Category: Articles

Interpretation of those impressions by the author.

Continuing in a decades old tradition of the Canadian Institute Underwriting providing a great educational forum for underwriters from coast to coast every January they held another very successful seminar in 2007. The content was excellent. The speakers were at the top of their game. The organizers made sure every detail was in place for success. The attendees were there in force eager to learn and share their thoughts. I was fortunate enough to be asked to present on the subject of advisors/brokers relationships with underwriters. Over the last 38 months I have surveyed many advisors and MGAs on what is their perception of the industry and more particularly the underwriter and the whole new business function or process. The most recent follow up survey shows that the opinion of most if not all Canadian life insurers is that there service has deteriorated even further. The underwriter takes it on the chin even though they may not have started the perception.

But enough on that since it is the result of the survey conducted of the attendees which interests me the most right now. There were 75 attendees and they represented a true cross section of Canadian life insurers’ underwriters and indeed a representation from coast to coast. I was happy when 72 o the attendees completed the seminar’s questionnaire. Like advisors and brokers filling insurance applications not all questions were answered for various reasons. Overall the fewest answers were 64 for any one question. This would be I hoped at the time a truly valuable reflection of what underwriters were thinking on a wintry day in January just after the crunch of year end.

The first question asked each how many years they have had an underwriting authority level (the ability to accept or reject business on their sole signature, the power of the pen). I was surprised to find the range of years was from under one to over thirty three. The majority of attendees (46 of 72 respondents) had more than 5 years of underwriting authority. At the other end of the spectrum, twelve respondents had up to one year of authority and they were the ones without that glimmer in their eye from declining too much business (yet). A large benefit comes at this seminar when the neophytes challenge the establishment on the why’s and why not’s of underwriting. Open minded senior (in authority time frame) underwriters can learn to change if the neophytes push hard enough. Neophytes can pick up both good and bad habits from the more established risk taker.

Interaction with those who distribute the life insurers’’ product to me is key to successful relations between those who sell and those who stand in judgement (actually most sit at their desk). When I was a young know nothing risk taker my bosses sent me along with others like me to a course on communication and “selling” or probing. I learned to ask questions, respond sufficiently and deal with angry clients. I also as an aside learned working in reinsurance and dealing with insurers’’ presidents, actuaries and underwriters was far easier than dealing with those who sell our products. From the attendees responses it appears 45 of 70 have taken a communication or sales course. I am not convinced this high number is an accurate reflection of how many actually took a course other than a “good manners on the phone course”. I hope it is true that companies are finally seeing the merit in having risk takers learning more than what is the latest treatment for a weak left ventricle.

It was not surprising to learn only 37 of 72 respondents had any “one on one” interaction in the past two years with advisors! In fact only 11 of 72 had six or more “one on one” session with advisors over a two year period. I guess that explains why the chasm between advisor and underwriter has grown so wide. If you do not interact you do not grow in understanding and delivery. Is this isolation because underwriters just do not have the time or is it because companies want to isolate the decision maker from the advisor?

The question that I positioned as number four in the survey was the one I was most anxious to have an answer to since it was at the very foundation of our industry which is based on trust and in turn comes from forthright participants be they advisor, underwriter or reinsurer. I asked the respondents “what percentage of advisors are 100% forthright?” Starting with the young and uninitiated (one or less years of underwriting authority) we had 4 of 10 underwriters say advisors were 100% forthright 0 to 40% of the time. Not a good start for those who should still be building their own impression and opinion from experience not hearsay. But we all know how powerful gossip and hearsay along with urban myth can be. At the other end of the maturity spectrum, those with five years of underwriting battles under their belt were a little more split in opinions. 10 of 43 respondents thought advisors were 100% forthright only 20% or less of the time. 3 of 43 thought 21 to 49% of the time. Getting better were the 19 of 43 who felt it was between 50 and 80% of the time. Scoring an “A” were the 10 who believed advisors were 100% forthright 81 to 95% of the time. One lone underwriter with three years of authority answered that advisors are 1005 forthright 100% of the time. It was an anonymous survey so no I cannot pass on her/his name.

Am I an idealist when I would like to think that the target of absolute trust through full and complete disclosure should be at least 80% or better? Perhaps if our industry had more interaction and “one on ones” between the two solitudes we could improve the impression since that is all it is an impression.

The next question should have been divided in two to get a real impression of what underwriters think but as it stands it still worked. “What % of advisors do a good job of getting medical and financial information?” There were 18 of 64 respondents who thought advisors did a good job less than 50% of the time. One lone very experienced underwriter felt it was more like closer to 100% of the time. The remaining 45 of the respondents felt the advisor did a good job between 50 and 90% of the time. One added in bold letters that advisors do a better job getting medical information than financial information. Must not deal with financial advisors! This spit of respondents reflects the fact that some companies maintain that 20 to 40% of applications come in to the head office incomplete. What is missing is something from the mundane and trivial to the must have and a showstopper if left out. All would unanimously say this is a “marketing” or “distribution” department problem not an underwriting problem but it is the bad old underwriter who is blamed for asking for the complete answers. Yes we need to know if they had cancer or not and when and where. Da!

How do you judge an underwriter or for that matter an underwriting department? There are two components to the job. One is the quality of the decision. Is the case a standard risk based on best judgment or is there a need for actions like declining or rating the risk? Getting that right is not easy sometimes as there is a lot of grey around the risk selection process (the variables in health are amazingly huge). Make a rare error or exception and it is built into the price but make either too large an exception or too many exceptions and errors and the company will suffer financially (the financial burden of the errors though is often so far off it is hard to rally enough support for quality now because good quality costs money to accomplish). The respondents were almost, but not quite, unanimous in their believe that speed of issue is not the best measure of the underwriters but rather it is quality of their work. Only 4 of 69 respondents thought speed was the best measure. It is also notable that it was 4 underwriters in the 5 plus years of experienced decision making that opted for speed (age does make you faster and perhaps you forget that subconsciously you are worried about quality).

There has been a debate over the last few years as products and the fanciful sales concepts spread (how to make insurance not look like insurance is an art form). Those who sell our industry’s products swear the underwriter has no idea what the product is all about and thus have no right to underwrite it. The survey results show that 45 of 68 respondents believe the underwriter knows the product better than the advisor. There is a funny comment added to one of these answers which was “but that is not saying much!” That is a reflection of the fact the products or the concept is so complex no one understands what it can do or suppose to do. Glad the consumer is smarter than all of us as they must know the product since they buy it.

Over the last five years the reinsurer has been much maligned for causing too much angst amongst underwriters and in turn the distribution networks. We are blamed for everything from poor time service and declination of policies to global warming (the hot air thing). Okay here was the opportunity to ask in a confidential setting “Do reinsurers help with insurers’ quality and time service?” Of the 65 respondents to this question 60.5 said yes! The half a respondent comes from the fact that he/she thought that reinsurers help with quality but not time service. Was that their answer because it was a reinsurer asking the question? Was that their answer because they truly believe it? I like the latter.

Was the exercise worth doing? Absolutely since it in some ways confirmed my own opinions of where the underwriters were in their thinking these days and in other ways worried me that not much has changed in perception of the trust issue. We still have a lot of work to do on the “forthright” part and if we can get that number up to well over 80% across the board I am sure the quality of information will improve making the whole process faster — everybody then wins.

Written by

Ross A. Morton

2007-02-01

When I wrote this in very early 1973 I was three years out of university where I studied Canadian history and abstract mathematics after deciding actuarial science and law were too boring for my warped mind. My greatest “boss” ever, Bob Spittel, and the president at the time of Mercantile and General Reinsurance Canada, Ian Michie, pushed, encouraged, corralled or cajoled me into writing a paper for presentation at the Pacific Insurance Conference (a very prestigious event in the early days). If they liked my paper, if those in Canada who felt it was worthy of representing Canada at the conference and if I would deliver my first real big audience of elders (20 plus years my senior in age and experience) presentation M&G would send my dear wife and I to Japan for the actual conference.

Bob’s prodding and brotherly advice made it all possible. Ian thought that if my wife joined me in such an exotic location she would get pregnant and I would truly be a family man (a deeply held belief for all his male staff). His concept of fertility was somewhat antiquated and this idea was right up there with facing the bed along a north south axis! Bless you Ian for caring.

Anyway the paper past musters by all who signed off on it so off I went to represent Canada. When there my wife and I were treated as royalty since the Japanese loved the article being that it was different and less boring than all the others. The Japanese insurance industry furnished Sue and I with a butler and chauffer for the conference and its ancillary events while poor President Ian rode with all other delegates in buses. Looking back the article is so tame compared to much of my writing. Was it perhaps the long beautiful legs of my wife in the shortest of mini skirts (it is 1973) that really was the attraction and not my words?

Anyway if anyone wants the Japanese version I have it also but I cannot attest to the quality of translation or that it may indeed be better than the English version.

Ross

2004-04-07

Pacific Insurance Conference – 1973

The Canadian Life insurance industry has relatively stabilized itself in the realm of new product development in the last couple of years. There are, however, various “old products” which have been revamped to exploit current market potential arising from government tax changes or economics inflation.

At the present time, over fifty life insurance companies operating in Canada are offering a form of variable contract in which the policyholder’s benefit is variable according to the performance of a special investment fund. Basically, there are five forms the variable contract takes: a decreasing term combined with and “increasing” investment fund: guaranteed level insurance plus accumulated fund values; minimum death benefit plus investment fund value; increasing minimum death benefit due to investment fund appreciation; and yearly adjusted death benefit either increased or decreased value. Sales results of all forms have been mediocre but one Canadian company has experienced sales far and above the Canadian Life Insurance Association’s most liberal predictions.

As a result of recent Canadian federal government tax legislation changes, life insurance companies are experiencing and all too needed influx of individual savings dollars back into the registered retirement savings plans. The market for these plans has grown considerably and there is every expectation that is trend will continue.

The tax legislation changes also provided an incentive for the sales of the income-averaging annuity. The annuity was not a new product but an old product adapted to entice the resultant sales from a market predicted to produce $12,000,000 of premium income per year.

Initial sales results of an inflation-linked family income plan have not be exactly encouraging, but rather discouraging. This plan, linked as it is to a cost-of-living index, could prove to be more marked in the future should inflation continue to devalue the dollar’s purchasing power.

The paper makes short mention of the deposit term type policy and its generally good sales results. The persistency problem is very negligible with this plan and companies are able to almost ignore the problems of the early lapse.

The almost totally revised federal Unemployment Insurance Act necessitated a revision of privately offered accident and sickness insurance coverage. With the exception of the self -employed, the federal unemployment scheme provided mandatory accident and sickness benefits to all employed Canadians. Three approaches (an integration provision, and elimination period and a split benefit) were instituted to offset duplication by private accident and sickness insurers. The new plans were really “old plans” with changed indemnification schedules.

The recent trends in new Canadian products have been toward cheaper term insurance, which could lead to super selective risk appraisal. The consumerist movement may shortly take a very critical appraisal of the life insurance industry, just as it has delved into the automobile insurance industry resulting in government intervention.

WHAT NEW CANADIAN INSURANCE PROCUDTS

Introduction

1. In the fall of 1972, the Excelsior Life Insurance Company published the results of its survey of Agents concerning their attitudes of the insurance industry. A mere 1% of those surveyed replied that “lack of products” was a major cause of their agency not doing more life insurance business. Other than the occasional agent requesting a mutation of an existing policy form, it would appear that the Canadian insurance industry has stabilized itself in the area of new product development.

2. By defining new product, one must not include the confusing method of renaming old products so the name coincides with an advertiser’s extravagant plans to “con” the public into spending money on insurance. New products in the past have included family policies, guaranteed insurability benefits, fifth dividend options, variable annuities, variable life and deposit. There have been no such innovations in Canadian products during the past two years, other than the introduction, by companies, of policies which have been available to the public through competition insurance companies previously.

3. This paper, therefore, will not delve into the introduction of so-called “new products” but will concentrate on the old products which are generating the greatest amount of publicity in the insurance industry today in Canada. The first two policy types which come to mind are the variable contracts and the registered retirement savings plans; however, one must also include the mention of deposit tremor modified term, economy linked family income plan and the income averaging annuity contracts.

