Valuing a Book of Life Insurance Contracts

The Situation

A life insurer discovered that a portfolio of term and universal life policies acquired in a recent transaction had losses above what would be expected given the underwriting ratings on the policies. The insurer had contracted with a brokerage to underwrite and sell policies, and the resulting book of business displayed a higher rate of errors and larger deviations from expected categories than typically observed. The insurer sought compensation from the seller of the company under an indemnification agreement associated with the sale of the assets. Upon failing to agree on a solution, the insurer sued for damages based on the agreement.

NERA's Role

The insurer retained NERA to calculate damages associated with alleged underwriting errors for the portfolio of term and universal life policies. The NERA team developed discounted cash flow models to calculate the expected cash flows from the policies as underwritten based on the insurer’s pricing formula and the lapse and mortality assumptions used by the company in developing rates. Using a random sample of policies audited by a third party, NERA compared the as-underwritten expected cash flows to the expected cash flows based on the audit assessment, if that assessment was different enough to indicate an underwriting error and not just a difference in judgment. The difference for the audit sample was extrapolated to the full group of term policies. Damages for the universal life policies were based upon differences in mortality benefits.

The Result

The client used NERA’s damage analyses to support their litigation claims, and eventually settled.