Report of the Society of Actuaries Simplified Issue Survey Subcommittee January 2008 Society of Actuaries 475. N. Martingale Rd., Suite 600 Schaumburg, IL 60173 Phone: 847-706-3500 Fax: 847-706-3599 Website: http//www.soa.org Copyright © 2007 by the Society of Actuaries All rights reserved by the Society of Actuaries. Permission is granted to make brief excerpts for a published review. Permission is also granted to make limited numbers of copies of items in this issue for personal, internal, classroom or other instructional use on the condition that the foregoing copyright notice is used so as to give reasonable notice of the Society’s copyright. This consent for free limited copying without prior consent of the Society does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for resale. Table of Contents Executive Summary........................................................................................................................5 Introduction.....................................................................................................................................7 Product Information......................................................................................................................10 Table 1.1 – Number of SI Products Offered.............................................................................10 Table 1.2 – Year Began Selling Each SI Product.....................................................................10 Table 1.3 – Number of Policies Issued in 2003........................................................................11 Table 1.4 – Number of Policies Expected to Issue in 2004......................................................11 Table 1.5 – Plan Type for Each SI Product..............................................................................11 Table 1.6 – Length of Graded Benefit Period...........................................................................12 Table 1.7 – Graded Benefit Structure.......................................................................................12 Table 1.8 – Premium Pattern....................................................................................................12 Table 1.9 – Premium Payment Period......................................................................................13 Table 1.10 – Factors Used to Vary Premium Rates..................................................................13 Table 1.11 – Minimum Issue Age.............................................................................................14 Table 1.12 – Maximum Issue Age............................................................................................14 Table 1.13 – Factors Used to Vary Issue Age Limits...............................................................14 Table 1.14 – Minimum Face Amount Issued............................................................................15 Table 1.15 – Maximum Face Amount Issued...........................................................................15 Table 1.16 - Factors Used to Vary Face Amount Limits..........................................................16 Table 1.17 – Riders Offered on SI Product...............................................................................16 Table 1.18 – Markets Where SI Product Is Offered.................................................................17 Table 1.19 – Primary Target Market.........................................................................................17 Table 1.20 – Distribution Channels Served by SI Product.......................................................18 Table 1.21 – Primary Distribution Channel..............................................................................18 Table 1.22 – Basis of Compensation for Top Distribution Channel.........................................19 Table 1.23 – Duration 1 Compensation as a Percentage of Premium......................................19 Table 1.24 – Compensation as a Percentage of Premium.........................................................20 Table 1.25 – Why Company Entered SI Market.......................................................................20 Table 1.26 – Primary Reason Entered SI Market.....................................................................21 Underwriting Requirements and Criteria......................................................................................21 Table 2.1 – Nonmedical Information Requested......................................................................21 Table 2.2 – Underwriting Action Based on Rating or Declination...........................................22 Table 2.3 – Underwriting Action for Employment Status........................................................22 Table 2.4 – Underwriting Action for Driving Record..............................................................23 Table 2.5 – Underwriting Action for Felony Convictions........................................................23 Table 2.6 – Underwriting Action for Aviation Type................................................................24 Table 2.7 – Underwriting Action for Avocation Type.............................................................25 Table 2.8 – Underwriting Action for Alcohol or Drug Use / Abuse........................................25 Table 2.9 – Underwriting Action for Prescription Medication Associated with a Non-ratable Impairment................................................................................................................................26 Table 2.10 – Underwriting Action for Prescription Medication Associated with a Ratable Impairment................................................................................................................................27 Table 2.11– Timeframe Used for Recent Hospitalizations.......................................................27 Table 2.12 – Underwriting Action for Hospitalization or Alternative Care.............................28 2 Table 2.13 – Timeframe Used for Consulting with Physician..................................................29 Table 2.14– Additional Underwriting Information for Consultations......................................30 Table 2.15 – Underwriting Action with