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2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa.

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Presentation on theme: "2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa."— Presentation transcript:

1 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires Session/séance : PD-19 Impact of Recessions on LTD Experience Speaker(s)/conférencier(s) : Jeff Schuh, Peter Douglas, Ken Fraser

2 Evolution of the U.S. recession Historical connections between recessions and Group LTD experience in the U.S. Canadian LTD metrics vs. Economic indexes Canadian LTD Profitability vs. Economic indexes Agenda 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

3 PD-19 Impact of Recessions on LTD Experience Jeff Schuh, VP & Senior Actuary ING Reinsurance 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

4 Summer “Beginning of the end” Trouble brewing in the U.S. housing market (prices dropping, inventories climbing, foreclosures up) MBS quality drops 2 large Bear Stearns hedge funds go bankrupt ($1.6B) due to MBS exposure – despite AAA rating First crack in the edifice Cost of borrowing up, spreads increase U.S. Economic Timeline 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

5 March 10-16, 2008: “A very bad week” Monday Rumors circulate that Bear Stearns is running out of cash Stock begins to nosedive (slowed only by Spitzer scandal!) Thursday Bear Stearns suffers run on bank as clients pull money Needed emergency cash or file bankruptcy overnight, call to JP Morgan JP Morgan and NY Feds send over analysts to look at the books Friday JP and Feds discover enormity of problem: sub-prime exposure, credit default swaps, interconnectedness with other banks Feds propose a loan $30B to JP Morgan to fund Bear Stearns purchase Saturday JP offers Bear Stearns $8-12/share ($170 in 2007, $30 previous Friday) Sunday JP revises bid and offers $4/share Treasury Secretary Henry Paulson worries about “moral hazard”, insists that JP lower offer to $2/share to penalize Bear Stearns Economy limps along until the fall… U.S. Economic Timeline 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

6 Sept 9-16 th, 2008: “The Week America’s Economy Almost Died” Tuesday – Lehman Brothers stock drops 45% in one day Wednesday – LB announces earnings early, to no avail Thursday – LB computerized trading system freezes when JPMorgan demands $5B collateral on short notice Friday Paulson insists there will be no bailout, citing “moral hazard” issues Geithner declares “somebody needs to buy them” BOA and Barclays interested – but BOA purchases ML instead, Barclays drops out Sunday – LB files bankruptcy Tuesday LB goes under Stock market nose dives Banks unwilling to lend money, credit markets freeze up AIG nationalized after stock drops 61% Wednesday – Goldman Sachs and Morgan Stanley now teetering U.S. Economic Timeline 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

7 September 20$700B bailout proposed September 21GS and MS turn themselves into bank holding companies (all five major investment banks are gone) September 25Washington Mutual becomes largest bank failure ever October 3Congress passes bailout bill allowing government authority to purchase toxic assets or capital injections U.S. Economic Timeline 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

8 Lehman Bankruptcy Bank of America acquires Merrill Lynch Federal Reserve rescues AIG Bailout Plan passed Goldman and Morgan Stanley become banks Washington Mutual seized Wells Fargo acquires Wachovia Fannie Mae/Freddie Mac bailed out Car Makers (Detroit) seek bailout President Obama elected Speed of economic collapse was startling… September & November, General Meeting Assemblée générale General Meeting Assemblée générale 2009

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13 Recessions Are Not Equal Opportunity Events (snapshot from early 2009) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

14 Potential for higher incidence rates Potential for lower termination rates (longer durations) Effect will vary by diagnosis, industry, occupation, demographics Statements above are logical and plausible, but largely anecdotal. What proof do we have that this linkage exists? What does this have to do with Group LTD? 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

15 Metrics M&A Impact on Group LTD Incidence (2000) Unum 2004 Incidence Study 2008 SOA Termination Rate Study ING Survey on Economic Impact (2009) New Academic Papers Profits 1990 LTD Industry Profits 2008 Industry LTD Claims Review Recent Results from Select Insurers (Unum, Standard, Met) U.S. Evidence of LTD/Economy Linkage 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

16 Study by one U.S. insurer found LTD incidence rates and loss ratios increased immediately after M&A activity* – Incidence rates 10-15% higher after M&A date – Annual incurred claims per employee were 21% higher Were these from employees who were very likely to be laid off? Does this differ from current environment where employment is uncertain and workers may be afraid to go on disability? Will there be a disability “echo” during economic recovery as postponed claims are filed and new claims arise from overworked staff? *Source: ING Reinsurance Disability Forum, 2000, Vol. 7, No. 2 Impact of M&A on Group LTD 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

