Session 106 PD, Profitability Trends for Disability Insurance. Moderator: John R. Murphy, FSA, MAAA

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Session 106 PD, Profitability Trends for Disability Insurance

Moderator:

John R. Murphy, FSA, MAAA

Presenters:

Scott D. Haglund, FSA, MAAA

John R. Murphy, FSA, MAAA

Robert F. Wade, FSA, MAAA

(2)

Scott D. Haglund, FSA, MAAA, FLMI

106PD: Profitability Trends for Disability Insurance

Tuesday, October 13, 2015

(3)

Individual Disability

Industry Trends

Annual statement data

1990-2007 IDEC Report

(4)

Industry Trends – Annual Statement Data

Used annual statement information for top 39

companies.

Followed their results over a ten year period

In 2014, the 39 companies represented 99% of the

industry premium

Statement pages used

Schedule H, Non-Cancelable

Exhibit of Number of Policies, Accident & Health, Other

Analysis of Operations

(5)

Industry Trends – Annual Statement Data

Growth in Net Earned Premium (Schedule H, Non-Cancelable)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

An

nu

al

%

Gr

ow

th

R

at

e

N

et

E

ar

ne

d P

re

m

iu

m

, i

n T

ho

usan

ds

(6)

Industry Trends – Annual Statement Data

Average Growth Rate 2004 to 2014, Direct Earned Premium, Census Area

Groupings, Non-Cancelable A&H

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

East North

Central

East South

Central

Mid Atlantic Mountain

England

New

Pacific

Atlantic

South

West North

Central

West South

Central

Non-Census

%

o

f N

et

E

ar

ne

d

Pr

em

iu

(7)

Industry Trends – Annual Statement Data

Incurred Losses as % of Net Earned Premium (Schedule H,

Non-Cancelable)

54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

o

f N

et

E

ar

ne

d

Pr

em

iu

m

Average 65.3%

(8)

Industry Trends – Annual Statement Data

Commissions and Expenses as % of Net Earned Premium

(Schedule H, Non-Cancelable)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

o

f N

et

E

ar

ne

d

Pr

em

iu

m

(9)

Industry Trends – Annual Statement Data

Incurred Losses, Commissions and Expenses as % of Net

Earned Premium (Schedule H, Non-Cancelable)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

o

f N

et

E

ar

ne

d

Pr

em

iu

m

(10)

Industry Trends – Annual Statement Data

Underwriting Gain, Before Dividends, as % of Net Earned

Premium (Schedule H, Non-Cancelable)

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

o

f N

et

E

ar

ne

d

Pr

em

iu

m

(11)

Industry Trends – Annual Statement Data

% Growth in Inforce Policies (Exhibit of Number of Policies,

Accident & Health, Other)

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(12)

Industry Trends – Annual Statement Data

Net Yield on Invested Assets

3.50

4.00

4.50

5.00

5.50

6.00

6.50

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

Ne

t Y

ie

ld

o

n

In

ves

ted

A

ss

et

s

(13)

Industry Trends – 2012 IDEC

0

20

40

60

80

100

120

140

Class M

Class 1

Class 2

Class 3/4

1990-1994

1995-1999

2000-2003

2004-2006

(14)

Industry Trends – 2012 IDEC

Actual to Expected Incidence Ratios, By Issue Year

0

20

40

60

80

100

120

Pre 1990

1990-1994 1995-1999 2000-2006

Employer Sponsored

Individually Sold

(15)

Industry Trends – 2012 IDEC

Actual to Expected Incidence Ratios, By Issue Year

0

20

40

60

80

100

120

140

160

California

Florida

Other

Pre 1990

1990-1994

1995-1999

2000-2006

(16)

Industry Trends – 2012 IDEC

Actual to Expected Claim Termination Ratios, All Durations

(Calendar Year of Issue)

92

94

96

98

100

102

104

106

(17)

Industry Trends – 2012 IDEC

Actual to Expected Claim Termination Ratios, By Monthly

Indemnity, All Durations

0

20

40

60

80

100

120

(18)

Blue Collar / Small Employer Market

Market is unique for several reasons

Motivation

Usually highly motivated so business can keep doors open

Need for the coverage

Income replacement, but also to keep business doors open

Market penetration

(19)

Blue Collar / Small Employer Market

Challenges

Business or industry financial condition

May not be a business existing for claimant to recover to

Reaching the owner

For some industries, finding the office / owner may be difficult

Replacing the right level of income

At times, difficult to determine what earnings are that need to

(20)

Industry Trends – 2012 IDEC

Actual to Expected Incidence Ratios (by Monthly Indemnity)

0

20

40

60

80

100

120

Acc &

(21)

Industry Trends – 2012 IDEC

Actual to Expected Claim Termination Ratios, By Monthly

Indemnity, All Durations

Employer Sponsored 91.3%

(22)

