2007 SOA Spring Meeting

The Many Ways of Selling Insurance Through Banks

October 17
Presented by:

Keith Dall, FSA, MAAA - Milliman, Inc. Chris Hause Hause Actuarial Solutions, Inc. Tim Neumann BankWest Investment Services

Agenda
A Global Perspective US Market Overview Bank Distribution Opportunities and Challenges

A Global Perspective

Bancassurance Market Share: Latin America

70%

10%

10%

Brazil
Source: LIMRAs 2006 Bancassurance Study

Chile

Mexico

Bancassurance Market Share: Europe

71% 62% 59%

26% 20%

S p a in

F ra n c e

Ita ly

G e rm a n y

UK

Source: LIMRAs 2006 Bancassurance Study

Bancassurance Market Share: Asia

50% 47% 45% 40%

25%

24%

20% 10%

T a iw a n **
* 2005 data ** 2004 data

K o re a *

M a la y s ia *

Hong K o n g **

C h in a *

S in g a p o re *T h a ila n d **

In d ia **

Source: LIMRAs 2006 Bancassurance Study

Back to the States

Bancassurance Sales in the US (billions)

$72.1 $65.1 $61.2 $50.2 $43.1 $41.0 $34.6 $29.6 $16.5 $10.7 $2.8 $14.7 $3.4 $10.7 $3.5 $6.9 $19.2 $10.3 $10.6 $9.6 $10.8 $12.5 $8.0 $0.3 $0.5 $0.6 $0.9 $1.3 $1.2 $33.4 $33.0 $14.1 $15.6 $27.4 $10.9 $12.5 $18.1 $74.4 $70.8 $80.3 $83.4 $80.9 $78.4

$46.3

$45.5

$43.1 $32.0 $36.4 $30.8 $36.5 $32.4 $32.0 $31.3 $30.3 $18.0 $22.5 $18.2

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

fixed annuities mutual funds total bancassurance products

variable annuities life insurance

Deconstructing Bank Life Sales (millions in first year premium)

$ 1 ,1 1 8 $986

$760

$484

$328 $192 $146 $159 $124 $166 $176 $189

2000

2001

2002

2003

2004

2005

s in g le p r e m iu m

r e c u r r in g p r e m iu m

The Larger the Bank, the More Likely It Offers Bancassurance

100% 71% 54% 25% 51%

Community Super (less than $4) Community ($4-14)

Regional ($14-24)

Super Regional ($24-60)

Mega (over $60)

assets in billions

Source: FDIC

But We are Still a Nation of Small Banks

8,765

129
Community (less than $4) Super Community ($4-14)

27
Regional ($14-24)

38
Super Regional ($2460)

15
Mega (over $60)

assets in billions
Source: FDIC

The Players: Banks

Life Insurance Distribution Methods

70%

30% 23% 14% 5% 8% 5%

licensed bankers

retail agents

FCs

stand-alone agency

advanced agents

referrals to outside agency

direct response

percent of banks surveyed

Source: Kehrer-LIMRA Bank Life Insurance Sales Study, 2006

Growth of Bancassurance Sales Forces

2000
Brokers Platform Reps Percent Platform Reps Registered 13,900 25,000

2002
15,000 44,800

2004
16,500 47,700

2005
16,100 49,400

33%

56%

52%

61%

Revenue Penetration: Investment vs. Life Insurance Sales

$26.44

$1.92

Investment Sales

Life Insurance Sales

Sales revenue per bank customer household

Profit Margin by Size of Bank (retail deposits)

Based on retail deposits
30% 26%

L e s s t h a n $ 7 b illio n

M o r e t h a n $ 7 b illio n

N e t in c o m e a s a p e r c e n t o f c o n s u m e r in v e s t m e n t p r o g r a m r e v e n u e

Bank Distribution: Many Considerations

More Complex Products

FCs, Agents

Platform Bankers
Level of Product Complexity Distribution Costs

Telesales Internet

Simplified Products

Direct mail

Mass Marketing

Relationship Selling

Compatible Distribution Strategy for a Bank

Distribution Category

Direct Response

Bank Branches

Other Distribution

Distribution Channel

Direct Mail Tele-Marketing Internet

Licensed Bankers, agents

Financial Consultants

Advanced Agents

Target Market

Low Income Middle Income

Low Income Middle Income Emerging Affluent

Middle Income Emerging Affluent Affluent

Affluent High Net Worth

But More than Half of Banks Use Only One Method

4 methods 8% 3 methods 13% 5 methods 5%

2 methods 20%

1 method 54%

Source: Kehrer-LIMRA Bank Life Insurance Sales Study, 2006

Opportunities and Challenges

10

US Banks Have Barely Penetrated Their Customer Bancassurance Opportunity

Typical bank has captured some investment business from only 8.1% of its customer households On average, banks have been selling investments for 12.8 years Banks are capturing only 26% of the financial assets of the customers who do invest through them

Key Challenges
Getting buy-in from bank management Encouraging financial consultants and platform reps to sell Consumer awareness and likelihood to buy

11

Likely to Buy?

