Voluntary Employee Benefits: Market & Pricing

1. Voluntary Employee Benefits: Market & Pricing Warren Cohen, FSA, MAAA Jacob McCoy, FSA, MAAA Darrell Spell, FSA, MAAA

2. Definition of Voluntary • Common terms used in the industry are voluntary, worksite, supplemental coverage, etc • 100% Employee Paid Coverage • May be linked to Employer Paid Coverage • Supplemental Life • Core/Buy-Up Disability • Carriers may include business with partial Employer subsidies

3. Major Market Trends • Continued Growth • Eastbridge Statistics • Group Benefit Carrier Expansion • Expanded Product Lines: Critical Illness & Accident • Individual Carrier Distribution Expansion • AFLAC Acquisition of Continental American • Continued Blurring of Group vs. Individual • Increasing Awareness in the Market • Large/Jumbo Cases

4. EastbridgeStatisticsU.S. Worksite/Voluntary Sales Report, April 2012 • New Business Premium Growth • Total sales in 2011 = 5.5B • 2011 growth rate = 4.5% • Top 15 companies account for 82% of the market • Takeover business accounts for 42% of the market

5. EastbridgeStatisticsU.S. Worksite/Voluntary Sales Report, April 2012 • Top Companies (47% Market) • Aflac • Unum • Colonial • Allstate • Top Products (68% Market) • Term Life Insurance • Short Term Disability • Accident • Hospital Indemnity • Dental

6. EastbridgeStatisticsU.S. Worksite/Voluntary Sales Report, April 2012 • Distribution Channels • Benefit Brokers • Career Agents • Classics • Specialists • Occasional • 55% Group, 45% Individual

7. Areas of Blurring • Group vs. Individual Contract • Greater rate and filing flexibility with Group • Lower MLR’s with Individual • Group products with “Individual” features • Issue age rating, portability, heaped commissions • Individual products with “Group” features • GI/minimum participation, case specific rates

8. Group vs. Individual Distinctions These Distinctions Are Also Blurring • Enrollment Methodology • Group meetings vs. 1-1 • Administrative Platform • Self-Admin vs. Individual records • Distribution • Benefit brokers vs. Worksite Specialists • Renewal Pricing Changes

9. General Data Challenges • Self-Admin Data Limitations: Aggregate Bill • Exposure Based on Initial Rating Census • Integrity of Participation Data • Initial vs. Ongoing • Assumed vs. Actual • Quality Control Checks • Segregating Portability Experience

10. General Pricing ChallengesEmployee Choice • Various Forms of Employee Choice • Amount of Coverage • Plan Design: Disability Elimination & Benefit Period • Dependent Coverage • Pricing For Apparent Value • Anti-Selection • Possible offset from increased participation

11. General Pricing ChallengesTakeover vs. Virgin Risks • Possible Use of Known Information In Case Level Pricing • Participation Rate: Count & Amount • Age/gender mix • Loss experience • Actual vs. Eligible Census • Assume higher participation from poorer risks? (e.g. Blue Collar vs. White Collar employees) • Participation varies by case size? • Assumed Benefit Level and Expense Loads

12. General Pricing ChallengesBase Claims Costs • Mixing Employer Paid and Voluntary in an Experience Study • Is the Age/Gender Slope the Same?

13. General Pricing ChallengesApplication Of Group Rating Factors • Do Industry & Area Factors Apply? • If so: • Link to Employer Paid coverage factors or modify? • Data sources for New Voluntary Only Products?

14. General Pricing ChallengesParticipation Requirements • Should Minimum Participation Requirements Impact Pricing? • How Are Requirements Enforced? • Commission Linked to Participation?

15. General Pricing ChallengesPortability • Assessing Value of Portability • Data Sources? • Theoretical anti-selection risk • Administrative Costs • Who Pays For Value • All Participants Vs. Self-Supporting Pool • Combination of Above • Death Spiral Risk? • Impact of Port Experience on Group Experience?

16. General Pricing ChallengesComposite vs. Age Based Rates • Measuring Composite Rating Risks • Possible Risk Mitigation • Experience on Takeover accounts • Variation By Product (e.g. Flatter VSTD claim cost curve) • High projected participation

17. General Pricing ChallengesIssue Age Rates/Heaped Commissions • New Territory for Group Benefit Carriers • Individual Persistency Assumptions Required • Utilize Industry Data • Develop ability to track experience • Financial reporting – DAC?

