Life Essay 2009

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presenTed by The

Society of ActuArieS

Visions For The Future


Of The Life Insurance Sector

Copyright 2009 by the Society of Actuaries.

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Introduction
On behalf of the Financial reporting, product development and reinsurance sections of the society of Actuaries, we are pleased to present the top 10 essays selected from those submitted by members of the society of Actuaries in response to: Life insurance 2020 foresight A call for essays. The call was open to all members of the society of Actuaries as well as affiliate members of the sponsoring sections. The current economic crisis that dominated the news during 2008 and 2009, the expansion of technology, changing accounting standards, access to capital and changing demographics are some of the challenges to the life insurance sector. Thoughtful visions of the future provide a catalyst for dialogues that can shape what should be and what could be the future of the life insurance sector. The sponsoring sections initiated this call to stimulate and expand those dialogues. each author submitted a short essay in response to the following questions. What is your vision of a financially sound, operationally efficient, growing and profitable company operating in the life insurance sector in the year 2020? What are the critical issues that this company must address between now and 2020?

The authors provided stimulating and thought-provoking insights into the future state of the life insurance industry. There are many challenges and opportunities that face the life insurance sector. While there is no one perfect vision of the future, actuaries can provide insightful views that meet the challenges and maximize the opportunities. Their deep understanding of the complexities and the risks uniquely enables them to envision the future. Monetary awards were presented to four authors for their outstanding papers: Ken beckman, Risk Management For The Individual: The Key To Life Insurer Success In 2020 And Beyond Chiu-Cheng Chang, Adjustable Biological-Age Pricing For The Global Market sharon Giffen, Sustain: An Industry Speech About Success As A Niche Player In 2020 Maria Thomson, Industry Will Experience Zippy Growth Through Zip Processing We hope you will enjoy reading the essays and taking time to reflect on your vision of a financially sound, operationally efficient, growing and profitable company operating in the life insurance sector in the year 2020. We believe the thought leadership exhibited in this collection of essays will motivate you to be involved in the management of your company and the regulation of the life insurance sector to create solutions on the way to reaching your vision. sincerely, Steven Malerich, fSA, MAAA, Chair
FInAnCIAL repOrTInG seCTIOn, sOCIeTy OF ACTUArIes

John Currier, fSA, MAAA, Chair


prOdUCT deVeLOpMenT seCTIOn, sOCIeTy OF ACTUArIes

ronald Klein, fSA, MAAA, Chair


reInsUrAnCe seCTIOn, sOCIeTy OF ACTUArIes

note: The thoughts, insights and opinions shared in these essays are not necessarily representative of the views of the Society of Actuaries or the authors employers.
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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Insurance Companies In 2020


by John Aprill
A financially sound, operationally efficient, growing and profitable company operating in the insurance sector in 2020 must have the following attributes: through the later stages of life. This will have an impact on both the insurance risks and equity investments. Investments will change. Equity product pricing will de-

It must KNOW its customers and its production system. It must KNOW its risks and how it will address its risks BEFORE they actually occur. It must be nimble. It must grow real profits from the current products it sells. And most importantly, it must be able to integrate each of these cohesively.

cline. The normal price to earnings multiples will decline. Why pay for 10 years worth of future earnings if we can no longer predict how long an organization will remain in business? This will reduce the value of stocks. To increase portfolio yield, there will be a need for speculation, which will encourage assets moving into small- and medium-sized companies. Instead of a large group of people saving for retirement,

the assets will be cashed out. This will put pressure on asset purchasers of assets.

prices, as the number of retirees increases relative to the The Company Of 2020 Knowledge Of Customer This has several dimensions. It must deal with todays known risks and tomorrows unknown risks. Scenario testing will only be a starting point; the real test must be in the extremes. The action plan must also be specific for the next quarter and next several years. There will be no forgiveness falls apart in the next reporting period. Insurance risks will change. There will be continuing

discussion of the quality of life and whether death is an

appropriate alternative to a poor quality of life. This has come to the forefront in recent health care discussionsis a hospice more appropriate than continuing medical care? will be determined in part by each individual. We already see signs of this occurringthe growth of hospices, regrettably, the high cost of a final illness.

Death may no longer be determined by medical doctors. It

for a solution that addresses a problem in one period and The company cannot guess what its customers want

individuals taking charge of their medical care and, This might mean that the mortality experience for the

nor hope that the products it produces will be welcomed in the marketplace; it must know its customers and their needs and it must create products that its customer base will

older ages may be worse than expected and pricing will

a product batch of onea broker or agent selling one contract to one individual. This is not the generic term product nor is it the asset.

purchase. The insurance company must be able to produce

need to reflect it. Before it does, the impact will be a loss to life insurers and health insurers (especially Medicare), a gain to retirement and social security. Knowledge Of Risks This group may not live as long as originally priced. Many pricing models assume mortality improvement over time. But what happens if the mores of the population change to remove the social stigma of an earlier death than medicine adjust to this change?

mores. For examples, baby boomers are about to retire

Also, it must be totally attuned to the changing social

and will create the largest group that will CHANGE the way we retire and die. Over the next 10 years, there will be profound changes to the way retirement and life choices are considered. The main thrust is the baby boomers moving

would allow? And, how quickly would our pricing models

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Insurance Companies In 2020 by John Aprill

accelerate. Why? Because there is such fear concerning amounts of hedging, even at the individual level. As individuals move to a specific solution, the mass exodus risk

The nature of financial shocks and their frequency will

profits. Only with a thorough knowledge of the customer base and the risks insured is this possible. An Integrated Company Each of these items is a formula for success if applied at the same time, and yet a formula for failure if applied selectively. It is possible to know your customers intimately and deliver products that meet their every need, but if the company cannot be successful.

the current financial fiasco, there will be a need for greater

may not be considered. So, if everyone heads for the exit doors at the same time as occurred in portfolio insurance, Also, individuals do not always act in directions that may apparent reason. the hedging will fail and result in a market downturn. be rational, which may cause market anomalies for little

they are not profitable in the near term and the long term,

A Nimble Company It must be able to move quickly from one product to another or one distribution system to another. It must contemplate an exit strategy and be able to execute it. It cannot commit time. It cannot have the huge costs to exit that exist today.

Critical Issues To Be Addressed The critical issues that must be faced are the workforce, technology and legacy product administration. Workforce The workforce will continue to be an issue. There will be an increasing need for actuaries, but it takes time to produce new actuaries. Baby boomer actuaries will retire, reducing

to a strategy that may become obsolete in a short period of In the present economy, we have learned that

organizations that become too large are not good for the economy because if there is a failure, the impact is huge.

the workforce at the same time that the need for actuaries will increase. This may increase actuarial salaries over the short term, but it will also increase the workload for actuaries. This is a good news side to the workforce equation.

This philosophy will be carried out through capital restrictions and no doubt through the anti-trust policy preventing new large institutions by disapproving them. As

a result, we should expect to see many more small- to midsized organizations. These organizations will be able to react quickly to changes in the environment and not be subject to legacy issues discussed below. Profits From Products Currently Sold This means the profits must come from the products that are sold today, rather than the products that were sold generations ago when interest rates were low, mortality was decreasing, and expenses were decreasing products. This is the often ignored revenue portion of the balance sheet. To meet profit goals today, costs are cut; to meet profit goals in the future, the profits must flow from the products sold

Actuarial work and evaluation of risk exposures have

become extremely sophisticated and require thousands of iterations. The time frame for reporting has progressively some point the human element is required to explain what has taken place and what actions are needed to resolve them. This is the perfect job for experienced retired actuaries. Technology Technology has moved forward to make production faster and has also made testing feasible, but it has not addressed a fundamental issueinstant results are not always unshortened. Systems can only take the process so far. At

There will be a need for experienced actuaries to work.

today. And the increasing revenue stream means increasing

derstood and may not be actionable. The development of

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Insurance Companies In 2020 by John Aprill

artificial intelligence systems is needed to assist the human component, but these systems are not there yet and will companies will be spending a lot of research dollars to achieve this goal. not be fully functional over the next 10 years. Insurance

of product development that must be administered even system or valuation system must be updated, every product

if only one product is sold. Whenever an administrative must be moved. This will benefit newer companies without with generations of legacy products.

legacy baggage over companies that have been in business

Legacy Product Administration Legacy product administration will become even more burdensome than it is today. Imagine another 10 years

John Aprill, FSA, MAAA, J.D., CFA, CHFC, is an independent consultant in Boston, Massachusetts. He can be contacted at [email protected].