17 Presented at SOA 2004 Anaheim Health Spring Meeting Unum LTD incidence rates from mapped against U.S. recessions of 1990 and 2001 Discovered correlations between incidence rates and macro-economic indexes Startling conclusion: incidence rates continued to rise after the 1990 recession, and officially peaked 16 quarters after the recession officially ended Unum Incidence Study 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

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20 Conclusions of Unum Study Implications are troubling given current economic indicators… 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

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22 U.S. Consumer Confidence Index 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

23 Actual values and claim rates not available Correlations vs. causation No linear relationships Mix of business: results not corroborated by other insurers, current Unum results not adversely affected by recession (significant move down-market and concentration in “recession resistant” industries) 2001 recession incomplete, inconclusive during study period Not all recessions have similar effects More to Group LTD profitability than incidence rates However, the study served important role by generating discussion and increasing awareness of LTD/Economy linkage Qualifications with Unum Study 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

24 “Impact of the U.S. Economy on the Disability Market” – 9/2009 Incidence Rates: – Majority of participants felt economy had minimal impact on incidence or that incidence had declined – “Some industries with increasing incidence rates are offset by tendency of employees in other sectors to hang on to their employment or RTW more quickly in order to avoid losing job” – “We have experienced more instances in which claims submitted were not eligible because their hours were reduced below plan” Recovery Rates: – 78% felt recession had not affected recovery rates, however… – 56% felt recession has dampened employers’ willingness to support RTW – “There is less willingness to hold jobs open or make accommodation to allow some to return to work” ING Reinsurance Industry Survey 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

25 Speaker noted only modest drop in termination rates during 2001, offset by increase in mortality Source: “SOA Experience Table Update” – Edd Bailey, Eric Poirier (2009 JHA Dynamics of Disability) New SOA LTD Study: Short Duration (<5 yrs) Termination Rates 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

26 “Long-Term Disability Claims Rates and the Consumption- to-Wealth Ratio” published in the Journal of Risk and Insurance [March 1, 2009] – Purpose: investigate relationship between Group LTD claim rates and the economic indicators. Explore the ability of the consumption- to-wealth ratio to predict LTD submitted claims rates.” – Option Theory utilized as LTD insurance treated as put option – Conclusion: “When the consumption-to-wealth ratio is low, claims rates are high. We find that the connection is fairly strong and robust” Predicting SSDI submitted incidence using time series (ARIMA) models – Preview given at SOA Annual Meeting (Oct , 2009) – Relatively high predictive power New Academic Studies from the University of Southern Maine (Center for Business & Economic Research) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

27 The catch… Consumption-to-Wealth Study: – Examined only two industry sectors: manufacturing and wholesale/retail. – Based on Unum-only data – This is an academic paper - Dynamic Ordinary Least Squares Cointegrating Regressions: ARIMA Model: – Time series models are a black box, do not provide insight into reasons for predictive ability. New Academic Studies from the University of Southern Maine (Center for Business & Economic Research) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

28 U.S. LTD Industry Profits vs Recession - LTD experience does not track directly with recession. Lagged effect? - Poor experience generally attributed to white collar lay-offs, liberal plan designs (physicians/attorneys), rise of managed care, etc. Source: Jan GUAA presentation (Rich Clement – Smith Group) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

29 15 participating companies, representing 75% of U.S. disability market. Government Plan – Applications for SSDI benefits “surged” during 2008 – SSDI approval rates continue to decline Private Plans – LTD insurers report that over past several years, incidence and durations have been declining – Almost without exception, participants report that the downturn has not affected disability claims as of the reporting date – “The participating member companies generally expect to see some influence on claims from the current economic downturn, although none predict a severe impact.” Council for Disability Awareness: 2008 LTD Claims Review 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

30 StanCorp shows no adverse link between economy and overall Group Benefit Ratio Source: 9/10/2009 KBW Insurance Conference 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

31 Drill-down into LTD-only benefit ratio yields similar results Source: 9/10/2009 KBW Insurance Conference 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

32 Source: StanCorp’s quarterly earnings calls 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009 StanCorp’s Quarterly Group Benefit Ratios - through 3Q09

33 Bad News: Unum shows uptick in LTD incidence rate during 3Q09. STD deteriorated as well. Good News: Average size of claim decreased, claim volatility coming from “non-economically sensitive sectors ”. Source: 9/9/2009 Annual Investor Meeting 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