Not aware 53%

Aware 47%

Would not consider purchasing 46%

Would consider purchasing 54%

Source: LIMRAs Buying Life Insurance Through a Bank

US Bancassurance at a Crossroads
Typical bancassurance business contributes 2% to overall banking enterprises bottom line Bancassurance is highly profitable, but Need to increase scale

12

Selling Insurance to Middle Markets

Product Type
- Term Insurance - ROP Term - GI/SI Whole Life - ULSG - UL with LTC Riders - SPIAs - Simplified Indexed Products
25

Selling Insurance to Middle Markets

Simplify the Sale

- Fully Guarantee; No Illustration - Return of Premium - Guarantee Issue - Instant Issue - Simplify Underwriting

Tele-underwriting Prescription Drug Data Base

26

13

The Effect of Debt Cancellation on Credit Insurance Products

SOA Annual Meeting October 17, 2007

Credit Insurance 101

Chris Hause, FSA, MAAA President, Hause Actuarial Solutions, Inc.

Credit Insurance 101

Products Premiums Markets

Credit Insurance Products

Life Disability Unemployment

Premiums
Established by state (usually regulation)
Life Disability Some unemployment

Premium Payments
Historically single premium, financed with the loan Monthly outstanding balance
Open-end loans Lines of credit Credit unions Real-estate secured

Markets
Banks Credit Unions Auto dealers Other dealers (furniture, electronics, jewelry) Finance companies

Bank Market
Installment - not secured by real estate
single premium life and disability

Installment - secured by real estate

MOB life and disability

Business and Home equity loans

MOB life and disability

Credit cards
MOB life, disability and unemployment

Credit Union Market

Almost exclusively MOB life and disability Composite rates for disability Experience rated Very few insurers in this market, majority is through a single carrier

Auto Dealer Market

Single premium exclusively, due to loan sales Life Disability Some unemployment

Finance Company Market

Single premium historically Some carriers have moved to MOB Life Disability Some unemployment Personal Property

Other Dealers
Primarily single premium on installment sales MOB on revolving lines, proprietary credit cards Life Disability Unemployment Property

Gramm-Leach-Bliley
Enacted in 1999 Legitimized debt protection products Exempted from state insurance department jurisdiction No rate regulation No specified benefits No licensing

Immediate Effect
Credit card programs were replaced by debt protection New benefits were added Installment was slower
Bona fide monthly alternative Dealer business

Credit Unions are a natural fit, but tend to be risk-averse

Long Term Effect

Some markets will probably survive
Small bank Finance company Small Credit Union Dealer

Credit property GAP Creditor-placed coverage

HOEPA and Predatory Lending

Home Owners Equity Protection Act Enacted in 1994 If fees (including CL&D) exceed $400 (indexed) or 8% of loan, a High Cost loan Secondary market implications Predatory lending action is more on the local level

Immediate Effect
Single premium was stopped MOB programs were developed
APR Level monthly Critical period Disability

Total written premium took a hit Closed-end MOB filling the void

Credit Life: Single Premium

3,000,000,000

Premium Amounts

2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000

99 00 01 05 98 97 02 92 93 94 95 96 03 20 04 20 20 20 19 19 19 19 19 19 19 19 20 20 20 06

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Credit Life: Closed-End MOB

160,000,000 Premium A mounts 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000

92

94

Gross Written Premiums

Net Written Premiums Premium

Credit Life: Open-End MOB

600,000,000 Premium A mounts 550,000,000 500,000,000 450,000,000 400,000,000 350,000,000 300,000,000
94 95 96 92 00 93 01 97 02 98 19 19 19 19 19 19 19 20 20 19 03 04 20 20 20 20 20 05 06 99

Gross Written Premiums

Net Written Premiums Premium

19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06
Year
Earned Premium Premium

19

19

19

19

19

95 96

93

Year
Earned Premium Premium

10

C o m m is s io nR a tio%
L o s sR a tio%

L o s sR a tio% 40 39 38 37 36 35 34 33
19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

