Non Traditional Business in General Insurance

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					               Non-Traditional
           Insurance & Reinsurance

          The Caribbean Actuarial Association
          2007 Annual Meeting
          6-7 December 2007
          Nassau, The Bahamas




Stéphane Lévesque, FCIA, FSA
Member of the Caribbean Actuarial Association
Agenda
Non-Traditional Insurance & Reinsurance

         Thinking
         Outside
        the Box!!!


                                          2

December 6th - 7th, 2007
Agenda
Non-Traditional Insurance & Reinsurance

       Life Settlements

       Takaful & Retakaful

       Micro-insurance

                                          3

December 6th - 7th, 2007
Life Settlements – What is it?
   “A life settlement is a financial transaction in which
a policyowner possessing an unneeded or unwanted
life insurance policy sells his policy to a third party
for more than the cash value offered by the life
insurance company”.

  “The buyer becomes the new beneficiary and is
responsible for all subsequent premiums.”


                                                            4

December 6th - 7th, 2007
Life Settlements – What is it?
      Life settlement market evolved in the late 1990s
      as an extension of the viatical market
        • Viatical industry was developed in the mid-1980s to
          provide cash to needy AIDS patients
        • Viatical industry received well-earned bad press
        • Many cases of fraud and abuse


=> There are significant differences between the
   previous viatical industry and the current life
   settlement market
                                                                5

December 6th - 7th, 2007
Life Settlements vs. Viatical
                                       Life Settlement                           Viatical

Period                     Late 90's                             Mid-80's
                           Senior citizens over age 65           Terminally ill patients
Policyholders
                           With / without a medical impairment   Mostly AIDS patients

Life                       Longer > 2 years                      Short < 2 years
Expectancy                 Usually between 6 to 10 years         Usually 12 months or less
                           > $100,000                            < $100,000
Policy Size
                           Usually over $250,000                 Usually between $25,000 to $50,000
                           Long-term and portfolio-based         Short-term and opportunistic
Investors                  Large institutional transactions      Small private transactions
                           Structured pricing (Probabilistic)    Unsophisticated pricing (Deterministic)

Regulations                Developing regulations                Very little regulations
                                                                                                           6

December 6th - 7th, 2007
Life Settlements vs. Viatical




                           Vs.




                                 7

December 6th - 7th, 2007
Life Settlements - U.S. Market Overview
      Fastest growing insurance market
        • Grown from $0 in mid-90’s to $12-$15 billion today
      A study by Conning & Co. found that:
        • Senior citizens owned approx. $500 billion worth of
          life insurance (2003)
        • About 20% of policies owned by seniors have life
          settlement values in excess of their CSV
      Aging population and increase in life insurance
      sales at older issue ages will increase market
        • By 2030, the U.S. population over age 65 will double
          from 37 million to 72 million
                                                                 8

December 6th - 7th, 2007
Life Settlements - When & Why?
      The policy is no longer needed or wanted
        • Insured have outlived the risk insured or beneficiaries
        • Business partnership / key employee insurance
      Premiums have become too expensive
        • Relative to income level
      Opportunity to obtain a better insurance policy
        • New underwriting requirements
      Change in estate planning needs
      When lapsing the policy is the only option
        • A study by Milliman USA found that 89% of UL
          policies issued do not pay a death claim
                                                                    9

December 6th - 7th, 2007
Life Settlements - Issues to Consider
      Still a relatively “young” and “inefficient” market
        • Most policyholders are not aware of this option
        • Policyholders may not get the maximum value
        • High transaction costs
      Need more regulations
        • NAIC Viatical Settlement Act enacted in many states
        • Lack of contract disclosure (Commission / fees)
      Questionable sales practices
        • “STOLI”: Stranger-owned Life Insurance
      Financial and tax impact
                                                                10

December 6th - 7th, 2007
Life Settlements - Parties to a Transaction
                           Financial Advisor
      Policyholder




                             Provider "A"      Investors "X"


    Life Settlement
        Brokers              Provider "B"      Investors "Y"



                             Provider "C"      Investors "Z"

                                                               11

December 6th - 7th, 2007
Life Settlements - Industry Implications
      Policyholders
        • Provide a secondary market for life insurance policy
        • May get a better “fair” market value than just lapsing
          the policy for its cash value
      Insurance Company
        • Strong lobbying against Life Settlement
        • May have to provide better value / options to
          consumers
        • May have to review some pricing assumptions
          (Lapse)
      Regulators
        • Need legislation to prevent fraud and abuse
                                                                   12

December 6th - 7th, 2007
Life Settlements - Other Markets
      What about the Caribbean & Latin America?
        • Natural evolution of the life insurance market?
        • It is happening elsewhere
              > United States
              > Starting in Canada in some provinces and in
                 Europe
        • Potential development of new markets will depend on
          the local regulatory environment
            > Insurability interest requirement
            > Transferability right