4. The latter part of this paper will delve into the implications of the revised Unemployment Insurance Act on the Canadian accident and sickness insurance products. The products involved in this area are not “new products” but are old products with new indemnification schedules and rules.

VARIABLE CONTRACT

5. Approximately fifty life insurance companies operating in Canada are now offering the variable contract to the public. The majority of these contracts are sold on the promise that they will fight inflation; i.e., the variable contract combines previously known insurance features and certain required guarantees with the publicly appealing opportunity for an inflation offset and growth factor. Generally, the policyholder’s benefits vary according to the performance of a special investment fund, usually consisting of common stocks, but there are those funds that include bonds and mortgages. Prior to variable contracts, the ordinary life participating policy, with its value depending mainly on the life insurance company performance regarding expenses, mortality and investment returns, was the closest plan available to combat the inflationary trend of the Canadian economy.

6. In connection with life insurance, there are five mutations of the variable contract available in Canada. First, there is the form which combines a decreasing term life insurance contract with and investment fund that is predicated to increase in value to exactly counter balance the decrease in life coverage. At maturity, which is frequently age 65, the guaranteed amount of insurance has been reduced to zero and the amount accumulated in the special investment fund becomes payable.

7. A second similar form of contract provides a guaranteed level amount of insurance, payable on death, in addition to the amount accumulated in the special investment fund. As some specified age, again typically age 65, the policy is changed to one providing a guaranteed level amount of insurance for the balance of the policyholder’s lifetime. This new amount of insurance is determined by multiplying the amount in the special investment fund at the age by a factor guaranteed when the contract was originally issued.

8. Under a third and somewhat different form of contract, a minimum death benefit is guaranteed from the inception of the contract. Included in this death benefits is the amount accumulated in the special investment fund; thus, if the latter amount exceeds the amount of the guarantee, the amount in the fund will be paid; whereas, if he amount in the fund is less than the guarantee, the guaranteed amount will be disbursed to the beneficiary.

9. A variation of this third type of contract provides that the guaranteed minimum death benefit will be increased by and appreciation in the special investment fund over the premiums paid into the fund. Both the latter tow types of contracts more often than not provide for a maturity at a specified age, frequently age 65, and for the payment of the amount in the fund or a guaranteed amount if greater at that time.

10. By searching further, one finds another form of contract in this broad category of variable contracts, which provides an initial amount of insurance which is adjusted annually through the application of any growth or decline in the special investment fund over the past year to provide additional or possibly reduced amounts of insurance. This latter form of contract generally provides that some part of the insurance is fully guaranteed and that only the balance will reflect the performance of the special investment fund.

11. Almost all variable contracts have three basic features: benefits on maturity or death may not fall below a pre-determined floor; cash surrender values are provided through out the term of the contract; the amount of cash surrender values is not guaranteed and reflects the fund’s performance; and a policyholder can convert at any time to a fully guaranteed life insurance policy. Purchasing power of the conventional insurance surrender or maturity dollar has eroded to a point where this form of long-term guarantee investment was regarded with skepticism by much of the buying public. Therefore, the public in the past couple of years has been conditioned to expect more from its hard-earned savings dollar. The variable contract has found a ready-made market as well as a generally willing sales force. However, the life insurance companies offering variable contracts have met with variable sales results.

12. On rather large Canadian company, following the agents’ request for an equity linked policy to meet competition, introduced such a policy in the 1972 calendar year. One would have expected to an overwhelming number of applications to be processed by this well known and respected company, especially since various members of the Canadian Life Insurance Association predicted the variable contract would account for over fifty per cent of sales volume in the early seventies. However, the company mentioned has only experienced a sales result of two per cent of its total number of policies sold. The one encouraging item is that the average size ($15,000) of the equity linked plan is greater than its overall average size policy ($12,000).

13. The variable life contract has not exclusively met with such an unenthusiastic response as a sales result. One Canadian company has increased its volume by more than double its 1970 volume and became the fastest growing life insurance company in Canada. The bulk of their sales – ninety per cent – has been in the form of an equity linked policy utilizing a common stock based fund. A fifty per cent increase in sales force has been experienced and the company is truly based on the variable contract. Their plans for the future include selling life insurance and annuity policies whose values are tied to and fluctuate with a fund of real estate investments. Presently, there are problems existing with government authorities concerning the liquidity problem of such a fund, but these may soon be resolved. Real estate is the one commodity that we cannot artificially manufacture and as its scarcity increases its value increases. A property-linked fund should prove to be popular, since most Canadians are constantly aware of the rapidly increasing value of real estate and realize it is the safest investment, barring a general depression.

14. Other sales results from Canadian companies show results which are almost invariably below the Canadian Life Insurance Association members’ predictions, and the agency demand for the variable contract has currently stagnated. Companies who are actively soliciting sales of the variable contracts are obtaining reasonable sales results. On the other hand, the companies that merely added the contract to placate agency demands are not truly encouraging abundant ales results. This possibly reflects back to my opening remark that only one per cent of the agents surveyed felt that the lack of new products was a reason for fewer life sales.

REGISTERED RETIREMENT SAVINGS PLANS

15. Life insurance as a form of savings has stagnated during the period 1962 to 1972. A decade ago, almost one-half of a Canadian’s personal savings went into life insurance policies; whereas, today the figure is approximately one-fifth of his savings. In fact, government issued Canadian Savings Bonds have overtaken life insurance savings. Thanks to recent tax legislation changes, which allow the Canadian taxpayer to deduct up to $4,000 if self-employed (or $2,500 if not self-employed) from his taxable income if the money is used for retirement savings, there has been an influx of savings dollars back into life insurance. The taxpayer is always looking for ways and means to pay fewer dollars to the Taxation Department. Insurance companies, as well as trust companies and the like, are now advertising the availability of their own registered retirement savings plans. These plans are tax shelters which allow the purchaser to invest gross interest and gross capital gains before taxation. The buyer may even borrow money to buy the plan, with the added bonus that the interest on the borrowed funds is also tax deductible.

16. In 1972 the dollar value of the registered retirement savings plan deductions was $320,000,000, which represents an increase of forty-two per cent over the 1971 dollar in those taking advantage of the deductions – representing 248,719 Canadians. As an example of the tax savings, a self-employed taxpayer earning $20,000 per year could save $1,698 in taxes by diverting $4,000 of his income into a registered retirement savings plan.

17. It must be stressed that this is not a new product, but it is a new incentive to the buying public to purchase old life insurance products (provided the product matures by the owner’s seventy-first birthday) such as endowments, annuities, and some of the variable life contracts. The outlook for an ever-increasing volume of business is this area is very good, provided the Canadian government does not reduce this tax deduction.

18. The registered retirement savings plans, offered by Canadian insurance companies, produce a soaring premium income, excellent low lapse ratio and do not allow the applicant-owner to borrow any portion of the funds value. The direct result is an abnormally high cash flow into the life insurance industry. Thus, the larger insurance companies are evolving into the real estate development industry in order to obtain adequate returns on their large capital resources. By financially supporting a total residential, industrial or commercial venture from the land acquisition through to the leasing to tenants, larger insurance companies experience yields on their investment of 8% or higher, while taking advantage of the cash flow. The financing of existing real estate, producing less than a 7% yield, is therefore left to the European financial centers.

19. A second side effect of the registered retirement savings plans is their stabilizing effect on the Toronto Stock Exchange. The laws stipulate 90% of these registered funds be invested in Canadian securities. This, therefore, constantly provides a reliable flow of capital into the Toronto Stock Exchange moderating the periods of “bear” markets which are more evident on the New York Stock Exchange.

20. Recently, the Canadian insurance industry has seen the introduction of plans, not really new plans, which are provided to meet the current trend in the industry. One plan is meant to take advantage of the changes in income tax legislation which provides for further tax shelter. The second plan has been introduced to combat inflation. The third plan is meant to combat the persistency problem with life insurance contracts and especially term contracts.

INCOME AVERAGING ANNUITIES

21. With the introduction of the revised Income Tax in Canada in January 1972, the insurance industry found a ready-made incentive to the buying public to buy income averaging annuities. The applicant must buy the income averaging annuity within the taxation year or within sixty days of the year-end. The buyer can then deduct from his taxable income the lesser of the actual amount paid for his income averaging annuity and the amount of his income which qualifies under the Income Tax Act minus the sum equal to one year of payments. This Act is quite appropriate in areas where an individual may receive a large sum of money as income in any one taxation year which he may not anticipate receiving in future years.

22. There are various areas where the income averaging annuity would be very appropriate, and they include:

(1) Any payment out of the superannuation or pension fund can be transferred into an income averaging annuity unless there is some provision in the fund or legislation that does not permit it

(2) Payment upon retirement in recognition of long service, can be tax sheltered in an income averaging annuity.

(3) Single payment from an employee’s profit sharing plan, in satisfaction of his rights under the plan, can be transferred to an income averaging annuity.

(4) The new Income Tax Annuity provides for a number of new interesting opportunities for transferring funds such as deferred profit sharing plans which can be withdrawn to an income averaging annuity.

(5) If an employee’s pension is amended and a lump sum becomes payable to him even though he continues to be a member, he can transfer the payment to an income averaging annuity.

(6) The payment from an employer or former employer in respect of loss of employment (i.e., severance pay), if paid in the year of retirement or the following year, can also be tax sheltered.

(7) A return of premiums received from a registered retirement savings plan on the death of an annuitant can be transferred to an income averaging annuity.

(8) Net taxable gains are also transferable into an income averaging annuity. Also, incomes from production of a literary, dramatic, musical or artistic work or income from activities as an athlete, musician or public entertainer can also be “averaged” to cut taxes.

23. The annuity in question must be purchased from a “person” licensed or authorized to carry on an annuity business in Canada, which means a life insurance company. The income averaging annuity can be an annuity certain for a fixed period of up to fifteen years – it can also be a life annuity with up to fifteen years guaranteed. However, in neither case may the guarantee period go beyond age 85, nor may the benefits start later than ten months after the purchase of the annuity. The income must be level for as long as the annuity is payable.

24. Even though the individuals affected by such annuity plans are in the minority in Canada, there is indeed a market for this type of plan and it has been predicted that there will be sales of approximately ten to twelve million dollars in premium in the next couple of years from this plan. One company to date has experienced about two million dollars of sales in its first year, which is, in their opinion, a very good sales result.

INFLATION AND FAMILY PLANS

25. Inflation problems were mentioned earlier in connection with the variable contracts, and how variable contracts were aimed at fighting inflation. One Canadian company has recently introduced and inflation linked family income plan which allows for the benefit payable to be linked to the cost of living. The death benefits payable increase yearly according to the rise in the cost of living, with the provision that the increase is no more than twenty per cent in one year and a guaranteed minimum increase of four per cent in any one year. The plan is convertible at any time for the amount of the increased value, which depends again on the economic inflation factor. To date, the sales results of this plan have not been as good as expected and no real trend can be foreseen at the present time, even though the plan should appeal to those people worried about the purchasing power of their savings dollar in the future.

DEPOSIT TERM

26. Although the problem of persistency in Canada has shown a decrease in the past couple of years – decreasing from a fifteen point one per cent lapse rate in mid 1971 to a thirteen per cent lapse rate by the end of 1972 – it is still a major insurance problem. One product, aimed at eliminating the financial strain of lapses, has just recently been marketed by a couple of insurers in Canada. This is the deposit term type of policy.

27. The company that has experienced the best sales result with this plan sells a modified term plan on the basis of a ten year renewable term, with a deposit that varies by age (example, at age 20 the deposit is $5.50 per mil and age 60 the deposit is $16.96 per mil). With the deposit term, this company has experienced a very low lapse rate of two per cent and its sales are now forty per cent of its total business. Since no portion of the deposit is returnable at time of lapse, the company feels that it has more than covered its first year expenses and thus does not have to worry about early persistency problems. The commissions to agents are 100 per cent in the first year with nil commissions on renewal, and the commission is based on the regular term premium, not on the combined regular premium plus deposit.

