2006 General Meeting Assemblée générale 2006 Chicago, Illinois 2006 General Meeting Assemblée générale 2006 Chicago, Illinois Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Session IP-4: Disability Reinsurance Group Disability Excess Reinsurance Jeffrey L. Schuh, FSA, MAAA Vice President, Senior Actuary ING Reinsurance Minneapolis, Minnesota

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Group Disability Excess Reinsurance Agenda: Overview Financial Terms Administrative Provisions Underwriting Provisions

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Overview Advantages of Excess Reinsurance  Flexibility  Compatibility  Cost  Volatility Protection  Surplus Protection Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms 1. Excess of Time o Reinsurance liability begins “x” months after date of disability o Typically excess of loss and excess of time (example: XS of $5,000/mo and Excess of 12 months) o Complicates administration, reserves must account for this 2.Excess of Loss o Most common type of excess arrangement o Recently, bigger spread in attachment points (XS $2,500 - $15,000) o Reinsured liability is determined by the percentage of the claim above the attachment point. Adjustments to Gross Monthly Benefit (COLA, offsets) typically shared pro-rata. 3.Excess on top of Quota Share o Enhanced volatility protection beyond traditional quota share Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Miscellaneous arrangements Excess of $x for groups with maximums >= $y (y > x) Excess of Reserve – moving target, reserve basis issues Portfolio Reinsurance (a.k.a. Aggregate Reinsurance, Disability Stop Loss) – difficult to administer, reserve basis issues Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Funding Methods I.Fully pooled II.Aggregate Corridor Direct carrier “self funds” first $x of reinsured paid claims Similar to Aggregating Specific deductibles with Medical Threshold set low enough so that corridor is always met Reduces dollar-swapping between direct carrier and reinsurer Adds administrative complexity. Each underwriting year must be tracked separately and paid claims accumulated towards aggregate corridor. III.Refunding / Bill&Call / Swing Rated Usually not practical for volatile, long-tailed products Financial Terms Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Methods for Choosing an Excess Attachment Point History, inertia Appetite for volatility Manage reinsurance premium level Stochastic analysis Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Financial Terms Monte Carlo simulations of Excess LTD Claims Census-based model (Salary, Gender, Age, Plan Design) Use probability distributions to randomly determine: Claim Incidence Claim Duration Social Security Offsets Calibrate model to expected claim levels Run several thousand simulations or “years” (e.g., 10,000) Output of model is a distribution of annual reinsured claim liability and summary statistics Can determine optimal attachment point based on various criteria Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Monte Carlo Results: Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Monte Carlo Results (cont’d.): Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Administrative Provisions Risk Attaching vs. Loss Occurring – Loss Occurring “Clean cut” at the reinsurance effective and termination dates Independent of underlying policies Reinsurer responsible for all claims incurred (losses occurring) while the reinsurance treaty was in effect Simple to administer – Risk Attaching Linked to the underlying group policies’ renewal dates Prevents change in reinsurance costs from affecting groups off- anniversary or under rate guarantee Administratively more complex to keep track of runoff under prior Reinsurer and transition to new Reinsurer Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Administrative Provisions Premium Submission I) Exposure Based:  Methods 1. Rate per $100 of RMB 2. Rate “factor” times a manual 3. Convert to %-of-premium rate on a group by group basis  Advantage: closely links reinsurance premium with actual exposure  Disadvantage: requires census and administrative capability II) Percent of Premium  Reinsurance rate expressed as a percent of total block premium (flat % or table varying by SIC and/or Maximum Benefit)  Advantage: Simple to administer, no census required  Disadvantages: –Introduces concept of leveraged trend –Reinsurance premium not linked to exposure, subsidization Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Administrative Provisions Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Underwriting Provisions  Automatic vs. Facultative Overall Maximums Typically vary by Excess Level Ex 1) Excess $5,000 with $15k Automatic & $25k Facultative Ex 2) Excess $10,000 with $25k Automatic & $35k Facultative  NEM/NELs outside of current UW Guidelines  Facultative Cases as Separate Treaties  Large Case Notification (% of Premium treaties only)  Number of Lives  Street Premium  Reinsurance Exposure as a % of Total  Variation from Formula Rate Group Disability Excess Reinsurance

2006 General Meeting Assemblée générale General Meeting Assemblée générale 2006 Underwriting Provisions Other Notification Triggers SICs, Occupations Plan Designs Rate Guarantees UW Point System Group Disability Excess Reinsurance