The multi-product firm?

Philip Morris International, the tobacco company that sells Marlboro cigarettes, is getting into the life insurance business.

Called Reviti, the wholly owned subsidiary will initially sell life insurance in the U.K. with plans to expand into more markets overseas. Smokers will receive discounts if they stop, quit or switch to a possibly less carcinogenic product, like Philip Morris’ vaping devices.

On average, people who switch to e-cigarettes will receive a 2.5% discount on premiums, people who switch to Philip Morris’ heated tobacco product iQOS for three months will receive a 25% discount, and people who quit smoking for at least a year will receive a 50% discount, the company said. Premiums for a 20-year-old nonsmoker run about £5 ($6.47) per month for a life insurance policy that pays £150,000 ($194,125). The same premium would buy a £60,000 ($77,650) policy for a 40-year-old nonsmoker.

Here is more from Angelica LaVito, via Sheel.


I suppose that's a case of horizontal integration, especially if the customer is no longer vertical

Diapers, booze and caskets. Those three and you can't miss.

The policy looks like vape marketing to me, but sure why not.

Interesting that they don't consider the old product line more at risk with this acknowledgement of harm. Maybe this Reviti went rouge.

Life insurance is the mirror image of lending: with lending, the borrower gets the cash up front and repays over time, while with life insurance, the borrower pays up front and gets the cash at the end. Actuaries, the darlings, calculate the risk. The beauty of life insurance is that there is the "risk" that the "borrower" will stop making payments on the "loan" and allow the "loan" proceeds never to be paid or, God willing, will live beyond life expectancy and continue to pay premiums beyond what the actuaries expected. For life insurance start-ups, this "risk" is magnified by the law of numbers: any insured population will eventually die, but most of them will die later rather than sooner, creating large profits for the start-up insurer during the start-up. Life insurance is a scam, "shout it from the roof tops", as out host might say.

Why is it a scam??? I mean, like any investment there is risk involved but I don't think it is a scam. It is actually closer to health insurance in my view. You are betting on some odds you don't control (health) and on some potential gain / loss depending on that. I actually think that the example given here is more about marketing than life insurance per se (i.e., PM is trying to convince customers that vaping is safer by giving people discounts on life insurance)

No, life insurance isn't a scam, but what the tobacco company is doing is leveraging on the law of numbers, front-loading revenues from life insurance to mask the death of revenues from tobacco. Duh.

That doesn't make sense. If they insure smokers who die early they will lose money from those policies...

Speaking as an actuary, I can tell you that the scam in pretty much any whole life or annuity product is the front-loaded sales premium. It's an outdated business model with high customer acquisition costs that must be paid by someone. Nothing wrong with the actuarial logic.

Insurers get cash flow up front (what Buffett calls float). This is not the same thing as profits.

Thanks. How many insurers, incorporated in Arizona for reasons I don't know, have collected the "profits" from life insurance premiums collected in the early years which are distributed to the owners/executives of the insurer only to have the whole thing collapse after a few years. You understand as an actuary, but our friends who comment on this blog don't.

Zero as far as I'm aware. Insurers must hold liability reserves against policies and are mostly restricted to fixed income investments. All pretty highly regulated.

A couple insurers (Executive Life, Mutual Benefit) blew up in the 1980s, but it was more to do with GIC products and reaching for yield, so more like a bank failure.

" Insurers must hold liability reserves against policies and are mostly restricted to fixed income investments"- I think that such insurers are enablers for governments to issue 30 year bonds. I wonder who in their right mind would buy a 30 year bond yielding 3% (or less a while ago)? It's the insurance companies forced to. Captive audience.

Nice wispy theory Ray, but insurers hold a lot more corporate bonds than government bonds.

3% more or less has been the going rate for 30-year US government debt for a decade. Billions of dollars change every day voluntarily at this rate. With 1.5% inflation, it's been a good store of value.

A basic challenge in selling financial products is the difficulty in hiding sales commissions.

For if you pay $33,000. for a new car, you don't perceive that you just received a $30,000. car and then paid somenoe $3,000. to sell it to you. But if you buy a $33,000. investment with an up-front sales load, you can't help but notice that your investment's NAV is only $30,000.

Whole-life policies are an exception. You might realize that the actuarial risk is low in the first few years (because you're insurable, and younger than you'll ever be again) and the initial increases in cash value paltry, but these "features" are hidden well enough so that few customers will realize that this is because they're paying off a big sales commission. Indeed, most customers probably retain the illusion that somehow someone else must be paying these expenses.

1. Two product market issue:

Raise the price of vape products and lower the price of insurance.

2. What's the discount if you discontinue using vape or cigarettes entirely. What is the price of insurance for a non-smoker without a history of smoking.

What's the difference between an e-cigarette and a "heated tobacco" product?

e-cigarettes heat a liquid which contains nicotine and flavor.

heated tobacco product heats actual shredded tobacco leaves. heated tobacco products are very similar to popular marijuana vaporizers, albeit at a smaller size.

Interesting. Sounds a lot like a regular cigarette, but I guess it doesn't actually combust, then?

Honestly, even if the insurance is competitively priced, this is a win, win, win for Philip Morris International:
1) They make money off the insurance business.
2) They get good PR for incentivizing people to quit. (People who were no longer going to be their customers anyway.)
3) They also incentivize people who are planning to switch to vaping (their target consumer) to migrate to their new vaping products.

It's basically a marketing campaign that's also profitable on it's own.

Couldn't this also be seen as a hedging strategy by Philip Morris Intl.? If tobacco becomes less popular, their life insurance arm will rise in value due to fewer insurance claims being made. If it becomes more popular, their insurance arms loses but their tobacco arm is more profitable.

I heard somewhere that insurers with extensive life insurance AND annuity businesses do enjoy higher risk-adjusted returns due to the natural hedge on the two liability portfolios than companies that specialize in one or the other line.

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