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 Common Pitfalls: Inforce vs. New Sales For Example:Current Rate Block ChangeSegment A: 33% -10%Segment B: 33% 0.0%Segment C: 33% 10%Estimated Rate Impact: 0%In Reality:New Rate Sales ChangeSegment A: 60% -10%Segment B: 30% 0.0%Segment C: 10% 10%Actual Rate Impact: -5%
10 Common Pitfalls: Rate Variables are Dependent Consider an exampleCurrent Factor Actual CostOwn Occupation: 24 MonthUnlimitedIndustry: DoctorsLawyersAll Other24 Mo UnlimitedVariables 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 StudyPricing Factor ObservationUnlimited24 Month Own OccDo 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 CompaniesSample Calculations on over 1000 Representative CasesManual Rates Calculated as Publicly Filed
15 Smith Group Comparison of Filed Manual Rates: Variation of Individual Companies
16 Smith Group Comparison of Filed Manual Rates: Variation of Individual Companies
17 Smith Group Comparison of Filed Manual Rates: Industry Factors
18 Smith Group Comparison of Filed Manual Rates: Area Factors
19 Delaine Hare Fortis Benefits Pricing pitfallsDelaine HareFortis Benefits
20 Recipe for top line growth Discount 10% for “value” contractDiscount 10% for early interventionDiscount 10% on “good cases”Discount 5% for packaged LTD/STDGuarantee the rates for 3 yearsValue contract - improvements by the product development shopEarly intervention - improvement by the claims shopGood cases - improvement by the underwriting shopPackage sales - improved efficienciesWhere in all of this did the distribution system improve?
21 …and the bottom line Have you been too aggressive? If so, can you recover?Renewal is a double-edged swordOne big increase - can you afford the poor persistency?Layered increases - can you afford the good persistency?Do you try to recoup past losses? (“You can’t make up your losses if the policy leaves.”)Do you just try to get back to square one? You’ll never be satisfied with your overall returns if you keep making mistakes on new business.Traditional actuarial pricing models target the desired return over the life of the policy. It may not be reasonable to try to recoup losses on your mistakes after the fact. But if your business model has embedded mistakes, you’ll have trouble hitting your return objectives.
22 Watch your tailBetter claim management improves claim closures at early durationsWhat happens to closures at later durations?Is your reserve tail as strong as it used to be?It’s like a balloon - you push down on the front end of the reserve, and the tail pops up on you.
23 Simple reserve illustration For relative comparison onlyNot an opinion on what is an appropriate pricing discountSensitive to termination rate assumptionsValuation table, age, sex, etc.
24 Manage the early claims... 45 year old20% better term rate for 24 mo.Same term rate after 24 mo.19% cost savingsBaseExampleImproved
25 …without managing the old 45 year old20% better term rate for 24 mo.20% worse term rate after 24 mo.9% cost savingsBaseExampleImproved
26 Watch your assumptions Improved claim management & stronger contractDid they add to your margins?Did you give it all away?Was it as big as you thought?Some cases may not benefit at allCould have been making hay while the sun was shining.Perhaps our customers took the hay we made (and then some?)Perhaps some of the hay was actually weeds.
27 Table 95a / Basic 2000 TableConcerns expressed over appropriateness of this tableTermination rates in later durations appear to be overstatedReserves may be deficient
30 Claim Manager of the Year The award goes to… Nobody!!!Starvation effectElimination period is akin to a deductibleNothing controls incidence like loss of incomeWhen you add STD coverage, what are you replacing?Have we enabled more LTD claims by emphasizing a need for STD?Which provides more incentive to RTW during the STD period:60% to $500/week60% to $1,385/weekLine between STD & LTD is arbitrary. We may expect claims to close at the STD/LTD transition - does the claimant share that expectation?