28. We possibly will see in the future more companies selling this plan in order to combat a persistency problem on term business.

ACCIDENT AND SICKNESS INSURANCE

29. On June 23rd, 1971, the Canadian federal government passed, in parliament, a new Unemployment Insurance act which affected the insurance market by making insurers, issuing accident and sickness policies, adapt “old plans” to a “new market”. Again, we did not see a rash of new products, merely a rash of policy changes. Surprisingly enough, most insurers left the necessary changes to the last possible moment; most changes not being introduced until well into the 1972 year when the Unemployment Insurance Act was in full momentum and ready to start on July 1st, 1972.

30. Significant sections of the new Act as they affect insurers were:

(a) Universal coverage was enforced; thus employees not self employed were not included. It has brought into the scheme some one million more employees previously excluded due to their salaries (earning more that $7,800 per year.)

(b) The new act provides benefits after eight weeks of insurable employment in the past fifty-two weeks, making it closer to insurance company practices.

(c) Contributions are scaled to earnings while benefits are expressed as a percentage of earnings; benefits are more related to protecting a person’s standard of living and adjust automatically with that standard.

(d) Sickness and pregnancy were added as valid reasons to draw benefits under the Unemployment Insurance Scheme.

(e) The new Act takes the position of “second payer” only with regards to group policies and not to individual policies which are bought personally by he claimant.

31. The insurance industry countered that major changes would not be required to be introduced with the coming into effect of the Unemployment Insurance Act, and that coverage would retain the flexibility that has always been characteristic of individual policies providing income replacement benefits. One such insurer stated: “ Our underwriting practices considers the Unemployment Insurance Act benefits to be like any other existing coverage and we try to ensure that any benefits offered by our company do not allow for unnecessary or duplicate coverage.”

32. Generally, three approaches: an integration provision, and elimination period, and a split benefit were instituted to offset possible duplication and the problem of over-insurance. The integration provision approach controls the amount the insured will receive, or the insurer will pay, when the insured is concurrently entitled to receive Unemployment Insurance benefits. The provision would reduce the monthly benefit of the policy, not the government benefits. Unfortunately, the reliance on this provision alone results in poor sales results and/or policy owner dissatisfaction and heavy lapses. The insured prefers to know that he will receive the full benefits paid for and expected, regardless of what the agent told him at the time of the sale.

33. The elimination period approach, commonly a one hundred and twenty day elimination period, is a second method of combating the over insurance problem in the early stages of benefit. However, as one must qualify by twenty weeks’ contributions under the Unemployment Insurance Act for entitlement to its cash benefits, it is quite possible that a policy owner may not indeed qualify; thus, one could be left with a loss of earnings and no adequate replacement for the one hundred and twenty day elimination period. We also have the factor that Unemployment Sickness benefits can be deferred until payments under a registered group of sickness plan are exhausted, thus leaving the insured over-insured for a possible one hundred and twenty day period. Many companies have been endeavoring to sell this approach. Proposed insureds, realizing the delays encountered with dealing with a government agency and being unfamiliar with the available Unemployment Insurance Sickness benefits, have, however, been rather reluctant to purchase a plan that does not benefit them for one hundred and twenty days.

34. The third approach, split benefits, has been in use by some companies for some time. The Unemployment Insurance benefit is taxable income; this, insurers are issuing policies with modest benefits for the first seventeen weeks and then for the full qualifying amount thereafter continuing for the balance covered benefit period. Again, sales on this type of plan are hard to make, since the agent is faced with a communication problem. The buyer still prefers to know that if he is purchasing a benefit he is purchasing the full benefit and not twenty five per cent now and the balance after seventeen weeks.

35. Various combinations of these approaches (i.e., the integration approach in conjunction with the split benefit approach) are being used, but all it appears to be doing is confusing the consumer, and not encouraging good sales results.

36. A self-employed individual is purchasing more and more accident and sickness insurance on the conventional plans available. This market is relatively unaffected by the Unemployment Insurance Act, and thus not burdened with further confusing approaches concerning the how’s and when’s of paying benefits. Further inducement to the professional, self-employed market is the recent introduction of the return of premium on disability income policies. The policy generally provides for the return of the three-quarters of the paid in premiums with the insured paying about forty per cent extra in order to provide for this benefit. Those consumers, who had previously believed they were better off self-insuring themselves against loss of revenue, are now purchasing a plan that “always” gives them something back.

RECENT TRENDS

37. Since the Canadian life insurance industry has no new legitimate “new products”, one would find it hard to summarize the trends of “new products”. Instead, possibly the above comments on life and accident and sickness insurance shows that the recent trend has been more centered on the marketing of old products to produce greater sales results. There have also been various other forms of marketing to increase sales results, and they included sales through catalogue order forms, mass merchandising, amongst other “gimmick” type of solicitation. The products offered are not new but they do, however, fill the need for a market that has been virtually left to stagnate. Since the amount of insurance that this market is seeking generally produces a small commission, it does not attract the agent to a possible sale. Thus, by a direct mail or mass merchandising approach, this market is beginning to be solicited once again, but not by the professional sales force, rather through a mail order type business.

38. There is a definite trend, recently, to counter the increasing competition to sell “cheap” term by decreasing to the lowest, and possibly below, the rates charged to the consumer. These old plans with their new bargain basement rates cannot withstand the usual expected mortality losses that are based on the insured being given a standard premium when his individually assessed mortality falls somewhere between eighty per cent and one hundred and thirty per cent of normal. As a result, these new rates will warrant acceptance of only those lives that are assessed at one per cent mortality or better, excluding literally millions in the one hundred and one per cent to one hundred and thirty per cent category presently obtaining standard rates. This latter group must reapply on a different plan which has the conventional rate structure.

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39. If this trend for new product rates continues, it could lead to rates on certain products for those who show a more and more finite mortality; i.e., ninety-one to ninety-two percent, ninety-three to ninety-four per cent, ninety-four to ninety-five per cent, … one hundred and twenty eight to one hundred and twenty-nine per cent,… If this happens, the Canadian insurance industry will, by such a pricing structure, be offering rate classifications similar to automobile insurance rates. A super standard life risk will be paying a lower premium, just as the good driver with merit “discount” pays less for automobile coverage. The average standard life risk, if there is such an animal, will be paying the conventional rate, just as the average (one accident every couple of years) driver pays. The just substandard, or borderline standard life, will pay more in premiums, similar to the poor driver. The average driver’s rates are now going up at a phenomenal rate, coinciding with the poor driver’s experience and rates; only the good drivers are stabilizing. It seems bound to hold true for the life insurance rates if the trend continues for a “cheap” rate structure.

40. The public is now demanding that the individual provincial governments investigate the automobile insurance industry and it has resulted so far in three out of ten provinces now providing a basic automobile coverage and excluding all private enterprise for the driving public. It will not take the various consumers’ associations long to realize that the life insurance industry may require a very similar attack on its practices if the above-noted trend continues.

41. Competition is generally very susceptible in our society, but when the competition adversely affects the status quo of the purchasing public, it is unnecessary and unwarranted. Hopefully, the industry will not bow to agent demands for lower rates for much longer, but will find a better and more equitable method to supply the necessary competitive edge.

42. Mr. William MacFarlane, in his article entitled “Consumers – no longer a Non-word” in the National Underwriter of January 8, 1972, stated that “ The Life insurance industry today, unlike its counter parting the Property and Liability field, has been the happy victims of virtually complete neglect as far as a consumerism movement is concerned. The sleepy giant has been nudged on occasion, prodded on others, has rolled over and yawned, and then evidently brushed off its detractors and unspectacularly gone back to doing business in the same old way and at the same old stand.”

43. As stated at the very beginning of my talk, new products are not really what the life insurance industry needs. With the rise of consumerism and the consumerist and related groups, the life insurance industry can expect to undergo a scrutiny as never before encountered. Developing new products just to please a minority group is not what is required. The life insurance industry should take a look at the products it now sells and possibly offer even fewer policy types in the future. There should be a tendency in the future to drop all the various and overly confusing policy names as well as making the policies much simpler for the average insured.

Another in the series of articles encouraged by Steve Carlson of Marketing Options. The industry was full of concern for whom and what were reinsurers. I was doing several speeches across Canada on the subject of reinsurance and retrocession. Steve pushed me to give an overview of the industry seldom seen by the distributor. I tried to write an article that outlined how it worked and also strived to be neutral as to which reisnurer was best (there was no best at that time, but there was mediocrity).

Distributors wanted to know why their product manufacturer (insurer) would use a certain reisnurer and thus not have access to the flexibility of many reinsurers. Times changed by the end of the 1990’s most companies used multiple reinsurers to allow for maximum capacity and greatest flexibility in product and risk selection.

Ross

2004-04-07

Marketing Options

November 1990

If you have been in the life insurance business long enough you can probably remember when you did not know the word reinsurance existed. In those days, if you were employed by a reinsurer, you told the person next to you on the plane that you were an insurance agent or that you were calculating random but known theories of mortality. The first was to ward of unwanted conversation, the second to attract their probing dialogue. Here we are in 1990 with the reinsurers so far out of the closet they almost refuse to go back in even when encourage by insurers. Every agent has heard the word ‘reinsurer’ or those infamous words ‘the reinsurer has declined’.

The life reinsurance industry environment has been one of the unprecedented growth and change that was not predicted in the 1970s. The number of competitors grew as the exclusive reinsurers with head offices or ownership outside of Canada came to dominate those local companies who historically touched on reinsurance via reciprocity (the gentlemanly exchange of business between companies). At the same time, local but smaller Canadian exclusive reinsurers aligned themselves with European or American reinsurers to provide a capacity equivalent to the larger international participants.

Now the reinsurance business in Canada is comprised of about 20% of the sums insured written in a year or the astronomical amount in 1989 of over $15 billion. The reward, or reinsurance premium involved, however does not do justice to the amount of risk since it hovers around the 4% figure. The insurance industry is intelligent in that it reinsures as much risk as possible but is stingy with its premiums.

Mergers and acquisitions that are transpiring in Europe as well as the contraction of the Canadian industry makes for some interesting scenarios that are purely speculative. For example, will the reinsurance industry decrease from over 100 players internationally to a dozen or so reinsurance conglomerates? Will the Canadian insurance industry shrink to 40 companies, or twelve, if you listen to the real pessimists?

The issue of AIDS pricing was truly a means of increasing the charge for reinsurance risk taking – a direction that was surely needed. There was no margin in the reinsurer’s price to cover the additional mortality due to the virus. A healthy market requires a competitive price from the company to the consumer and a competitive price from the reinsurer to the company.

When the final tally comes in the industry has many competitors for the reinsured volumes available. The competitors are one thing above all else, competitive. (The market is only marginally increasing while reinsurers need large volumes to sustain them through the 1990s) A ceding company can coerce a lucrative deal with the reinsurer it can in turn choose one of several alternatives: give the agent higher commissions; lower the price to the potential policyholder; or pocket the margin as profit for its owners. Which is most often chosen is as easy for the novice to pick as it is for the most seasoned veteran of the insurance industry.

The price the reinsurer charges are, in a net sense, much thinner than the price in the rate book. The reinsurer can be charging simply mortality (approaching zero in the early years for some models) with modest additions for expenses (usually zero – the loss leader theory) and profit (try for bank interest rates, if you dare). What the reinsurer is alluding to is the theoretical decree that only the original ceding company has higher expenses and high profit assumptions.

The second most important element in marrying a reinsurer is price… The third most important element is, you’ve guessed it, price.

As a company moves down the list, which does become repetitive, you do reach other elements that go into the decision making process that ends with choosing a reinsurer for the next twelve months. No where on the list is there an item called ‘client relations’. About the closest is the tried and true category of head office underwriting support. This is ranked number one when there is a problem but falls to eighteenth place when all is quiet on the difficult case front.

