Claims and Underwriting Issues for Income Protection

2. Claims and Underwriting Issues for Income Protection International Congress of Actuaries Paris, France June 1, 2006

3. Claims and Underwriting Issues for Income Protection Panelists Alexander Roux Munich Re of Africa aroux@munichre.com Edward Fabrizio General Reinsurance Life Australia Ltd efabrizio@genre.com Daniel Skwire Milliman, Inc. (U.S.A.) dan.skwire@milliman.com

4. Risk Management in Group Income Protection Alexander Roux, FIA Member of Operational Management Corporate Actuarial Munich Re of Africa

5. Variation in Claim Recoveries Chart from CMI Report 20, page 275

6. Target Market Reasons for the Variation in Claims Recoveries • Product Variation • Maturity of Claims Book • Risk Management: Underwriting • Risk Management: Claims

7. High Recovery Rates Recovery Rates in Isolation of Incidence Rates Due to high incidence rates (?) I.e. Poor claims assessment (?) • Low Recovery Rates Due to low incidence rates (?) I.e. Good claims assessment (?)

8. Underwriting – Selection and Assessment Risk Management Tools • Environmental Assessments • Claims Assessment & • Ongoing Claims Management • Forensic Assessments • Case Management • Early notification Period • Absence Management

9. Potential Value UnderwritingEnvironmental Assessments – Practical difficulties – Skills – Time & Cost • More Information vs. True Intervention – Benchmarking – Assistance in pricing – Interventions – Risk Management

10. Quality of Initial Clinical Claims Assessment General Work Ethic Regulatory Environment Claims Management (1)Forensic Assessments • Limited Potential Depends on: • Where did it Work? • Buying out of existing claims books • Messy by nature

11. Claims Management (2)Case Management • A Relatively New Tool Definition: In depth, “hands-on” approach to claimant with the aim of ultimately achieving either good “medical management” of claimant or rehabilitation. Medical Management is the appropriate optimal treatment given the condition and the compliance to that treatment. • Level of Success Varied (thus far) Depends on: • Correct selection of cases that warrants in depth “hands-on” approach • Define at outset Period & Budget (Discipline in avoiding overruns) • Employer Co-operation - Redeployment

12. Claims Management (3)Early Notification Period • Potentially Valuable • Medical (physical impairment) Intervention early enough – Reduce chances of later LTD E.g. Avoiding hypertension from becoming a cerebrovascular incident – leading to a chronic or terminal condition. • Psychological (non-physical impact) Intervention early enough – Improves desire to recover E.g. Facilitation of relationship between employer and employee (out-of-sight is also out-of-mind)

13. Claims Management (4a)Absence Management • A Relatively New Tool Definition (In the South African Employment Context): The assessment of absence patterns due to the utilization of sick leave by employees and the consequent pro-active intervention mechanisms activated based on these patterns (A more sophisticated form of early notification period) • Two common forms of Absence Management 1 Comprehensive Absence Management: Identifies all the causes of unscheduled absence (medical, psychological, social, and vocational factors) 2 Selective Absence Management: Identify specific patterns only, where such patters serve as an expected precursor to eventual LTD

14. Claims Management (4b)Absence Management (continued) Comprehensive Absence Management • Implementing a comprehensive program involves greater strategic considerations than merely more affordable income protection and; • Cost of a comprehensive program is likely to exceed any potential discount to disability insurance • Hence introducing a comprehensive absence program attaching to insurance can be like a tail wagging the dog Selective Absence Management • Designed specifically to fit into an insurance product/concept • Primary aim is to reduce incidences of (eventual) LTD • Ignores patterns of absence not expected to lead to eventual LTD

15. Claims Management (4c)Absence Management (continued) What are absence patterns? Sickness Absence Ratio The number of days sick leave taken divided by potential working days over a given period Absence Frequency Ratio Percentage of people taking sick leave, for a given time period (compared to the allowable working days over that period) Absentee Severity Ratio Durations of sick leave (when taken) and the Implied severity E.g. A single event of more than 7 consecutive days Vs. Repeated periods of less than 5 days

16. Claims Management (4d)Absence Management (continued) Decision to Intervene • Based on Absence Data & Clinical Data Combined • Specific absence patterns should trigger need to acquire clinical data • Cost of Intervention (e.g. Return to Work program) vs. Cost of Benefit Stumbling Blocks to Absence Management • Introduction of Absence Management with Employer (with regard to definition of disability) • Poor Co-operation from HR (administration & suspicion) • Poor consequent claims experience (good information does not automatically equate to a good intervention program)

17. Claims Management (4e)Absence Management (continued) Benefits of Absence Management - Reduce LTD incidences (but not recovery rate!) - Can eliminate some of the subjectivity in the more “manageable” causes of disability (psychological & spine) Causes of subjectivity: • Inconsistent approach to diagnosis among medical professionals, medical reports and intervention & treatment being applied • Subjectivity in description of symptoms and the degree of the condition Absence Management model can lead to a more consistent approach to diagnoses, medical reports and the proposed interventions applied

18. Risk ManagementClosing Remarks Analyzing Claims Management Process is about trying to make sense of Qualitative Information • Not actuaries’ strong point • Essential for appropriate pricing of disability income protection ?