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Keeping The Promise


by Dennis R. Barry
In order to imagine the outline of a successful U.S. life insurance company in the year 2020, its important to think for a minute about what the world in which that company institutions we needed to look more like them and less like refocus both our customers and our companies on the value of meaningful long-term guarantees. focuses as the business develops:

our traditional selves. The years 2020 and beyond should

operates will be. There are a lot of possibilities for nearly every aspect of life in the United States, but one demographic fact above all others has potential to dominate the landscape. In 2020, almost half of the baby boomers will be on Medicare and nearly all will have reached an age

A successful guarantee business requires three distinct Choosing which of lifes risks to insure and how to do so,

at which retirement is either a current reality or a rapidly are ominous:

Managing the assets and liabilities until the guarantee comes due, and Making good on the promise. The first of these focuses is essentially the marketing

approaching one. The implications are many, and some Pension plans, which for many, many years have been

major buyers of stocks and other securities in this investments will be sold rather than bought. The effect on the securities markets may be profound.

function. Insurance companies choose which business(es) to be in, find adequate capital to fund the business, and then develop and market products. Marketability will depend

country, will be in or near liquidation status where

on finding a delivery system that can sell the promise at a price that is both attractive to the customer and sustainable for the insurer. Theres nothing magic here. This is what

Governments which have the responsibility of paying for the promises made in earlier, less demographically challenging times, will be cash-strapped, more so daunting problems relating to pensions and retiree health benefits for their workers, as will the federal the liabilities.

insurance companies have done for well over 100 years.

than today. State and local governments will face

But in the past few years, guarantees have lost ground to the sexier market-based financial products that, because of tees seem stodgy and unnecessary. Why go for a low-return their (sometimes) spectacular performances, made guaranguaranteed product when you can buy a market-value product that will greatly out-perform it over the long haul? Of course the answer is that in the short haul, which is where

government but with vastly differing means of financing The Social Security system in total, and Medicare specifically, will be facing severe financial problems.

we actually live, things arent always quite so rosy, but except in times of pronounced volatility people tend to forget that fact. The demographics of the third decade of this century look likely to have a negative effect on stability in a lot of things.

which weve operated for a long time. In that setting, with

All these issues will threaten the social contract under

so much of life in flux for all generations, and with all of society entering rougher and more uncharted waters each year, the life insurance company that will be successful is Making and keeping promises will separate the successes Insurance has always been the vehicle that promised a one that can market, manage and deliver on guarantees. from those that dont last. This position is nothing new. result to its customers and delivered it. But along the way,

with difficulties relating to risk management. There are obvious financial issues. How best to fund a particular promisethe old fashioned way, via conservative invest-

The second focus, managing the promise, is fraught

we thought that in order to compete with other financial

tion of capital, or via hedging and other financial strategies

ments that over time bring the desired yield and preserva-

that rely in part for their success on the financial stability

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Keeping The Promise by Dennis R. Barry

of a variety of counterparties? Or perhaps it is a mix of the

two, or an approach that has not yet been used for these

today? Being in the guarantee business means that no matter on the promise when the time comes, even if the promise

types of products. The financial approach to products ofcomplex, difficult and very important. Beyond the financial aspects of guaranteed products, how sure are we that the promise itself wont change over time? For life insurance,

what happens, for better or worse, the insurer must deliver has changed in the meantime. Making that come true will require that premiums, reserves and insurance company capital levels be realistically conservative and not just optimistically adequate. The guarantor is going to have to be able to survive the thousand-year rain, even if it occurs twice in five years.

fering meaningful guarantees will require decisions that are

it used to be that dead was dead. Now medical technolalready have come to the end of life. A simple promise to

ogy can keep alive someone who a few years ago would pay at death has become somewhat fuzzy. Other forms of

guarantees have similar risks. A court decision that changes care policy could wreak havoc on that line of business over-

from other financial institutions. In the insurance world,

Guarantees are what set insurance companies apart

the meaning of a well-established provision of a long-term night. The same goes for critical illness policies, disability and many others. Only payout annuities seem somewhat secure, but as mentioned above, medical technology can affect longevity, in both directions. The bottom line is that, except for the very simplest forms of insurance, it isnt certain that the promise assumed at the beginning of an insurance policy is what will eventually have to be delivered.

however, life insurance companies are unique in the length of time over which their guarantees may apply. A life insurance policy, issued on a newborn in 2020, could well

be in force in 2120, and if there are settlement options available, it could still be delivering on a guarantee many years into the 22nd century. That uniqueness offers insurers an opportunity to fill a product/marketing gap that no one else can fill, but it also requires the discipline to recognize that this different financial role carries with it different management responsibilities. Selling guarantees must ultimately be secondary to delivering on guarantees.

promise. The simple you die, we pay premise of a life insurance policy reflects the ultimate delivery on this contract. Along the way, a lot of things may have happened

Which brings us to the final focus: delivering on the

other financial institutions in the capital markets, but doing so cannot be at the cost of abandoning their unique abil-

Life insurance companies may have to compete with

to both parties to the deal but at the death of the insured, the insurer must pay. For other forms of insurance, and their guarantees, things are not so simple. As noted above, a court decision can undo many years of practice in a risks inherent in a long-term care policy where any or all particular line of business. Think of the potential legal of the activities of daily living can be redefined by a court radically change what long-term care means. Consider the effects of the current economy on disability coverages.

ity to offer the guarantees that no one else can. Guaranteed other financial products, but it may take longer for them not lend themselves to a management style that focuses on quarterly earnings. It isnt realistic, and it isnt prudent. If

products can be priced for returns that are competitive with to bear fruit. Guarantees that last 25 or 50 or 100 years do

at any time or where changes in methods of treatment can

insurers take advantage of their unique market, and manage their products and businesses appropriately, the rewards will be there, eventually, for all stakeholders. But if for the capital markets, eventually isnt satisfactory, then 2020 and beyond will be the remaining large mutual life insurance companies who can, if they stick to the markets
7

Or what will happen to lifetime income guarantees if life volving bionic parts and transplants that are unthinkable

expectancy takes a leap because of medical advances in-

it may be that the surviving, successful promise sellers of

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Keeping The Promise by Dennis R. Barry

they know best, generate the capital they need on their own. tunities and challenges to the companies manufacturing and Life insurance, like all businesses, offers unique oppor-

and deal most successfully with their challenges. Time will tell, but betting on the success of life insurance companies whose marketing and management focus is on the guarantees that are unique to their charter seems like a good choice.

marketing those products. Like other businesses, success

will come to those that take advantage of their opportunities

Dennis R. Barry, FSA, MAAA, is a principal at Barry Consulting Services, LLC, in Little Rock, Arkansas. He can be contacted at [email protected].

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

risk Management for The Individual: The Key To Life Insurer Success In 2020 And Beyond
by Ken Beckman
Enterprise risk management continues to be a major focus contribution plans have limited investment knowledge

in many industries and the life insurance sector is no exception. In fact, an insurance companys future survival is highly dependent upon the ability to successfully manage an insurance company must take advantage of its experits various risks. However, to thrive and not just survive, tise in risk management by also addressing the risks faced by its individual customers in a much better and more comprehensive way than is done today. This can be

and often make unwise choices when investing large sums or choose life-cycle funds have no guarantee that future plex and costly option strategies could be employed, there is no product that currently offers an easy-to-understand

of money. Even those who receive investment advice required returns will be achieved. Although certain com-

and affordable way for the average person to purchase investments.

accomplished through the development of a single product identify and manage the risks encountered over a lifetime. Companies that can successfully develop such a product will

insurance protecting the value of retirement or personal Furthermore, even though the insurance sector

that will allow individuals and families to simultaneously

currently does offer a vast array of products to mitigate mortality and morbidity, separate policies must be researched and purchased to cover the variety of risks that exist. For example, to protect against the morbidity

life insurance sector of the future.

see profitable growth and become the dominant force in the The value derived from human capital allows individu-

als to meet basic needs such as food, clothing, housing,

risk one would need medical insurance, disability insurance and long-term care. Consumers and their agents spend valuable time trying to understand and compare features and costs from a laundry list of products rather than making optimal risk-based decisions that maximize both tradition and regulation, but it results in many products they may not fully

education and health care, both during the working years meet these needs are: lifespan),

and in retirement. The three primary risks in attempting to Mortality (premature death and longer than expected Morbidity (disability, extended later life health issues conditions currently covered by comprehensive health benefit plans), and

insurance protection and minimize cost. This is due to

consumers feeling frustrated with the process and purchasing and that do not efficiently cover all the primary risks. Without any significant industry change, as technology improves the ability to compare costs and product features, the insurance products as offered in todays market will become commodities, limiting opportunities for future growth. To grow in the year 2020 and beyond, life insurers will understand

requiring assisted living and long-term care and

Investment risk (the risk of loss to retirement and personal investments). Although these risks are well known, for a variety

of reasons individuals often do not or cannot protect

themselves. For example, assuming one saves enough of current earnings for retirement, investment risk is still a large obstacle in achieving a desired retirement income. This risk has increased recently by the rapid decline of defined benefit pension plans. Most participants in defined

need to become personal risk managers for their customers Successful companies will offer a policy that provides

rather than just a place where insurance policies are sold. comprehensive risk management services for individuals and families. The product will offer lifetime protection

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

risk Management for The Individual: The Key To Life Insurer Success In 2020 And Beyond by Ken Beckman

from all the primary risks in a single insurance policy using the following coverages: Life insurance, Longevity insurance (i.e., guaranteed lifetime retirement income payments), Disability insurance, Long-term care insurance, Investment insurance, and Medical insurance (contingent upon the outcome of national health reform). An interactive system, using the latest technology, will

scenarios would demonstrate the advantages of funding

long-term care throughout an entire lifetime, increasing the

proportion of young insureds that currently have long-term care coverage. If this strategy is successful, it will provide a company the opportunity to expand the size and diversity all consumers.

