Docstoc

Financial Underwriting

Document Sample
Financial Underwriting Powered By Docstoc
					  A Fistful of Dollars: Financial
 Underwriting in the Real World
      Anastasia Ammon, FLMI, ACS, AALU
VP Underwriting & Chief CI Underwriter US & Canada
        Optimum Re Insurance Company
               September 10th, 2007
As an Underwriter
When the Premium is Large
and it is a high-profile case
do you feel like you are “under the gun”?
        Financial Underwriting
• The purpose of Life Insurance is to protect
  against economic loss resulting from the death
  of the insured
• If the amount applied for is in excess of the
  amount of the potential economic loss, then poor
  persistency or adverse selection may occur
• The role of the Underwriter is to insure that the
  amount applied for is justified based on the
  potential economic loss
• This process is called Financial Underwriting
“Don’t let the perfume of the premium
 overpower the smell of the risk.”

            --Slogan in Underwriter’s Office
          Insurable Interest
• There must be insurable interest at the
  inception of the contract; in the absence of
  insurable interest it becomes mere
  speculation and is prohibited by law
• The continued life of the insured must
  have greater value than that provided by
  the death benefit resulting from the
  premature death of the insured
“Sometimes the dead can be more useful than the living.”
                    (Clint Eastwood in A Fistful of Dollars)
               http://en.wikiquote.org/wiki/A_Fistful_of_Dollars
          Personal Insurance
• Personal Insurance replaces lost earnings
  caused by premature death
• This includes special needs such as mortgage
  life insurance and college funds
• Young professionals such as doctors or lawyers
  are usually allowed higher amounts than their
  current income would allow since their future
  income is very likely to increase significantly
          Personal Insurance
               ( Cont.)
• Multiples of income are usually used to justify
  personal insurance amounts; most individuals
  do not have as much insurance as they could
  qualify for so amounts in excess of the tables
  should be analyzed carefully to be sure they are
  justified
• Inspection reports, copies of tax returns, income
  statements by CPAs, copies of employment
  contracts etc can be used to verify earnings if
  the amount applied for appears unusually large
“A man's life in these parts often depends on a mere scrap of information.”
                             (Clint Eastwood in A Fistful of Dollars)
                        http://en.wikiquote.org/wiki/A_Fistful_of_Dollars
Typical Personal Income Tables
•   Age 18-40            •   20 x Income
•   Age 41 - 50          •   15 x income
•   Age 51 - 69          •   10 x Income
•   Over 69              •   5 x Income


       But what if the amount applied for
       exceeds these multiples?
Guidelines are intended to guide our decisions but
Are not the same as rules which must be obeyed




     That’s why our Financial Guidelines are not carved
     On Stone Tablets--
Underwriting Judgment is needed to make reasonable exceptions
To the guidelines when it is appropriate to do so.
Questions to ask:
1. Does it make sense? (Thank You, Charlie Will!)
2. How good are the sources of your information?
3. Will the person be worth more dead than alive to family or business?

--Ross Morton (RossMartin.com)
        Estate Conservation
• Life Insurance can be used to prevent
  forced sale of Estate assets for estate
  taxes
• Life Insurance can also serve to conserve
  the estate for heirs
• Creation of an estate, however, by
  insurance in excess of estate conservation
  needs is speculative and uninsurable
          An example of Estate Tax
                 Tables
•   2004                                            •   $850,000 exempt
•   2005                                            •   $950,000 exempt
•   2006                                            •   $2,000,000 exempt
•   2007                                            •   $2,000,000 exempt
•   2008                                            •   $2,000,000 exempt
•   2009                                            •   $3,500,000 exempt


