Download Group LTD Pricing Issues

Group LTD Pricing Issues
SOA Spring Meeting, Dallas, Texas
May 30, 2001
Session 48
Rick Leavitt - Smith Group
Delaine Hare - Fortis Benefits
Dave Fitzpatrick - The Standard
The economy, circa 1998-2000
• Decline in unemployment
• Interest rates started to rise
• Rising Index of Leading Economic
Indicators
LTD industry, circa 1998-2000
• Improving LTD profits
– Positive results, but is ROE strong enough?
– But it beats the early 90’s
• Deteriorating STD profits
– Suddenly losses!
Where’s the cheese?
• Who got the cost savings resulting from
managed and integrated disability?
– The carrier????
– The employer????
The economy, circa 2001
•
•
•
•
Stock market has stumbled
Unemployment starting to rise
Interest rates falling
Index of Leading Economic Indicators is on
the rise
• Consumer Confidence falling
Agenda
• Manual rating pitfalls
• Competitive pricing pitfalls
• Measurement & accountability
Manual rating pitfalls
Rick Leavitt
Smith Group
How Useful Are Your
Manual Rates?
1. Do they accurately predict claim costs?
2. Are they adjusted for current risk
dynamics…Unemployment? Discount Rate?
3. Do your underwriters use them?
4. Do you track sold to manual rates?
Common Pitfalls:
Inforce vs. New Sales
For Example:
In Reality:
Current
Block
Rate
Change
Segment A: 33%
Segment B: 33%
Segment C: 33%
-10%
0.0%
10%
Estimated Rate Impact: 0%
New
Rate
Sales Change
Segment A:
Segment B:
Segment C:
60%
30%
10%
-10%
0.0%
10%
Actual Rate Impact: -5%
Common Pitfalls:
Rate Variables are Dependent
Consider an example
Own Occupation:
Industry:
Variables are
Dependent
Current Factor Actual Cost
24 Month
1.00
1.00
Unlimited
1.10
1.10
Doctors
Lawyers
All Other
1.50
1.20
1.00
2.00
1.10
1.00
Doctors
Lawyers
All Other
24 Mo
30%
50%
80%
Unlimited
70%
50%
20%
Common Pitfalls:
Rate Variables are Dependent
Hypothetical Example:
Results of Own Occupation Study
Pricing Factor
Observation
Unlimited
1.10
1.26
24 Month Own Occ
1.00
1.02
Do you need to adjust the Own Occ factor?
Common Pitfalls:
Changing Dynamics Over Time
115
110
1998
2000
?
1999
2001
105
100
95
90
85
1998
1999
2000
2001
Three Year Study shows rate is right on…
What is appropriate for 2001?
Smith Group Comparison of
Filed Manual Rates
• 12 Top Companies
• Sample Calculations on over 1000
Representative Cases
• Manual Rates Calculated as Publicly Filed
Smith Group Comparison of
Filed Manual Rates:
Distribution of the Ratio of Manual Rates
Max/Min
50%
Max/Avg
Avg/Min
40%
30%
20%
10%
0%
1
1.5
2
2.5
3
3.5
4
4.5
5
Smith Group Comparison of
Filed Manual Rates:
Variation of Individual Companies
Company A Manual Rate .
Company A versus the Average
2.5
2
1.5
1
0.5
0
0
0.5
1
1.5
Average Manual Rate
2
2.5
Smith Group Comparison of
Filed Manual Rates:
Variation of Individual Companies
Company B versus the Average
Company B Manual Rate .