18. General Pricing ChallengesExperience Rating • Are Non-Contributory Algorithms Directly Transferrable to Voluntary? • Same credibility factors? • More volatility for voluntary? • Basis for Experience Data Requirements • Eligible or Projected Participating Lives

19. General Pricing ChallengesExpenses • ID and Measure Costs Unique To Voluntary • Enrollment • Solicitation Materials • Billing Reconciliations • Logical Relationship With Non-Contributory Loads • Minimum Loss Ratio Considerations

20. Group Term Life Pricing ChallengesParticipation Factors • Theoretical Development: Extra mortality by participation • What have we learned? • Ratio of average claim to average coverage • Linking Participation to Experience • Data scrubbing • Actual vs. Assumed • Credibility of results/Smoothing • Pricing Execution: Case Specific vs. Defaults

21. Group Term Life Pricing ChallengesUnderwriting/GI • Should Rates Be Adjusted For: • GI Level • Range of EE Options • Impact of Case Size • Theory vs. Experience Analysis • Identifying GI risks: Impact of Grandfathering • Tracking experience of underwritten risks • Interaction with Participation Factors • Impact of Prior GI on Takeovers

22. Group Term Life Pricing ChallengesOpen Enrollments • Enhancing Participation vs. Anti-Selection • Takeover Rules • Re-enrollments of Existing Cases • Limited GI vs. True Open Enrollment • Need for Open Enrollment Pricing Factors?

23. Critical Illness Pricing ChallengesUtilization of Population Data • Primary Source But Adjustments Required • Understand Data (e.g. First Diagnosis or not) • Incidence vs. Prevalence • Contract Language • Benefit Trigger Definitions & Benefit %’s • First Lifetime Diagnosis Requirement • Refine Age Groupings • Reconciliation of Multiple Sources

24. Critical Illness Pricing ChallengesGeneral to Insured Population • Start With Theoretical 100% ER Paid Scenario • Multiple Methodologies/Sources • Dash & Grimshaw Calibration Formula • International Data • Reinsurer Data (if applicable) • Insured/General Ratio for Other Lines • Actuarial Judgment • Competition • Validation of Pricing Assumptions

25. Critical Illness Pricing ChallengesParticipation & GI Factors • Highly Theoretical Development • Considerations similar to Life • More anti-selection potential? • Pricing Execution • Any basis for case specific adjustments? • Minimum Participation For GI • Management of shortfalls

26. Critical Illness Pricing ChallengesValue of Gatekeepers • First Lifetime Diagnosis Requirement • Major pricing consideration • Benefit Waiting Periods • What types of claims do they prevent? • Pre-Existing Condition Exclusions • What can be deemed a pre-existing condition? • Child Triggers (Birth/Prenatal Issues)

27. Critical Illness Pricing ChallengesUnique Benefit Provisions • Recurrent and Additional Events • Need for and value of separation periods • Some population data available • Understand what underlies baseline incidence • Health Screening/Wellness Benefit • Sources of utilization assumption: judgment? • Applicability to Children • Separate per life charge? • Is This Medical Coverage?

28. Critical Illness Pricing ChallengesIndustry and Area Factors • Do They Apply to CI? • Basis for Development • Align with Life Factors • Possible modifications

29. Disability Pricing ChallengesPre-Ex Exclusion • Price differentials for GI with Pre-ex vs. GI with No Pre-ex • Theory & Experience • Relationship to Employer paid factors • Takeover (prior service credit) vs. Virgin • VSTD vs. VLTD • VSTD Pregnancy Risk • Value of Partial Pre-ex Benefit • Limited Benefit Duration or Percentage

30. Disability Pricing ChallengesReplacement Ratio • After-Tax Replacement Ratio Considerations • What Has STD/LTD Experience Shown Us • Incidence and Claim Termination Rates • Gross-Up Plan Experience • VSTD vs. VLTD Impact • Impact of Plan Maximums • Individual vs. Group Replacement Ratio

31. Disability Pricing ChallengesParticipation Factors • Considerations Generally The Same As Life • More Anti-Selection Potential Than Life? • Insured uses benefit • Subjective nature of disability • Actual vs. Eligible Census More Important • Combined VSTD/VLTD Offering • Impact on projected participation by product • Minimum participation requirement considerations

32. Disability Pricing ChallengesPortability • Definition of Disability after Porting? • Nature of RTW efforts after Porting?

33. Voluntary Accident Pricing ChallengesData Sources • Myriad of Benefits • Some Population Data available • Extrapolation and adjustments required • AD&D/Supplemental Health Experience • General to Insured Population Adjustment • Not as Material as CI? • Historically material for AD&D • Other Supplemental Health?

34. Voluntary Accident Pricing ChallengesEvaluation of Anti-Selection • Does Participation Matter? • Less Than Other Voluntary Products? • Potential Dependent Anti-Selection • Utilization • Number

35. Voluntary Accident Pricing ChallengesIndustry & Area Factors • Less of a Consideration • But Relatively Common for AD&D • Limit Access to 24 Hour Coverage for Select Industries