19. Return To Work Edward Fabrizio Deputy General Manager and Chief Actuary General Reinsurance Life Australia Ltd

20. 90% of new claimants expect and want to work 2/3rds claimants have manageable conditions (such as back pain, depression, cardiovascular) where work should be realistic Work can improve health and well-being, and prevent deterioration However, many are treated as their working lives are at an end Obstacles to RTW are often non-health related, but include confidence, skills, financial incentives, availability of jobs Working is a realistic and positive option Department for Work and Pensions, British Government, November 2002: Pathways To Work

21. Potentially manageable conditions predominate Department for Work and Pensions, British Government, November 2002: Pathways To Work

22. Significant utilisation of RTW strategies via Rehabilitation and Case Management programs Supportive product features – rehab / retraining benefits, partial disability benefits, recurrent disability benefit Value of internal rehabilitation programs doubted compared to external providers Claim professionals are generally not trained and educated in RTW skills strategies in any structured manner – varies by company Australian Snapshot….

23. Vocational Rehab and RTW Assistance Benefits Partial Disability Benefits Recurrent Disability Benefits Work-site Modification Benefits Work Incentive Benefit Loss of Profit Benefits Business Expense Policies Align contract provisions and product design with what we want to achieve – return to work Product Features supporting RTW

24. Australian Life industry survey undertaken to examine the current rehabilitation models and outcomes Rehabilitation was defined as the use of vocational and occupational rehabilitation tools for the objective of Return To Work Black, M & Winterbottom, L; “Rehabilitation – Working Models and Sustainable Outcomes.” Presented at the ALUCA Conference, 2004 Cairns, Australia. “Do it once, do it well…”

25. DECENTRALISED Claim Professional responsible for referrals Usually limited experience with rehabilitation, except for on-the-job training Usually minimal responsibility to track and measure all rehab outcomes Micro Approach CENTRALISED One person responsible for all rehabilitation referrals Usually a Rehab Specialist with qualifications and experience in rehabilitation Usually sole responsibility to screen, manage, track and measure all rehab outcomes Macro Approach Working Models

26. Length of Rehabilitation Intervention and RTW Rate

27. Rehabilitation Cost and Benefit

28. Referrals

29. The Payoff Matrix

30. The Centralised Model : * lower cost, and * more conducive to achieving sustainable outcomes Return to Work Philosophy and Programs must become an integrated part of the companies culture in order to control claims costs RTW programs must incorporate an integrated approach with all stakeholders with critical emphasis on date of injury/illness reporting and early intervention responses Companies to be more stringent implementing / managing rehabilitation, training claims staff, and analysing their results. Rehabilitation risks becoming ineffective and a costly claims tool without adequate program planning Implications and considerations

31. Pathways to WorkA British Government initiative 2002

32. Six pilot areas ending 31 March 2006 to trial for new claimants: New framework of work focused interviews Improved referral routes to disability employment programs New work focused rehabilitation programs in conjunction with NHS Early results = Pilot programme doubled RTW rates within 5 months Pilot Areas

33. Behavioural intervention (psychologists) Coping with health conditions and disabilities (counsellors, occupational therapists, physiotherapists) Jobs/employability training (personal advisers) More than just clinical intervention

34. It’s about putting the individual first Employers Physician Other Vendors Physiotherapists Multi-Discipline Assessment Team Chiropractors Health Care Vendors Workers Occupational Therapists Insurance Case Manager

35. Lessons for international markets proposed by Pilot Programme included: Change attitude of medical practitioners on RTW philosophy Educate about therapeutic benefits of work Educate employer on maintaining employees on partial basis and use of incentives Shift insurers’ focus from medical to psycho-social rehabilitation UK evolving as a life and health market and philosophy to “creative solutions” Shifting across the continents

36. SYDNEY1.3.2006 • Being without work: • Increases mortality • Decreases social interaction & self esteem • Removes a sense of identity and purpose in life • Increases mental health problems • Introduces financial difficulties and a lack of security “Work is a blessing not a curse.Work supports good health.” Barth RJ, Roth VS: “Health Benefits of Returning to Work.” Occ and Enviroment. Med. Report 17, 3 March 2003, p13-17.

37. Multilife Disability Underwriting in the U.S. Daniel D. Skwire, FSA Principal and Consulting Actuary Milliman, Inc.

38. Traditional Income Protection Products

39. Multilife plans involve the sale of individual disability policies to 3 or more employees of a common employer. Multilife Disability PlansDefinition

40. “Multilife” does NOT mean: Group Insurance Professional Associations Multilife Disability Plans

41. More flexible and generous coverage than group insurance Lower morbidity than traditional individual policies due to group risk selection Efficient administration through list billing and simplified underwriting Multilife Disability PlansObjectives

42. Plan Design Premium Rates Underwriting Administration Multilife Disability PlansKey Features

43. Multilife Disability PlansPlan Design

44. Level issue-age rates with policy reserves Unisex premiums to avoid discrimination Discounts to reflect favorable experience “List-billing” sends one bill to employer Premiums paid by employer, employee, or both Multilife Disability PlansPremiums

45. Traditional: Full medical and financial underwriting Guaranteed to Issue (GTI): Full underwriting, including substandard actions, but coverage may not be declined Guaranteed Standard Issue (GSI): No medical underwriting. All policies are issued on standard basis. Multilife Disability PlansUnderwriting Methods

46. Multilife Disability PlansTypical Underwriting Methods

47. Favorable risk classes Uniform plan chosen by employer Pre-existing condition exclusion Actively-at-work requirement High participation rate Low maximum amounts Limited time periods Multilife Disability PlansSuccess Factors for GSI Underwriting

48. Streamlined quote process using census data Pre-filled applications Documentation of underwriting offers List-billing sends one bill to employer Capture group-level data for experience analysis Monitor participation rates Multilife Disability PlansAdministration

49. Multilife Disability PlansRecent Experience by MarketActual-to-Expected Claim Incidence Source: Society of Actuaries, 1990-1999 Experience

50. Multilife Disability ExperienceRecent Experience by Underwriting MethodActual-to-Expected Claim Incidence Source: Society of Actuaries, 1990-1999 Experience