of its risk pool, reducing the average cost of coverage for Even after the policy is issued, the risk management

system will allow the insured to view updated illustrations would continuously monitor changes in the familys risk

as circumstances and risk tolerances change. The system exposure and notify the insured of coverage adjustments fied at any time. The actual product details may vary from company to company, but the main objective is to enable individuals to fully understand the risks they face and promuch or as little of that risk as desired.

be used to obtain demographic, financial, health and other information. The system will then use this information to explain to applicants the implications of the primary risks they face, both at present and in the future. Next, customers policies to choose from, with each policy offering protection from all the primary risks, but differing in cost and the will be provided with a menu of several possible insurance

that might be needed. Selected coverages could be modi-

vide an efficient and effective way to protect them from as In order to create a risk management product for the

amount of coverage provided. All the policies on the menu would be optimized, based on the applicants risk tolerance and other variables, so that regardless of the policy selected

individual and make sure it is financially sound, many

issues must be addressed. First, companies need to dramati-

cally improve existing enterprise risk management practices.

it will provide the best possible coverage at the lowest possible cost. To achieve optimal protection, the coverages contained in each policy would be expressed in flexible terms. For example, the amount of life insurance would

Regulators, the public, and company management must additional risks they are accepting. Companies that are successful should benefit from a larger pool of offsetting and uncorrelated risks, providing a reduced net risk unexpected events.

all be confident that companies will be able to handle the

vary over time (possibly reaching zero coverage at some family status, other assets and tax considerations.

point) and correlate with specific factors such as income, For each policy being considered, the system will

exposure and an improved ability to absorb future extreme Pricing for morbidity and mortality risk can continue

illustrate the impact on an applicants projected future net income and net worth under a variety of scenarios. These scenarios would be designed to show prospective insureds that insuring for more risks (rather than fewer) and insur-

to rely on actuarial principles, but must go further by

considering the combination and interaction of risks at the coverage less expensive compared to insuring each risk individually with a separate product. In addition to pricing traditional risks in this new framework, actuaries and other insurance professionals must also evaluate and profitably

individual and family level. Pricing at this level will make

ing for these risks sooner (rather than later) provide the maximum protection at the lowest cost. For example, the

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

risk Management for The Individual: The Key To Life Insurer Success In 2020 And Beyond by Ken Beckman

price risks that are very prominent, but have not commonly

been insured. Specifically, the risk of decline in retirement insurance using both existing and new techniques. This

risk management, pricing, underwriting, marketing and greater insurance coverage at a lower cost. administration all must be kept low in order to provide Companies, regulators and other interested parties have

investments will need to be addressed with investment coverage might guarantee a minimum return over specified

intervals, such as a 3 percent return on a stock mutual fund

all recognized the need for insurers to manage their own forts on managing the risks of individual customers. As

at the end of 20 years. Risk-based pricing would be used so that insuring riskier investments and having more generous guarantees would cost more. Marketing must be modified to better educate the public

enterprise risk, but the industry now needs to focus its efthe leading experts on risk and insurance, actuaries must

take the lead in promoting this concept to company man-

about these risks that imperil the financial health of individuals and families. For this product to work, the public must understand it is more effective and less costly to address these risks fashion through a variety of separate policies. Underwriting

agement and employees as well as with regulators and the

public. If companies can begin to demonstrate they are

helping manage the risks faced by individuals and families in a comprehensive manner while remaining financially sound, the existing regulatory and other barriers to change

at the household or individual level rather than in piecemeal must be flexible and timely, while avoiding anti-selection. By 2020, technology and electronic commerce will have advanced rapidly, and companies must fully utilize these istration of this new product. Finally, the costs for improved

will dissipate. A successful implementation of an individual risk management product will give the actuarial profession a great opportunity to fulfill its responsibility to the public and provide a solid foundation for a thriving life insurance sector of the future.

new technologies in all aspects of the marketing and admin-

Ken Beckman, ASA, MAAA, CFA, is associate actuary at New Era Life Insurance Company in Omaha, Nebraska. He can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Life Insurance Views for 2020


by Bruno Caron
Our society has gone through significant changes mainly Internet has helped insurance companies promote their informed decisions, but has the life insurance industry computers online. The need for agents selling insurance agents has decreased in the past decade. This more efficient way of selling insurance would allow insurers to offer

due to technological advancements in the past decade. The products and has made it easier for customers to make more fully grasped the available modern technology to become as efficient as possible? On the other hand, will fundamental obsolete? In the next decade, successful firms will, in the to do well in the long run. values such as transparency and honesty ever become authors opinion, have to combine those two forces in order

policies would therefore decrease, just like the use of travel

products at a more competitive price, and the necessary

technology is already available. The one area where the the face amount purchased is very high and where there are insurance purchase.

author does not foresee a decrease in the use of agents is where estate planning or complex tax issues associated with the

Insurance reward System efficiency And use Of The Internet Through information availability and education, the author believes that, as years go by, individuals will become more aware of their life insurance needs. Also, more insurance shopping tools should be available to customers. The old as it has been in the past. The idea of an insurance company reward system, similar to fidelity programs offered by airline companies and

major hotel chains (but hopefully more effective), could in proportion to premiums paid and used to buy other

see the day. Points could be earned by policyholders insurance products or to get additional coverage or riders.

saying, insurance is sold, not bought may not be as true The Internet has revolutionized multiple layers of

From the insurance companys perspective, such a reward in policyholders. Such a reward system would benefit both holder and the insurance company.

program would increase persistency, awareness and loyalty parties and strengthen the relationship between the policy-

modern society. As information becomes more availthe author anticipates an increase in the use of Web sites

able and the execution of transactions becomes easier, for selling insurance. Web sites providing insurance premium quotes are already abundant, and some Web sites have already started selling insurance online. A challenge tion, so that individuals will have the confidence to buy

regulatory And Taxation Issues play a critical role in the cash-value-oriented products. The individual tax treatments of inside build-up will

for those Web sites is to patiently build a strong reputainsurance through this distribution channel, the same way sites, although they may have been less inclined to do so travelers now buy airline tickets through traveling Web

Although cash-value-oriented products offer multiple products is the very advantageous tax treatment of the earnings of such products. Some cash value products serve actions are very hard to predict. as a second 401(k) vehicle. Regulators views and future Regulators serve and protect individuals by making

advantages, one of the most sought-after features of such

when online travel Web sites were in their infancy. Also,

commercial life insurance companies would have an

advantage to start selling insurance directly from their Web site. Life insurance shoppers could get the coverage they want and the appropriate riders online, similar to the way customers can customize their purchase when buying

sure that insurers have enough funds to meet their obliga-

tions. It is natural for them to impose strict requirements and use conservative assumptions to evaluate liabilities in

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Life Insurance Views for 2020 by Bruno Caron

order to protect the public. Having said that, proscribing unreasonable reserves and capital requirements usually does not serve the population well. It typically results in insurers finding ways such as securitization and offshore

insurance carriers, fraternals have an unprecedented asset: an impeccable record of transparency and honesty. Fraternals provide a valuable service to society through multiple social programs and charitable sponsorships. If

reinsurance agreements to get around such requirements.

Principle-based reserving is already at the center of multiple Society of Actuaries task forces, and implementing these requirements will be a challenge for both carriers and

the movement becomes better known to the public, some policyholders may be interested to contribute to this if they pay similar prices, and fraternals have similar ratings treatment. Can fraternals use their tax advantage and good reputation to compete with economies of scale of commercial carriers and offer similar prices as well as achieving good ratings? Can they reach out to a broader public? If

regulators, but the author believes that this approach will be beneficial for society in general in the long run, as the focus will appropriately be on the obligations of the insurer to meet its contingent liabilities. Currently, a great deal of ments. Those efforts and resources could be used elsewhere or simply removed to offer a more competitive product. Shareholders Shareholders of life insurance companies, just like shareholders of any other corporation, are in a constant shareholders is definitely a positive aspect for an quest for more and better information. Transparency to organization as a whole because it ultimately enables

as commercial carriers. Also, fraternals get a special tax

effort is put in finding solutions to bypass excessive require-

the answer is yes for the two interrelated questions above,

policyholders may turn to fraternals to meet their insurance presence in the life insurance industry in the next decade. Securitization

needs, which would significantly increase the fraternal

Securitization in the life insurance industry took many different shapes and served different purposes in the past. The author believes in the added value of securitization in the life insurance industry in general and sees a demand from both sides. First, the originator (in this case the life insurance company) would benefit from removing some mortality risk from their book, forgo some

the providers of capital to make better investment and risk choices. This usually translates into more disclosure on a firms activities. This is typically helpful for investors, but the information disseminated must be done in a manner

that makes the information understood and is of value to investors and analysts. The successful insurance companies of the next decade, in the authors opinion, will disclose information, to the public. fraternals In the light of the recent corporate scandals and lack of transparency, the public, rightfully or not, has a low opinion of corporate leaders in general. This may be an opportunot necessarily more, but more concise and pertinent

return in order to write more new business and make a profit on originating policies. Second, the capital markets would welcome a way to diversify equity and interest rate risk, as mortality risk is a random risk that is uncorrelated

to those two risks. Past securitization arrangements have involved many parties and have been very costly. In order for securitization deals to be successful in the future, they will have to be simpler, cheaper to implement and more transparent, and target a broader market. Securitization would ultimately transfer some of the mortality risk of the insurer to an outside investor. Simplicity and cost are important because potential investors are attracted to a

nity for the fraternal industry to surge. Usually challenged

with the lack of economies of scale compared with regular

new risk, but obviously for a reasonable return. If the cost

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Life Insurance Views for 2020 by Bruno Caron

of the issuing security reduces the potential to earn this return, the whole securitization concept is pointless. Also, insurers always have the reinsurance option to transfer risk to be effective, it has to be done at a comparable cost to