2.5
2
1.5
1
0.5
0
0
0.5
1
1.5
Average Manual Rate
2
2.5
Smith Group Comparison of
Filed Manual Rates: Industry Factors
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0.5
Government
Engineering
Social Services
Educational
Legal Services
Health Services
Doctors Offices
Miscellaneous
Data Processing
Advertising
Hotels/Personal
Investment
Real Estate
Insurance
Insurance
Security Brokers
Mortgage
Banking
Retail Trade
Wholesale Trade
Transportation
Manufactoring
Construction
Mining, Oil and
Agricultural,
Smith Group Comparison of
Filed Manual Rates: Area Factors
1.25
1.15
1.05
0.95
0.85
0.75
WA
CA
TX
MO
IL
MN
WI
MI
IN
OH
TN
FL
GA
NC
VA
MD
PA
NY
NJ
MA
Pricing pitfalls
Delaine Hare
Fortis Benefits
Recipe for top line growth
•
•
•
•
•
Discount 10% for “value” contract
Discount 10% for early intervention
Discount 10% on “good cases”
Discount 5% for packaged LTD/STD
Guarantee the rates for 3 years
…and the bottom line
• Have you been too aggressive?
• If so, can you recover?
• Renewal is a double-edged sword
– One big increase - can you afford the poor
persistency?
– Layered increases - can you afford the good
persistency?
Watch your tail
• Better claim management improves claim
closures at early durations
• What happens to closures at later durations?
• Is your reserve tail as strong as it used to
be?
Simple reserve illustration
• For relative comparison only
• Not an opinion on what is an appropriate
pricing discount
• Sensitive to termination rate assumptions
– Valuation table, age, sex, etc.
Manage the early claims...
• 45 year old
• 20% better term rate for 24 mo.
• Same term rate after 24 mo.
• 19% cost savings
1.0
l(x)
0.8
0.6
Base
0.4
0.2
Improved
0.0
0
24
48
72
96
120
144
Months of duration
168
192
216
240
l(x)
…without managing the old
• 45 year old
• 20% better term rate for 24 mo.
• 20% worse term rate after 24 mo.
• 9% cost savings
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Base
Improved
0
24
48
72
96
120
144
Months of duration
168
192
216
240
Watch your assumptions
• Improved claim management & stronger
contract
• Did they add to your margins?
– Did you give it all away?
– Was it as big as you thought?
– Some cases may not benefit at all
Table 95a / Basic 2000 Table
• Concerns expressed over appropriateness of
this table
• Termination rates in later durations appear
to be overstated
• Reserves may be deficient
Value of early intervention...
LTD without
benefit of early
intervention
LTD with
benefit of early
intervention
…is relative
LTD without
benefit of early
intervention
LTD with
benefit of early
intervention
LTD with no
STD coverage
in front
Claim Manager of the Year
• The award goes to… Nobody!!!
• Starvation effect
– Elimination period is akin to a deductible
– Nothing controls incidence like loss of income
– When you add STD coverage, what are you
replacing?
What is a “good case”?
• Manual rates already reflect the “good” plan
design & “good” industry
• Is “good” experience really credible?
Persistency & profitability
115%
110%
105%
100%
95%
90%
Rate Charged
Profitable Rate
85%
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
…during a recession
• Drop in interest rate raises the bar
• Higher unemployment may raise the bar
125%
115%
105%
95%
Rate Charged
85%
Profitable Rate
Measurement & accountability
Dave Fitzpatrick
The Standard
Calculated (Manual) Rates
• Group Aging and impact on rates?
(recession and baby boomers)
• Aging census one year can increase claim
costs 5-10%
• Multiple year rate guarantees?
“You can’t manage what you can’t measure.”
“What gets measured gets done.”