31 What is a “good case”?Manual rates already reflect the “good” plan design & “good” industryIs “good” experience really credible?Have we enabled more LTD claims by emphasizing a need for STD?Which provides more incentive to RTW during the STD period:60% to $500/week60% to $1,385/weekLine between STD & LTD is arbitrary. We may expect claims to close at the STD/LTD transition - does the claimant share that expectation?
32 Persistency & profitability Blue line is target rate - the long-term run rate - this rate may not be known to you when the case is sold - or maybe your underwriter rolled the dice on their risk selectionRed line is actual charged rate pattern over the policy lifetime - losses emerge early, and you react to them with a series of increasesFirst 4 years, the area between blue and red represents your losses.After 4th year, area between red & blue represents your gainsCan you keep the group long enough to make your return over the life of the policy?Year 1Year 2Year 3Year 4Year 5Year 6Year 7
33 …during a recession Drop in interest rate raises the bar Higher unemployment may raise the barHave we enabled more LTD claims by emphasizing a need for STD?Which provides more incentive to RTW during the STD period:60% to $500/week60% to $1,385/weekLine between STD & LTD is arbitrary. We may expect claims to close at the STD/LTD transition - does the claimant share that expectation?
34 Measurement & accountability Dave FitzpatrickThe 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 AnalysisCan easily be aggregated at underwriter/rep /plan levelCan help in pricing vs. loss ratio analysis onlyProvides a measurable target that is easily understood
38 Reasons Why Rates May Vary Underwriting ConsiderationsMistakesExperience RatingCredibilityUnderwriters may discount loadsChange in census from proposal to effective date
39 Return on Equity (ROE)Formula for Underwriters to ensure attainment of ROE targetsROE = 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 AmountsC1 = Asset Risk - All otherC2 = Insurance RiskC3a = Interest Rate RiskC3b = Health Credit RiskC4a = Business RiskC4b = Health Adm Exp - Business Risk
41 Return on Equity (ROE) Pros and Cons of an elegant formula: Impressive to look at and discussDifficult to challengeHard to explainNot 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 reservesPossible 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 explainMore likely to be used by underwritersConvenient to periodically reviewApproximates equity to the satisfaction of most normal actuariesPercentages may vary by companyCan be further refined as % of premium
44 Industry/Occupation Variations One role of the underwriter is to assign the “best” occupation classIndividual DI has some lattitude in assigning which might result in 5-20% differenceGroup occ factors are combination of industry/occupation assignment
45 STD - What’s Up!JHA Profitability Survey reports STD profits are negativeLack of concrete evidence that managing STD reduces LTD claim costsBrings into question the assumed savings of integrating disabilityProbably caused by aggressive acquisition pricing or assumed expense saving
46 Group Insurance Handbook Maximize participation - preclude individual selectionVoluntary/contributory LTD violates these two principlesMost selection can be priced and/or controlled100% 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 compensationSelection may be controlled through EOIEvidence is your friendDoesn’t need to be an inconvenienceFree 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 AccountabilityCombination of office loss ratio and sold rates in relation to manualActual loss ratio tied to predetermined targetPositive or Negative!
50 Bottom-line Accountability Sales reps/Office Managers tied to target loss ratios and sold-to-calc ratiosIn 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
51 Pricing - Reserve Analysis Measuring results requires appropriate reserve analysisIncurred But Not Reported ReservesReported ReservesActual-to-expected Termination Rate Study - theoretical elegantActual reserve runouts better
52 Reserve Analysis“The whistles and bells don’t cost much during good economic times.” Rick Leavitt, Las Vegas“Reserve runouts on IBNR and reported reserves are better during good economic times.” Dave Fitzpatrick, Dallas
53 Reserve AnalysisIBNR reserves and reported reserve runouts fluctuate over time for many reasons (incidence rates, claim management, RTW offsets, SS awards/denials, re-opens, economy, replacement ratios, mortality)IBNR range without adjusting - 40% of reserveReported range without adjusting - 12% of reserve
54 Rate FilingsRequired in several states prior to use (FL, WA, CO, ND, NY)Inability to gain timely approvals may impede progress in improving profitability