34 Source: 9/9/2009 Annual Investor Meeting 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

35 Source: 9/9/2009 Annual Investor Meeting 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

36 Source: 9/9/2009 Annual Investor Meeting 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

37 Source: MetLife Q Earnings Call - October 30, 2009 The group disability morbidity ratio (96.4%) was above the target range for the first time this year. “Disability claim incidence picked up in the third quarter after several quarters of stable experience, although there was a similar up-tick in the year-ago period.” “Recoveries, which have been lower than anticipated all year, remained below expectations.” MetLife Underwriting Results 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

38 2004 Unum SOA Presentation SOA Table: CDA 2008 LTD Claims Review: University of Southern Maine – Center for Business & Econ Research LTD & Consumption to Wealth Ratio Links 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

39 PD-19 Impact of Recessions on LTD Experience Peter Douglas, Instructor Math & Stats University of Regina 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

40 PD-19 LTD During A Recession Statistical Analysis – Historical Background – Data Sources – Impact on Incidence – Impact on Termination – US, Canadian and UK data 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

41 All of this data free on the web! But ideally we need longer Canadian LTD history. Data Studies 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

42 Historical Unemployment 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

43 Canadian Economic Indicators 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

44 CIA LTD Studies Short history with key gaps Termination Rates – Study released 2009 – New study underway Incidence Rates – No study to date – Planned 2009 study on hold 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

45 CIA Terminations A:E ratios generally improved over time Regardless of changes in unemployment! 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

46 CIA Terminations Detailed Results Correlation of A:E Ratio Improvement over time more important than job market More terminations in poor job market? – More soft claims (year 1 results) Biggest impact in years 4-10? 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

47 CPP Disability Approvals 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

48 CPP Disability Approvals 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

49 CPP Approval Rates Subjective –Politics –Policy changes –Current political pressure? Clear spikes when unemployment is high Expect an increase in CPP approval rates for General Meeting Assemblée générale General Meeting Assemblée générale 2009

50 WCB Statistics Results by province –Some gaps –Key stats added in 2000 –Not always consistent between WCBs Key Statistical Measures –Number of Loss Time Claims –Payroll –% LTCs receiving benefits after 2 years 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

51 Past WCB Studies Incidence Improves During a Recession –Fewer inexperienced workers –Less safe equipment mothballed –Hazardous industries worst hit by economy Fear of job loss –may increase or decrease incidence claims No clear impact re cost per claim 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

52 WCB Incidence Rates ($M adjusted payroll) Incidence of time loss claims decreases over period Unemployment generally decreases, but no clear link 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

53 WCB Incidence Rates (per 100 Lives) More useful measure but shorter history Again no clear link to unemployment 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

54 WCB Continuance (after 2 Years) History is short and incomplete. Most provinces see increase in longer term claims over time. No clear link to unemployment General Meeting Assemblée générale General Meeting Assemblée générale 2009

55 SOA 1995 LTD Study Slightly longer history over full cycle. More data and results shown by quarter. Terminations inversely correlated to unemployment General Meeting Assemblée générale General Meeting Assemblée générale 2009

56 SOA 1995 LTD Study Same data shown as XY Scatter plot. Downward trend indicates A:E ratios↓ as Unemployment ↑ 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

57 SOA 1995 LTD Study Regression models can be fit to data, but why? Clearly results are driven by more than unemployment General Meeting Assemblée générale General Meeting Assemblée générale 2009

58 SOA 2008 LTD Report Recovery rates improved with both job market and time. Not clear which is most important, implication for recession 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

59 SOA DI Study Incidence Rates Incidence rates improved with job market Not clear they will get worse with job market General Meeting Assemblée générale General Meeting Assemblée générale 2009

60 SOA DI Study Incidence Rates Same data as XY scatter plot. Study does not look at termination A:Es by year 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

61 UK Experience UK Group Income Protection  LTD Typically 13 or 26 week EP CMR20 –Termination Experience –Includes results from –Experience grouped into 4 year periods –UK economic trends differed from US and Canada over much of this period 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

62 UK Group Experience No pattern based on employment or over time! A:E high in periods of high UE (91-4) and low UE (75-8) A:E low in periods of high UE (83-6) and low UE (95-8) Economic forecasts were grim in the early period covered 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

63 What Does the Data Tell Us? General Meeting Assemblée générale General Meeting Assemblée générale 2009

64 What Does the Data Tell Us?. Incidence rates –Improved with job market in past Other factors at work? –May deteriorate with job market Plausible causation (stress, anti-selection) Supporting data hard to find CPP disability approval rates –Strongly correlated with unemployment in past 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

