 28.5M Cash Value Age 55 Age 65 Age 75 Age 85 $ 4.4M $ 5.9M $ 8.8M $ 13.7M $ 4.5M $ 8.3M $ 14.2M $ 23.1M

60. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial issues Investment options on UL product Guaranteed minimum GIA rates eg: 90% GoC rate - MER Reliability of bonus interest feature Sustainability of dividend scale Actuarial issues Investment options on UL product Guaranteed minimum GIA rates eg: 90% GoC rate - MER Reliability of bonus interest feature Sustainability of dividend scale

61. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial issues Guaranteed increases tied to tax liability Return of premium feature Reinsurance capacity Initial Ultimate Are there embedded options that are valuable to the client? Are there features that add cost that are of little value to the client? Actuarial issues Guaranteed increases tied to tax liability Return of premium feature Reinsurance capacity Initial Ultimate Are there embedded options that are valuable to the client? Are there features that add cost that are of little value to the client?

62. CIA Annual Meeting Session 2104 – Actuaries in Distribution Implementation Review of facts Summary of Planning Process Summary of existing structures Review of Cost / benefit analysis Ask for the cheque Implementation Review of facts Summary of Planning Process Summary of existing structures Review of Cost / benefit analysis Ask for the cheque

63. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial issues “Not Taken” rates increase with travel time from fact find to offer Lowest price doesn’t always “win” KISS principle Actuarial issues “Not Taken” rates increase with travel time from fact find to offer Lowest price doesn’t always “win” KISS principle

64. CIA Annual Meeting Session 2104 – Actuaries in Distribution Servicing – term plans Update of facts Market survey Conversion opportunity Servicing – term plans Update of facts Market survey Conversion opportunity

65. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial Issues Anti-selective lapses When does your term product break- even? Does conversion rate vary by face amount? Are conversion costs accurately reflected in pricing? Actuarial Issues Anti-selective lapses When does your term product break- even? Does conversion rate vary by face amount? Are conversion costs accurately reflected in pricing?

66. CIA Annual Meeting Session 2104 – Actuaries in Distribution Servicing – permanent plans Update of facts Update of policy values vs illustration Variance analysis Review of asset allocation for UL plans Servicing – permanent plans Update of facts Update of policy values vs illustration Variance analysis Review of asset allocation for UL plans

67. CIA Annual Meeting Session 2104 – Actuaries in Distribution Actuarial Issues Mortality, lapse rates vary with face amount Does source of earnings analysis reflect policy size? Actuarial Issues Mortality, lapse rates vary with face amount Does source of earnings analysis reflect policy size?

68. CIA Annual Meeting Session 2104 – Actuaries in Distribution The Sales Process at Pal Insurance Fact Find / Needs Analysis Integration with existing structures Strategy Inventory Program architecture Implementation Servicing The Sales Process at Pal Insurance Fact Find / Needs Analysis Integration with existing structures Strategy Inventory Program architecture Implementation Servicing

69. CIA Annual Meeting LOOKING BACK…focused on the future