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Group LTD Pricing Issues SOA Spring Meeting, Dallas, Texas May 30, 2001 Session 48 Rick Leavitt - Smith Group Delaine Hare - Fortis Benefits Dave Fitzpatrick.

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Presentation on theme: "Group LTD Pricing Issues SOA Spring Meeting, Dallas, Texas May 30, 2001 Session 48 Rick Leavitt - Smith Group Delaine Hare - Fortis Benefits Dave Fitzpatrick."— Presentation transcript:

1 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

2 The economy, circa Decline in unemployment Interest rates started to rise Rising Index of Leading Economic Indicators

3 LTD industry, circa Improving LTD profits –Positive results, but is ROE strong enough? –But it beats the early 90s Deteriorating STD profits –Suddenly losses!

4 Wheres 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 Common Pitfalls: Inforce vs. New Sales 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%

10 Common Pitfalls: Rate Variables are Dependent Current FactorActual Cost Own Occupation:24 Month Unlimited Industry:Doctors Lawyers All Other MoUnlimited Variables are Doctors30%70% DependentLawyers50%50% All Other80%20% Consider an example

11 Common Pitfalls: Rate Variables are Dependent Hypothetical Example: Results of Own Occupation Study Pricing Factor Observation Unlimited Month Own Occ 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 of Filed Manual Rates:

15 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 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... Base Improved 45 year old 20% better term rate for 24 mo. Same term rate after 24 mo. 19% cost savings

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

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 1 Year 2 Year 3 Year 4 Year 5 Year 6 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 cant manage what you cant 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 = whereC 0 = Asset Risk - Affiliated Amounts C 1 = Asset Risk - All other C 2 = Insurance Risk C 3a = Interest Rate Risk C 3b = Health Credit Risk C 4a = Business Risk C 4b = 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 companys 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 - Whats 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 Doesnt need to be an inconvenience Free cholesterol check

48 If you arent 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

51 Pricing - Reserve Analysis Measuring results requires appropriate reserve analysis Incurred But Not Reported Reserves Reported Reserves Actual-to-expected Termination Rate Study - theoretical elegant Actual reserve runouts better

52 Reserve Analysis The whistles and bells dont 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 Analysis IBNR 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 reserve Reported range without adjusting - 12% of reserve

54 Rate Filings Required in several states prior to use (FL, WA, CO, ND, NY) Inability to gain timely approvals may impede progress in improving profitability

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