Adverse Medical Information...................................30 Table 2.16 – Underwriting Action for Medical History of Health Condition..........................32 Table 2.17 – Routine Underwriting Requirements...................................................................33 Table 2.18 – Reflex Underwriting Requirements.....................................................................33 Table 2.19– Tobacco Products Considered..............................................................................34 Table 2.20– Premium Risk Classes..........................................................................................35 Table 2.21 – Maximum Rating to Qualify as Standard............................................................36 Table 2.22– Method of Offering to Substandard Risks............................................................36 Table 2.23 – Maximum Amount of Insurance on Insurance Receipts.....................................37 Table 2.24 – Reinsurance Retention.........................................................................................38 Table 2.25 – Retained Percentage on First Dollar Reinsurance...............................................38 Assumptions and Experience........................................................................................................39 Table 3.1 – Who Is Involved in Setting Pricing Assumptions..................................................39 Table 3.2 – Factors Used to Vary Pricing Assumptions...........................................................39 Table 3.3 – Distribution of Submissions to Underwriting Department....................................40 Table 3.4 – Distribution of Not Takens....................................................................................41 Table 3.5 – Percentage of Contestable Claims That Were Contested......................................41 Table 3.6 – Amount Paid on Contested Claim Settlements......................................................42 Table 3.7 – Top Three Leading Causes of Death.....................................................................43 Table 3.8 – Total Percentage of Top Three Leading Causes of Death.....................................43 Table 3.9 – Prevalence of Leading Causes of Death by Cause................................................44 Table 3.10 – Pricing Mortality Table........................................................................................44 Table 3.11 - Expected Mortality for Male Issue Age 25..........................................................45 Table 3.12 - Expected Mortality for Male Issue Age 45..........................................................45 Table 3.13 - Expected Mortality for Male Issue Age 65..........................................................46 Table 3.14 - Expected Lapse Rate for Male Issue Age 25........................................................47 Table 3.15 - Expected Lapse for Male Issue Age 45................................................................47 Table 3.16 - Expected Lapse for Male Issue Age 65................................................................48 Table 3.17 - Actual Lapse Rate for Male Issue Age 25............................................................48 Table 3.18 - Actual Lapse Rate for Male Issue Age 45............................................................49 Table 3.19 - Actual Lapse Rate for Male Issue Age 65............................................................49 Table 3.20 – Frequency of Formal Experience Studies............................................................50 Table 3.21 –When Experience Last Reviewed.........................................................................50 Table 3.22 – Plans to Reprice or Revise the Product................................................................51 Technology and Process...............................................................................................................51 Table 4.1 – Automatic System Makes Decision.......................................................................52 Table 4.2 – How Automatic System Used................................................................................52 Table 4.3 – Percentage of Applications Issued by Automatic System.....................................52 Table 4.4 – Applications Received by Type.............................................................................53 Table 4.5 – Application Types by Medium..............................................................................53 Table 4.6 – Reason for Using Multiple Methods......................................................................53 Table 4.7 - Target Total Turnaround Time for All Applications..............................................54 Table 4.8 - Actual Total Turnaround Time for All Applications.............................................54 Table 4.9 - Target Underwriting Turnaround Time for All Applications.................................55 3 Table 4.10 – Actual Underwriting Turnaround Time for All Applications..............................55 Table 4.11 – Who Completed the Application?........................................................................55 Table 4.12 – Delivery Medium to Producer.............................................................................56 Table 4.13 – Delivery Medium to Policyowner........................................................................56 Table 4.14 – Time to Receive Underwriting Requirements.....................................................56 Table 4.15 –Vendor/Source of Underwriting Requirement......................................................57 Table 4.16 – Type of Third Party Vendor.................................................................................57 Table 4.17 – Technology Used in SI Underwriting and Issue Processes.................................58 Cross Sectional Analysis...............................................................................................................58 Chart 1 – Expected Mortality by Average Size – Issue Age 25...............................................59 Chart 2 – Expected Mortality by Average Size – Issue Age 45...............................................60 Chart 