Conclusion Transparency and efficiency are the common denominators of this essay. In the end, both firms and customers Also, reputation will always remain a crucial ingredient to the success of a life insurance company. It is not something will benefit from an alignment of these objectives.

or hedge it one way or another. In order for securitization reinsuring mortality risk; otherwise, there is no incentive for the insurer to securitize. Transparency is another key which they are getting. A black-box-type security is usually element; investors want to be able to evaluate the risk into not attractive for investors. Finally, volume is another key component of a successful securitization to reduce the cost per security and add liquidity in the market in which it is traded. Successful firms of the upcoming decade will technicalities of such securitization agreements are beyond the scope of this essay. have securitization as an available option. Details and

that can be coded overnight. Transparent contracts (without unpleasant surprises) as well as investments in technology

overly complicated details, upfront fee schedules and no are among matters a life insurance company will have

to put efforts in to establish and sustain a strong reputa-

tion and be successful in the long run. These undertakings can be costly initially, and it is a challenge to remain comultimately draw the line between the key players of 2020 and the life insurance companies of the past. petitive while assuming these costs. But these factors will

Bruno Caron, ASA, MAAA, is an associate at Towers Perrin in New York, New York. He can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Adjustable Biological-Age Pricing for The Global Market


by Chiu-Cheng Chang
Just as stated in the Call for Essays, we are witnessing an evolutionary shift in almost every aspect of the life insurance industry. The demographic profile of our paper, I used a large volume of World War II data of

Japanese survivors from the atomic bombs. About 20 physiological variables were used to determine a persons biological age.

primary client base is changing. New distribution channels and manage risk.

are emerging. We are even changing the way that we assess There are many active participants in the life insurance

expectations. Today we have medical devices (scans,

Time flies, and technological advances exceed our

industry in addition to life insurance companies. The line between financial service companies has blurred. Risks or combined with other unrelated risks as a means to economy adds a level of complexity to the management of life insurance companies. are written in one market and shifted to other markets, mitigate risk. Operating in a rapidly changing global

scanners, tools, equipment, etc.) that also utilize about 20

inputs (variables, indexes, measurements, etc.) to calculate human physiological (biological) ages. These devices are noninvasive and so simple to use; they are truly handy and convenient. Moreover, many studies conducted by the manufacturers of these devices confirm that the calculation results are very much consistent with todays common knowledge regarding, for example, healthy lifestyle. In other words, we can predict, based on those 20 variables, whether ones biological age will be more or less ones chronological age before we actually measure it. I feel that these devices have achieved what I had envisioned in my 1992 paper: A human beings true biological age should be measurable or at least closely estimated, distinct agesa chronological and a biological age.

insurance industry to continuously adapt in order to be in a of this emphasis that I feel obliged to write this essay to present my view of Life Insurance 2020 Foresight.

The Call for Essays emphasizes the need for the life

position to effectively and efficiently operate. It is because

great challenge to our industry. From the time when a com-

Pricing life insurance products equitably has been a

and every human being should have two (most likely) The traditional approach to pricing life insurance prod-

bined male and female mortality table was used to the time

when male and female distinct tables are used, we have also the use of levels of substandard risks and preferred risks, smokers versus nonsmokers, etc. Although it is well known than those of unmarried, and the differences are just as large

come up with various risk classification methods such as

ucts on a single fixed age over the entire policy duration

is clearly outdated. Policyholders could change from being to overweight, then to standard weight; to a preferred risk or in reverse order, from being a substandard risk to a preferred risk and vice versa; from being married to

that married policyholders have much better mortality rates as those between smokers and nonsmokers, it seems that

a smoker to a nonsmoker or vice versa; from being obese

no life insurance company has used this factor to further to trace married versus unmarried status.

classify risks. One wonders whether it is too cumbersome In 1992, I presented a paper titled, Mathematical

divorced to remarried to divorced to becoming single; or

any of all the possible mathematical combinations of the suitable to todays highly dynamic and rapidly changing

above and beyond. Clearly the traditional approach is not global lifestyle since it is considered piecemeal, unsystemcumbersome and non-global.

Approaches to Estimate Human Biological Age to the 24th International Congress of Actuaries (ICA) in Montreal, Canada (ICA Transactions Vol. 4, pp. 401406). For that

atic, static, short-term, local, regional, less scientific, too

15

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Adjustable Biological-Age Pricing for The Global Market by Chiu-Cheng Chang

simple underwriting tools if necessary at the very begintific and global. It is nothing but a simplified and unified

biological age (supplemented by well-established but

Pricing life insurance products according to ones

effectively. This is because biological age is so fixed and static.

dynamic; it is unlike chronological age, which is 2. Because of the deterioration of the environment, workrelated stress, unemployment, financial crises, natural disasters, etc., many old and new diseases and ill health

ning of 2020) is simple, systematic, dynamic, more scienapproach to traditional risk classifications. It may also

be viewed as a clear-cut summary or a very condensed form of traditional multiple sets of mortality tables. Using modern medical devices to measure ones biological

are attributed to unhealthy lifestyles. In fact, a growing number of researchers have even concluded that all modern diseases are lifestyle diseases. And far more

age, we can see very clearly that throughout ones lifetime ones biological age versus ones chronological age. One

one can definitely and significantly decrease or increase important but perhaps forgotten social (now global) func-

people are now paying much more attention to the

relationship between their lifestyle and their health. people will be using it more intensively.

Since biological age is such an effective indicator, Armed with the adjustable biological-age pricing tool,

tion of the life insurance business is to change policyholders behavior for the very benefit of the policyholders themselves. Pricing according to biological ages can rekindle and highlight this function most effectively.

life insurance companies can then target the global market

simply as never before. To envision how such a 2020, let us first look at the automobile insurance market (including high school GPAs) to price auto insurance premiums for young drivers. All the drivers have to do is

a single fixed interest rate to price life insurance products when the life insurance industry replaced a single fixed

More than 30 years ago, life insurance companies used

biological-age-pricing scheme may end up globally in in California where auto insurers use about 20 variables

over the entire policy period. It was truly revolutionary interest rate with floating (variable, adjustable) interest rates for pricing purposes just as other financial service industries adopted floating interest rates for all financial catch up with the transition from a single fixed interest rate chronological age to dynamic adjustable biological ages.

to keep calling various insurers until they are satisfied with the best offer they can get. Similarly in the United States, ly competitive, potential buyers shop for the best offer just where large amount term life insurance premiums are highlike the young drivers in California shop for auto insurance. Finally, todays Internet is booming with all sorts of similar auctioneering approaches to buying and selling. I envision the future life insurance market with the

transactions. What I am suggesting now is nothing but to to floating interest rates: a new transition from a single fixed This new transition is expected to become more intense

in a time of rapidly intensified economic globalization for the following reasons:

adjustable biological-age-pricing scheme will look like

those phenomena I describe above. Obviously, we have highlighted below:

1. Todays human beings are undergoing much faster and

to deal with a number of issues between now and 2020 as 1. Find a base (state, country, nation, territory, legal entity, tax haven, etc.) where the insurer is allowed to issue policies using biological age for pricing purposes.

more intense changes throughout their lifetime than at any time in history; the more intensified the economic globalization, the more so. These changes will be

reflected in ones biological age most directly and

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Adjustable Biological-Age Pricing for The Global Market by Chiu-Cheng Chang

2. Work closely with regulators in various jurisdictions age pricing is nothing but a simplified and unified version

worldwide convincing them that adjustable biologicalof the traditional but much more complicated risk-

style, which in turn will bring about lasting benefits to all parties concerned. 5. Establish a sophisticated system (paralleling to the

and approves the sale of a biological-age-priced product,

classifying scheme. Once a regulator is so convinced

system used to support floating interest rates) to the biological ages.

effectively and adequately support dynamic changes in The adoption and popularization of the biological-age

it is expected that other regulators will follow suit just have experienced.

as smoker versus nonsmoker distinct premium rates

idea will have profound effects on the whole world. I will cite a few in the following: 1. We need a new definition of normal retirement age. 2. We need to redesign pension plans. 3. We need to redesign annuity products. 4. Since upward mobility is part of human nature, we will witness a healthier world with higher and longer human productivity contributing to the global good.