                                                                13

December 6th - 7th, 2007
Life Settlements – Role of the Actuary
      Advisory Role
        • Provide actuarial services to specific individual
             > Personal Actuary role
      Individual Pricing
        • Getting more sophisticated
        • Probabilistic & stochastic pricing
      Portfolio Modeling
        • Life settlement-backed securities
        • Portfolio / securities stochastic modelling

                                                              14

December 6th - 7th, 2007
Agenda
Non-Traditional Insurance & Reinsurance

       Life Settlements

       Takaful & Retakaful

       Micro-insurance

                                          15

December 6th - 7th, 2007
Takaful - What is it?
      Insurance contract in compliance with the Islamic
      law (Shari’ah Law)
        • Family Takaful:        Life insurance
        • General Takaful: P&C Insurance
      Shari’ah Law - combination of 3 sources
        • Qur’an: Central Islamic text
        • Sunnah: Prophet Muhammad explained and defined
          in practice
        • Interpretations by Islamic Scholars
                 > Reflect current circumstances and economic realities
                 > Results in wide variations
                                                                          16

December 6th - 7th, 2007
Takaful vs. Conventional Insurance
      Conventional Insurance (Life, Health and P&C)
        • Not compatible with the Shari’ah Law
        • Non-permissible elements:
                 > Uncertainty: Timing of payment, amount, or whether
                   made or not
                 > Gambling: Premiums could be small when compared
                   to potential payout
                 > Usury: Interest is not permitted


=> Must make structural changes to conventional
   insurance structure as we know it…
                                                                        17

December 6th - 7th, 2007
Takaful vs. Conventional Insurance
      Some structural solutions:
        • Uncertainty: Ensure that some payments are made in
          one form or another
        • Gambling: Provide some guarantees and / or return of
          premiums benefit
        • Usury: Use Shari’ah compliant investment funds
                  >        Capital gains are allowed
                  >        More investment funds become available




                                                                    18

December 6th - 7th, 2007
Takaful - Contract Transparency
      Full disclosure
        • Contract terms
        • Profit distribution between the participants and the
          “operator”
      Two most popular types of contracts:
        • Mudharaba Model => equity participation
        • Wakala Model => service agency
        • But a good dozen models in total


                                                                 19

December 6th - 7th, 2007
Takaful - Mudharaba Contract Model




                                     20

December 6th - 7th, 2007
Takaful - Wakala Contract Model




                                  21

December 6th - 7th, 2007
Takaful - Shari’ah Board
      Since Takaful is faith based
      Each company is required to have a Shari’ah
      Board
        • Variation
      Board composed of Islamic Scholars
        • Usually 3
        • Recognized and respected in the community (local
          and international)
        • Uphold Islamic Law


                                                             22

December 6th - 7th, 2007
Takaful – Potential Market
      Takaful is a relatively small market but it is
      growing rapidly
        • Insurance penetration among Muslim is very low
          compared to non-Muslim
        • Estimated annual growth of 15% to 30% globally
        • Huge potential market with 20% to 25% of the world
          population




                                                               23

December 6th - 7th, 2007
Takaful – Potential Market
      Takaful is a relatively small market but it is
      growing rapidly
        • According to Eckler’s 2007 study, the potential
          worldwide market by 2015, in terms of new annual
          premiums:
            > Approx. US$6.4 billion for Family Takaful
            > Approx. US$4.9 billion for General Takaful
        • Moody's estimates total Takaful premiums
           > More than US$2 billion in 2005
           > Predicts increase to US$7 billion by 2015
                                                             24

December 6th - 7th, 2007
Takaful - Muslim Population




                              25

December 6th - 7th, 2007
Takaful - Muslim Population
      Worldwide
        • Between 20% and 25% of the world population
        • Mainly Asia, Africa and Middle East
      North America
        • One of the fastest growing segments
                 > About 0.8 million Muslims in Canada
                 > About 3.0 million Muslims in the US




                                                         26

December 6th - 7th, 2007
Takaful - Muslim Population
      The Caribbean, Central & South America
        • Potential to develop a “Niche Market”
        • Approx. 3 million Muslims
             (source: www.islamicpopupation.com)

             Countries               Muslim (%)    Muslim Population
             Trinidad & Tobago       ≈ 6% to 8%       ≈ 110,000
             Honduras                ≈ up to 2%       ≈ 140,000
             Mexico                     ≈ ¼%          ≈ 260,000
             Panama                  ≈ up to 5%       ≈ 150,000
             Argentina               ≈ up to 1%       ≈ 500,000
             Brazil                       ---         ≈ 170,000
             Guyana                     ≈ 10%           ≈ 80,000
             Suriname                   ≈ 20%           ≈ 80,000
                                                                       27