Summary

Both favorable and unfavorable trends

+ Earned premium growth

+ Expense patterns

+ Incidence rates

- Some challenges with underwriting gain

- Lower investment returns

- Challenges with policy growth

Opportunities exist with blue collar / small employer

(23)

GSI Profitability Trends

(24)

Agenda

• Introduction to GSI

• Market position and current sales trends

• Relation of GSI profitability to LTD and IDI

profit patterns

• How current GSI trends may impact future

profitability

(25)

Reasons for GSI from HR perspective

• Reverse Discrimination

• Recruitment and Retention

• Rate Stability

(26)

Income Protection Arrangements

Public Plans

Legislated

Negotiated

Uninsured

Employer

Plans

Insured Employer

Plans w/Shorter

Premium

Guarantees

Conditional

Renewable

Group Policy

Form

Individual Plans or

Insured Employer

Plan Longer

Premiums

Non-Cancellable

Individual Policy

Form

• Social

Security

• State Paid

Leave

• Workers

Comp

• PERS

• PTO

• Sick Pay

Plans

• ASO

• STD

• LTD

• Voluntary

• Worksite

• Association

• Medical UW

• 1 Life

• Multi-life

• No Med UW (GSI)

• Taxable

(27)

IDI Market Basics

Features of IDI versus LTD

o

Lower required loss ratios

o

Higher RBC

o

Longer premium guarantees

Size (Sales)

$500 to $550 Million

Growth (2010 to 2014)

2%

Individual Disability Income Market Segments

SEGMENT

FEATURES

MARKET

SHARE ‘14 2010-'14 AGR

Single Life

Full medical & financial UW

40%

2%

Multilife

Full UW, Discounts, 3+ apps

15%

4%

Worksite

Short benefits, via employer

25%

-2%

(28)

Basic Theme - Current Status of GSI:

“IDI > GSI > LTD”

• Pricing Points

• Morbidity

• Persistency

• Expenses?

Where is this not true?

• Regulation: GSI aligns with IDI

• Markets:

GSI aligns with LTD

(29)
(30)

• Morbidity

New IDI valuation table assigns a 79% incidence factor

to Employer Sponsored Plans (e.g., GSI)

• Persistency

• GSI annual aggregate lapse rates 2% to 4% > IDI’s

• LTD lapse rates 4% to 6% > GSI’s

• Expenses

• Commissions Rates – less for GSI than IDI but higher

than LTD

• Operations – less for acquisition, offset by lowering

placement rates and higher maintenance costs

(31)

Current GSI Market Trends

• Greater competition

• Business model has succeeded

• Profitable and somewhat stable

• Internal and External

• Growing Riskiness

• Increasing income replacement rates

• Decreasing data quality and participation

• Experimentation

(32)

GSI Market Trends – Competition

• Greater Competition

• Generate higher income replacement rates

• Other issues: AAW, Pre-X, Mental/Nervous

• External Competition

• Convergence with LTD

• Competition from surplus lines (Lloyd’s)

• Internal Competition

• No new entrants

• Technology Investments

(33)

GSI Market Trends – Risk

• Higher face amounts – From $200 to $500/life

• Lower participation seen for voluntary cases

• What is the lowest acceptable participation level?

• Continuing experimentation in

• Case design,

• Technology applied,

(34)

GSI Future Profitability – Positives

• If you bundle the right risks in the right way, you can

waive medical UW & still keep long premium guarantees

• Sales growth continues

• Market likes rich benefits for executives and professional with

easy placement

• Favorable impact of new technology to reduce costs

• Fewer competing carriers than in LTD and IDI

• Employer paid cases not particularly price sensitive,

emphasis more on high benefit amounts

• Well designed LTD/GSI combo plans can act as a helpful

damper on GSI morbidity

(35)

GSI Future Profitability – Negatives

• Growth in GSI case churn puts pressure on carriers to

accept mistakes of the past

• Morbidity more likely to rise than not

• Greater competition from LTD and Surplus Lines

• Great Recession showed GSI has LTD-like shock lapses

• Data uncertainty: Market wants ease of placement, like

LTD. But inadequate data will damage profitability

• Intermediaries evolving fast to maximize their take

• Ease of entry can imply ease of exit so technology

(36)

GSI Trends – Conclusions

• Very interesting small market lying between two larger

markets, inheriting attributes of each in dynamic,

evolving ways

• This demands more experimentation than elsewhere

• Historically successful with growth and reasonable, but

choppy, profitability

• Competition from internal players, adjacent markets, and

intermediaries is increasing, eroding GSI margins

• Main risk vector is case design (UW) liberalization

• Must counter with UW discipline

(37)

TRENDS IN GROUP DISABILITY

PROFITABILITY

(38)

Topics

1. Morbidity

2. Social Security

3. Expenses

(39)
(40)