3. Work out in great detail a global underwriting manual underwriting procedure and process to be followed, all the safeguards to be employed, etc.

covering the medical devices to be used, the

4. Establish a detailed but effective system to evaluate policyholders requests for a change of their biological age. Since the devices are simple to use, the system will help push policyholders to lead a very healthy life-

Chiu-Cheng Chang, Ph.D., FSA, FCIA, FAIRC, FSII, CLU, ChFC, MAAA, is chair professor in Risk Management at Asia University in Taichung, Taiwan. He can be contacted at [email protected] or [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Sustain: An Industry Speech About Success As A niche Player In 2020


by Sharon Giffen
It is with great pride that I speak to you about our fraternal Living or Sustain. How did we surpass our own expectations for success over the past decade? process, reducing to 5 percent the applications that cannot

benefit society, The American Society for Sustainable

be processed automatically. For those cases, the judgment from a service provider on a variable cost basis. From 2015, can complete forms themselves and now 75 percent of

of a skilled underwriter is needed; we buy that expertise we eliminated the need for a sales intermediaryapplicants applications are submitted directly. With real-time processes, once the application is complete and pre-authorized deductions from their bank account are set, clear cases are

support our members families in times of great need; in turn, the tax-free profits we generate are dedicated to furthering our mission of enhancing Americas desire and ability to lead lives that will sustain our planet. Regreening of the earth is a goal we can all relate to today; Sustain sponsors activities, programs and education to Living a greener life has become increasingly popular engage member families to change their daily lives.

Some backgroundSustain sells life insurance to

issued electronically. Formal contracting is complete upon receipt of their biometric signature using the retinal scan software that has become standard for online identification. Compliance monitoring is easy; AI wont misbehave, is reduced, as AI is persistent to ensure consistency of electronic health data and answers to questions. and electronic records are complete. Misrepresentation

since the turn of the century; people are willing to volunsustainable living.

teer and to pay more for goods and services that support In the last 10 years, virtually every facet of our business

has changeddistribution and administrative operations and, importantly, how we assess and manage risks to better use our capital.

online in real timebut there are exception cases. In

Post-issue service is almost exclusively self-service,

addition, we have legacy business, administered on an old system, requiring some service staff. We built some automation to front the old system, and will let it run off there.

to our mission. Our market demographic is the Internet lives online, and who want to contribute to sustaining our

In 2010, we committed to truly align every activity

generation who transact their personal business and social earth for future generations. This is the middle-income marketordinary people with straightforward insurance and a limited product line including term and whole life insurance, we had to become a low-cost provider to survive. needs. With a low average face amount and premium

technology and AI. Looking for early payback, we found that in-sourcing allowed us increase volume quickly. Today, we are one of the leading industry providers of

To achieve all this, we have invested significantly in

the electronic application-through-issue process. Our partner companies are typically small. We can charge industry average. Our partners retain in-person services, keeping control of live customer interaction. a variable cost above our marginal cost, but still below

and administrative processes to automate everything possible. In 2011, we introduced electronic applicationsthe used tele-underwriting during the application process along application is completed online during the sales call. We with electronic underwriting tools. With that, we achieved In 2013, we introduced artificial intelligence (AI) into the

Armed with that vision, we retooled our new business

Only a decade ago, we were in the independent agent market, competing with other providers for market share. Our mission was interesting to them, but not sufficiently commission demands. We were incurring high marketing

Distribution has evolved in concert with our processes.

about 50 percent of issues requiring no further intervention.

compelling to sell at a higher price or to reduce their

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Sustain: An Industry Speech About Success As A niche Player In 2020 by Sharon Giffen

costs including the travel necessary to attract distributors. This was not well-aligned with our mission and is no longer a source of sales. A small group of brokers embraced our mission and

to model and assess risk that could also be used in everyday business decisions. In 2010, we retained a consultant to build a data store

Importantly, we wanted and needed to have a better way

became dedicated to us. These personal producing general agents (PPGAs) sell to and service our customers who video, and they assist in their local communities to deliver commission expectations. want the personal touch, generally delivered by voice or the Sustain programs. For this, we are happy to pay their Early on, we experimented with social networks, such

to feed a comprehensive model of our business. From there

we layered business intelligence that is executive-friendly, ness, resulting in broad and deep understanding of the cost structure and profitability of each product.

allowing executives to examine any dimension of the busi-

stochastic projections. These give us reserves and capital under the principle-based approach. Rapidly, we recognized the need to develop in-house expertise in running the model. Now our risk managers run comprehensive sets of stochastic scenarios, providing a very rich data store. Sampling became necessary to get results at a level of those runs and can provide quick estimates, with appropridetail that is useful. Now AI controls sampling to access ate ranges of out-comes based on the results of the larger body of data. This is accessible for timely operational decision-making. We focus our risk analysis on the tails, insureds. We no longer discard any economic outcome as tail-riskanything is possible!

The projection model is built for stochastic-on-

as Facebook. These avenues provided some success at

raising awarenesspeople were drawn to our mission but no sales traction resulted. That changed in 2015 with world that was introduced as a social network in 2003. the commercialization of Second Life, the virtual online We established a presence in the Sustainable Living Pa-

vilion in Second Life. We had an overwhelming number of visitors, and we were able to sign many up as noninsurance members. We then expanded our presence so visitors to the pavilion also knew that we sell insurance,

and that buying from us would support the cause. Our online processes were well-aligned with these folks it is their preferred way to do business. Even so, early on, we stumbled. Each avatar in the Pavilion was a staff

both in economic conditions and in the behavior of our

memberlike other avenues of sales, we couldnt scale to meet demand. When AI was expanded to include the sales process in 2018, we reached near unlimited scalability for new business.

our business. We have made a practice of outsourcing to experts any function that requires specialized skills in limited quantities. We cannot afford to attract and retain these professionals and provide the back-up necessary to mentioned, underwriting is one such skill. Additionally, reduce our dependence upon a handful of individuals. As weve retained an investment firm to handle our assets

I should comment briefly on some other aspects of

zation than highly cost-effective administration and distribution. The advent of a principle-based approach

Now, there is more to running a profitable organi-

Reporting Standards in the early part of the decade caused us to review our reporting methodologies, too.

for reserves and capital and International Financial

we provide modeled cash flows and duration targets, and audit, payroll and human resources are other examples of outsourced activities.

monitor performance to agree-upon benchmarks. Internal

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Sustain: An Industry Speech About Success As A niche Player In 2020 by Sharon Giffen

alignment to the right mission and investment in the right technology for the time. We have seen phenomenal sales growth, with unit costs of both acquisition and mainfunds ongoing technology research, as we strive to costtenance shrinking. The income from in-sourcing activities effectively keep up with the interaction preferences of our itself many times over, as we have strictly managed within

Summarizing, we have enjoyed the benefits of

issues. First, how do we keep satisfying our customers needs for future financial products? Clearly, our product line needs to expand, and we will do that in a controlled manner, with analysis of the risks and opportunities available. Second, how do we expand beyond our geographic borders, to allow global growth of the insurance business?

To wrap up, I want to comment on our most pressing

members. Our investment in risk modeling has paid for a fairly narrow risk appetite and avoided some of the losses experienced in the industry due to changing customer behavior in volatile economic times that are the new normal. Lastly, we enjoy tremendous loyalty from our customersthey want to see us succeed, because that planet along with their insurance proceeds.

The virtual world is a rich source of global interest in geographic boundaries of the United States. Will we ever

membership, but we can only sell and service within the see a global standard of regulation for insurance? Are We live in hope!

International Financial Reporting Standards the first step?

means their beneficiaries, their children, will inherit a better

Sharon Giffen, FSA, FCIA, MAAA, is senior vice president and chief financial officer at Foresters in Toronto, Canada. She can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

niche Life Insurance: One Answer for Being Successful In 2020


by Jay M. Jaffe
The good news about the future of the life insurance And, is there any way to predict which niches will be the most attractive? Any life insurance company that operates as a successful Foresight, Focus, Discipline, Market intelligence, Innovation, and Luck.

industry is that life insurance is a product that will always

be needed. The bad news is that many, if not most, life

insurance products already have or will become commodity products. Therefore, one of the key questions facing much of the life insurance industry in the year 2020 is how to survive in a commoditized market environment.

niche player in the year 2020 is likely to possess:

to be very efficient operators or niche players. If a com-

Companies that do well in a commoditized market tend

pany elects to compete on price, then it must be a low cost

manufacturer or it will not make money. However, in niche

markets, price may not be the only or even the major factor driving a prospects purchasing decision and being able to identify and connect with a particular niche market becomes of paramount importance. While both the efficient operator and niche player

interrelated. Moreover, the interrelationships between these elements are dynamic rather than stable. Foresight means having vision to identify those niche

Practically speaking, all of the niche player factors are

approaches will work, they require different skills and

attitudes in order to be successful. Efficient operators will probably be larger companies that can afford to invest in related price discounts from suppliers. The efficient operators will also use very specific operating targets and have the discipline to stick to their plans. On the other hand, the niche players will be more marvolume-related technology and are able to obtain volume-

markets that have a high potential for success both in terms

of sales and profits. Weeding out the many interesting but

unworkable or inappropriate concepts that are present in both a view of the current and future market trends and a grasp of consumer attitudes.

the marketplace is a talent in itself. To do this well requires

future plans and directions. Particularly smaller companies beyond the companys ability to concentrate its efforts on what it can and needs to do best.

