Rate GuaranteesCIA 2008 Annual Meeting IP-18 Group Hot Topics

Cindy LauAVP, Disability Financial ManagementSun Life Financial

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Agenda

1. Prevalence of Rate Guarantees on New Sales

2. Distribution of Requests for Rate Guarantee

3. Prevalence of Rate Guarantees on Renewals

4. Why Rate Guarantees?

5. Concerns around Rate Guarantees

6. Factors Considered in Pricing for Rate Guarantees

7. Costs of Rate Guarantees

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Prevalence of Rate Guarantees on New Sales

1. Guarantee Period

Life & LTD :• 2-year guarantees very prevalent on new sales; • trend to longer guarantee periods (3 and 4 years)

Health & Dental : • usually 12–18 months; • have started to see requests for longer guarantee period in

the East

Rate guarantees :-• are more prevalent on larger cases;• have been moving from East to West over the last few years;• longer than12 months were rare on life and Ltd new sales a

few years ago.

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Prevalence of Rate Guarantee on New Sales (cont’d)

2. Cap on Rates• Guaranteed maximum trend factor in Health & Dental is

not uncommon• Have seen requests for guaranteed maximum rate

increase on life and LTD

3. Retention Charges• In Ontario, 3 year guarantee is becoming more prevalent

on ASO policies.

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Distribution of Requests for Life and LTD Rate Guarantee

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Prevalence of Rate Guarantees on Renewals

• In general, rate guarantees only happen on clients going to market

• Have seen request for bi-annual renewal

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Why Rate Guarantee?

• Client doesn’t want a surprise

• Client wants to reduce effort spent on renewal negotiation

• Plan sponsors with FLEX plans would like to have the rates locked in between FLEX plan enrollments

• Plans involving unions may request for rate guarantee period to coincide with the union agreement period.

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Concerns around Rate Guarantees

• Offer of guarantee would be OK if it is priced properly. In reality, it might not happen due to market pressure.

• Lose the option of re-pricing annually

• Challenges the principle of group insurance “YRT”. Should it be priced as a 3-yr or even 5-yr term?

• If clients go to market at the end of each guarantee period, never be able to recover the experience loss and new sales discount during the guarantee period

• Lessons learned from the past:segregated fund guaranteesreinsurance recapture options

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Factors Considered in Pricing for Rate Guarantees• Additional discount as a result of longer guarantee period

• Option cost for the opportunity to adjust the price

• Additional cost of capital (MCCSR)

• Reserve impacts

• Demographic / aging of the group

• Morbidity trend

• Health and dental cost trend

• Forecast of economy /interest rates

• Plan sponsor organizational changes (e.g. HR, union, M&A, etc.)

• Inflation rate for retention charge guarantee

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Cost ConsiderationsFirst Lets Consider a “Typical” Sale of LTDpolicy• Contains a modest discount that works off over time• Unrestricted ability to reset price

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Cost Considerations - 2What are impacts of a 3-year Guarantee?• Extends the initial discount• Increases cost of capital

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Cost Considerations - 3What are impacts of a 3 year Guarantee?• Extends the initial discount • Increases cost of capital• Restricts future required rate increases where otherwise

required

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Cost Considerations - 4What are impacts of a 3-year Guarantee?• Extends the initial discount• Increases cost of capital• Restricts future required rate increases where otherwise

required• May encourage continual cycle of guarantees