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Canadian Institute of Actuaries L’Institut canadien des actuaires 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver 2007 Annual Meeting Assemblée annuelle 2007 Preferred Products - 10 Years Later An Underwriter’s Perspective Fraser Cutler June 29th, 2007 2007 Annual Meeting Assemblée annuelle 2007 Preferred Underwriting Page 3 • Primary Tenets of Risk Selection – Know the risk – Predictability 2007 Annual Meeting Assemblée annuelle 2007 Client Underwriting Audit Results Page 4 2002 – 2006 192 Audits Total Cases Reviewed 25,897 Preferred Cases Reviewed 12,500 Non-Preferred Cases Reviewed 13,397 Client Underwriting Audit Results 2007 Annual Meeting Assemblée annuelle 2007 2002 – 2006 Preferred Disagreements Top Five Build Total Cholesterol Medical History Waived Requirements Lab Findings 0 5 10 Percentage % Page 5 15 20 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 6 What Did We Agree On? 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 7 • Based on the client’s manual of record – Reinsurers – Direct writers 100% 91% Yes Yes • Adherence to treaty guidelines – Reinsurers – Direct writers 85% 70% Extremely important Extremely important 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 8 Where Did We Disagree? 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 9 Adherence to Preferred Criteria – Reinsurers 77% Extremely Important – Direct writers 46% Extremely Important 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 10 • Adherence to Internal Guidelines – Reinsurers 69% Extremely Important – Direct writers 32% Extremely Important 2007 Annual Meeting Assemblée annuelle 2007 Audit Survey Results Page 11 • Business Decision Justification – Reinsurers – Direct writers 100% Extremely Important 46% Extremely Important 2007 Annual Meeting Assemblée annuelle 2007 What Did We Learn? Page 12 Business decisions allowed Survey Reinsurers 92% 2% or less Direct writers 51% 2% or less Preferred 5.3% Without offsets Non-Preferred 4.2% Greater than four table deviation Audit Results 2007 Annual Meeting Assemblée annuelle 2007 What Did We Learn? Page 13 Compliance with Age/Amount Requirements Audit Results Preferred 13.6% Exceptions involved waived requirements Non-Preferred 23.3% Exceptions involved waived requirements 2007 Annual Meeting Assemblée annuelle 2007 What Did We Learn? Adherence to Preferred Criteria Survey Reinsurers 100% Extremely Important or Very Important Direct writers 89% Extremely Important or Very Important Audit Results Preferred Disagreements Page 14 8.3% Exception Rates By Age Band Cumulative percentage of cases 2007 Annual Meeting Assemblée annuelle 2007 Client Underwriting Exceptions by Age 40% 35% Major exceptions 30% Minor exceptions 25% 20% 15% 10% 5% 0% <30 30-39 40-49 50-59 60-69 Policyholder Age Page 15 70-79 80+ 2007 Annual Meeting Assemblée annuelle 2007 What Did We Learn? Page 16 Exceptions can be identified Cholesterol and build are the primary preferred exceptions The APS is waived more than any other requirement Other medical history is sometimes ignored Internal exception guidelines need to be shared at the time of pricing Overall, underwriting error is minimal 2007 Annual Meeting Assemblée annuelle 2007 What Does It Cost? Preferred Distribution 0.75 1.0 1.25 Premium Actual/Expected Super Preferred 75¢ Page 17 Preferred $1.00 Standard $1.25 2007 Annual Meeting Assemblée annuelle 2007 What Does It Cost? Distribution With Exceptions 0.75 1.0 1.25 Premium Actual/Expected Super Preferred 75¢ Page 18 Preferred $1.00 Standard $1.25 2007 Annual Meeting Assemblée annuelle 2007 The Impact of Exceptions Assume a hypothetical set of 200 policies with an 8% exception rate Policy Count Class Expected Mortality Before After Exceptions Exceptions Without With Exceptions Exceptions Relative Increase Preferred 92 100 75.4% 77.7% 3.1% Residual 108 100 121.0% 122.3% 1.1% Overall mortality increase 2.1% (3.1% + 1.1% ÷ 2) Page 19 2007 Annual Meeting Assemblée annuelle 2007 The Impact of Exceptions Hypothetical Reinsurance Pricing Reinsurance Premium 80.0% To cover mortality 12.5% Expenses, cost of capital, reserves 7.5% Pre-tax profit Mortality 80% x 1.021 = An extra 1.7% of premium 1.7% ÷ 7.5%= 23.0% Profits Reduce by 23% YOUR COST…? Page 20 2007 Annual Meeting Assemblée annuelle 2007 Why Does it Happen? Page 21 Pressures to make exceptions ▫ Producers ▫ Cycle times ▫ Cost ▫ Competition ▫ Shareholder premium goals 2007 Annual Meeting Assemblée annuelle 2007 What’s Next? Page 22 Better understanding of pressures and perspectives Is there a better way to underwrite? Evolving preferred underwriting Re-examining How We Underwrite the Elderly 2007 Annual Meeting Assemblée annuelle 2007 Typical Preferred Criteria 1. Smoking status? 2. Parents survived to age 60? 3. At or below average weight? 