The support that an agent needs from the underwriter on the difficult case is beyond price because it often has a value that does not equate to dollars but only to peace of mind and confidence. If the agents are well serviced they are less likely to get the unpleasant surprise that a competitor has found a better price. The agent, who is at the forefront, needs to know that the offer he is presenting to the client is the best given the myriad of factors influencing an applicant’s insurability. The reinsurer provides support to that head office underwriter by ensuring the availability of the latest risk classification material. If the case is outside of the normal, then quick, concise assistance should be available to that underwriter.

Traditionally, the support of the reinsurer’s underwriting department was closeted away well beyond the agent’s group. It was possibly considered wrong to have the reinsurance underwriter know anything about the world of the agent. The ivory tower of the reinsurer’s underwriter even had a moat around it. Today we have witnessed these underwriters boldly leaving the tower to venture into the camps of the producers to actually see and hear the realities of today’s jumbo cases and somewhat rated lives. All of a sudden there is an understanding, not total yet, but growing. Agents have even been known to now befriend a reinsurer and vice versa.

Support for the unusual case, be it on a complex financial issue or a specific medical problem, is of utmost importance when choosing the reinsurer. If it is ignored the agent is left with not 95% of cases being issued standard but maybe 85%. That extra one in ten could be costly. To balance the accolades that a great reinsurance underwriter brings to the agent/ceding company relationship is the worry by some head office underwriters that it occasionally goes too far. The reference, of course, is to the reinsurance underwriter who may overstep his role and both jeopardize the integrity of the ceding company underwriter or make and unfulfillable promise to an agent of group of agents.

Does every other element pale in comparison to the foregoing? Yes, says the underwriter. Putting the big picture together, the price and underwriter factors are probably the most important issues between company, reinsurer and agent. The fact that the reinsurer has terrific administrative systems and people is important to the company but a non issue to the agent. If the flow of risk and premium between reinsurer and company is fouled up rarely could it impact the customer or agent.

The unfettered commitment of the reinsurer to the life reinsurance business and to the particular company is an element to consider but of only trivial consequence to the agent. The agent should have the confidence to the reinsurer is involved for the long term and takes time to stay abreast of agent issues, but that’s it.

There are two remaining elements a life company considers when selecting a reinsurer and both could be at the top of the list but both could be deemed so fundamental that they are present without being listed. The two elements are related since very rarely do you have the one without the other. Top performing people work in an environment that knows the financial stability is behind them since it is they who risk personal reputation by implying something that is not there. Financially stable reinsurance companies can attract the best people to protect that stability and enhance it. You simply can’t have on without the other. The marriage of the best reinsurance people with the mightiest of reinsurance giants, either stand alone companies or networks of diverse interest, gives peace of mind to the ceding company.

There has been much said about the financial weakness of the life reinsurers. Unfortunately most of the rumor is make believe or wishful thinking by in secure individuals or dubious competitors. No life reinsurer was involved in the reinsurance difficulties of the non life industry. As a rough guess, less than 4% of Canadian reinsurance volume is with unlicensed or unaccredited reinsurers. The last two or three million of $30 million case must be covered somewhere. To the best of my knowledge, the primary reinsurers operating in Canada are all federally licensed or accredited, thus meeting the financial requirements and scrutiny of the Department of Insurance and it’s army of auditors.

Go with a reinsurer to lunch and draw your own conclusions about their value to the industry. It would be hard to imagine anyone concluding anything other than they are great people doing an exemplary job in a confusing industry. Remember to base your judgment on price (who pays the bill?), price (who offers to pay the bill?), price (the restaurant chosen), the underwriting support (the number of times the word ‘standard’ is used), administration (did the reinsurer eat lunch using utensils in the proper order?), commitment ( the number of times he/she fell asleep), financial stability (did the maitre’d politely return the reinsurer’s credit card and ask for cash?) and people (was it a real smile or was it painted on?).

I may be opinionated but I am not one to have long drawn out debates on issues where the outcome could go either way. Debating with my parents over the “bed time” or use of the car were rarely won by yours truly. I learned the fine art of trying to set up a win while fighting a losing battle. Loving parents would remember my conceding to their wisdom as to when to sleep and when to drive, thus giving in to my next request strategically structured to look like a major concession compared to previous loss. Ever since my days in school on the debate team I have steered clear of taking a side artificially. I cannot fake my emotions. I like my emotions and passions to shine through whenever I speak and as a wise mentor once told me that implies arguing for only what you believe in strongly.

To get to where life reinsurance is today in Canada and to a degree in the world was there an evolution or a revolution. This was the question to be debated in the wisdom of the executive of the Canadian Reinsurance Conference (April 8th, 1999 Royal York Hotel). The CRC executive called on Bill Tyler of Lincoln Re (Fort Wayne, Indiana) and yours truly to be the combatants. Hugh Haney, ex President of Financial Life and sage consumer of reinsurance for decades, was to serve as referee. The two of us combatants were equally matched with 30 years insurance service although Bill’s was all under the brand of Lincoln and mine was via a myriad of wily tutors.

At the outset I took the stand that the only difference between evolution and revolution was the letter “R” at the start, so how could we have a debate. When you are as old as me you have seen the cycle repeat itself and from numerous decades of exposure the changes all become evolutionary at first glance. At second glance I thought there were spikes of revolution. The participants were to decide which side they sat on given a strict definition of each word Hugh dug out of his historical pleadings to MGA’s. This should be like debating which side of the anatomy the sporran is worn.

Bill and I quickly decided we were going to keep our beliefs to ourselves. We built our presentations not really knowing the opponents stand. All we knew was that the subject was to be segmented into four sub classes of reinsurance issues namely, “financial reinsurance”, “mortality”, “mergers and acquisitions”, and “technology”. From that early point on I knew I could be me, unencumbered by rules that stymied creativity. There was no prize for winning but I mentally saw myself as David against Goliath, Canada versus the USA, tradition versus “Off the Wall”, etc.

First on the agenda of topics was the financial reinsurance topic. Humour has a disarming impact on any audience. I started my dissertation with a picture from the 1800’s depicting a circle of the era’s business elite pointing fingers at each other with no clear indication where to start or finish. The caption read “Who has the people’s money?”. In a reinsurance context the question would be who has the capital (holds the reserves, puts the money away for the future, etc.)? The expertise in both ceded and assumed reinsurance have been fantastic at the art and science of maximizing limited capital for the benefit of all and for the most part in a fashion that has proved very prudent.

The original term for financial reinsurance was “surplus relief”. This term fell into disfavour in the 1980’s because of the abuse of the concept and the question of real transfer of risk for reward. Today’s financial reinsurance skill evolved slowly as the technology improved to analyze risk, personnel broke out of the traditional thinking and confidence emerged in the new concepts. The concepts included new terminology that only the most brilliant and abstract could dream up. Amongst the terms of today are securitization, counter party risk, Seg fund exposure, hedge fund and safe derivatives, CATePUTS, evergreen clauses and some deciduous trees, financial restructuring, regulatory arbitrage (=offshore), and of course the phrase “Do it through Barbados, Bermuda, Turks or Ross’ backyard”. Standing firmly behind these financially engineered marvels is the security of “class A-! Floating rate defeasance notes, paying a coupon rate of LIBOR 1.75% and rated AAA…” Certainly looks like the banks have had their input already on the world of reinsurance.

If the foregoing paragraph left you confused you now understand the position of 00% of the people who supposedly work in the assumption or ceding of insurance under the umbrella of “financial reinsurance”. Like most of us by the time you grasped the full intricacies of words and statements within the confines of “financial reinsurance” new words and statements would have emerged to keep you eternally perplexed like some of Joseph Conrad’s deeper novels.

Financial reinsurance has evolved from a simplistic usage of regulatory differences or oversights to one of complex legal, accounting and actuarial smarts. Someone once said that reinsurance from a financial perspective could be defined as anything where there is a 10% chance of a 10% loss. I would hasten to add that in life reinsurance that is a good definition but in the reality of health reinsurance results indicate a 90% chance of a 110% loss. A true revolution in the business would be recognized when health reinsurance is always profitable at least from a risk selection process.

The use of judicious financial reinsurance today has emerged as one of the main building blocks of many companies’ demutualization schemes or the rise and consistency of bottom line numbers. As capital management continues to be front and centre we are probably going to witness a further evolution of financial reinsurance albeit it may have a revolutionary new name.

After the vagueness of financial razzmatazz (I warned you the words would change) the debate or friendly sparring moved to the cornerstone a reinsurer’s success, mortality. Often presented as the core competency, mortality is nothing more than the educated wagering on how soon how many will lapse, replace, alter, amend, going on long term waiver of premium or, heaven forbid, die. No one in the insurance or reinsurance business has yet to open a Chinese fortune cookie to read “The mortality table you used today is too optimistic!” but we do stand the chance that the message could read “That wasn’t chicken.”

For decades and centuries our mortality continued and continues to improve. Every time we project the insured population death rate we do it with the comfort that every previous prediction was realized and in fact overly pessimistic. I gave thanks of course to the actuarial brethren gathered therein for their ability to frighten as they repeatedly throughout my career warned that this table is the lowest we will ever be able to go. The further praise for their reversal of opinion mere hours yet sometimes days later saying they have found a new and lower table. I have always wished I could go to the bush like that and bring back so many miracles.

I assured the by now encouraging with applause and laughter audience that regardless of point of view at the realities of today there was a multitude of silver linings in mortality. Actuaries for all their timidity have harkened a perpetual 1-% improvement in mortality per year. Morticians who I had just met returning from their equivalent to the Canadian Reinsurance Conference told me in strict confidence that their business is growing at 1% per year and will continue at that rate or more for years to come. I felt good that everyone could win.

For all the bleeding hearts in the audience I gave them solace with the pearl of wisdom that reinsurance pricing and subsequently insurance pricing were not the only prices to fall so far so fast in the 20th century. The cost of a transatlantic telephone call has fallen from $250 US in the 1930’s to less than 36 cents in 1998! And actuaries and management think we have seen competition to drive prices down. The evolution of the price and revolutionary pressures on our price are surely not new!

Mortality assessment by underwriters has been, as underwriters usually are, able to go both ways (focus on standard to decline folks). Some impairments or sub impairments have shown remarkable improvement to reflect the even more remarkable improvements in medicine. The myocardial infarction (big heart attack) in the 1970’s was rated at 300% mortality plus an additional $20.00 per $1000 of risk. That was on a 50-year-old male 3 years post infarction. Today some 25 years later the same risk is assessed at 200% mortality plus $10.00 per $1000. Medicine is so good today we can lower our ratings and give the best-impaired lives the better rates.

However all is not a downward spiral, as some would have you believe. The 30-year-old insulin dependent diabetic is now rated 300% mortality, up from 225% mortality 25 years ago. This is because we tend to define the various degrees of diabetes today and in doing so some are rated higher but many are rated lower. I just chose a good example to make my point and show the lower revolution was just an evolution of classification of risk.

At the same time as underwriters were for the most part slashing intelligently the extra premiums for various and sundry impairments to life the actuarial gurus were, as always, vying to get to zero faster. Reinsurance prices have fallen for the standard risk about the same as telephone calls over long distances. In 1976 the total cost of yearly renewable term premiums payable to a reinsurer were just under $100.00. By 1996 that same male 50 if they did not smoke (or could lie well) would pay just under $25.00. Our core cost of reinsurance was approaching 25 to 30% of the 1976 costs.

Combining the base standard rate with the myocardial infarction rating alluded to above and we fall off our comfortable pew in shock. In 1976 we would have collected (no interest factor) almost $450 per $1000 of risk over a ten year period. In 1996 the premium collected totals about $80! The number in 1999 is even lower but I refrain from using that price with deference to all those myocardial infarctions who may relapse in the stampede to buy at today’s tiny premium.

To put an exclamation point on my evolution point I enlightened the audience and reminded some of the older crew that the table they perhaps studied from was inappropriate for today. The Halley mortality or life expectancy table of 1687-91 said that a male age 50 could expect to live 16.8 years. For all recorded time actuaries have said mortality will improve by 1% per year. How is it that the 1980 British table only gives a 28-year life expectancy to the same 50-year-old male? That improvement of 11.2 years does not quite hit the mark if there truly was a 1-% improvement per year. Only 17 people, assumed to all be number crunchers, left the room at this point. Obviously they were rushing out to get my honorary FSA wallpaper revoked. Oh ye of little humour.