    http://www.irs.gov/formspubs/article/0,,id=112782,00.html#estate_exclu_2003
Older Age Risks
              Mature Market
• Longer life expectancies and wealthier senior
  citizens have created a significant market for Life
  Insurance in the Mature Market
• Mortality is volatile as older individuals are more
  vulnerable to impairments than younger
  individuals
• Adverse selection is potentially greater as
  children who are aware of problems seek
  insurance for their parents
Juveniles
                 Juveniles
• Juvenile policies are often purchased for
  savings, as gifts and to guarantee future
  insurability
• Beneficiary should be parents; Grandparents
  may be owner and/or premium payor
• All siblings should be similarly insured
• Parents should have a significant amount of
  coverage as well; usually twice the insurance on
  the juvenile
• Parent or guardian must sign app to show
  agreement for the insurance and to attest to
  correctness of application questions
Underwriting for Persistency
               Persistency

• Early lapses affect the profitability of the
  life insurance policy
• Many companies underwrite for
  persistency as well as mortality aspects of
  the risk
• Look carefully if short term need,
  unemployed, unstable finances, history of
  multiple replacements or lapses,
  premiums in excess of 25% of annual
  income
Charitable Giving with Insurance
            Charitable Giving
• Charitable Giving uses life insurance to insure
  against loss of contributions (cash or time or
  other services) due to the premature death of
  the contributor
• Insurable interest is established by showing a
  regular pattern of support to the charity: financial
  contributions, other support or fund raising
  activities
• The amount of Life Insurance should be limited
  to the present value of future contributions
  unless extraordinary circumstances can be
  documented
Trusts
                  Trusts
• Trusts can protect assets from adverse
  taxation that would otherwise diminish the
  value of the assets
• A Trust can be revocable (provisions can
  be altered or the Trust can be cancelled)
  or irrevocable (the agreement cannot be
  changed or cancelled without the
  agreement of the beneficiary)
                    Trusts
                    (Cont.)
• A Life Insurance Trust gives the trustee the right
  to own and hold life insurance policies in order
  to exclude the insurance proceeds to be exempt
  from taxation
• Trusts of this nature shield income from current
  taxation, protects wealth from diminished value
  at probate and estate settlement and enables
  the conservation of wealth
• Death benefits should not exceed the potential
  tax liability and asset loss for the beneficiary
Bankruptcy
                Bankruptcy
• The Bankruptcy Code allows Chapter 13 or
  Chapter 7 for individuals and Chapter 11 or 7 for
  Businesses
• Chapter 7 releases individuals from almost all
  debt after non-exempt assets have been
  liquidated and paid to creditors
• Chapter 11 allows businesses to reorganize and
  restructure debt subject to court approval
• Chapter 13 allows individuals to set up a
  repayment plan subject to court approval; often
  for less than the original debt
                Bankruptcy
                  (Cont.)
• Life Insurance for individuals still in the
  bankruptcy process involves persistency risk
• Adverse selection may be present if there is
  significant personal stress suffered by the
  individuals or business owners
• Medical history of alcohol or drug abuse,
  employment instability, adverse driving record,
  hazardous avocations are all indications of
  potential adverse selection
• Recovery from the bankruptcy should be
  documented and stable income established in
  an amount to justify the amount applied for
Business Insurance Evaluation
 Evaluating Business Insurance
• As with personal insurance there must be a
  greater value from the continued life of the
  insured than that provided by the death benefit
  resulting from the premature death of the
  insured
• Over-insurance is speculation and can lead to
  suicide or homicide if the policy on the insured
  has greater value than the economic advantage
  provided by the continued life of the insured
• The business must be in good financial health in
  order to justify any type of business insurance
Venture Capital and Startups
  Venture Capital and Startups
• More than half of all new businesses will fail
  within 5 years due to insufficient funding or
  planning
• Look carefully at experience of management
  team, product or services to be offered and
  anticipated profitability projections
• Look at source of funds to be sure from a
  reputable source and amount of funding to be
  sue the business can survive the initial years of
  losses to become profitable
Key Person Insurance
               Key Person
• The value of a key person to a business must be
  demonstrated based on skills, contacts or
  knowledge
• Usually evaluated based on multiples of
  compensation for the number of years needed to
  replace the person and recover the losses (5-
  10x)
• Compensation includes gross salary, regular
  bonuses, benefits, significant “perks,” stock
  option values and profit-sharing arrangements
                Key Person
                  (Cont.)
• Look for other key persons in the firm to be
  similarly insured
• Avoid accepting risks where key person is
  significantly impaired as this usually represents
  adverse selection
• Key Person insurance on individuals nearing
  retirement is not acceptable except for minimal
  amounts unless satisfactory justification is
  provided
Buy and Sell
               Buy and Sell
• A Buy and Sell Agreement prevents forced sale
  of business assets by heirs of the deceased at
  reduced values
• The insurable value for Life Insurance is equal to
  their ownership percentage of the net worth of
  the business plus a modest growth factor
• The business should be stable and viable and
  demonstrate no financial problems
Insurance to cover a loan
                  Creditor