3 – Expected Mortality by Average Size – Issue Age 65...............................................60 Table 5.1 – Distribution of Average Policy Size, for Products with Financial Institution Customers as the Primary Target Market (Issue Age 45, Duration 3)......................................61 Table 5.2 – Distribution of Average Policy Size, for Products with Middle Class/Income as the Primary Target Market (Issue Age 45, Duration 3)..................................................................61 Table 5.3 – Distribution of Average Policy Size, for Products with Senior Market as the Primary Target Market (Issue Ages 45/65, Duration 3)...........................................................62 Table 5.4 – Distribution of Average Policy Size, for Products with a Bank Platform as the Primary Distribution System (Issue Age 45, Duration 3).........................................................62 Table 5.5 – Distribution of Average Policy Size, for Products with Direct Mail as the Primary Distribution System (Issue Age 45, Duration 3).......................................................................63 Table 5.6 – Distribution of Average Policy Size, for Products with an Independent Broker as the Primary Distribution System (Issue Age 45, Duration 3)...................................................63 Table 5.7 – Distribution of Average Policy Size, for Products with an Automatic System (Issue Age 45, Duration 3)........................................................................................................64 Appendix A – Participating Companies.......................................................................................65 4 Executive Summary Some of the key results of the Simplified Issue Survey are highlighted below. The percentages and numbers in this summary reflect the proportion of all respondents or products responding to a particular question. Note that most of the report is presented as the percentage (or number) of products that fall into a category rather than the percentage (or number) of companies responding. We recommend reading the full report to better appreciate the statements below. Company Information • In August 2004, a survey was sent to actuaries and chief underwriters at U.S. life insurance companies requesting data on simplified issue (SI) products written in the U.S. The survey covered products marketed during 2004, but introduced prior to 2004. The survey also requested some general information on the number and types of SI products sold by each company. • Twenty-seven companies responded to the survey with 21 providing data on two of their top selling SI products. The number of responses to each question varied. There were only a few questions with responses for all 48 products or from all 27 companies. Product Characteristics • Over 75% of the respondents offered more than one SI product, with two SI products being the most common number offered (35%). • Premiums varied by age (97%), sex (86%) and smoking status (64%). • Maximum face amounts ranged from under $25,000 to $2,000,000. • Respondents offered SI products to a rather wide variety of markets. The senior market (43%), blue collar (41%) and middle class/income (41%) were the most common. The primary target market most frequently chosen was Financial Institutions Customer (26%). Underwriting Requirements and Criteria • The most common types of application questions used to underwrite SI products are listed below (used by at least 80% of the products): o Gender; o Use of tobacco products; o Alcohol or drug use/abuse; o Recent hospitalization or alternative care utilization; o Personal history of heart disease, stroke, internal cancer or melanoma, HIV/AIDS, blood disorders, kidney conditions, Alzheimer’s disease or dementia, diabetes, liver conditions, or respiratory conditions. 5 • All of the respondents asked applicants about personal history of heart disease or stroke. • It was common to automatically reject or decline applicants who had an adverse history of the following: o Convictions for driving under the influence of drugs or alcohol (86%) o Drug abuse (85%) o Alcohol abuse (80%) Assumptions and Experience • The most common underlying base mortality table was the SOA 1975-80 Basic Select and Ultimate Table (46%). • The top two leading causes of death were heart disease and cancer. • Mortality assumptions for pricing SI products varied considerably. This was not surprising given the diversity of products in the survey. For example, the expected mortality rate for a male, age 65 in duration 1 ranged from 1.02 per 1,000 to 76.26 per 1,000. • Lapse assumptions also varied considerably among the products. For example, the expected lapse rate for a male, age 65 in duration 1 ranged from 1.3% to 34%. For those respondents providing actual experience, actual lapse experience exceeded expected except at the later durations (6 and 10). Technology and Process • Fifty-six percent responded that an automatic underwriting system was used to process SI product applications. Eighty-seven percent of those with an automatic system allowed the system to make the final underwriting decision at least part of the time. The automated decision, when allowed, was either accept or reject. • Half of the respondents indicated they exclusively used paper applications for their SI products. Only one respondent indicated that they exclusively used an electronic application and two exclusively used a phone application. • Actual underwriting and total turnaround time tended to exceed expected underwriting and total turnaround time, respectively. • The main technology used in the SI underwriting and issue process was imaging (81%). 