Aging of the U.S. workforce

Baby Boomers

2007-2009 steeper

Flatter recently

Average aging -- 0.2

per year

Stable growth in average age over the past decade+

40.0

40.5

41.0

41.5

42.0

42.5

43.0

Average Age of US

Workforce

Source: US Bureau of Labor Statistics

40.0

40.5

41.0

41.5

42.0

42.5

43.0

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Average Age of U.S. Workforce

Source: US Bureau of Labor Statistics

(41)

Age distribution of the U.S. workforce

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

<25

25-34

35-44

45-54

55-64

65+

Percentage of Workforce by Age

Source: Bureau of Labor Statistics

2003

2015

Workers under age 35 make up a lower % of the workforce

(42)

Claim aging in 2008 SOA GLTD Experience Study

Aging in claim data consistent with BLS

Female claims aging faster than males

Varies by diagnosis

50

51

51

52

52

53

53

54

54

55

55

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Average Age of Open Claims

Source: 2008 SOA GLTD Experience Study

Male

Female

46

47

48

49

50

51

50

51

52

53

54

55

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Average Age of Open Claims

Source: 2008 SOA GLTD

Experience Study

(43)

Population mortality improvement

1.3%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

20-35

35-65

65-85

85-100

Total

20-65

Male Avg Mortality Improvement

Compressed Mortality File

2000-2007

2007-2010

2000-2010

0.9%

-2%

-2%

-1%

-1%

0%

1%

1%

2%

2%

3%

20-35

35-65

65-85

85-100

Total

20-65

Female Avg Mortality

Improvement

Compressed Mortality File

2000-2007

2007-2010

2000-2010

(44)

Mortality rates by attained age and duration

Excluding cancer, M&N and pregnancy

Significantly higher mortality at older ages in Q1 and Q2

60+ mortality rates as % of age 40-49 levels out at 200% starting in Q3

0%

100%

200%

300%

400%

500%

0.0

1.0

2.0

3.0

4.0

5.0

Q1

Q2

Q3

Q4

Year 2

Year 3

Year 4

Year 5

Year 6+

Mortality Rates by Attained Age and Duration

Source: 2008 SOA GLTD Experience Study

(45)

Aging U.S. working population

Q. Has your company measured an aging of LTD covered lives

consistent with BLS data?

13%

13%

60%

13%

A. Greater than BLS data

B. Less than BLS data

C. Haven’t measured

D. Can’t measure

(46)

Incidence after 60

Q. What is the slope of incidence after age 60?

35%

13%

9%

43%

A. Continues to go up

B. Flattens out

C. Goes down

D. Can’t measure

(47)

Aging population – why it matters

38%

25%

25%

13%

A. Composite rating

B. Rate guarantees

C. Experience rating

(48)

Effect of combo plans on LTD experience

Q. Has your company measured the effect on LTD experience when

LTD is packaged with STD?

3%

29%

59%

9%

A. No difference from stand-alone LTD

B. LTD experience is better when

packaged with STD

C. LTD experience is worse when

packaged with STD

(49)
(50)

Timing of Social Security approvals

Q. Has your company seen a change in the length of time it takes for

claimants to receive Social Security approval?

66%

20%

7%

7%

A. Yes, the length of time has

increased in the last few years

B. Yes, the length of time has

decreased in the last few years

C. No change

(51)

Rate of Social Security approvals

Q. Has your company seen a change in the rate of approval for

claimants applying for Social Security?

19%

27%

23%

31%

A. Yes, the approval rate has

increased in the last few years

B. Yes, the approval rate has

decreased in the last few years

C. No change

(52)

Effect of trust fund depletion

Q. Has your company determined what the contractual requirements

are regarding offsetting for Social Security for existing claimants if

benefits are reduced pursuant to a trust fund depletion?

7%

22%

48%

22%

A. Not required to change offsets

on existing claimants

B. Required to reduce the offset

for existing claimants

C. Haven’t concluded yet

(53)
(54)

Expense trends

Expense optimization

Focus on expense management since last recession

Outsourcing gathering momentum

Sceptical view of overhead allocation

Expense investment

Admin systems viewed as opportunity versus necessity

Customer experience increasingly getting attention

Big data needs better systems

(55)
(56)

LTD earnings trend

2010

2011

2012

2013

2014

1Q15

2Q15

Company 1

Company 2

Company 3

Company 4

Company 5

Company 6

Company 7

Company 8

Company 9

Company 10

Company 11

(57)

LTD earnings trend

Number of LTD Carriers Reporting YoY Earnings Growth – Public Earnings Releases

3

4

2

8

6

8

6

0

1

2

3

4

5

6

7

8

9

(58)

U.S. economy

The good news

GDP above pre-recession peak

Low unemployment

Low inflation

The bad news

Home prices below pre-recession peak

“U6” unemployment higher than pre-recession

Figure

Updating...

References

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