Quickly turning the audience’s attention to a new focus was blatantly foreseeable at this juncture. Mergers and acquisitions were next on the hit parade that sunny day in Toronto as the audience glamoured for more, more, more of the opinionated insight. I had no picture to visualize for the unimaginative that size matters so I merely stated that size matters today. Reinsurance was a $124 billion dollar industry in 1998 of which 75% was North American and Western Europe and 83% was nonlife. I would speak only of the remaining 17%, which seem to make the listening audience thankful because it would probably mean 83% less verbiage from yours truly.

All industries are going through the big is better phase be it automotive or banks or financial conglomerates. Why would anyone insist that this should not happen in insurance. We already have insurance leaders whose appetite for power is far greater than their current empowerment. As my Mother wisely said at times “their eyes are bigger than their bellies.” This M & A thing is not new even though we currently reflect on the loss of the following through one take over or another:

Those are the names of companies that went through merger, acquisition or sale of blocks. Everyone things that is all so new it is revolutionary. I pointed out to the audience that they collectively must be suffering from Alzheimer’s since that list was predated by the ongoing saga of company ownership consolidation for decades. Others led the way to extinction in one graveyard in Canada or another repository for old insurers, namely:

Each of those is a story undo itself, from purple Cougars (the car not the feline) to perverted offenders in leadership. As the audience was already morose I quickly moved on to at least say that many a reinsurance operation had also departed the Canadian scene in the same period. Cheers of applause from the cedants in the room were not heartening to me.

Reinsurers are endangered as the tree frog and harp whale. The following are amongst the dearly departed although some are basking in the warmer climates (the analogy is to more lucrative ROE countries):

Most were here in Canada for brief histories while others were so good like Storebrand the competition just had to buy them out of the market. I noticed not one tear from the audience from either the reinsurance brethren or the cedants. I do think I made the point that anything so insidious over 30 years cannot be labeled as a revolution.

Just to cheer the audience up since most made a lucrative living from the mortality trade I graphically showed how reinsurance has grown over the years tat I have been in it (not that I take full credit for reinsurance popularity today). In 1939 reinsurance accounted for .02% of all new sums assured (as well as about .02% of new premium). By 1969 (my first year in insurance) the new business going to reinsurers was under 4%. In 1999 it is predicted that new sums assured reinsured will hit the 50% mark. There are many that believe that the premium percentage is still mired at .02%! How long will it take for 50% of all in force sums assured are resident with the reinsurers and the dynamics within our business take a radical turn. Is this mortality outsourcing taken to its highest level?

Last topic to debate, although I thought I had won via humour 3 out of 3 so far was technology. I wanted to keep my options open to go both sides of the revolution or evolution debate so I continued to be vague to confuse the audience (something like writing for MO). A reinsurance opinion of technology is like the road sign I came across in Australia. In the middle of nowhere the road sign said “Emergency telephone 174 kms Ahead”. The message is correct but how much good does it do you if you are having an emergency. Reinsurance technology is similar in that the reinsurers views on technology are often insightful, well constructed, interesting to listen to but of now immediate use to the insurer who lacks money, people and inclination to implement.

The communication and transportation of paper with data or data without paper has gone through the phases of mail, express mail, courier, facsimile, compatible facsimile, back to couriers, bicycles, Internet and back to bicycles. In the end we still manhandle tons of paper between insurer and reinsurer. The reinsurer is somewhat narrowly focused on the paper and data they need and miss the point that reinsurance historically is a low priority item for most cedants.

As reinsurance gains in magnitude (remember the numbers a few paragraphs ago) will we experience a revolution in technology to shrink the tons to trickles.

I conclude with a picture of the evolution of man from ape to upright model citizen. Within the picture’s six forms of man (it was a man not a woman) I asked the audience to look around and realize the evolution continues with a few revolutionary mistakes.

Bill went back to Fort Wayne wondering aloud as to how he ever agreed to part of the non debate but happy that he was well received by hundreds of Canadians. Hugh went on to further consultancy, thankful that the debate was so mild mannered he could spend his time deep in thought about the evenings wine selection. Me, I went home to write the article while I still remembered the topic. I never did see the votes the audience submitted on our performance. Ah well, no news is good news.

The Canadian life insurance industry for decades has been subject to the allure of “shopping” their more difficult risks to various reinsurers to obtain a lower underwriting assessment. “Shopping” is the art of taking all the known information available on a life and sending it to 1,2,3,4, or more reinsurers who say they are experts at finding a more optimistic appraisal of the persons health, occupation, avocation, aviation and/or travel plans. Inevitably insurers have found that one or more reinsurers’ optimism to be strong enough to accept the case without an extra premium or only a trivial extra. As this columnist has stated in previous articles, everybody wins — consumer gets policy at low price, broker gets commission, company gets gross premium, reinsurer gets thin premium, and retrocessionaire gets thinner premium.

A dependence has been cemented binding the insurer to the reinsurers that is unwavering. Every reinsurer supports this marriage and has no inclination to change the status quo. To withdraw competitive facilities of substandard specialists known as reinsurers is almost like withdrawing automatic bank machines. A better analogy is saying that this would be like taking the child who has mastered the two wheeler with training wheels and say you must now go straight to the unicycle!

Legends of reinsurance would cringe at the thought their efforts over decades were about to be erased by those reinsurers experiencing from a tight money policy and/or a misunderstanding of the consequences. After all, facultative underwriting is a labour intensive business requiring skilled personnel (see MO #— “Pusillanimous Underwriters”). A reinsurer could quickly reduce overhead by jettisoning the facultative underwriting service and thus improve the bottom line or reinvest it in more pricing actuaries. Lord knows we could also use more compliance staff to keep up with the sound business practices paper work.

I do not profess to understand what lurks in the minds of some reinsurance management in this insurance business of 1999. Perhaps they have found some revolutionary secret road to success. When I look at the facts of what the sacrifice would be I have to step back and somewhat stoically stand by the insurers who, to the best of my knowledge, want full facultative service from the reinsurers.

How big a market is the substandard, borderline standard and decline group of applicants for insurance? Big enough to sit up and notice the premiums attached are more than enough to fuel the salivary glands of marketing/sales officers. Buried in the CLHIA statistical issues are the numbers that are often overlooked or worse still end up on the wrong desk or filing cabinet. The following chart is a synopsis of the CLHIA report on issued policies.

The number of cases in the survey can be somewhat misleading given the participant companies in the survey can vary and the number of companies is shrinking (merging,, acquisitions, departures, etc.). If we ignore some of the subtle changes and concentrate on the trends I can draw better conclusions. The “face amount” is the amount of risk or coverage in millions (add six zeros or 000,000 for the mathematically challenged).

The numbers when viewed in terms of case count and sums assured over the seven years made me realize I had been preaching an untruth. The fallacy that the business declined and or rated had not changed for years becomes clear. Yes, by number of cases the old adage that about 4% are rated and 3% are declined but look at the other line of numbers. As an industry 6.2% of sum assured is charged an extra premium which is up from 5.1%. In the decline row the increase from 2.6% to 4.9% of business being turned away is quite remarkable. Combining these two categories of risk we are looking at $9.7 billion dollar of sum assured at even $3 per thousand translates to annualized premium of nearly $30 million dollars. The numerical significance is magnified by the perhaps 60,000 policyholders that may feel they were not treated fairly (equitably) by the insurance industry.

If those companies not in the survey magnify the above chart and my numbers the number of disgruntled consumers may be 70,000 and the premium impact rises to $36 million. I am old enough to remember when new premium income of $36 million was significant. I am sure there are many an MGA who would dearly love to control that premium!

For those readers who see the substandard, borderline standard (you know reinsurer likes standard and insurer likes 50 to 100% extra) and decline as “of no significance” can cease reading. For the enlightened few who are still with me, this is a large and potentially controversial group of consumers. To date in Canada we have been free of significant legal battles with individuals who are not acceptable at standard rates. I would like to believe that a relevant factor in avoidance of such a tumultuous path is the predominant use of all availability facilities to keep the price as close to standard as possible if in fact standard is out of the question.

Using a shopped or facultative program where three or four reinsurers try aggressively to outbid (lower price wins) the insurer as well as the other reinsurers keeps the standard group large, the substandard premium minimum and the declines to a minority. No where but in North America do we see such a large number of shopped cases (perhaps close to 200,000 in NA). South Africa is another country with this phenomenon but not having been there to give a speech yet I cannot speak from a first hand basis. We have a free market for sales in insurance and have kept legal encumbrances out of the pricing. In more and more countries companies are forced to accept all risks and only now are some of those countries saying maybe we should avail ourselves of the facultative opportunists.

The seller of our product be it agent or broker has benefited from shopping program. Cases that would disappear into the not taken bucket are in force, commissions paid, company has premium to cover already incurred costs of underwriting and requirements ad reinsurer is tickled pink (Steve is pink politically correct?). Telling the broker their cases will no longer be shopped if they are ratable or decline conjures up visions of veins popping and guns (figuratively only) being drawn. Thirty years of saying “we have sought the best quote from all the reinsurers to get your customer insurance at the lowest price” has warmed the hearts and pocket books of many brokers.

Can you make a lot of money from facultative underwriting. Some skilled reinsurers have specialized in this market for decades and at last glance they are all alive and well with stock values climbing as fast as potentially demutualizing companies only dream. IT is also a fact that most reinsurers started their existence through the facultative channel and grew into rich automatic reinsurers. So when I here through the grapevine that some reinsurers are about to abandon this segment and even throw cold water at it I say to myself “You’re gonna what?”. I cannot believe it is so.

To stretch a premise I see underwriters left without a major tool in their arsenal to get cases issued at low prices. I see brokers and agents left with lost sales and angry consumers who have a fair price one-day and perhaps a decline the next. I see consumer activist groups demanding equally (far different than equitably priced) priced products regardless of medical history. I see a fundamental change in Canada’s life insurance pattern. I also see reinsurers with lower cost, fewer staff and plain vanilla automatic regimes.

I won’t be the first down this new road that is being ploughed through our environment. I can’t condone what I feel is an abandonment of my friends who happen to be my customer. If the industry follows the new road I would have to follow and I would benefit financially from lower costs and fewer staff training and retention issues. I hope to be there to the end helping the last holdout to the shopping program. This is one time I will let someone else lead. And in the end who really cares if their reinsurer decides to get out of facultative underwriting.

I am still left scratching my head asking my peer reinsurers “You’re gonna what?”

I am enthralled by the outsider’s view of underwriting as an arcane process that has remained mired in its narrow hallways for decades. “Why underwrite?” asks the banker new to insurance risk. “Because we will not take the risk otherwise!” says the mortality outsourcer or reinsurer in yesterday’s jargon.

One COO has observed that every time he looks at the process, he concludes that many underwriters are performing limited underwriting but large amounts of clerical work. “Yes, but if you do not have all that senior talent reading all the files you may miss something,” says the scribe of underwriting fame. Wise answers to complex questions? Who are we kidding? The wisdom comes from refusing to spin the sporran around and call it a fanny pack!

We must reinvent the risk selection process. One does not have to write at tedious length to make the point. Our industry cannot continue on with manual underwriting labour being the tour de force in the new business department. Computers should handle 80% of the cases — those that are clean and unfettered by medical, avocation, aviation, occupation or financial issues. Save the under- writers for 20% of the cases that are unique and beg for more attention.

Is this revolutionary? Hardly. A few selected companies have made the break from the manual tedium of that well-paying clerical function called underwriting to embrace real risk selection by top-paid professionals. Couple the computer with inventive ways of managing the real underwriter and you have a winning company.

Years ago in MO, I said in one of my visionary moments that the world of insurance would be swamped with underwriting technology by 1999. Instead, we have the debate over which is better — the numerical points system born of the ancient but still practical numerical rating system or the “in/out” method. (The latter is not a variation of the rhythm method but rather a poor descriptive of the yes/no method to determine one’s eligibility for a product’s price.) Is this debate a mere sham to delay the decision-making process to automate the mundane?