6 Introduction This report presents the results of a survey on U.S. SI products that was conducted in August 2004 by the Society of Actuaries Committee on Life Insurance Mortality and Underwriting Surveys. It is based on SI products offered in the U.S. during 2004 with sales prior to January 1, 2004. Twenty-seven companies responded to our survey, providing information on a total of 48 SI products. We asked for information related to a company’s top two current selling SI products. We asked for more than one product to try to better capture the marketplace due to the wide variation in SI products. Products without sales prior to January 1, 2004 were asked to be excluded. A list of the companies which participated in the survey can be found at the end of the report in Appendix A. While a few questions requested information related to all SI products the company issued, the majority of survey questions asked for information that was specific to an individual product. Therefore, most data tables in this report show the percentage (or number) of products with a specific characteristic. These tables also display the total number of products for which responses were provided on a question. In certain situations where a survey question was relevant to all SI products issued by a company, the table displays the percentage and number of respondents instead of products. Note, in some instances, the percentages shown in a table do not add to 100%. This is either due to rounding or because a particular question allowed respondents to select more than one response. The phrase “simplified issue” can mean different things to different people. To provide as consistent a survey as possible with meaningful results, we asked respondents not to provide information on products with any of the following characteristics: • Nonmedical band of a fully underwritten product • Routinely required paramedical examinations • Routinely collected bodily fluids; however, respondents were asked to include products with agent-collected oral fluid or urine • Guaranteed issue products • COLI/BOLI products • Credit insurance products • “Group” products other than affinity groups solicited by mass marketing • Juvenile-only products (e.g., under age 16) • Annuity products The intent of the survey was to gather information on the many variations in SI products, including product types, target markets, underwriting requirements and criteria, related pricing assumptions and actual experience, and the utilization of technology in their underwriting processes. The Simplified Issue Survey Subcommittee believes the results of this survey will be of interest to a diverse audience, as the material covers a broad spectrum of issues related to SI products. 7 The intent of this report is to provide an objective observation of what U.S. life insurance companies are doing with respect to SI products. The Subcommittee did not try to offer explanations or interpretations of the respondents’ answers. The report is divided into five sections: • Product Information • Underwriting Requirements and Criteria • Assumptions and Experience • Technology and Process • Cross Sectional Analysis While we suggest that the report is read in its entirety, the reader can quickly find an area of interest by referring to the Table of Contents on pages 2-4. Caveats While we anticipate and hope that the results prove useful for the industry, there are a few caveats that must be made: • The data the Subcommittee received, while fairly comprehensive, is by no means a look at the whole industry or all SI life insurance products in the marketplace. • The results are indicative of the SI products and underwriting practices as of January 1, 2004. While SI life insurance products have been sold for many years, relatively recent and continuing advances in technology and underwriting systems allow for frequent changes in product design and open up new markets and methods for their distribution (e.g., internet or banks). Therefore, SI products and underwriting practices continue to evolve and may have changed since the survey was conducted. • Terminology and the definition of “simplified issue” vary from company to company and even product to product. The lines are blurry between small face amount or nonmedical products, simplified issue, guaranteed issue, quick issue products, etc. There are also diverse definitions of the standard rate class and even a preferred rate class among these product types. • The Subcommittee relied on the accuracy of the data provided by the respondents. Acknowledgments The Subcommittee would like to thank all of the companies who participated in this Survey. We also thank those who helped us review this document and offered helpful suggestions and comments. Finally, the Subcommittee thanks a number of the Society of Actuaries staff for their help in completing this project, especially Jack Luff and Korrel Crawford, without whose help this could not have been completed. 8 Comments on this report and suggestions for another simplified issue survey are welcome and can be addressed to the Committee on Life Insurance Mortality and Underwriting Surveys, c/o Jack Luff at The Society of Actuaries. Disclaimer This Survey is published by the Society of Actuaries (SOA) and contains information based on input from companies engaged in the U.S. life insurance industry. The information published in this Survey was developed from actual historical information, and does not include any projected information. The SOA and the participating companies do not recommend, encourage, or endorse any particular use of the information reported in this Survey. The SOA makes no warranty, guarantee or representation whatsoever and assumes no liability or responsibility in connection with the use or misuse of the survey results. Simplified Issue Survey Subcommittee Lori Morgan, Chair Steve Andrews Rick Bergstrom Anna Hart Ed Hui Al Klein Mark Swanson 9 Product Information This section of the survey gathered basic product information relating to product design, riders, marketing, and compensation. The Survey asked respondents for the number of SI products offered at their company. Over 75% offered more than one SI product, with two SI products being the most common number offered (35%), as shown in Table 1.1. Table 1.1 – Number of SI Products Offered Number of Products Percentage 1 23% 2 35% 3-4 23% 5+ 19% Number of Respondents 26 Respondents were next asked in what year their company began selling the SI products for which they responded to in this Survey. Seventy percent were introduced since 1999, as shown in Table 1.2. Table 1.2 – Year Began Selling Each SI Product Year Percentage 1991 to 1995 10% 1996 8% 1997 6% 1998 6% 1999 10% 2000 10% 2001 15% 2002 19% 2003 13% 2004 2% Number of Products 48