4. Low cholesterol 5. “Normal” lab values 6. Normal blood pressure =<140/80 7. No aviation 8. No hazardous sports 9. Less than 4 moving violations 10. No risky travel Page 23 2007 Annual Meeting Assemblée annuelle 2007 Page 24 Society of Actuaries 1997 and 2002 Preferred Surveys Preferred criteria 1997 response ranges (average) 2002 response ranges Participating companies 54 54 (26 responded in prior surveys) Build: BMI (kg/m2), example 45 y male 24 to 37 24 to 32 Cholesterol 200/5.2 to 400 /10.4 (mg/dL//mmol/L) (249/6.4) Cholesterol/HDL ratio 3 - 10 (5.8) 200/5.2 to 274/7.1 Blood pressure (mmHg) 125/80 to 165/95 120/80 to 150/90 Exceptions Underwriter (UW) judgment 90% No exceptions 18%, Most common: build & cholesterol, UW judgment 72%, 4.0 to 6.5 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Facts Page 25 The vast majority of deaths come from vascular disease or cancer. Accidental death rates have a barbell shape. Younger people are most affected followed by older people. Independently verifiable data has increased value. Questions are great but nothing beats a test or report. Applicants always know more than we do. This is why early cancer deaths continue to be a difficult problem to underwriter. 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Myths Page 26 We can’t underwrite the cancer risk. 1. What if no one qualified for preferred with one year of smoking abstinence. It should be a minimum of three for preferred and five for best preferred. 2. Family history requirement should move up in age as the applicant moves up in age. 3. After certain key ages preferred should require regular established medical care. Annual exams and cancer screening such as colon exams and mammography. 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Myths Page 27 An acceptable driving record should contain no more than three violations in the past three years. More accurately… No moving violations is the appropriate number. 2007 Annual Meeting Assemblée annuelle 2007 Underwriting By Age Age 35 Age 70 Apparently healthy Suspect impairment Known Impairment Page 28 2007 Annual Meeting Assemblée annuelle 2007 Causes of Death by Age Page 29 Age Cause of Death (U.S. 2003) Incidence Lifestyle Cancer Environmental Cardiovascular 20-39 Accident Suicide Assaults 70% 15% 15% 40-55 Heart disease Cancer Accidents 25% 40% 35% 56-70 Cancer Heart disease Lung disease 10% 42% 48% > 70 Cancer Heart disease Stroke 8% 30% 62% 2007 Annual Meeting Assemblée annuelle 2007 Cause of Death: Age 70 and Up Page 30 Ages 60-79 Ranking Male Ages 80+ Female Male Female 1 Cancer Cancer Heart Diseases Heart Diseases 2 Heart Diseases Heart Diseases Cancer Cancer 3 Chronic Respiratory Diseases Chronic Respiratory Cerebrovascular Diseases Diseases Cerebrovascular Diseases 4 Cerebrovascular Diseases Cerebrovascular Diseases Chronic Respiratory Diseases Alzheimer’s Disease 5 Diabetes Diabetes Influenza Chronic Respiratory Diseases 2007 Annual Meeting Assemblée annuelle 2007 Mortality in the Elderly Age 20-39 Accident Suicide Assaults 40-55 Heart disease Cancer Accidents 56-70 Cancer Heart disease Lung disease > 70 Page 31 Cause of Death (U.S. 2003) Cancer Heart disease Stroke Dementia Influenza Typical preferred exclusions: • High cholesterol • Elevated blood pressure • Overweight • Hazardous activities Family history of longevity Health maintenance - screening Function testing – pulmonary, cardiac Cognitive testing New Criteria Age Specific Preferred Criteria 2007 Annual Meeting Assemblée annuelle 2007 Underwriting Criteria Tobacco 40-49 50-59 60-69 > 70 No tobacco products past 5 years No tobacco products past 5 years No tobacco products past 5 years No tobacco products past 10 years No tobacco products past 10 years Acceptable physical exam within 5 years No recent unexplained weight loss Acceptable physical examination within 2 years, including ECG and cancer screening No recent unexplained weight loss Acceptable physical examination within 2 years, including ECG and cancer screening No recent unexplained weight loss Annual physical examinations, including ECG and cancer screening No recent unexplained weight loss Physical Examination Albumin >3.6 Creatinine <1.5 Hb >13 (males) Hb >12 (females) Nutritional/ Metabolic Blood Pressure (not under treatment) ≤130/80 ≤140/80 ≤145/85 ≤150/90 ≤150/90 Build BMI ≤27 BMI ≤28 BMI ≤29 BMI ≤30 BMI >22 ≤30 Total cholesterol < 220 Tchol/HDL ratio ≤5.0 Total cholesterol < 230 Tchol/HDL ratio ≤5.0 Total >100 and < 250 Tchol/HDL ratio ≤5.0 Total >100 and < 260 Tchol/HDL ratio ≤5.0 Total >100 and < 280 Tchol/HDL ratio ≤6.5 < 2.5 if available < 2.5 if available <3.5 * <4.5 * <6.5* No family history of cardiovascular, cancer, or diabetes occurrence or death prior to age 65 No family history of cardiovascular, cancer, or diabetes occurrence or death prior to age 65 No family history of cardiovascular, cancer, or diabetes occurrence or death prior to age 65 No family history of cardiovascular, cancer, or diabetes death prior to age 65 At least one parent survived to age 70 No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence Cholesterol (not under treatment) PSA Level Family History (include grandparent s where data available) Mental Illness/Drug Abuse Page 32 20-39 No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence