Making Disability Business Successful and Profitable. Dr. Andreas Heider (Actuary) Gen Re Life/Health R&D Taipei, 31 August 2016

Transcription

1 Making Disability Business Successful and Profitable Dr. Andreas Heider (Actuary) Gen Re Life/Health R&D Taipei, 31 August 2016

2 Agenda Introduction A story of success What can go wrong? Big data and portfolio management Pictures: Josef Kirchmaier-Gilg-fotolia Andreas Heider Andreas Heider Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

3 Agenda Introduction A story of success What can go wrong? Big data and portfolio management Pictures: Josef Kirchmaier-Gilg-fotolia Andreas Heider Andreas Heider Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

4 What is disability income insurance? Disability Income (DI) Insurance protects the earned income of the insured person. A benefit is paid, when the insured's ability to work (and therefore to earn a living) is restricted due to a disabling illness or injury. Ways to measure disability: The insured must be unable to perform income producing duties perform one important duty work more than 10 hours per week earn more than 25% of predisability income perform a list of stated physical activities perform any / own occupation Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

5 What is disability income insurance? A medical doctor has to certify the claimant s inability to work. - The insurer should always reserve the right to render their own judgment by consulting medical experts on their behalf. The benefit is typically paid monthly as long as the claimant stays disabled (up to an end age of e.g. 65). Both individual and group covers exist - Individual cover often more generous - Group cover premiums may (partially) be paid by employer, part of a package Picture: istockphoto, tirc 83 Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

6 Any versus own occupation For occupation based definitions, it is necessary to specify whether the policy protects the ability of the insured to work in - their own occupation - their own or a similar occupation - any occupation Any occupation covers are cheaper than own occupation covers. Own or similar is between own and any. It is often defined as own occupation or any occupation for which the insured may be reasonably suited by education, training or experience (sometimes called own ETE ). It is less objective than own and any. any occupation own or similar occupation own occupation stricter definition, lower premium more generous definition, higher premium Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

7 Waiting period and deferred period The two notions are sometimes mixed up and hence a common source of confusion: - the deferred period (also: elimination period) is applied throughout the policy, whereas - the waiting period only at the commencement of the policy Waiting period Deferred period Picture: Microsoft Policy commencement date Beginning of insurance cover Sickness inception date Beginning of benefit payments Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

8 Impact of deferred periods (DP) on premiums Products with shorter deferred periods are more generous than those with longer DPs because the insured gets a benefit even if he is off work for a short time only. Hence products with shorter DPs are more expensive. In the following we consider a disability cover with - starting at age 30 up to age 65 - male clerical assistant - accident + sickness - aggregate with respect to smoking status - 1% interest rate - individual business Using the US industry table (US 2013 valuation table) we get the following net premiums for different DPs. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

9 Net premium for different deferred periods 3,000 Yearly net level premium per $ 1,000 monthly benefit in the US 2,500 2,000 1,500 1, DP in days Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

10 Occupational classes The disability risk is strongly linked with the occupation. Commonly 4 occupational classes: Class Description US Disability incidence rate* 1 2 academics, professionals, clerical occupations, university educated, certain administration employees and skilled nonmanual workers simple office occupations, possibly including to some extent physical, manual or creative tasks, not exposed to any additional special risks or accident risks skilled manual workers physical hard work, high risk occupations 10.5 * male, age 50, deferred period 90 days, accident + sickness, due to 2013 IDI table Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

11 Disability awareness 1 in 3 1 in 5 1 in 10 1 in 25 1 in 50 1 in 100 How employees in the US perceive the odds of becoming disabled for at least three months during their career 7% 5% 10% 14% 20% The risk of becoming disabled is often underestimated 44% White collar workers Men Women Probability of becoming disabled for 90 days or longer between age 35 and 65: Likelihood of a premature death for the same age group 27% 31% 20% 11% Sources: Gen Re Life & Health Fact Book 2015, 2007 Milliman study for LIFE Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

12 Sickness versus accidents People believe that most disabilities are accidental in nature and therefore avoidable. The perceived percentage of accidents among all disability causes is 35% whereas the real percentage of accidents is only 10% in the US 1. U.S.: Unintentional disabling injuries by class 2 44% 26% On the job Off the job motor vehicle Off the job public Off the job home 11% 19% 1 Source: JHA, Inc., 2003 U.S. Group Disability Rate Study & Risk Management Survey 2 Source: Gen Re Disability Fact Book , p. 32; U.S. National Safety Council, Injury Facts 2014 Edition Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