Focus means having a clear picture of a companys

ket-oriented and will probably tend to be more creative. The niches dont have to be large to be profitable. In fact, the larger the commoditized companies grow, the more opportunities may be presented for the niche marketers because life insurance has traditionally been characterized as a product that is sold rather than bought and large companies tend to abandon markets. The potential for achieving higher returns on invest-

cannot extend their companies talents and resources

a company becomes focused, it needs to make certain it has the discipline to keep working at its plan. The road to success is hardly smooth and will face many potholes and same time not losing sight of the intended end goals before they have been thoroughly vetted.

Discipline must be present and follow focus. Once

detours. The trick is to learn to readjust plans while at the

ment would seem to be more likely for the niche players than the commoditizers because if theyre successful, they wont be competing on price (or commission). So

how does a company become a successful niche player?

increases its odds for making the right decisions. Knowing

Market intelligence is one way that a company

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

niche Life Insurance: One Answer for Being Successful In 2020 by Jay M. Jaffe

more about the market environment than the competition track, not only at the time of the original decision to pursue a concept but also while the concept is being implemented.

makes it easier to be confident that a company is on the right

many and too few areas of activity is a critical step in building a niche company. One of the best sources for identifying niches with the

having a new idea does not mean that the concept will work. Often people mistake innovation for invention. These are two related but different concepts. An inventor is a person with a new idea who usually doesnt devote the energy or have the ability to make the idea a commercial requires a different talent and this is referred to as innovasuccess. Putting an idea into an environment that works tion. Having innovation skills is extremely important for

Innovation refers to making something happen. Simply

most potential is to create communication directly with markets. In other words, you need to keep open lines of of producers and prospects. These individuals tend to be selves as engaged in some form of insurance distribution.

the people who see the needs and wants of insurance communication with those individuals who have the ears a breed unto themselves although they often describe themThe problem that many life insurance companies have

is that they dont go out of their way to be attractive to

niche players because they will likely see many business solutions in order to generate and sustain profitable operations.

these creative minds. It is not uncommon for life insur-

opportunities in uncharted waters that require practical No matter how much foresight, focus, discipline,

ance companies to reject outside marketing input out of

hand or fail to respond quickly to concept proposals. The closely with just a few life insurers that recognize how

result is that people with niche concepts tend to work to efficiently evaluate new concepts. Ironically, if asked, markets but the simple fact is that they arent prepared to react when approached. So which niches will be active in terms of both volume

market intelligence and innovation a company is fortunate to have, success usually includes some element of luck. Of course, a company can work to make its own luck by than its competitors.

almost all life insurers will tell you they want new

being the player that understands the total picture better Even with all the basics in place, if a company wants to

and profitability in 2020? Here are some thoughts:

be a long-term niche player, it needs to start by recognizing that finding new niches is not a hit-or-miss process. Finding niche markets can be a programmed process if it becomes

Electronic marketing will eventually become much more targeted and sophisticated with discernable niches; Longevity products will gain acceptance and

ingrained in a companys operating philosophy. Locating step is to assign someone the responsibility of developing new niches. The next basic element of operating as a successful new markets is, in itself, a full-time job, and so the first

and services to this growing and important need niche;

some life insurers will specialize in providing products

Favorable lifestyle-based life insurance products will emerge as a niche among those people who want to be rewarded for living a healthier lifestyle;

niche marketer is to understand that a company that believes in a niche marketing philosophy doesnt have to have too many niches to be successful. On the other hand,

Niches will develop for special needs children and address their particular circumstances;

adults because traditional life products dont adequately A group of products that are designed to perform in a low-interest-rate environment will become a niche; and

having only one narrow niche could be precarious because

markets emerge and disappear with great rapidity in todays

economic climate. Understanding the balance between too

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

niche Life Insurance: One Answer for Being Successful In 2020 by Jay M. Jaffe

Markets abandoned by large insurers often offer

potential for a more hands-on operational environment, particularly when they are not burdened with large layers of corporate overhead costs. Undoubtedly, there will be several strategies success-

player. Companies may actually like this approach better once they understand how to operate as a niche marketer and taste the fruits of their labors. For a life insurance company to be a successful niche

fully used by life insurance companies in the year 2020. Among these will be both broad market and niche life be an option to be a broad market operation because they insurance players. But for many companies there will not will lack the capacity (including capital) to play against the big boys. The alternative will be to become a niche

player, it will not only have to follow the factors described in this paper but accept this approach to doing business. tions to take a glance at what the future might look like and It might behoove many current life insurance organizaconsider moving to a niche strategy on a proactive avenues have closed.

basis rather than waiting until many of the more delectable

Jay Jaffe, FSA, MAAA, is president of Actuarial Enterprises Ltd. in Chicago, Illinois. He can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

A new Perspective On Some familiar risks


by Steven Malerich
The life insurance sector of the future faces two significant societal risks that have so far been of little concern to the business. A financially sound, operationally efficient, growing and profitable company in the life insurance sector in the year 2020 will recognize these risks, will understand tion and high interest rates. We have experience with some of the dangers they pose to life insurance. Some have argued that demographics played a role in

that period of economic turmoil, with a large generation of young people facing the capital needs of their new adult about the Unthinkable, in the March 2004 issue of The Life Actuary.) The new risk has some resemblance to the old, but the needs of our customers will be different. In that past era we had some challenges keeping existNow, that same generation is moving into retirement. life. (I am among that groupsee my editorial, Thinking

their significance to the business, and will act to lessen the risks.

the risks while addressing customer needs in the face of Although the coming demographic shift in the United

States and several other nations has been well known for many years, some of its implications are not yet widely needs is the issue of producing goods and services for the recognized. Beyond any issues of financing retirement entire population. Despite the known concerns, there is a few workers. If that does happen, we may not know it until

ing policies in force, but high interest rates allowed us to more life insurance was an obvious approach to meeting customer needs. Growing incomes of the young generation made that possible.

risk that too many people will retire too soon, leaving too its too late to correct. One likely result is rapid inflation eroding the value of what retirement income most people will have.

paint a very attractive picture of our new products. Selling

some implications are not widely recognized. Among the risks are climate change, depletion of energy and fresh water supplies, and strain on various food sources. Here, rapid inflation will erode the value of retirement income.

Environmental risks are also well known, but again

will be to sell adequate retirement income protection to those same customers while they still have enough money to buy it. If we fail to capture the money early, whats left will likely be insufficient by the time people realize they need the protection we offer. And, if inflation erodes the value of what protection we do provide, more protection.

This time, incomes will be declining. The challenge

too, a risk is that supply will be unable to meet demand, and A true nightmare scenario could occur if both risks are

our customers will not have enough money left to buy

realizedtoo many people retire too early and we see a degradation.

collapse in productive capacity due to environmental

Environmental Risk Its harder to see the relevance of the second riskenvironmental degradationto a life insurance company. Except for the obvious fact that the business needs people and resources, which are both threatened by these risks, we dont normally think of this as significant to our business. Yet, significant it may be.

What These Mean To Life Insurance To imagine a sound, efficient, growing and profitable life insurance company in 2020, we must understand what these risks mean to that company. Demographic Risk The relevance of the first risktoo many people retiring too soonis easy to see. Thirty years ago, we saw rapid infla24

be inadequate if scarcity leads to rapid inflation, which then leads to a loss of purchasing power. A guaranteed

The performance of our products, for the customer, may

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

A new Perspective On Some familiar risks by Steven Malerich

lifetime income isnt of much value if inflation makes it insufficient for satisfying basic needs. That either or both of these risks will be realized by

contrast to the consumption-oriented economy the world has known for several decades, investing in ever-increasing production may be damaging, perhaps even fatal. Redi-

2020 seems unlikely, but by then one or both might be unavoidable. Adding to these societal risks, insurers will face a particular riskreputation. Promises of a secure

recting investments to long-term productivity needs will

be difficult. It is easier to anticipate near-term benefits than fail to see major problems before they develop in the coming years.

long-term, but near-term anticipation will almost certainly

retirement income will ring hollow if that security is eroded by inflation. Regardless of what causes inflation, life insurers may be seen as failing to deliver on their promises if

many customers see the value of their protection evaporate and they cant afford to buy more.

for the greatest dangers and invest accordingly. Among

Some insurers may try to anticipate the best solutions

these, a few may guess right and reap the windfalls of being invested in the right businesses at the right time. Any such companies, and their leaders, will be seen as visionary and celebrated in the business and popular press. However, such wrong and suffering because of it. This is a high risk strategy, and probably best avoided by most.