Bill Hewitt, 1991
Successful Measures of Sold-toCalculated Rates
• Actual-to-Expected Analysis
• Can easily be aggregated at underwriter/rep
/plan level
• Can help in pricing vs. loss ratio analysis
only
• Provides a measurable target that is easily
understood
Reasons Why Rates May Vary
•
•
•
•
•
•
Underwriting Considerations
Mistakes
Experience Rating
Credibility
Underwriters may discount loads
Change in census from proposal to effective
date
Return on Equity (ROE)
• Formula for Underwriters to ensure
attainment of ROE targets
• ROE = Net Income/(Average Equity)
• Equity = Required surplus +
(STAT reserves - GAAP reserves)
Return on Equity (ROE)
• An elegant formula:
Equity =
[ A *{C0  C4 a  (C1  C3a ) 2  (C2 ) 2  (C3b ) 2  (C4b ) 2 ]
 (1987 CGDT tVxSPIA100bp - Company Adjusted tVxnew money yields) }
k
where C0 = Asset Risk - Affiliated Amounts
C1 = Asset Risk - All other
C2 = Insurance Risk
C3a = Interest Rate Risk
C3b = Health Credit Risk
C4a = Business Risk
C4b = Health Adm Exp - Business Risk
Return on Equity (ROE)
Pros and Cons of an elegant formula:
• Impressive to look at and discuss
• Difficult to challenge
• Hard to explain
• Not understood by underwriters and many
normal actuaries
Return on Equity (ROE)
• An example of a much simpler formula:
Equity =
30% of annualized premiums +
30% of case reserves
Possible to approximate to fit individual
company’s equity requirements!
Return on Equity (ROE)
Pros and Cons of a simple formula:
• Easy to understand and explain
• More likely to be used by underwriters
• Convenient to periodically review
• Approximates equity to the satisfaction of
most normal actuaries
• Percentages may vary by company
• Can be further refined as % of premium
Industry/Occupation Variations
• One role of the underwriter is to assign the
“best” occupation class
• Individual DI has some lattitude in
assigning which might result in 5-20%
difference
• Group occ factors are combination of
industry/occupation assignment
STD - What’s Up!
• JHA Profitability Survey reports STD
profits are negative
• Lack of concrete evidence that managing
STD reduces LTD claim costs
• Brings into question the assumed savings of
integrating disability
• Probably caused by aggressive acquisition
pricing or assumed expense saving
Group Insurance Handbook
• Maximize participation - preclude
individual selection
• Voluntary/contributory LTD violates these
two principles
• Most selection can be priced and/or
controlled
• 100% participation on a rich plan design
may not be a good thing (gross-ups).
High Maximum Benefits
• Less pressure in recent years
• Impact of bonus and incentive
compensation
• Selection may be controlled through EOI
• Evidence is your friend
• Doesn’t need to be an inconvenience
• Free cholesterol check
“If you aren’t getting the results you want, ask
the magic question, ‘What is being
rewarded’.”
Getting Results, Michael LeBoeuf
Manual Rating - Quality Assurance
• Field Office Managers/Reps Accountability
• Combination of office loss ratio and sold
rates in relation to manual
• Actual loss ratio tied to predetermined
target
• Positive or Negative!
Bottom-line Accountability
• Sales reps/Office Managers tied to target
loss ratios and sold-to-calc ratios
• In year 2000, positive and negative
compensation impacts were offsetting, but
significant at the individual level.
• Percentage of reps received higher
compensation due to favorable sold-to-calc
ratios was somewhere near moiety
Pricing - Reserve Analysis
• Measuring results requires appropriate
reserve analysis
• Incurred But Not Reported Reserves
• Reported Reserves
• Actual-to-expected Termination Rate Study
- theoretical elegant
• Actual reserve runouts better
Reserve Analysis
• “The whistles and bells don’t cost much during
good economic times.”
Rick Leavitt, Las Vegas - 2000
• “Reserve runouts on IBNR and reported reserves
are better during good economic times.”
Dave Fitzpatrick, Dallas - 2001
Reserve Analysis
• IBNR reserves and reported reserve runouts
fluctuate over time for many reasons
(incidence rates, claim management, RTW
offsets, SS awards/denials, re-opens,
economy, replacement ratios, mortality)
• IBNR range 1993-1998 without adjusting 40% of reserve
• Reported range 1993-2000 without
adjusting - 12% of reserve
Rate Filings
• Required in several states prior to use (FL,
WA, CO, ND, NY)
• Inability to gain timely approvals may
impede progress in improving profitability