December 6th - 7th, 2007
Takaful & Retakaful
      Until recently the absence of retakaful (“takaful
      reinsurance”) was limiting the growth of takaful
        • Retakaful pools/arms/divisions now available through
          conventional reinsurers
                 > Munich Re, Swiss Re, Converium
                 > Hannover Re - 2007 expected global premium
                   volume US$ 20 million
        • Exclusive retakaful companies
                 > Takaful Re (UAE)
                 > Best Re (Tunisia)

                                                                 28

December 6th - 7th, 2007
Agenda
Non-Traditional Insurance & Reinsurance

       Life Settlements

       Takaful & Retakaful

       Micro-insurance

                                          29

December 6th - 7th, 2007
Micro-insurance – What is it?
      Definition
        • Insurance for poor people in developing countries who
          are not covered by any social or commercial
          insurance schemes (source: Wikipedia)
      Natural evolution of the micro-credit market
        • Remarkable success of Grameen Bank in Bangladesh
        • The World Bank estimates that there are now more
          than 7,000 micro-finance institutions serving some 16
          million poor people
        • CGAP experts estimate that 500 million households
          benefit from these small loans
                                                                  30

December 6th - 7th, 2007
Micro-insurance - Poverty
      1.3 billion live on less than $1 (Purchasing Power
      Parity (“PPP”)) a day *
      Almost half of the world, approx. 3 billion, live on
      less than $2 (PPP) a day**
      Informal economy
        • Unregulated, largely self-employed
        • About 70% of developing countries

* The Other Crisis, World Bank, 1998
** Koffi Anan, speech, October 17th, 2000
                                                             31

December 6th - 7th, 2007
Micro-insurance - Vulnerability
      Live and work in risky environments
      Higher risk of perils
        • Illness and health care related expenses
        • Death
        • Accidental death and disability
        • Loss of property
        • Agricultural losses




                                                     32

December 6th - 7th, 2007
Micro-insurance - Poverty & Vulnerability
      Compound each other
      The poor face
        • Financial loss
        • Continual fear
            > Less likely to pursue income generating
              opportunities
      Consultative Group to Assist the Poor (“CGAP”)
        • Consortium of 33 public and private development
          agencies working to expand access of financial
          services to the poor

                                                            33

December 6th - 7th, 2007
Micro - The Poor & Financial Services
      Having access to financial services
        • Provides the means for making improvements
            > On their own terms
            > Sustainable way
        • Ripple effects through improvements
            > Children’s education
            > Health care services when needed
            > Better health practices



                                                       34

December 6th - 7th, 2007
Micro-insurance
      Natural progression of the micro-credit industry
        • Means to protect the gains that micro-credit clients
          have made
            > Protect the client’s own income
            > Protect the integrity of their core lending group
      When not implemented correctly, leave clients
      unconvinced and unwilling to renew insurance




                                                                  35

December 6th - 7th, 2007
Micro-insurance - Products
      Most needed
        • Life
        • Health
      Demand driven
        • Must fit the needs of the community
        • Systematic product development
        • Minimize product failure
            > Better perception of insurance
            > Greater renewals
            > Faster expansion of market
                                                36

December 6th - 7th, 2007
Micro-insurance - Business Models
      Number of delivery models experimented
        • Partnership between insurer & microfinance
          intermediary
             > Most effective
        • Community Based Organizations (“CBO”)
        • Service providers, such as hospitals
        • Government programs
        • Retail chains


                                                       37

December 6th - 7th, 2007
Micro-insurance - Key to Success
      Partner with local organization for distribution
        • Brand name
        • Clear communication, one page (pictorial) contract
        • Target high participation
        • Efficient premium collection
        • Link with other services




                                                               38

December 6th - 7th, 2007
Micro-insurance - Key to Success
      Clearly defined products
      Rapid service
      Community verification of claims
        • Health
            > Appropriate treatment protocols
            > Health promotion and prevention
      Database to help manage
      Underwriting the community and insurance


                                                 39

December 6th - 7th, 2007
Micro-insurance - Challenges
      High mortality and morbidity
      Assets at risk subject to more claims
      Low administrative margins
      Ability to pay small amounts
      Transforming their own traditional views
        • Micro-insurance can be profitable with innovative
          approaches




                                                              40

December 6th - 7th, 2007
Micro - Transformational Thinking
      Creating efficient organizations
      Creative solutions
      Understand real service issues
      Learning opportunity for staff
        • Knowledge that can be transferred back to current
          market

                           Transform our understanding
                           of insurance and management

                                                              41

December 6th - 7th, 2007
Eckler Ltd. - Thank You!


                           Wherever
                             your business
                                   takes you…


                                  Stéphane Lévesque
                                 slevesque@eckler.ca
                                   +1-416-696-3090
                                                       42

December 6th - 7th, 2007

				
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