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Group LTD Pricing Issues SOA Spring Meeting, Dallas, Texas May 30, 2001 Session 48

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

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Group LTD Pricing Issues SOA Spring Meeting, Dallas, Texas May 30, 2001 Session 48

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  1. Group LTD Pricing IssuesSOA Spring Meeting, Dallas, TexasMay 30, 2001Session 48 Rick Leavitt - Smith Group Delaine Hare - Fortis Benefits Dave Fitzpatrick - The Standard

  2. The economy, circa 1998-2000 • Decline in unemployment • Interest rates started to rise • Rising Index of Leading Economic Indicators

  3. 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!

  4. Where’s the cheese? • Who got the cost savings resulting from managed and integrated disability? • The carrier???? • The employer????

  5. 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

  6. Agenda • Manual rating pitfalls • Competitive pricing pitfalls • Measurement & accountability

  7. Manual rating pitfalls Rick Leavitt Smith Group

  8. 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?

  9. For Example: Current Rate Block Change Segment A: 33% -10% Segment B: 33% 0.0% Segment C: 33% 10% Estimated Rate Impact: 0% In Reality: New Rate Sales Change Segment A: 60% -10% Segment B: 30% 0.0% Segment C: 10% 10% Actual Rate Impact: -5% Common Pitfalls: Inforce vs. New Sales

  10. Common Pitfalls: Rate Variables are Dependent Consider an example Current Factor Actual Cost Own Occupation: 24 Month 1.00 1.00 Unlimited 1.10 1.10 Industry: Doctors 1.50 2.00 Lawyers 1.20 1.10 All Other 1.00 1.00 24 Mo Unlimited Variables are Doctors 30% 70% Dependent Lawyers 50% 50% All Other 80% 20%

  11. 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?

  12. Common Pitfalls: Changing Dynamics Over Time Three Year Study shows rate is right on… What is appropriate for 2001? ?

  13. Smith Group Comparison of Filed Manual Rates • 12 Top Companies • Sample Calculations on over 1000 Representative Cases • Manual Rates Calculated as Publicly Filed

  14. Smith Group Comparison ofFiled Manual Rates:

  15. Smith Group Comparison ofFiled Manual Rates: Variation of Individual Companies

  16. Smith Group Comparison of Filed Manual Rates: Variation of Individual Companies

  17. Smith Group Comparison ofFiled Manual Rates: Industry Factors

  18. Smith Group Comparison of Filed Manual Rates:Area Factors

  19. Pricing pitfalls Delaine Hare Fortis Benefits

  20. 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

  21. …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?

  22. 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?

  23. 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.

  24. Manage the early claims... • 45 year old • 20% better term rate for 24 mo. • Same term rate after 24 mo. • 19% cost savings Base Improved

  25. …without managing the old • 45 year old • 20% better term rate for 24 mo. • 20% worse term rate after 24 mo. • 9% cost savings Base Improved

  26. 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

  27. 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

  28. Value of early intervention...

  29. …is relative

  30. 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?

  31. What is a “good case”? • Manual rates already reflect the “good” plan design & “good” industry • Is “good” experience really credible?

  32. Persistency & profitability Year 4 Year 5 Year 6 Year 1 Year 2 Year 3 Year 7

  33. …during a recession • Drop in interest rate raises the bar • Higher unemployment may raise the bar

  34. Measurement & accountability Dave Fitzpatrick The Standard

  35. 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?

  36. “You can’t manage what you can’t measure.” “What gets measured gets done.” Bill Hewitt, 1991

  37. Successful Measures of Sold-to-Calculated 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

  38. Reasons Why Rates May Vary • Underwriting Considerations • Mistakes • Experience Rating • Credibility • Underwriters may discount loads • Change in census from proposal to effective date

  39. 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)

  40. Return on Equity (ROE) • An elegant formula: Equity = 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

  41. 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

  42. 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!

  43. 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

  44. 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

  45. 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

  46. 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).

  47. 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

  48. “If you aren’t getting the results you want, ask the magic question, ‘What is being rewarded’.” Getting Results, Michael LeBoeuf

  49. 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!

  50. 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

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