A Successful Life Insurance Company A sound, efficient, growing and profitable life insurance company in 2020 will be actively involved both in minimizing the risks and in protecting its customers from their effects.

a strategy would likely see far more companies guessing

mitigate these risks. Even coming out of the recession, consumption may stabilize at a lower level than before, slowing the environmental strains. And, capital markets people to delay retirement.

It is possible that the current financial crisis will

begin early, in the next few years, investing relatively small amounts in various businesses or technologies that hold hope for preventing or mitigating the dangers we face.

A sound strategy for facing these risks might be to

may not come back as strongly as before, inducing more It is also possible that well exit the current crisis much

Gradually, more money can be invested in areas that remain promising. Especially if followed by many insurers, such investments may be all thats needed to develop solutions to some of these problems before they become acute. Products If numerous insurers are widely invested in solutions to the problems associated with these risks, we may avoid remain a significant danger that the problems are not

as we have done other recessions of recent decadeswith ever-growing consumption and renewed optimism leading more people into early retirement. The more conservative of these scenarios would likely

make the following transition easier for life insurance companies. The more aggressive scenario would likely is essentially the same. Investments As a major source of capital, insurers have the opportunity to see the coming dangers and invest in promising solutions to the risks. This will require increased foresight. In make the transition difficult. Either way, the path to success

severe shortages and hyperinflation. However, there would entirely avoided. Even more moderate levels of high

inflation can be devastating to the value of financial against inflation.

security programs that do not include significant protection As before, a company can successfully serve life

insurance needs even if inflation becomes significant again.

25

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

A new Perspective On Some familiar risks by Steven Malerich

Despite the new significance of a retired population, there

will still be younger families for whom life insurance young family market will not be a growth opportunity, ex-

provides important protection. However, this time the cept to keep up with inflation. To continue growing, the growing retirement population.

to overcome inertia. To retain a solid reputation, the company will have to deliver on its promise of protection even under conditions of elevated inflation. And, if the company for the company, too. Perhaps that takes us back to an investment strategy designed for the times. Conclusion In 2020, a life insurance company will be positioned for success by having made investments that enhance worker overcome many of the stresses now placed on our environproductivity to support a higher dependency ratio and that ment. Those investments will be complemented by products guarantees, as well as the longevity of those guarantees.

To make those sales, the insurance company will have

successful company will need to serve the needs of the Historically, life insurers have held a small share in the

is to remain strong, the products will have to perform well

retirement income market. Social insurance and pensions have dominated, with individuals retaining the risk that their personal savings will be exhausted before they die. The successful, growing company in 2020 will have to tap to provide substantial protection against inflation.

this market. To remain successful, that company may have Reaching this market will not be easy. The associated

that protect the purchasing power of retirement income

dangers of not having guaranteed lifetime income and of any such income proving inadequate after inflation are both sacrifice now for protection against such distant risks.

long-term dangers. Most people are not easily persuaded to

Steven Malerich, FSA, MAAA, is assistant vice president and actuary at AEGON USA in Cedar Rapids, Iowa. He can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

2020 Life Insurance Company Success Story


by Max J. Rudolph
Conditions faced over the next 10 years will determine companies in 2020. Continued low interest rates will disdramatically. By 2015 rates began to rise, and central banks around the world were forced to intervene with higher rates to slow inflation when oil supplies were cut.

the characteristics of successful U.S.-based life insurance advantage in-force blocks since interest earned will be those same insurers to suffer. New entrants will challenge previously dominant firms for new sales. What follows is a tions looking forward from September 2009. economic Scenario 20092020 Following the financial crisis that began with the Federal Reserve induced stock market bubble in 1995 through the 20092012 influenza pandemic and Iran/Russia/ Venezuela driven oil disruption in 2015, this period was a roller coaster ride for the life insurance industry rivaling the previously uncharted period of 19651985. The pandemic hit the economy hard, as did several terrorist events. In hindsight, these two periods proved to be very simipotential outcome of a reasonable scenario based on condi-

less than expected. Material interest rate rises would cause

reducing initial death benefits. High mortality claims and increased counterparty risk resulted in an accelerated consolidation of the industry, which is considered an

The pandemic caused life insurance product redesigns,

oligopoly today. Companies selling participating life policies, mainly those operating under a mutual charter, performed better than those writing term policies. Several reinsurers went belly-up when the U.S. death rate suffered over 20102012. regulation This scenario led to national insurance legislation in 2015, adding national health care and moving the life/health insurance industry to a federal charter, regulated along with

through 0.3 percent (1 million deaths) excess mortality

lar. Markets were volatile, even on their way up, and then broke. In the 1960s guns and butter spending (funding simultaneously for the Vietnam War and new social prothat were only released when expectations for inflation increased with the dual oil price shocks of 1973 and 1979. The period starting in 1995 had already seen reduced

other financial services firms like banks. By 2020 the insurance regulatory staff. At first they worked quite

federal government had five years to build up their closely with the NAIC, but over time their focus has regimes overseas. The state insurance departments became compliance and actuarial functions. Marketplace than trying to be all things to all people, forming alliances with other focused insurers. With numerous stresses in the financial world since Surviving firms have focused on specific risks rather

grams like Medicare) created pent-up inflationary pressures

moved to consistency with financial service regulatory outsourcing vendors competing with others for audit,

interest rates drive increases in value of financial assets.

The Dow Jones Industrial Average, a bellwether of stock

values, increased from 1,000 in 1982 to a high of over 14,000 points in 2007. The dot-com bubble burst shortly Sept. 11, 2001. Interest rates were reduced to stabilize markets. Those lower rates encouraged home ownership after the millennium, followed by the horrific events of

1995, insurance products became simpler and more

through a variety of new tools. When cracks in the finangovernment tried solutions including bailouts of those too

transparent. Insurance agents retired at a faster rate than they were replaced, and consolidation eliminated many fee-for-service model expanded, with a financial services companies from the brokerage market. As a result, the

cial markets led to widespread liquidity freezes, the U.S. big to fail and low interest rates. The pandemic lengthened the crisis. Over time the Treasury curve steepened

planner shopping online for the appropriate product.

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

2020 Life Insurance Company Success Story by Max J. Rudolph

Family offices became more prevalent, with actuaries providing Personal ERM services. Company consolidation sped up after the federal

Annuity Products Fixed account products continue to be popular but design features have evolved so there are no interest rate floors. nies to report losses on their large deferred annuity blocks. The long period of low interest rates caused many compaOnce the federal charter was put in place, the required

charter was put in place and regulation expanded. An consistent throughout the industry. This allowed a new

oligopoly formed by the survivors kept prices high but entrant, Wal-Mart, to take market share at the smaller size and rural part of the market much as they had done for banking. Their focus on enterprise risk management and markets.

floor was eliminated, and transparency in the marketplace determined guarantees. Today more liabilities are tied directly to assets purchased to back them, with the investment risk passed through and no guarantee wrappers attached.

pricing discipline has made Wal-Mart a key player in these

Life Insurance Products After the pandemic there was a shift toward products with reduced initial death benefits that generated reserves and cash values. This reduced company risk and lowered capital requirements. A group whole life product was reintroduced to the marketplace with features allowing portability. The price of term life policies went up markedly after the first primary reinsurer went under and was not saved.

the 10-year stagnant stock market forced future retirees to save more if they hoped to meet their goals. A recent development has allowed an individual to pay into a participating payout annuity, with benefits based on some units of future payout using their age today. Later tions are conservative. Dividends pass along investment additions using current attained age. The buyer purchases they can buy more, based on their attained age. Assumpgains, expense savings and excess mortality beyond what

Payout annuities have become more prevalent since

after the financial issues of 20082010 involved life settlements. With mortality independent of financial variables, private equity investors were willing buyers. This had a were lapse-supported, with assumptions that some policies material impact for life insurers, as many existing policies would lapse with value remaining in the contract. Someone with little probability of dying soon would take the cash value at lapse while someone with increased likelihood money. As it turned out, these securitizations were poorly

One of the first securitized products to come back

was priced for and allocates additional units of payout benefit to the future annuitant. The product is fully portable and has been very popular in the 401(k) market. Variable Products Products backed by mutual funds have struggled to succeed in the low return market of recent years. Most variable life products have lapsed without value as the funds dried seized up, and hedging programs were found to be both less up. Variable annuities struggled after the derivatives market successful and more expensive than promised. Pure vanilla benefit rider, are being offered again. Group Products Companies focused on group term insurance were impacted badly by the pandemic as they had large blocks of busi-

of collecting on the policy now had an outlet to get the priced. They focused on mathematical modeling rather than actuarial knowledge of the subject. This left policyholders firm writing primarily term or with an aging block of whole pricing assumptions required a sensitivity with no lapses. as the winners while investors and insurers struggled. A life policies was especially susceptible to this risk. By 2020

variable annuities, sometimes with nothing beyond a death

28

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

2020 Life Insurance Company Success Story by Max J. Rudolph

ness in the affected age groups and few assets to back them.