The in/out method uses the simple decision tree that if any answer is positive you are out of the price assigned to the product class applied for. This is a good system and accommodates rudimentary risk selection. Because an individual applicant fails one question, does that mean they are indeed an inferior risk? If you priced it that way, then say it is so. Then it’s a no brainer and companies can hire the cheapest of talent to “underwrite” all their cases. Fortunately, to protect some jobs, exceptions were built to add a dimension of thought to the under- writing process. A positive answer could be ignored if all other answers are negative.

Now since even that secondary process of gray area underwriting may be automated with a rudimentary rules engine, underwriters developed the personal touch. On a given day for a given agent, the underwriter can always “give in”, “make a value decision” or just want to feel good by ignoring the positive answer(s). What we do not know as an industry is how often that is happening. Is the twentieth underwriter in the department making far too many exceptions and how would I ever know that in a manual environment?

The points method is closer to the historic risk selection methodology. It assigns points or takes away points depending on the various positive or negative answers. It tries to weigh the total to see if a person falls within a range. Thus, unlike the in/out system, with points it is known in advance that one can have negative results but with strong positive features one can still fit into a favourable category. Is it better? In my opinion it is — simply because it allows far more latitude in assessing the longevity of an individual but it requires far more structure at the outset. It is my favorite but that does not make it the “be all/end all”. Underwriters can still overrule the points total and still give away the shop unless data is collated and delivered that tells me what all underwriters are doing.

What makes both of the above effective is the workflow manager and reporting tools that deliver regular and concise reports to management about how many exceptions are being made, the degree of those exceptions, and the cost of those exceptions. I can tolerate exceptions to the rules on, say, 1% of cases or amount of insurance, provided I know that number. Only automation can do that. The system can put the risk in a category approved by underwriting, medical, marketing and

actuarial. But the system must point to underwriters who are going too far in their exuberance to say “yes”. This type of data allows you to evaluate whether your rules are too harsh or your underwriters too liberal.

Give me the consistency that comes from the likes of Cprompt’s AUS software or any of its competitors and I am an ecstatic executive. Load the software with the rules that all agree to and can see and, voila, consistent equitable underwriting. I know that the portfolio of risks that I am assuming is well within my tolerance for long term financial rewards and not long term surprises. The system will tell me which underwriter needs cajoling or an infusion of dogma. It allows an underwriting executive to meet the glares from the upper echelons with confidence as he reels off statistical proof that the company’s risk selectors are earning their salaries.

Here’s how one major life insurer and their underwriting leadership view the technology question and why they are moving to reconstruct their underwriting area to meet the challenges. I thank them for allowing me to quote from their executive summary. It clearly illustrates how they intend to meet their underwriting challenges.

“The principal benefits which we want to obtain through the use of an Expert Underwriting System are:

“(1) More consistent decisions. System-driven assessment processes ensure that all salient features are taken into consideration, and weighted appropriately. This applies to standard and substandard business.

“(2) Elimination of errors on quantifiable preferred underwriting criteria. The evaluation of preferred cases, with multiple risk factors, creates room for human error. Basic preferred underwriting criteria are based on quantifiable information, such as height and weight or blood pressure. Machine screening eliminates these types of errors.

“(3) Reduction of inappropriate preferred exceptions. Underwriters may be under considerable pressure to grant exceptions to allow preferred rates on cases which do not fit within our rules. In some audits of non-system underwritten business, exception rates of up to 20% have been identified, with serious preferred mortality implications. Automated underwriting reduces these situations. Rules for allowable exceptions are built into the system. Other, underwriter based exceptions, are limited, and the system produces reports listing exceptions which can be used for quality control purposes.

“(4) Strengthened audit control. Expert systems provide a clear audit trail for identifying numbers and types of exceptions, as well as evidence and substandard/decline ordering rates on each underwriter. These enable both insurer and reinsurer enhanced ability to review underwriting activities. This ensures that company and reinsurer underwriting standards are adhered to, and that risk to both is reduced.

“A second important objective will be to optimize the use of our tele-underwriting system. We intend to realize the following benefits, which will impact us financially (aside from soft benefits such as increased agent and customer satisfaction):

“(1) Better quality underwriting information. By replacing the agent with an objective and trained professional interviewer, and the use of effective drill-down questioning, we believe that there is less undisclosed or understated client information, and that the quality of information obtained is superior to agent collected information. We believe that this will result in more accurate risk assessment and improved long-term mortality experience.

“(2) Reduction in discretionary underwriting requirements. Due to the more detailed information obtained via our interviewers, we can reduce the percentage of cases with discretionary underwriting evidence, which will reduce our other product costs.

“(3) Reduced discretionary requirements also reduce administrative costs. Significant administrative costs are incurred whenever we order and have to subsequently follow for requirements. Reduction in ordering results in product cost reductions on the administrative side also.”

Software such as this company is now seeking brings consistency to the process that lets us move on to daring remuneration changes that finally reward the premier risk selectors. On a visit to another company in a foreign land, I witnessed one of the most creative remuneration packages for underwriters in action. My first reaction as a pessimist was to say it would doom the company. My second reaction as an optimist was to say that this is the answer.

This company rewards underwriters over and above the standard salary package with a true performance bonus. On a monthly basis, there is a reward for exceeding the standard number of final decisions made on pending cases (potential revenue sitting in the system). Make a final decision and, low and behold, revenue is earned. Thus, if an underwriter is expected to make 15 decisions a day and he hits 20 cases per day for the month, a bonus of $X times 5 times the number of work days in the month equals the bonus.

The second tier of bonus compensation is even more avant garde. Yes, the company went even further in enticing underwriters to be more revenue and marketing focused. At the end of the year, an underwriter earns a bonus based on a percentage of all premiums that they underwrote that went into force. For about a third of the underwriters in the company, the bonuses can be hefty — equating to multiples of base salary. For other underwriters there nothing has changed — they are of the old school. End result? The company gets far more from fewer people and it wins by pocketing the money it would have paid out for the more traditional head count increases in underwriting staff.

The Nay Sayers come from all sides, speaking of ruin and integrity issues. Yes, it is a stretch I would be the first to admit. With this type of inducement, won’t underwriters accept everything and anybody? The industry would be ruined!

But consider this. Why would an underwriting professional put their company at risk when they are under more scrutiny than currently exists in most companies? Internal audits and regular and frequent audits by the reinsurers who actually take the risks must be within the tolerance of prudent underwriting. Failure to meet the standards means a forfeiture of the bonus and perhaps one’s job, should the underwriter be deemed wantonly careless. Is it any different than the pricing actuary getting a bonus based on production? Professional decent people will not do you harm. Scoundrels will be found out through scrutiny shared by all the players. The current system minimally differentiates between the brilliant underwriter and the mediocre.

This company is ecstatic about the positive benefits they are witnessing. The producers and marketing people feel that the underwriters are a breath of fresh air. The battle between the underwriter and commissioned producer is slipping into obscurity. I applaud the innovations and I hope we see similar revolutionary thinking enter the Canadian market. The medical superiority of today’s underwriter now has to metamorphose into a marketing sophistication, supported by software tools and company tolerance of new reward systems. Then it will begin to resolve problems, such as expediting applications that take 8 minutes to complete on the Internet and 100 days to issue.

Zymurgy is the act of fermenting with respect to the making of good wine or beer. Well for that matter zymurgy can also produce bad wine and beer! I had to stretch to use the word but it is so apropos given that the fermenting going on in the insurance business is far from spring waters (Evian spelt backwards is naïve!). We are part of the great cauldron of fermenting financial services. We in Canada are not alone. We are mere followers of a global trend. We may even at times, heaven forbid said the American, be leaders. In an industry shrinking in terms of participants and at the same time short of leaders emerging in sufficient numbers, we are fermenting into unknown ale unless the ingredients are modified to meet the needs of future stakeholders

We are all too well aware of the mergers and acquisitions that abound and have been slowly occurring for the past decade. They do mount up and on reflection we have lost many but few of us would resurrect any of them. The leaders of each disappeared into retirement, bigger insurers or became consultants given their credentials. The consolidation of our industry which has escalated in pace is the foundation of our brew.

Gone are the stand-alone life insurers of British Columbia having succumbed to acquisition mania. Who remembers Seaboard, Glazier, British Pacific, Fidelity or even the old quaint North West Life? Gone from Alberta are the flamboyant and often controversial Life of Alberta, Sovereign cum Family Life, Rocky Mountain Life (does anyone have in their garage a purple Cougar, the Cougar car that is?), Paramount Life and the early Financial Life, or even the agent’s friend Substandard International (the near insurer). Saskatchewan said goodbye to Pioneer Life but hangs on to Cooperators and gained Crown. Gone from Manitoba are Monarch and the original Citadel. Solid and bland but gone. Ontario has a list too long for the editor yet they include previously strong names and even reinsurers. There were many and each had its quirks and unique attributes even in their demise. Gone from Quebec are just as many one-time regional life giants like L’Unique and Cooperants. My lack of fluency shortchanged my intimate knowledge of their stories. I love the Maritimes but I am hard pressed to find something to follow after “gone are ….”

The visionaries after a good smoke had predicted that the workers in our industry would run out of places to work by this new century we have entered. Why is it then that I constantly hear the wailing of presidents and senior executives as they face the truism “there are not enough good people to go around these days”. I never heard that when I was a young man just yesterday. We don’t say too loudly yet “I’m looking for a good man” since today the good man could be and often is a woman. Thank the heavens for the passage of time and the death of “only men will be tested for their potential leadership in our company.” The later being a very true statement by an early “boss” (now there is an antiquated word) who felt it was wrong to invest in females in the company since they would not be around for the duration nor could they be company leaders. So today where are all the good people?

The Globe & Mail of 00-09-22 had two articles on employees and it adds to the mixture of issues within our industry even though they were general comments. Barrie McKenna’s article titled “Take this job and …” talks of the least loyal employees. Nothing in the article will surprise any reader and one wonders why it got so much space. Canada ranks in the middle of the 32 nations covered. Is anyone surprised company loyalty is greatest in Columbia? Hello, read the front page for a while. That company loyalty is greater in the US than Canada was the only surprise but maybe the insurance industry is just not your average industry. Hong Kong and Singapore are at the least loyal category and that is as expected given their zeal for capitalism and making money right now thanks. Buried in the article was the comment I wrote about recently and that is ethics. The story states “nearly one-third of Canadian workers have witnessed unethical behavior by their employer within the past two years.” Hopefully not in the insurance business. The other relegated to page 12 story was by Madelaine Drohan and she asserts that research shows we (Canucks) are not as insecure in our jobs as some pundits believe. I agree with her and that’s all I am going to say.

Murray Axsmith is considered a world leader in career management services and in its role it provides the marketplace with its annual survey (see highlights in Transitions Volume 12, No. 1) of what’s hot and what’s not in the recruiting or dismissal business. I’ll be positive and stick to the summary of hiring highlights while leaving the ten top dismissal issues to the David Letterman’s top ten list someday. The survey, under the auspices of a John Hamilton who I am sure would love to talk to you about the detail, compares trends from year to year and thus is a great benchmark for employers as well as employees.

If you are one of those people who can’t lead a team to the bathroom nor converse with aplomb and passion with your staff, you are in the majority. After writing that masterful sentence I realize that in my experience those of you who are in the aforementioned group most often do not realize you are in the aforementioned group. Again, after writing that second masterful sentence I realize there are many of the human species that don’t wish to lead people anywhere let alone converse with the milieu. Everyone is different and our skill sets or innate desires vary in humungous fashion. The survey is emphatic in stating that the most difficult skill sets or competencies to be found are interpersonal skills and team leadership. Thus the reason for the return of the one on one interviews with other than just the human resource staff. Reference checks on these hard to quantify skills become very important. The study talks of increased use of the interview, reference checks, testing while dropping the inquisition panels that were once popular yet s warm as Inuvik in January.