• There should be collateral for the loan so more
  than 75% of the amount of the loan should not
  be required
• Loan terms should not be for less than 5 years
• Loans should not be extensions of existing loans
  or refinancing
• Loans should involve stable and viable business
  concerns only
Financial Statements
 What To Look For In Financial
         Statements
• Assets are anything owned by the
  individual or the business that has value
• Liabilities are anything the individual or the
  business owes to others
• Equity is the net worth of the business and
  is Assets less Liabilities
  Financial Statement Analysis
• Three types of CPA Reports: Compiled, Reviews
  and Audited
• Compiled reports are not investigated by the
  CPA but rely on numbers provided by the
  business or individual
• Reviews are somewhat more in depth but the
  CPA does not investigate all source documents
• Audited reports should reflect a thorough
  investigation of all source documents and an in-
  depth analysis of the financial records
           Financial Analysis
                (Cont.)
• Compiled reports are more commonly seen and
  are the least reliable
• Reviews and Audited Reports are more costly
  and are usually seen on larger businesses
• Look carefully at the CPA’s notes for any
  variations from generally accepted accounting
  principles that may affect the viability of the
  business
         Income Statements
• Income statements summarize the results
  for a specific period of time; also called
  “profit and loss” statements
• Sales minus Cost of Sales equals Gross
  Profits
• Gross Profits minus operating expenses
  equals net profit after taxes
• Net profit after taxes is the profit (or loss)
               Balance Sheet
• Snapshot of the company’s financial position at
  a single point in time (such as close of business
  at the end of the year)
• Assets are listed on the left; liabilities and capital
  on the right; both sides should be equal or in
  balance
• If current assets are less than current liabilities it
  may indicate a business that is in trouble as
  other assets may be difficult to liquidate quickly
  enough to satisfy the demand to pay current
  liabilities
               Ratio Analysis
• Certain ratios give a quick picture of the viability
  of the business
• Current Ratio is Total Current Assets divided by
  Total Current Liabilities; should be at least 2:1.
• Debt/Worth Ration is Total Liabilities divided by
  the Tangible Net Worth; usually less than 1.0—if
  debt load too great the company may have
  trouble acquiring additional funds if needed
       Does It Make Sense?
• Charles A. Will’s 1973 text “Does It Make
  Sense?” can be summarized by the title
• With all the guidelines, Financial
  Underwriting can be summarized by just
  these few words applied to the case at
  hand:
• “Does It Make Sense?”
          Stranger Owned Life Insurance (SOLI)



Premium Financed Life Insurance, the great
debate!!

