BACKGROUND

The Integra Financial Corporation is a holding company active through its subsidiaries in life insurance, general insurance, trust services, securities brokerage as well as asset and portfolio management. Operating mainly in the province of Quebec (Canada), Integra manages assets in the order of eight billion dollars and a work force of more than 2,200 permanent employees. Integra's life operations rank among the seven largest in Canada in terms of written premiums^[2].

One of Integra's most successful products (its ‘cash cow’ in the words of the CEO) is its Loan and Mortgage Insurance Plan, developed in the early 1980s. With more than two million insured loans, this program is one of the largest group insurance plan of its kind in Canada. Commercialized exclusively through financial institutions in the province of Quebec, this product is totally integrated with the banking systems of the participating institutions. Thus, when a loan application is accepted at one of these institutions, the loan officer can offer his client, on the spot, an insurance policy to cover his or her loan. In return, the participating institution receives a percentage of the premium for its efforts.

This capability is available because the banking systems of the institutions are electronically linked to Integra's insurance management systems. These systems automatically determine the risk exposure of the loan and establish the premium to charge for the insurance coverage. Rates are calculated as a function of the balance due on the loan. In other words, the premium declines with each installment applied to the loan. Thus, the client pays an equitable premium for the real financial risk that his loan represents. For example, if the agreed rate of interest charged on the loan is 6.23%, and the life insurance premium is set at 0.07% of the loan, then the actual combined rate will be 6.3% of the outstanding debt. Based on a broad experience in the loan insurance market and a huge database accumulating data since 1984, Integra's actuaries have been able to develop a very proficient risk evaluation algorithm. This algorithm enables the institution to offer an insurance product with practically no exclusions (no more than 1% of all cases are excluded) applying to any particular field of work or the practice of dangerous sports, thus greatly simplifying the administration and lowering the operating costs of the product. Few, if any, of its competitors had attained this level of sophistication.

According to Integra's management, these hard to replicate characteristics gave the firm a persistent competitive advantage over other loan insurance offerings since, as of late 1996, the competition could only offer fixed (and much higher) rates based on the total amount of the loan and had to charge termination penalties when their clients reimbursed their loans ahead of time.

^[2]For a more detailed financial description of the firm, see Appendix 1.