So here we have it, a shrinking home for talent and an even faster shrinking reservoir or cauldron of talented leaders and people endowed with interpersonal skills. But is that being fair to the human race as we race through our daily lives? Today the reward is for the here and now not the there and future. “Give me the quarterly results and make sure this year is 15% top line growth coupled with 15% bottom line growth,” said Ms. Y (name withheld for sake of sanity). In the age of instant gratification and rewards that must be felt, smelt and tasted immediately there is perhaps no room for saying lets wait 10 years and see if the product emerges as per the assumptions so cleverly constructed to squeeze another penny from the price. How do you inspire staff and leaders to leave a company in excellent shape, as judged 10 years from now, when stock options, bonuses, compensation and gratitude stem from the latest quarter or years results? Stand up the 3 of you who deep in your hearts have any real intention of being in the same company (or the new owners company) five years from now. All right all you 60 year olds we already discounted you in our severance calculations (early retirement whether you want it or not).

Is the fermentation creating putrid vinegar just beyond our sense of smell and vision of three-year plans and rewards or is this new twist of ingredients (short rewards, ethics, loyalty, leadership and interpersonal skills) going to produce a fine wine to be left for the connoisseur of our industry? I wish I knew. I do know what I hear and that is a lack of faith in finding the leaders with the criteria to make it work. The good news is the admonishments buried in the surveys will surely change in subsequent surveys, as the leaders appear to fill the void.

We just have to adjust to the new millennium’s prerequisites to success. That is, enjoy it while you can for a new longer-term reward packages will emerge to prevent the emaciation of our industry. Will it stymie the creative brilliance that has escalated the competitive bar? Not a chance and the brilliantly creative may even learn to talk to their staff about it in sentences of more than three words! The convergence of people skills and company needs has often been out of synch (just look at the good old days of only actuaries running the industry) so by happenchance we may have all our leaders emerge at once fitting the exact requirements of the companies’ “qualities in staff we want to hire list”.

I know I am still waiting for my personal rhythm to fall in harmony with some company’s rhythm.

In 1977 I was in my last year at M&G and looking for my next career opportunity while working as hard as ever at M&G. Like always in my life I left a person or a group of people but never the heart and soul of the company. Making the imminent departure was the fact that I thoroughly enjoyed working with a great group of people.

Dr. Brackenridge was already an icon of life insurance underwriting and a model medical director when we put a tour of the USA together to publicize his latest book. The book was a rewrite of a decades earlier version of the same title. Anyone who knew “Brack” immediately fell under his charisma and depth of knowledge and the great style of delivering sound expertise in a complicated field. We at the time wanted the Americans to meet the man for themselves, talk up the book and think better of the M&G. IT worked.

The tour was memorable and a milestone for the M&G. Many reinsurers break out of a “sameness” by doing the unusual but regrettably that is not the case today. Today perhaps we are mired in a rut of “sameness” which is just too comfortable for today’s leaders to beak from and charge forward. Perhaps a reinsurer just has to find there own “Brack” today and use him, her or it to lead that charge.

Anyway I reproduce here a story I was asked to write back then for publication in the M&G global magazine for staff. It did not get wide distribution and I struggled to find my original copy. It turned up this past week while researching for a book that I have been threatening to publish for years. Not the financial underwriting text but the one on our industry. Upon finding the old tattered copy and reading it I immediately found a smile on my face from ear to ear as the warm memories flooded my consciousness.

IT was a great “tour” and it will always remain a highlight of my reinsurance career. The people, both M&G staff and invited guests, all contributed to super times that indeed “do it for the M&G.”

Remember that it was written in a different time. The 1970’s were not the same as 2005. Political correctness was unheard of and travel was fun and novel still. If any of the words offend today I am sorry but I do not want to change it and loose the flavour. My current comments are in italics.

“BRACK’S BASH”

OR

“DOES THIS DOCTOR MAKE HOUSE CALLS AS WELL?”

(ALSO KNOWN AS THE M&G TRAVELLING CIRCUS OR THE M&G’s MAGICAL MYSTERY MOVEMENT)

Once upon a time (don’t worry it’s not about Goldilocks) there was a company called the M. & G. (Note that they had yet to brand themselves as M&G) This band of adventurous travelers (N.A. expression) liked to do the unusual and as often as not wondered why the unusual became a habit.

Who else, I ask you, could think of a plan that would involve the “Movement” of hundreds of words (in book form), across thousands of miles of open terrain on the North American Continent. The logistics of the event are beyond comprehension. Not since the Indians (N.A. expression or version) sold Manhattan Island to the Dutch has there been such a momentous occasion in history. The Canadian good guys (appropriately dressed in white) sat for hours trying to think of an imaginative, taxing ordeal that would put an author of such a book as “The Medical Selection of Life Risks” through in such a short period of time.

The “Movement” started in New York and then moved on to Washington, Dallas, Los Angeles, San Francisco – pause – Minneapolis, Des Moines (why here?), Chicago, Toronto (is there a better place?) and Montreal. The Montreal portion of the “movement” has been excluded due to my inability to converse rapidly in the French language – vive le Quebec libre. (Note looking back I have no idea why I added such an end to the sentence)

GWCB and I flew to New York in the wee small hours of Monday, May 16th to be greeted by Brack, EG and RW lazily enjoying lunch. It’s 10:00 a.m. and they are having an early lunch! No, it looks more like breakfast. GWCB and I were glad it was breakfast for, if it had been lunch, we would have missed the opening performance. New York, was an amazing city (probably still is). I was constantly worried that I would run out of money. I spent $90.00 in less than five hours on tips and cab fares. Why are we doing business in this town? Our actuaries would never have allowed for this type of expense margin in our rates.

It was difficult talking to Brack and EG on Monday since they still had not recovered from being inundated with a verbal barrage the day before. One of our clients had given them a very complete running description of city during a whirlwind tour of the city. Who says our clients will not talk to us? I was told the highlight of the tour was Harlem. It’s too bad the U.S. of A. could not obtain war relief to correct the damage caused by the internal wars in Harlem. Maybe the M. & G. and Jimmy C. could work out some catastrophe coverage. (Note how much has changed since the mid 1970’s and most of it for the better)

The Park Plaza was up to the standards expected by the members of the M.M.M. (see title). Elegant surroundings and superb service highlighted the day. Fortunately for the team, the books arrived with only five minutes to spare. A great volume of needless perspiration was spent in anticipation of trying to give away forty books when we didn’t have forty books to give away. All is well that ends well, and on such an original thought we left “The Big Apple” in a limousine which was forty feet long and thirty feet wide. To end the scene one must make a mental image of Brack taking copious feet of movies of the limo ride which are nothing more than road signs, steel girders and bridge abutments. These are of interest to engineers around the world, but heaven help Brack’s family and friends.

Ah….Washington and thank God for RRW who made all the arrangements. Did he really select the hotel and a dining establishment for dinner? Yes, he did! We had charcoal coloured lobster, a steak thin as bologna, wine served in glasses still tasting of a strong antiseptic detergent and a waitress who kept saying “it is not my fault, I’m only a part-time summer student trying to learn a trade.” Back in the hotel we found that our phones did not work. E.G. was without a lock on her door and proceeded to pile the television set, triple dresser, four chairs and her purse against her door to feel secure in her bed.

Fifteen guests were expected at our luncheon, yet the original room scheduled for the lunch would accommodate one thousand guests, a flying circus, a full orchestra and the complete M&G Cheltenham staff if we could have brought them over for the occasion. After a great deal of complaining and sulking in corners we were able to arrange a more appropriately-sized room. The hotel itself got its revenge on RRW by giving him a room which had no towels. When he emerged from the shower his story was that he was forced to roll around in bed to dry himself. At least he said he was rolling around in bed to dry himself, but knowing RRW the imagination could run wild with other possibilities. It would be unfair to mention the name of this hotel so I will just say it starts with the letter “M” and is named after a famous ship in American history.

In Dallas we were met by the ever jovial PHT who proceeded to give us an educational tour of the city of Dallas which is famous for only one thing and that is not reinsurance. (Note, was it the cheerleaders? Being this was a testerone charged trip?) One gets to appreciate the talented drivers that we have in the M. & G. when one of the M. & G. representatives can maneuver down a one-way street, going in the wrong direction, and fail to notice that he is in the wrong. This was an experience and I am sure that all our travelers have tried it at various times and have met with varying degrees of success. Thank God for group insurance.

The luncheon here went well with a large attendance of forty people, all of whom were thought to be invited friends of the M. & G. The books arrived on time and EG was able to welcome the first guests on her own, since the rest of the M. & G. contingent were off touring the city or shopping. At least the rest of us arrived for dessert and handshaking. Yes, it’s Wednesday, so it must be Dallas and we must prepare to move on to the next town. On the way to the airport, once again, was our fearless PHT driving us through the myriad of interstate highways. He made an unusual detour. This was on a country road and we made a “pit stop” at a local cemetery. PHT, being religious as he is, decided not to partake of the cemetery itself but merely walked off behind the bushes to the side of the cemetery and proceeded to let nature rule his body. This has been recorded on film by Dr. Brack and will be shown at the next convention of urologists.

We’re all tired, but we’re all looking forward to Los Angeles – hopefully we’ll be able to see it through the smog and not be distracted by the pornographic material we are sure to encounter. (Note, amazing what one thought in those days of a city and why?)

Ah…..problems started to happen – started to happen is wrong since we had nothing but problems since the start of this trip. GWCB made it to LA but unfortunately, his luggage did not. I had a feeling we should have tipped that red cap. The lack of books presented a problem. RAM and GWCB spent most of the morning digging through the warehouse of Emery Air Freight trying to find a package that contained fifty books. No books – no performance. The show must go on so we left Emery Air Freight with a solemn look on our face and madly tried to write an apology for our guests. Meanwhile back at the hotel EG had set up all the books and had an hour to spare to do some shopping. (Note, EG always found the books first!) It’s a wonder she still had money since she had shopped in every town and had filled her suitcase to the point where it was at least 100 pounds in weight. She must be a pet rock collector!

It’s time to move on but the eternal question crops up. Where’s Brack? Where are his briefcase, pipe, movie camera and extra film? This was the fourth day of keeping track of this individual and by this time our nerves were being frayed and our schedules were being pushed to the limit. It was a continual cry since the time the meeting ended. “I want to see LA”. A quick five minute tour of Beverley Hills was arranged in which time he saw at least one house and fifteen sign posts that pointed to various freeways in the Southern California area. On to the airport with no time to spare and we were quickly whisked on to the plane which would magically convey us to the city of San Francisco. Ah….what luck we met another actress (Note, an actress I liked up until her very rude and arrogant behavior on the plane) but that was a story censored out of this story by MH and SAC.

San Francisco went too smoothly to be believed and the hotel was exquisite.

Thus mentioning the name of the St. Francis should come as a very high recommendation to any one else wanting to venture into the town of San Francisco. The luncheon was a success and handshakes were given to all.

The weekend – a lonely weekend – in the town of San Francisco just Brack, EG and RAM. Saturday was spent touring the Monterey Peninsula and what else? – taking movies of road signs! This should be tremendous movie equal to any Fellini production with a cost only surmounted by that of JAWS. A lazy day Sunday arriving at the airport around noon and flying to that wonderful city of the north, Minneapolis. No, if it was Minneapolis it must have been Monday but I guess we had to get there on Sunday.

Flying into Minneapolis one wondered if there was going to be a runway or a large lake to land on. Lots of green, lots of blue, but few people. Once again everything at the luncheon went well with our nerves getting back to normal and our drinking capacity reducing somewhat since we had nothing to excuse the over-imbibing that had preceded this section of our “movement”. The dinner was cheap here – we had filet mignon for the price of macaroni in Toronto. No wonder we had such a turn out. How often does the client get a free meal of filet in these days of inflation and low salaries?

For seven days now we’ve been asked the question by Brack, “Why are we going to Des Moines? I don’t want to go to Des Moines; there can’t be anything in Des Moines, etc. etc.” But, as Brack learned in Des Moines, the town was founded on the banks of a river where all the wagons heading west to California broke down. Thus needless to say this town is made up of broken down wagons or people who were not able to mend their wagons on the way to the West. Maybe the town should have been named Broken Wagon but of course that name was used by a famous Indian once before but we won’t go into that.