C o m m is s io nR a tio%

45 40 35 30 25

55 50

19 92

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

10

15

20

25

30

35

65 60 55 50 45 40 35 30

19 93

19 94

19 95

19 96

19 97

19 98

19 99

Year

Year

Year

Year

Loss Ratio: Single Premium

Loss Ratio: Closed-End MOB

Commission Ratio: Single Premium

Commission Ratio: Closed-End MOB

Credit Life
20 00 20 01 20 02 20 03 20 04 20 05 20 06

Credit Life

20 00

20 00 20 01 20 02 20 03 20 04 20 05 20 06

20 01

20 02

20 03

20 04

20 05

20 06

11

Loss Ratio: Open-End MOB

70 L o s sR a tio% 65 60 55 50

19 92

19 93

19 95

19 96

19 99

19 94

20 02

20 03

19 97

19 98

20 05

Year

Commission Ratio: Open-End MOB

C o m m iss io nR a tio% 20 18 16 14 12 10
19 92 19 95 20 02 19 93 20 05 19 94 19 98 19 96 19 97 20 01 19 99 20 00 20 04 20 03 20 06

Year

Credit Life

Credit Disability: Single Premium

Premium A mounts 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000
94 98 02 03 96 97 92 93 01 95 99 00 19 19 20 20 04 19 19 19 19 19 19 20 20 20 20 20 05 06

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

20 06

20 01

20 00

20 04

12

Credit Disability: Closed-End MOB

180,000,000 Premium Amounts 160,000,000 140,000,000 120,000,000 100,000,000 80,000,000
19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Credit Disability: Open-End MOB

900,000,000 Premium A mounts 800,000,000 700,000,000 600,000,000 500,000,000 400,000,000
04 05 20 01 02 98 96 94 92 93 95 97 20 99 20 20 20 19 19 20 03 19 19 19 20 19 19 19 06 00

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

13

C o m m is s io nR a tio%

L o ss R atio%
25 30 35 40

C o m m issio nR atio%

L o ss R aio% 35 30 50 45 40 60 55
19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

22 20 18 16 14 12 10

50

55

60

65

70

75

19 92

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99
Year

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

19 93

19 94

19 95

19 96

19 97

19 98

19 99

Year

Year

Year

Loss Ratio: Single Premium

Commission Ratio: Single Premium

Loss Ratio: Closed-End MOB

Commission Ratio: Closed-End MOB

Credit Disability
20 00 20 01 20 02 20 03 20 04 20 05 20 06

Credit Disability

20 00

20 00 20 01 20 02 20 03 20 04 20 05 20 06

20 01

20 02

20 03

20 04

20 05

20 06

14

Loss Ratio: Open-End MOB

60 55 50 45 40 35 30

L o ss R atio%

20 03

19 93

20 01

19 98

Year

Commission Ratio: Open-End MOB

C o m m is s io nR a tio% 20 18 16 14 12 10
19 95 19 97 19 99 20 01 20 03 20 05 19 93 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06

Year

Credit Disability

Credit IUI: Single Premium

Premium A mount 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 02 01 97 93 92 95 96 94 98 99 20 20 19 19 19 19 19 19 19 19 20 20 20 20 20 06 00 05 03 04

20 00

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

20 06

19 92

19 94

19 96

19 97

19 95

20 04

19 99

20 02

20 05

15

Credit IUI - All MOB

1,200,000,000 Premium A mount 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 00 98 01 99 97 96 95 92 93 94 02 03 04 20 19 20 19 19 19 19 19 19 19 20 20 20 20 20 05 06

Year
Gross Written Premiums Net Written Premiums Premium Earned Premium Premium

Consumer Debt In Billions

2500 2000 1500 1000 500 0 1999 2000 2001 2002 2003

Revolving

Non Revolving

16

Credit Insurance Net Written Premium Penetration

P r emi um t o Debt P er c ent age 0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.1 5% 0.1 0% 0.05% 0.00% 1 999 2000 2001 2002 2003

Credit Insurance MOB Premium Plus Debt Protection Income

3,500,000,000 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 1998 1999 2000 2001 2002 2003

Earned Premium

Premium and Debt Fees

17

Credit Premium and Debt Fee Penetration on Revolving Debt

0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1999 2000 Earned premium 2001 2002 2003

Earned & Fee Income

Conclusions and Inferences

Single Premium Credit Life and Disability premium has decreased Closed-End MOB has increased Open-End MOB has decreased Loss Experience is mixed Overall, the total pie has increased, but credit insurance accounts for a smaller share of it

18

The Many Ways of Selling Insurance Through Banks

Tim Neumann BancWest Investment Services

In-Bank Business Partners

z Private Banking z Construction Bankers z Business Banking z Commercial Banking z National Banking z Wealth Management

Bank Customers
1. Small Business Owners
Business Continuation Planning: 1. Buy/Sell Agreement Funding 2. Key Man Coverage
Executive Bonus Plans: 1. REBA (restricted executive bonus arrangement) 2. 419 Single Employer Welfare Benefit Plan 3. 412i Defined Benefit Plan

Bank Customers Contd

2. High Net Worth Bank Clients

1. Estate Planning Wealth Transfer Charitable Remainder Trusts Ideal Plan Estate Equalization (Agricultural & Business)