1. 2007 General Meeting Assemblée générale 2007 Montréal, Québec 2007 General Meeting Assemblée générale 2007 Montréal, Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires IP-18 Group Expenses Pricing Tom Strickland, FSA, FCIA

2. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Pricing for Expenses Key goals Data requirements Methodology options Process details for one option

3. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Key Goals Should cover all expenses over the entire block (ideally for each benefit) If not - must understand the gaps and cover them somewhere Expense loads by case size and benefit need to be reasonably close to market levels Loads should be reasonably related to real differences in cost by benefit and case size Should be simple to understand and update

4. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Data Requirements Expenses allocated from major cost centres to benefits –Most companies would have at least this much –But it doesn’t tell you how to allocate by case size –Pricing needs to set a reasonably continuous slope of expenses by case size (formula, or if banded, many bands)

5. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Data Requirements - Cont’d Group by group metrics –Needed to test that the pricing methodology will recoup required total expenses –Need data by group for any driver you are going to use –Possible drivers: #certificates, #members, #policies, #billing divisions, $premium, $claims

6. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Data Requirements - Cont’d Research on market expense loads –Fraser and other industry surveys –Information received at time of quote

7. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Assumptions Key data requirements are all available We are pricing a single benefit, expenses for that benefit available by major cost centre We are pricing for expenses on a relatively homogeneous block –May have to look at small group separately (usually very streamlined processes)

8. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Steps in the Process 1. Decide the basic methodology (drivers) 2. Identify the cost per driver 3. Validate the cost allocation method against surveys and total expense needs. 4. Tweak driver costs if necessary to produce the right total expenses with reasonably “industry-standard” slopes

9. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Step 1 - Decide Basic Methodology Option 1 : Simple banded table of % premium/claim loads varying by $ claims level - eg – $0-5,000 annual claims - 20% premium/25% claims – $5-10,000 annual claims - 18% premium/23% claims – Etc.

10. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Decide Basic Methodology Option 1 - Pros and Cons – Simple and easy to work with Can be developed to roughly match industry slopes identified by surveys, competitor renewals Easy to validate vs surveys and your expense needs Could develop it based solely on market research - no need for detailed expense analysis – But - it misses some nuances Same expenses for 500 lives with 10K benefit as 50 lives with 100K benefit

11. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Decide Basic Methodology Option 2: Multiple Drivers – e.g. – Per policy – Per billing division (not available at quote?) – Per certificate/member – Per $ expected claims (maybe banded as Option 1)

12. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Decide Basic Methodology Option 2 - pros and cons – More complex to develop and update – More difficult to understand – But - can more accurately reflect unusual groups (eg many lives with small volume, groups with many small billing units) – Assume we choose option 2

13. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Step 2 - Identify Cost Per Driver 84% of all life costs for one company came from seven major cost centres - marketing, sales, underwriting, billing/admin, claims, IT, corporate/finance Interview the seven (+?) function heads or their reports

14. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Identify Cost Per Driver Interviews identify their 2-3 major tasks – Get time studies by case size for key tasks if possible – Ask for staffing requirement models, if available – If not, ask questions that will flesh out for each key task Fixed expenses Relative cost of 10/25/50/100/200/500 life group

15. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Identify Cost Per Driver From the questions and time studies, decide how much of each area’s expense is variable based on the key drivers: –Number of policies / billing divisions –Number of certificates/members –$ Claims –Nothing (fixed)

16. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Identify Cost Per Driver Also need to consider major non- staff costs – e.g. –Marketing brochures variable by #certificates/policies –IT hardware/software variable by #certificates Claims costs may be the only benefit-specific analysis

17. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Identify Cost Per Driver Accumulate all expenses variable by #policies - divide by #policies to produce base cost per policy Do the same for all other drivers Still unallocated will be fixed expenses in the line and other “overhead” items. These are often allocated prorata according to previous driver-based allocations

18. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Steps 3 and 4 - Validation Apply the new costs to the total number of policies, certificates, etc. in next year’s business plan to make sure they produce sufficient total expenses Compare the results by case size to industry surveys to make sure it is in line with the market Tweak factors as necessary – e.g. allocate fixed/overhead expenses using a banded claim approach to better match up with competitor loads

19. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Pricing For Group Expenses Questions?