65 What Does the Data Tell Us?. Termination rates ?!?! –CIA LTD shows no clear link to unemployment Increase in early months (soft claims)? –SOA study indicates experience worsens with job market –UK study inconclusive –WCB may not be applicable –Crash when things are really bleak (UK 80s) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

66 Links. CIA LTD –http://www.actuaries.ca/members/publications/pub_index_2009_e.cfmhttp://www.actuaries.ca/members/publications/pub_index_2009_e.cfm SOA 95 LTD –http://www.soa.org/research/group-disability/96-group-ltd-study-tables.aspxhttp://www.soa.org/research/group-disability/96-group-ltd-study-tables.aspx SOA DI –http://www.soa.org/research/limited-disability/hlth individual-disability-experience-committee-report.aspxhttp://www.soa.org/research/limited-disability/hlth individual-disability-experience-committee-report.aspx AWCBC –http://www.awcbc.org/en/financialdataandkeystatisticalmeasuresksm.asphttp://www.awcbc.org/en/financialdataandkeystatisticalmeasuresksm.asp UK CMR –http://www.actuaries.org.uk/knowledge/cmi/cmi_reportshttp://www.actuaries.org.uk/knowledge/cmi/cmi_reports OECD –http://stats.oecd.org/index.aspxhttp://stats.oecd.org/index.aspx 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

67 PD-19 Impact of Recessions on LTD Experience Ken Fraser, President Fraser Group 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

68 Recession and LTD Results Data Sources – Fraser Group Canadian Incidence and Continuance Study Quick Profitability Survey Sources of Profit Survey – Statistics Canada Gross Domestic Product Unemployment Rate 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

69 Quick Profitability Survey Survey of Group carriers Data from 1992 to 2008 A simple question? Were your results satisfactory in LTD? – Yes/No 2008 data from 17 companies, 91% market share 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

70 Sources of Profit Survey Survey of Group carriers Data from 1996 to 2008 Profit as Percent of Revenue 2008 data from 12 companies, 81% market share 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

71 Canadian Incidence and Continuance Study Experience Study Data from 2000 to 2003 Exposure and Claim data from employers < 1000 lives 2003 data from 13 companies, 34% market share 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

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81 Conclusion No obvious relationship of LTD results to macro economic 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

82 But we all believe there is one. Why can’t we see it? 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

83 Problem with Financials Reported LTD Financial results are not tightly linked to economy. – Valuation models may distort the direction, magnitude and timing of economic impacts. – Management actions (underwriting and claim management) may deflect economic effects. – Structural changes in the Insurance Industry may hide the economic impact (e.g. consolidation, regulatory action) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

84 Problem with Financials Don’t forget the revenue side Under pricing as layoffs increase average ages Collectability of premiums Anticipatory rate increases 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

85 Problem with Financials Theoretically better to look at claim fundamentals rather than final financial results – Incidence – Recovery Even so, management will employ best efforts to modify impact. – More selective underwriting – Tighter adherence to contracts – More investment in claim management 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

86 Problem with Macro Stats Both economic and industry statistics are averages of industry and regional sectors. For instance, – Downturn in high tech (1999)may have different LTD impact than downturn in manufacturing (2009) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

87 Problem with our Models Relationships are probably not linear. There is probably more than one independent variable – E.g. industry specific economic activity, financial strength of plan sponsor, age and occupation of employee, diversification of local economy These variables may interact to amplify or nullify effect on LTD There may be threshold relationships – Little or no impact until a certain level is exceeded (e.g. unemployment) 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

88 In summary There is a great deal of anecdotal evidence linking economic downturns to adverse LTD results. However, historical data does not show a causal relationship between macro economic measures and LTD financial results General Meeting Assemblée générale General Meeting Assemblée générale 2009

89 In summary Further research is needed and should focus on Claim fundamentals vs financial results Narrow industry or regional segments The effect of intervening variables 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

90 Sources –Canadian Incidence and Continuance Study Fraser Group and Denis Garand & Associates –Quick Profitability Survey Fraser Group –Sources of Profit Survey Fraser Group –Statistics Canada. Labour Force Historical Review 2007 (Table Cd1T46an). Ottawa, Statistics Canada, 2008 (Cat. No. 71F0004XCB). –Real Gross Domestic Product (GDP) per capita, Canada, HRSDC calculations based on 1) Statistics Canada. Gross Domestic Product (GDP), expenditure-based, provincial economic accounts, annual (CANSIM Table ). Ottawa: Statistics Canada, 2008; and 2) Statistics Canada. Estimates of population 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

91 Questions? 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009


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