past 10 years No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence past 10 years No history of chronic or recurring mental illness or depression No history of treatment for drug or alcohol dependence past 10 years New Criteria 2007 Annual Meeting Assemblée annuelle 2007 Age Specific Preferred Criteria (Continued) Underwriting Criteria 20-39 Hazardous Activities No ratable occupations No hazardous activities including aviation (commercial aviation excluded), scuba diving, extreme sports, auto racing No ratable occupations No hazardous activities including aviation (commercial aviation excluded), scuba diving, extreme sports, auto racing No ratable occupations or avocations including aviation (commercial aviation excluded) No ratable occupations or avocations including aviation (commercial aviation excluded) No ratable occupations or avocations including aviation (commercial aviation excluded) No moving violations past 5 years No DUI past 5 years No more than 1 moving violation past 5 years No DUI past 5 years No more than 1 moving violation past 5 years No DUI past 5 years No more than 1 moving violation past 5 years No DUI past 5 years No moving violation past 5 years No DUI past 5 years Credit check clear No bankruptcy past 7 years No felony conviction/probation last 7 years Financially justified Credit check clear Financially justified Credit check clear Financially justified Financially justified with clear insurable interest Financial/Miscell aneous Underwriting Credit check clear No bankruptcy past 7 years No felony conviction/probation last 7 years Financially justified Employment Verifiable employment records without frequent job changes Verifiable employment records without frequent job changes Verifiable employment records if appropriate Verifiable employment records if appropriate Verifiable employment records if appropriate Physical/Social Activities Physically active including travel, exercise, social activities Physically active including travel, exercise, social activities Physically active including travel, exercise, social activities Physically active including travel, exercise, social activities Physically active including travel, exercise, social activities No ratable medical impairments No personal history of cancer (except for nonmelanoma skin cancer) No ratable medical impairments No personal history of cancer (except for nonmelanoma skin cancer) No ratable medical impairments No personal history of cancer (except for non-melanoma skin cancer) No ratable medical impairments No personal history of cancer (except for nonmelanoma skin cancer) No evidence of cognitive impairment No ratable medical impairments No personal history of cancer (except for nonmelanoma skin cancer) Driving Personal History Page 33 40-49 50-59 60-69 > 70 2007 Annual Meeting Assemblée annuelle 2007 Parental Longevity and Mortality Odds Ratio for mortality in 2370 middle-aged patients with both parents still alive after 25 years of follow-up Sex Odds Ratio Males 0.63 Females 0.42 American J of Epidemiology 1984 Page 34 2007 Annual Meeting Assemblée annuelle 2007 Cancer Screening in the Elderly Page 35 Smoking cessation Underweight and/or recent weight loss Decreased serum albumin Anemia Hematuria 2007 Annual Meeting Assemblée annuelle 2007 Activity and Mortality in the Elderly Activities Social Church attendance, travel, movies and restaurants 0.81 Fitness Walking, sports or swimming 0.85 Productive Gardening, shopping, community work, employment 0.57 2,700 elderly residents of New Haven, CT Hazard Ratio greater than 1.0 = increased mortality Page 36 Hazard Ratio Glass BMJ 1999 2007 Annual Meeting Assemblée annuelle 2007 Mobility and Mortality Element 950 elderly with cognitive impairment Odds ratio for death within 2 years Odds Ratio Difficulty in dressing 2.08 Difficulty in getting about 1.69 History of falls 1.43 Abnormal gait 1.61 Abnormal motor strength 1.51 Odds Ratio greater than 1.0 = increased mortality Chronic Diseases in Canada 2000 Page 37 2007 Annual Meeting Assemblée annuelle 2007 Page 38 Underwriting Surveys Old Age Underwriting August 2005 48 respondents 80% indicated business over age 80 was less than 2% One-third have no special elderly underwriting guidelines Three-quarters have no special preferred criteria over 60 Over one-half felt placement and persistency were average Over age 70, one-half had no limit on how high a policy could be rated 2007 Annual Meeting Assemblée annuelle 2007 Page 39 Underwriting Older Ages in 2007 Things we do right ▫ Elderly questionnaire ▫ Lipid profiling ▫ Renal function ▫ ECG ▫ Exercise testing 2007 Annual Meeting Assemblée annuelle 2007 Page 40 Underwriting Older Ages in 2007 Things we would like to consider: ▫ Family history: longevity credits ▫ PFT Screening ▫ History of depression ▫ Labs – Albumin – Complete blood count 2007 Annual Meeting Assemblée annuelle 2007 Conclusions Page 41 1. Our studies indicate an opportunity to evolve preferred criteria. 2. Age matters in underwriting. 3. We need a better understanding of our underwriting tools.