Several large writers did not survive, and public perceptions of group term worsened. The group market adjusted to offer a cash value product that was portable. International Developments The financial crisis, pandemic and oil shock hit hard in all markets. While Europe followed the United States and countries, but the rebound came more quickly in developing experienced slow growth and weakening currency, growth

Showing its agility, Wal-Marts insurance division recently expanded into Canada, Mexico and China. Summary The economic path taken will determine the traits of successful firms. If the scenario described plays out, new

entrants and foreign firms will have an advantage. In-force blocks will act as a drag on existing life insurers as life settlements and low interest rates drive more efficient policyholder accelerate, favoring large insurers who focus on mortality risk with whole life products, pass through equity risk and keep expenses low. Products will evolve to add more portability and payout annuity options. A fee-for-service planner model will continue to replace commission-based behavior. Industry consolidation will

in BRIC (Brazil, Russia, India and China) came back more quickly until Russia had its internal civil war starting in 2017. Rather than develop its own insurer, Brazilian investors took advantage of the falling value of the dolSimilarly, investors in India bought a European insurance lar to purchase an existing insurer in North America. giant, and China became the home office location for AIG.

agents. Regulation will increase under a federal charter, and international consolidation will accelerate among financial services industries. A cheap dollar will put U.S.-based insurers at a disadvantage.

These transactions were made much easier when the federal charter imposed national regulation on insurer solvency.

Max J. Rudolph, FSA, CERA, CFA, MAAA, is the owner of Rudolph Financial Consulting, LLC in Elkhorn, Nebraska. He can be contacted at [email protected].

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V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Industry Will experience Zippy Growth Through Zip Processing


by Maria N Thomson
The number of insurance companies has been shrinking 1988 to less than half that today.
1

in the United States from a peak of 2,343 life insurers in will accelerate this shrinkage. In the year 2000, an analysis of Bests Insurance Reports premium written data showed that 30 life insurance families out of about 1,400 were writing 70 percent of all premiumwhich explains the shrinkage. This has been occurring because the successful The current recession

c) Processing the application, setting up a new policy record in the administration system and issuing the policy.

3. Maintaining adequate risk selection in order to: a) Keep mortality levels within actuarial expectations and b) Maintain coverage at affordable levels for customers. most companies are taking advantage of technology. The most high-tech and promising solution is e-applications with expert underwriting built in. Electronic underwritMVR and Rx history to supplement the screening quesIn order to address processing time and cost challenges,

firms in the individual life industry are primarily focused on the affluent, which is only about 10 percent of the population. Growth and resurgence of the life insurance industry over the next 10 years will come from mid-market expansion.

ing often takes advantage of e-databases such as MIB, tions. The current drawback is that there is little published data on the selection of risk efficacy of these tools. By 2020 these studies will have been donethe SOA has one in progress now.

eliminated. There are now many well established and highly suitable distribution channels for the mid-market, including: Various types of direct response: mail, media, Internet, outbound calls, etc., Work site, Bank agencies, P&C agencies, and Specialist agencies that form relationships with professional firms, banks, etc. The biggest remaining hurdles to success in the mid-

The distribution barriers to such expansion have been

panies, will use some e-tools in order to aid business

In 2020 most companies, even affluent market com-

placement by enhancing processing speed, and also to not rely solely on these tools to underwrite their policies,

reduce placement costs. Affluent market companies will but many mid-market companies will come to rely on these

tools entirely for the placement of the majority of their life

policies. In addition to using these tools for life insurance, some companies selling voluntary/individual health plans studies on the morbidity expectations for policies be available by 2020. will also avail themselves of these tools. However, underwritten utilizing e-underwriting and e-data may not Currently, at least five reinsurers that operate in the

market are:

1. Making sales simple and transactional for the agent and 2. Dramatically reducing the time and cost of placing new business. The elements of cost are: response), a) Agent compensation (or marketing costs for direct b) Underwriting, and

United States have e-underwriting softwarealthough not

all of them offer it to customers in the United States. The market for this software will grow and become a significant

ACLI Life Insurers Fact Book. 30

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Industry Will experience Zippy Growth Through Zip Processing by Maria N Thomson

source of growth for the reinsurers. Having this software,

and providing companion e-underwriting rules building seeking the mid-market trade. Some reinsurers will also provide value added in the form of expertise on how

is automatically set up in the policy administration system. headquarters. ZIP will also have the data populate a new tions in order to spot problem areas.

expertise, will provide competitive advantage for reinsurers

Thus, all manual new business functions are eliminated in business database to track responses to application quesZIP has chosen to distribute entirely through bank and

to take best advantage of e-data to build rules. Additional tional types of e-databeyond Rx, MVR, MIB and credit reportsthat could be useful for risk selection. The Successful Insurer Of 2020

value added may come in the form of research on addi-

P&C agenciesprimarily through licensed CSRs and loan officers. This distribution was chosen because: Cross-selling to an existing customer base is far more efficient than prospecting to new customers. Generally, customers will come to their bank or P&C agents, so home visits are usually not necessary. Between them, banks and P&C companies serve just about all the population that has income or assets. The distribution network is built and supported through

I shall call my vision of the successful company of 2020 ZIP Insurance. ZIP Insurance employs straight through processing

(STP) tools to underwrite and issue policies at the pointof-sale, utilizing e-tools as described above. ZIP Insurance will not use underwriters for underwriting new business,

but rather for establishing underwriting rules and updating them by analyzing data on e-application responses developments. and keeping current on pertinent industry studies and ZIPs approach to business makes the sales process

a wholesaling approach utilizing regional field managers and support them. Headquarters provides phone sales and IT support to assist with sales or sales system issues that may arise.

(wholesalers) who are assigned to recruit agencies and train

very transactional, thus lending itself well to the customer service representative (CSR) sales environments it has chosen for its distribution. ZIP Insurance software walks

with agents that are underperforming. ZIP provides its advertising to bring in insurance customers. Finally, agents

The wholesalers monitor agent production, and work

agencies with assistance with mail, Internet and media are encouraged to have an annual review with each of their insurance customers. The sales software has annual reminders built in, and the wholesalers encourage this as well. In the annual review sessions, the need for increased face amount is assessed, and the agent discusses additional coverages (riders) that can be added onto the policy, or health products).

the agent through the sale, screening questions, payment and policy delivery. While the agent is taking the applicant through the drill-down underwriting questions (personal history interview or PHI), the software will automatically poll the e-databases it is programmed to access. The PHI, in

combination with the e-data, will provide the software with the information needed to render an underwriting decision. If the sale is made, a credit card or electronic funds transfer e-mailed, as the customer prefers.

additional products that could be purchased (such as ZIP pays total first-year agent compensation for all lev-

payment can be accepted, and the policy will be printed or The application and underwriting data is transmitted

els that is well under 100 percent of premium, and only

electronically to ZIP Insurance, and a new policy record

modestly higher than renewal compensation. Agents find this low first-year compensation acceptable because the

31

V I S I O n S f O r T h e f u T u r e Of The Life Insurance sector

Industry Will experience Zippy Growth Through Zip Processing by Maria N Thomson

sales process is very quick and transactional, without any follow-ups required, and because there is no prospecting required. This compensation pattern is modeled after the custom for the sales of P&C insurance. As a result of very low new business processing costs

group. Thus, ZIP has a small staff, who are not even all colocated. Its sales operation is run from the Midwest, its IT and policy service liaison operations are in the South, and finance, underwriting and analysis are in the Northeast. In time, new business STP will be used by many

and low first-year agents compensation, there is almost no first-year strain on ZIPs business, and thus it experiences excellent returns on equity. ZIPs mortality experience is manageable due to: 1. A risk selection process that is of about the same quality as traditional nonmedical underwriting, 2. Much higher sales per agent than most companies currently experiencethus providing better risk spread, usually treated as a routine CSR transaction, verify application responses, and 3. Little selection gaming by the agent, as the sale is 4. Follow-ups with customers on a sampling basis to 5. Data monitoring to identify either adverse or anomalous results by agent and agency, by region, and by product and to improve underwriting questions.

insurers for life, disability and supplementary medical The industry will experience a resurgence, and most of the disability insurance.

products sold on an individual or voluntary group basis. population will become adequately covered by life and In 2020 competitive pressures are not very great for ZIP.

Several other companies will be distributing in the same fashion as ZIP, with similar processes. Currently, in 2009, a life insurance company is using a ZIP process to sell in this space, and many other companies in transition from ment processes.

through P&C agents. By 2020 there will be several players people-intensive to fully automated new business placeAs time goes by, competitive pressures will become

ZIP Insurance Companys greatest challenge. The fun-

damental problem will be managing to stay competitive

without returning to the industrys self-destructive cycle higher agents compensation, which led to the abandonment of the mid-market in the first place.

to focus on the new business process and managing its

Since ZIP is a young company in 2020, it has chosen

of increasingly restrictive underwriting, lower rates and

distribution. It outsources its policy administration to a

vendor which provides ZIP with a dedicated servicing

Maria N Thomson, FSA, MAAA, is board director at RAD Insurance Holdings, Inc. in Brimfield, Massachusetts. She can be contacted at [email protected].

32

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