•Will be addressed in greater details at our
next seminar
Before the Case Studies:
    Are There Any
   Questions Now?
   Case Study # 1
Located in your packet
                            Case Study # 1
•   Financial Case Study # 1:
•   Male 35
•   6.2.180
•   Occupation CPA
•   $1 million applied for March 2007
•   No Insurance in force
•   Medically Preferred
•   Inspection Report:
•   Earned Income                       $425,000
•   Assets:
•   Business Net Worth                  $500,000
•   Home Market Value                   $1,200,000
•   Personal Property                   $1,000,000
•   Savings/Checking                    $75,000
•   Total Assets                                     $2,775,000
•   Liabilities:
•   Home Mortgage                       $590,000
•   Other Loans                                      $35,000
•   Total Liabilities                   $625,000
•   Net Worth                                        $2,150,000
•   Credit Information:
•   38 lines of credit
•   27 paid as agreed
•   11 show delinquent
•   High credit amount                  $285,000
•   Amount owed all accounts            $147,655
                                      Case Study # 1
      Type of Account:                   Date Reported:   Credit Rating:       Balance Owed:   Past Due Amount:
1     Bank –Line of Credit               3/07             R5 (120 days late)   $5745           $534
2     Bank Card-Charged off              3/07             R9 (Charge off)      $3097           $562
3     Bank Card-Charged off              3/07             R9 (Charge off)      $38,100         $38,100
4     Retail Account-Transferred to      3/07             R9 (Charge off)      $728            $728
            Recovery
5     Computer Seller                    3/07             R5 (120 days late)   $1502           $194
6     Bank Card-Account closed by        2/07             R5 (120 days late)   $22,822         $2156
           Credit Grantor
7     Gas Card                           2/07             R5 (120 days late)   $443            $79
8     Bank Card-Account closed by        12/06            R5 (120 days late)   $17,560         $2602
           Credit Grantor
9     Bank Card-Account transferred or   11/06            R9 (Charge off)      $?              $0
           sold
10    Bank Card-Account transferred or   9/06             R9 (Charge off)      $14,487         $0
           sold
11    Retail                             4/03             R9 (Charge off)      $55             $55
12    Misc services—Collection Account   3/07             Unpaid               $18,201         $18,201
13    Medical—Collection Account         2/07             Unpaid               $411            $411
14    Tax Lien                           Filed 6/06       Released 8/05        $2262           $0
15    Tax Lien                           Filed 6/06       Released             $420            $0
16    Lien                               Filed 8/06       Open                 $79             $79

     For Case # 1: What is your underwriting decision and why?
Case Study # 2
Located in your
    packet
                         Case Study #2
Male 35
5.3.175
Occupation “Real Estate Developer” in Las Vegas, Nevada
$3 million applied for March 2007
Beneficiary Business Partner ;
Purchasing commercial property
No Insurance in force
Medically Standard
Inspection Report:
Earned Income $112,000 per year
Net Worth $83,000
($80,000 cash and investments
plus vehicle worth $19,000 less
$16,000 owed)
No home mortgage as he rents;
No credit card balances owed
“Numerous collections listed as well
as two trades currently in poor standing”—
 two placed for collection 2006;
nine placed for collection in 2004
Civil judgment dated April 2005 for $988 and
A Release of Tax lien from April 1999 for $713”
Misdemeanor 4 years ago for insufficient funds to cover
Checks written. Paid fine and 3 years probation; off
Probation now.
Unable to verify income through accountant.
For Case # 2: What is your underwriting decision and why?
   Case Study # 3
Located in your packet
                         Case Study # 3

Joint Last Survivor Life for $50,000,000
Male 35
Female 27
His in force $55,000,000
Her in force $2,000,000
No replacement for either
Joint net worth $25 million
He owns commercial real estate firm with $200,000 annual income
She is not employed.
Beneficiary is an Irrevocable Trust for their descendents.
He is one of two primary heirs to his parents estate, which is
currently valued in excess of $200 million and estimated by the agent
to grow at 8% to exceed $600 million in 15 years.
Therefore the agent feels the
total line is justified due to his long term need to defray potential estate tax liabilities
of his existing and future children.
For Case # 3: What is your underwriting decision and why?
The End

				
DOCUMENT INFO
Categories:
Tags:
Stats:
views:2
posted:6/25/2012
language:English
pages:58
jolinmilioncherie jolinmilioncherie http://
About