13 Causes of disability Causes of disability in German Disability Income 9% 25% 16% 29% 21% Mental + Nervous system Musculoskeletal system Cancer Circulatory system Other The classic dread diseases make up only a small part of all illnesses that could cause inability to work. Apart from the regular benefit payment, this is one other substantial difference between Dread Disease and Disability Income. Source: Morgen & Morgen 04/2015 Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

14 Many people assume to be already covered through: Social security Disability benefits often have only small amounts and short duration. Definition of disability might be very strict. Often the old age pension is lower for a disabled person than for someone who worked until the retirement age. Covers only work-related disabilities. Most disabling accidents and illnesses are NOT workrelated. Statemandated workers comp Employerprovided benefits Continuation of payments usually only for a few days/weeks. Not all employers offer additional long term disability group plans (funded by employer and/or employee). Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

15 There is need for DI insurance Benefits from: Costs / payments for: Social security Workers compensation Employer Living Loans / mortgages Savings (old-agepension) Special rehabilitation measures Special technical equipment + Result: usually << 0! Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

16 Underwriting disability 3 dimensions medical occupational Each of these are part of the whole. Therefore one needs to assess the insured across all three dimensions because a risk in one area may have different impacts on another. financial In addition: sports, hobbies, travel Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

17 Occupational underwriting Premiums are generally differentiated by occupation class Therefore it is important to know what occupation duties does the person perform. Job title occupation: e. g. managing director - White or blue collar? - What is the insured actually doing? - E. g. Managing director of a plumber s workshop: Office duties only or on site plumbing? if the person is self-employed or an employee: self-employed with a recently established new business concerns regarding future income, large proportion of businesses fail during the first couple of years Some occupations are exposed to significant risk which is deemed to be uninsurable (Artists, Musicians, Military, ). The location of the risk is such that it makes any eventual claim difficult to manage appropriately. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

18 Medical underwriting Although there are many medical impairments that have little impact on mortality, they may have substantial impact on a person s ability to work. Medical issues need to be matched up with occupational duties to provide an overall assessment of a condition: - e.g. a knee condition may not impact on a person s ability to perform computer programming, but would be a major issue if they were a tradesperson (plumber, carpenter, mechanic, etc.) Stress and mental illness conditions are of a particular concern with respect to disability income insurance - In some markets mental illness claims represent around 30% of all disability income claims by cost. They are very prevalent in the professional occupation categories and are generally very difficult to manage given current treatments. - Significant care needs to be taken when underwriting where the insured has disclosed prior mental illness issues. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

19 Financial underwriting There is, very simply, a direct interrelationship between how much of a person s income is insured, how often he or she will be disabled, and how long that disability will last. (Charles Soule, Disability Income: The Unique Risk, Fifth Edition, Bryn Mawr, PA: The American College ) Replacement ratio (benefit / gross income) Actual vs. Expected Claims Best s Review 1976 Transaction 1975 <50% 56% 88% 50% 71% 50-60% 88% 109% 60-70% 108% 142% >70% 137% 219% Financial underwriting needs to avoid overinsurance and ensure financial incentive to return to work Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

20 Financial underwriting Generally one would only insure maximum of 75% of earned income Reducing scale of coverage with higher levels of income What is income? - Income from personal exertion (wage / salary, commission, bonuses, share options, other benefits car / housing / education fees) - Passive income (dividends, interest, rent) - Determine what level of income is to be insured / would be lost on disability. Adjust for one-off effects on income. - Check income disclosed in application form with data from other sources tax returns, financial accounts, employer pay slips. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

21 DI claims management a significant challenge Definition of disability can be subjective Challenges for the claims assessor: work out if there are other motives - than the disability preventing them from work - for the insured to be on claim: - want to take early retirement / do not want to work / lifestyle - business has failed or is failing / cannot find other employment - motivation to be on claim may change during the course of the claim the longer a person is on claim the harder it is to return to work. diagnosis of the accident or illness causing an impairment resulting in an inability to work - pure diagnosis of a condition does not necessarily imply disability and inability to work - impairment must be assessed against the concrete occupational duties - same impairment may result in no effect on one occupation, but complete inability to work in another occupation. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

