How Much Do You Budget for Chargebacks?

[rousemark]

If fiirst year lapses do not have a large impact on profitability why do most companies have penalties for poor 13 month persistency? Terminate advances below 75% and even terminate contracts below 65% - 60%.. In fact, AGLA has moved their persistency marker to 65 weeks to try to improve profitability.

 

[Josh]

I will call an actuary and see if they can provide the mathmatical formula that you will not understand anyhow (nor will I) and call BS on regardless.

If you'd like to speak to your own lack of comprehensions skills then so be it, but I'm sure that if an actuary has a basis for the impact on the cost of an FE product based on the cost realized from taking an application that I can follow that math.

They do have built in assumptions to price around for lapses. It is when these assumptions are exceeded that the products pricing is effected. If priced for 10% lapses in the first year but you get 20% things changed and pricing is effected. Much like mortality...you price for $15 million in deaths, but you end up with $20 million...have to reprice to fit the experience.

You caught yourself in a bit of a mix up here. The assumptions you were talking before didn't even talk about anything that didn't stay on the books past 30 days. To the example I was using, that was almost all business that dropped off before the free look. According to you, the actuaries don't even consider that business.

Mortality is the highest driver of rates obviously. A company takes in $150 on a client and has to pay $15,000 in death benefit, it makes a larger impact than the $700 commission check. Deaths make a larger impact cases by cases but they are much smaller in quantity than lapses. 1 death can be $25K but 40 lapses out of 100 cases adds up as well.

What does it add up to? You're also using a heck of an example, 40 lapses? In exchange for those 40 lapses, using the example I've brought up (extreme as it may be), that would mean they picked up at least 60 cases that stayed on the books. Just to pick numbers, let's say it costs the carrier $50 to take an app (assuming they are doing a script check and a POS interview, half that if they aren't). If HALF the business falls off and they're doing all of that for nothing, but half of it stays on the books we're adding a cost of $50 per placed policy. That works out to $4/month for the first year. If the average policy stays on the books for at least 50 months it brings it down to $1/month. I think those are overly generous numbers that still have a negligible impact on the cost of an FE policy.

I'll look forward to hearing what the actuary has to say.
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Since you claim it is minimal...back that up with math. I would like to see how 40% lapses in the first year are profitable.

You can't have it both ways. That ~40% is from business that didn't make it past the first 30 days. See the above.

 

[MGA]

Rouse
Like I said blow that smoke somewhere else.

 

[rousemark]

. To the example I was using, that was almost all business that dropped off before the free look.

OK Josh.. Now I am confused.. But that doesn't mean much since I am so old I can't even remember what I have done over the years. (I am sure that is what MGA is implying rather than calling me a liar) e

In the example you gave 500K with only $300K retention, are you saying all that $200K was NTOs.. I assumed you were talking about first year lapse ratio.. Of course an NTO where no commission is paid would not be as big a drain on a company as a first year lapse where they are paying out more in commission than they are taking in.. There would be an administrative cost in either case but it doesn't seem that cost would escalate very much for a policy that stayed on the books for 6 months as opposed to an NTO.
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[Josh]

It was about $500k in premium and a little over $300k stuck past 30 days. The ~$200k was either NTO or for whatever reason didn't make it past the free look. I'm sure some fell off in the middle of the 30 day mark and the 13th month mark, but that's not where the greatest amount of it fell off.

 

[MGA]

Rouse
I am not a jerk. I just state the facts. I am sorry that no one believes that you never had an NTO in 41 years. It really sounds good when you state you were a debit agent and never had an NTO in that market either.

 

[djs]

Wow, a whole thread of chest pounding!!!!
I guess that NEVER happens here

 

[rousemark]

Rouse
I am not a jerk. I just state the facts. I am sorry that no one believes that you never had an NTO in 41 years. It really sounds good when you state you were a debit agent and never had an NTO in that market either.

Well, I have no reason to thump my chest about something that isn't true.. I am long past the age where I need to prove anything. If you read my other posts where I comment on my business you will see I have never claimed to be a big time producer or any of that type of stuff. So why should I start now? You are welcome to choose whatever you want to believe. As far as "no one" there may be others but you are the only one that has said it and just because you believe something it doesn't mean everyone else believes the same. After all you are the one that believes SL is the best thing since sliced bread.

When it comes to the debit, you can ask Reardon about my debit area.. Nice lower middle class homes in both the small town and rural areas of the county.. No ghetto areas .. One small housing project that was mostly seniors. I didn't write business in the slum areas..I didn't write business on welfare folks.. I concentrated on working class and retired people. Persistency and NTOs are directly tied to the type of prospect you chose to work with.

I regret the jerk remark and apologize.. I have removed it. The circumstances surrounding Pat Garret's death teaches me not to get involved in the type of contests that many seem to take pleasure in.

 

[somarco]

When you say "cable bill", are you including services like Dish Network and DirectTV, or purely cable?

Exactly.

Now maybe you can help others understand how lapses and not taken policies do not DIRECTLY impact pricing.

If that policy is not taken (or lapses before cost recovery), that expense has to go somewhere.

It does, but it is not allocated to a specific product line unless carriers are doing things differently from the way they did in the past.

Carriers review premiums, claims, IBNR reserves and reinsurance by line of coverage and by specific product lines. Retention costs (overhead) is calculated as a percent of premium.

Lapses are included in net premium calculations and the cost of underwriting and issuing those policies are thrown in to the total retention calculations.

I'm not sure about Somarco, but I always pay the important things first, which means I pay the cable, Dish and DirectTV, my 3 cell phone bills and make the payment on my big screen long before I pay my life insurance.

Heck, I can use the entertainment, but I found out I can't collect on my life policy!!!! Somebody else does. I have a much better use for that $17.95 a month!!!!

Had you bought a life policy that builds cash value you could borrow against it to pay your cable (or Dish) bill.

When I sold ghetto insurance that was a pitch that worked for me.

I even had a woman buy a mortgage life policy from me and paid for it with her HELOC checks.

True story.

Policy stayed on the books until she hit her HELOC limit which I believe was about 90 days.

 

[tins]

Rouse
I am not a jerk. I just state the facts. I am sorry that no one believes that you never had an NTO in 41 years. It really sounds good when you state you were a debit agent and never had an NTO in that market either.

I have no reason not to believe it. Rouse has been pretty honest the whole time I've been on here...never makes wild production claims. I'd think just about everybody besides you will take Rouse at his word. Not sure what you have against the old guy, but he's as honest as it gets.