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2006 General Meeting Assemblée générale 2006 Chicago, Illinois

Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois. Group Disability Reserving Unleash the Power of the 21 st Century Canadian Institute of Actuaries October 20, 2006. Barry Senensky FCIA

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2006 General Meeting Assemblée générale 2006 Chicago, Illinois

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  1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 General Meeting Assemblée générale 2006 Chicago, Illinois

  2. Group Disability ReservingUnleash the Power of the 21st Century Canadian Institute of ActuariesOctober 20, 2006 Barry Senensky FCIA www.claimanalytics.com

  3. Agenda • Evolution of reserve calculations • Where are we today? • How can we improve the process? • Summary

  4. Evolution of Reserve Calculations

  5. Computer Performance

  6. 1960’s

  7. Mainframe/manual Simplified formulas Conservative assumptions Infrequent experience and table updates Technology Paper Very early computers Tapes, disks Evolution of Reserve Calculations 1960’s

  8. Evolution of Reserve Calculations 1970’s

  9. Evolution of Reserve Calculations 1980’s PC jr!

  10. Mainframe calculations Move to basic principles calculations Conservative assumptions Evolution of Reserve Calculations 1970’s - 1980’s • Technology • Improved mainframes • PCs

  11. Evolution of Reserve Calculations 1990’s Tim Berners-Lee Ignites the Internet

  12. Mainframe/PC calculations Basic principles calculations Expected assumptions with explicit margins Deterministic scenario testing Technology Faster computers, more storage Online processing Internet Evolution of Reserve Calculations 1990’s

  13. PC-based calculations Basic principles Stochastic modeling Expected assumptions with explicit margins Technology Advanced software algorithms Powerful computers with more storage, faster processing, Access to large databases of historic information Evolution of Reserve Calculations Today

  14. What Have We Accomplished? • Tremendous progress due to evolution of computer power • Calculations now explicit and seriatim • Scenarios sensitivity-tested to better evaluate risk

  15. What do we still need to do? • For group disability reserving, need appropriate reserve for each disabled life • Benefits • Profitability of the business is not distorted from period to period • Eliminates cherry picking at quarter-ends • More understandable to stakeholders • Immediately captures business mix changes • Better alignment of claims and management personnel

  16. What are the specific requirements? • Termination rates to reflect each disabled life’s: • diagnosis • residence • monthly benefit • tax status • reporting lag • Offsets and probability of offsets appropriate to each claim

  17. Using Predictive Modeling to Calculate Reserves Appropriate for Each Claim

  18. ClaimsScoring • Claims scored from 1 to 10. • Scores show likelihood of return to work within a given timeframe. • Scores are calibrated: • Score of 1 indicates 0 – 10% chance of recovery within given timeframe, score of 2 indicates 10 – 20% chance of recovery within given timeframe, and so on. J. Spratt Score: 4 # 452135 J. Loe Score: 6 # 452009 P. Chang Score: 8 # 451156

  19. ScoringReport Q.P. … … … … …

  20. Five steps to developing LTD termination rates for Dave with claim scoring Dave

  21. Developing termination rates for Dave About Dave

  22. Developing termination rates for Dave Dave’s claim scores Likelihood of RTW (%) 3 months 5.9 6 months 14.7 12 months 27.5 24 months 34.5

  23. Developing termination rates for Dave Dave’s claim scores Likelihood of RTW (%)

  24. Developing termination rates for Dave Step One Cumulative RTW Probabilities • cumulative RTW Probabilities, 1-24 Months after EP • expressed as %

  25. Developing termination rates for Dave StepTwo Interpolate between months • choose uniform distribution, constant force or Balducci • here, used uniform distribution • expressed as %

  26. Developing termination rates for Dave Step Three Mortality rates • Canadian Group LTD experience /1000 shown here • alternative is company experience • may want to make adjustments, e.g. improvement from mid-point of study

  27. Step Four Convert cumulative RTW probabilities to month-to-month RTW rates Developing termination rates for Dave # of claimants who will recover in period.  TM cumulative RTW - LM cumulative RTW 1 - LM cumulative RTW - LM cumulative death rate # of claimants still on claim at start of period.  

  28. Step Five • Calculate Termination Rates • Termination rate = recovery rate + mortality rate Developing termination rates for Dave

  29. What to do after 24 months • Produce scores for 24 months, then use traditional methods thereafter • Produce scores for all future terms

  30. Summary Significant progress has been made in calculating reserves. Still needed in Group Disability reserving: • DLR’s that reflect the specific factors of each claim This is realizable today.

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