On the wagon again – we swore off drinks before the sun crossed the yardarm. Yet once the yardarm was crossed (we moved the yardarm) our guests arrived. Handshakes galore – no kissing – and sore arms from lugging hundreds of books across this vast continent! A pleasant place Des Moines. WH was in his glory shaking more hands than anyone else and feeling proud that this could only happen in America. Let’s get out of Des Moines before we all stick straw between our teeth and start rocking on the front porch.

Chicago – “that wonderful town, that wonderful town.” What a change after slow moving Des Moines. Well it wasn’t that it was faster since we sat in the cab for almost two hours in 90 degree temperatures on a freeway while everyone looked at an accident where somebody had scratched a bumper. No kidding that’s all the damage! But everybody felt that it was worth stopping to look at. Once again hundreds of feet of film were taken of this event and will be presented to the National Association of Road Accidents.

Have we lost Brack? No! He is merely out shopping again and taking movies of more buildings and roadsides. I think he is going to have difficulty deciding whether Smith Street was in Washington, Minneapolis or Chicago. That’s his problem; the M. & G. Canada staff doesn’t have to edit his film we merely have to endorse it. Chicago was successful – books on time, hot meal and very few “no shows” for a circus performance. RD and his lovely wife were exceptional hosts and did not have to apologize too often for the haggard look on the faces of three M. & G. staff that were now in their eighth-day of the Magical Mystery Movement. It must be Chicago since its Wednesday. Let’s get out of the place.

Ah…..home to Toronto. The town that beats all other towns and where the performance would surely peak – at least it would peak in the English language – one could not speak for the French language edition which was to follow. Toronto was a success with numerous jokes provided by Dr. C who was in rare form and provided jovial entertainment for all those who accompanied the guest. We were very fortunate to call in this guest performer and his addition to the Magical Mystery Movement and/or Traveling Circus was very fortunate. Between Dr. C and Brack it was very hard to get the meeting “on topic” but who cares. I can go home tonight and have a good sleep. Apparently, after this meeting wrapped up, several of the M. & G. bit players and walk on performers joined several of our clients in various bars throughout downtown Toronto and drank the wee hours away.

For those of you who don’t like to read a book before seeing the movie you can be sure that the movie version of this will be provided by Brack & Company. (Note, six months later the team had to sit through countless hours of a movie that had just what one expected — buildings and road signs) Admission will be cheap or at least voluntary. For those of you who think that this was an easy trip I can only quote that famous American author who once said “sit on it”. Thanks Brack!

The bit players on this tour included the following individuals EG, GWCB, RW, RD, WH, PHT, RAM, MAM plus assorted characters who were called in at the last minute for necessary walk-on performances. Of course the star of the show was “Brack”.

Initials have been used for the various characters in this performance so as to protect the innocent yet titillate the imagination enough to let everybody know who was at fault or who was doing wrong during various, performances in the nine cities.

The author of the story would like to thank Brack, for his participation and we are sure that his performance will be remembered at the Academy Award presentations for the best foreign film made in the U.S.A. and Canada. (Note, his film did not win but his book and subsequent re writes are big winners.)

When I was a mere child of almost 5 and living the country life in rural Ontario I learned that a minor indiscretion compounded by an oversight in delivering the whole story to a superior (Mom) could earn painful discipline. My indiscretion (in those days my vocabulary would have labeled it a mistake) was to play a very realistic game of “cowboys and Indians”. Today it is more likely aliens and earthlings given the difficulty in playing any politically incorrect game. But I digress from the games of the early fifties.

I, always one to like to play the oppressed, was the “Indian” and my neighborhood friend played the cowboy who unfortunately was my captive. I stepped over the line of make believe when I tied my friend to a tree and started the smallest of fires under my captive. It always worked out in the stories I was told so how was I to comprehend this was likely to be painful in reality. Another neighbor saw my activity and at the first sign of smoke decided the game had gone too far. Fire out. Scolding from kindly neighbor. Friend running home for the comfort of his mother’s apron (virtually all mothers worked only in the home in this postwar era). Me left to contemplate reaction of parents to my indiscretion.

My sanctity of my bedroom at home was the place to be for some quite reflection on the events. Passing Mom in the hall and responding to her “What’s happening?” inquiry I nonchalantly said I needed some rest and nap after playing with my friend. Mom knew immediately something was not quite right. Ross never took unforced naps! Within minutes of my respite Mom had found out from the grapevine in the neighborhood (the same one that was reengineered into the insurance business) of my deviant behavior. Two sins were committed in my parents’ mind. First the trick with the matches and second the failure to be forthright in my description of the mornings’ events.

Business brings many a similar lesson. Compounding a first mistake with a failure to communicate the complete story, well before the inquisition, is not unheard of in our insurance business. In fact I have seen that being very proactive with one’s own “spin” on a story can actually make the perpetrator of an error or oversight look like the hero and thus put immense distance between themselves and the problem. Some would refer to this as a failure to take responsibility for their actions but it seems most of those most adroit at this skill reap large personal gains, who am I to say it is wrong?

In the early 70’s there was a very interesting case on a purported oil and land baron in Oklahoma. The gentleman was applying for a very big policy (in today’s inflated times it would equate to an application for $100,000,000). On the first go round the general decision was to decline the case because of overinsurance. To make a long story medium in length the persistence of the lead company underwriter convinced the principle reinsurer to accept a part of the case as a favor to what was a very good automatic account. Using the leverage of this one acceptance the large case finally found all the needed facilities and it was issued. The issuance was wrong as there was no real justification for the amount and the underwriters failed to completely seek all necessary evidence.

As the claim unraveled we learned the insured was all but bankrupt, dubious debts to various and sundry entities (both legit and suspect) and medical evidence that was if my memory serves me right was done on someone(s) other than the insured. As an industry we jumped in with the theory of suicide to try and lay the groundwork for not having to pay a claim on a big case that occurred in the 11th month after issue. The suicide theory died, as it became clear to senior insurance personnel that two (2) bullets in the head from the back were not common in suicide by self inflicted gunshots! I was young at the time and yes one of the underwriters who saw the case, which meant I was bewildered at our industries floundering to get off the hook. We made a big mistake and were compounding it by hastily hiding our own oversights. Every senior officer in our business should read “The Mullendore Murder Mystery” to see how we are an industry of trust but also an industry that loves to skirt our responsibility at times of trouble. I say skirt because we generally pay up much to our glory but at times we do it only after ill conceived excuses.

All the famous or infamous cases like Mullendore, Johnson, Smith and Demeter involved insurable interest and overinsurance. All made it through our checks and balances because we are not perfect as an industry. Each though cost often more in litigation than the face amount! We won but we lost! In each there was immediate denial that perhaps our process for risk selection had failed which lead to some skillful spin doctoring as time progressed.

Not only did the individual case scurry through our process but hundreds and thousands have made it abusively through at times. Decades ago but within my time we had the story of a wonder company, a hero of the unsung, a model of sales prowess and a marketing genius. “Equity Funding” was the darling of the North American industry. It out sold projections. It could do no wrong. Reinsurers, those cagey paragons of virtue knew good when they saw it (see it in some current situations but that is a story to hot to print prior to age 55).

Reinsurers through very lucrative coinsurance allowance that bordered on the insane (tell me again how you can give me $1 and I can give you back $2.50 and I am the one who will get rich?) . My youthful recollection was that every reinsurer of note was lined up to feed the selling machine and be part of the gold rush (an historical BreX). Again to make a long story short (read the book) when the farce was exposed every gullible reinsurer pleaded every conceivable excuse in the books except the correct reason. Reinsurance greed like all of man’s greed made decision making foggy at best. Equity Funding was out of character for its time but the story was one of reinsurers’ greed and the media wanted to believe. Tens of millions of dollars were lost and one would like to think a lesson well learned.

The Equity Funding story gets repeated almost yearly as a new crop of industry marketing leaders blindly close their eyes to the latest pitchman who is selling far more than normal and becomes an overnight top producer/broker/agency. The two bit player may not use the phone books as profusely as Equity Funding but the scheme to defraud us is the same. Find a gullible company with one or two greedy decision-makers well placed and the commission system heaped and overflowing, will reward you for a short period.

Again the rule is if it has been done before it will be done again. Different players not steeped in personal exposure to the game will play the role of “sucker” in it and spin a story of how their situation was different. Why not admit you were duped like the earlier victims and quit the spin city rhetoric. Just like the fire and the subsequent deletion from my mornings activity became a double penalty, the hiding or minimization of our industry errors just makes us look stupid in addition to gullible. I am even told that there are numerous examples of producers doing wrong but in reference checks the producer was merely one who left the company.

When I recently heard some inside information about a recent episode of marketing skullduggery which was labeled I believe “Project bad Apple” I remarked that we were now working on fruits for code names since we have used up all the animal names. The scams the same just the victims are new. When Project Banana hits the industry it will have a slightly different bend to it but it will be the same old rotten fruit. Sometimes man is committed to making the same mistakes repeatedly just to keep the story fresh.

So much trust from consumer to board of directors I often wonder how there are any companies left to merge or be bought by banks. When we do get mistreated by the rare abuse of trust we will of course be able to spin a story and promotion that exonerates us as individuals while pointing the proverbial finger at others who are not as quick with the story telling. My first response back when Mullendore was killed and I was asked if as a bright young risk selector I accepted the case on behalf of that long gone reinsurer M&G was what you could expect. I many a time said I declined the case on Mullendore refusing to take one penny for M&G Canada. Wow my peers in North America were very impressed. Unfortunately even if they didn’t ask I would volunteer the whole story. That was for fear of Mom! The fact was the head office of M&G in London had already committed the full retention and thus I, sitting in Canada, could not accept any part of Mullendore. The abridged version of my action is the one that today lacks the forthrightness of the full story.

Every time I listen to a “spin doctor” weave a tale it reminds me of my minor tale that lacked credibility and how only a mother could see through it. My time as fire starter was short lived. Red seat from “the strap” left the right impression but today we believe in sparing the rod and thus at times ruining the industry.

Ross’ Hard Earned Rules

1. Big and early claims will test the best of underwriters and management regardless of how well you select risks.

2. Be proactive in analysis, questioning and agent training as to your needs.

3. Does it all make sense?

4. How good are the sources of your information. Third party information gatherers can be worse than agent or better than accountant.

5. Does the agent know the owner, insured and beneficiary? How long and well?

6. Did the applicant owner approach the agent or has it been a long “sales process” by the agent?

7. Get the agent to sign a synopsis of the financial aspects of the risk and his rationale for the sale.

8. Know; really know the lender of money as beneficiary.

9. Audited statements are excellent if you read the fine print to make sure they are truly audited and represent a complete company profile financially.

10. In partnership insurance who are all the partners and are they all insured equitably?

11. Does the sum assured applied for (and in force) represent the absolute maximum of a companies worth or a reasonable estimate of its worth (per share)?

12. Get your senior officers to agree on your company’s position on estate protection (no brainer), estate equalization (harder to adapt) and/or estate creation (avante garde).

13. Never, never allow a person to be worth more dead than alive to family or business!

14. Multiples of salaries for keyperson or personal insurance are strictly guides and must reflect in summation the true financial loss in terms of the time value of money.

15. Banks make great beneficiaries but they are not necessarily without bias — they always win with or without the insurance.

16. Is the application for insurance complete, current and all information volunteered on the application or in additional notes, memos or letters?

17. Are you guaranteed that the in force to be replaced will indeed be replaced? Do you follow up? Do you have legal remedial solutions?

18. Make use of your own companies accounting and investment experts to see if the finances are right on.

19. Use the Internet as you personal search engine for finding both personal and industry information.

20. Use your reinsurer to build a financial picture even if it means you and/or your reinsurer visiting the applicant for detail and peace of mind.

21. Never reinsure the risk if in your opinion the financial picture is unacceptable and the risk makes no sense since although you can reinsure the mortality you can never reinsure the notoriety from a bad claim.

22. If, with your advice and counsel, the agent cannot make it make sense, decline.