22 DI claims management a significant challenge Insured has a financial incentive to claim. It is in the insureds interest to maximize their income during a claim. Therefore, they may: redirect continuing income whilst on claim to other family members or entities in order to minimize offsets, maximize their pre-disability income by showing their financials in the best possible way, hide earnings whilst disabled If the insured is better off financially whilst on claim than prior to claim it will be a very difficult job to get them back to work. Picture: istockphoto, gunnar3000 Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

23 Good claims management is extremely important Early claims notification (esp. for longer deferred periods) to enable early intervention Assistance Service - informs and advises the disabled about his disability and about the right to benefit against third persons - diagnoses of rehabilitation measures - contacts present or future employers - determines validity of claim Regular reviews Target : cost saving Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

24 Managing Disability Income risk is different No lump sum but regular benefit payments - If there is no fixed benefit period (of e.g. 5 years) recovery has to be taken into account. - This makes the product more complex from an actuarial point of view as well as from a claims management point of view. Less objective in nature than Mortality or Dread Disease Differentiating by occupational class is necessary. Hence risk management is a challenge due to - the subjective risk - anti-selection - the economic cycle Picture: Josef Kirchmaier-Gilg-fotolia Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

25 Agenda Introduction A story of success What can go wrong? Big data and portfolio management Pictures: Josef Kirchmaier-Gilg-fotolia Andreas Heider Andreas Heider Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

26 It looks like paradise Picture: Andreas Heider Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

27 Some bad news Munich Re strengthened its reserves for Australian disability business by approximately 150m; cases of disability are becoming more expensive marketwide in Australia due to a significant lengthening of run-off periods. (8 November 2011 Press release Munich Re) Gen Re: Life/health operations produced net underwriting losses of $52 million in the second quarter of 2012 and $17 million during the first six months of The underwriting losses in 2012 were driven by increases in claim liabilities, which were primarily attributable to greater than expected claims frequency and duration in the individual and group disability business in Australia. (Berkshire Hathaway Quarterly Report, 2nd quarter 2012) Swiss Re: [ ] we saw negative developments in the Australian group disability business. These latter developments required us to add USD 369 million to reserves in (2013 Swiss Re Financial Report) Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

28 Both group and individual business have been affected. million AUD Individual DI in Australia net profit after tax Year ended March Great parts of the losses were borne by reinsurers. Source: APRA Quarterly Life Insurance Performance Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

29 so there seem to be some dark clouds over paradise. Picture: Andreas Heider Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

30 What have been the problems in Australia? All pricing parameters have been affected: - Incidence higher than expected - Termination rates lower than expected - Interest rates at a poor level Very generous definition of disability, the claimant gets the benefit when unable to - work more than 10 hours, OR - perform 1 important duty, OR - generate at least 80% of pre-disability income Consumer friendly market - Legislation / Court ruling - Legal advice in case of claims Claims management in group schemes complicated: no direct contact to the claimant Mental claims, which are very subjective in nature, have been a big problem Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

31 Problems in group schemes Group schemes often contain by their very nature a narrow risk diversification: many insured persons have similar occupations. This can become a problem when certain sectors get into economic trouble. Are white collars always better risks than blue collars? Is computer industry less risky than mining? Certain group schemes not only suffered from worsened recoveries but also from increased incidence rates. Automatic acceptable limits (AALs) have been steadily increasing (up to AUD 20,000 per month) Problem of communication: no direct contact to claimant, intermediaries sometimes reluctant to share information insurer financial intermediary employer claimant Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

32 The subjective risk two drivers Distribution of monthly benefit in typical portfolios (AUD*) 10,000+ 6,000-9,999 5,000-5,999 4,000-4,999 3,000-3,999 2,000-2,999 1,000-1,999 Average sunny hours per day % 10% 20% 30% 40% 50% * 1 AUD 5.8 HKD Germany Australia Germany Australia Source: Gen Re Research, Picture: Andreas Heider Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

33 After the big losses, Australian (re)insurers have been strongly focusing on close monitoring, professional claims management, more adequate premiums in order to resolve the problems. Picture: Andreas Heider Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

34 Agenda Introduction A story of success What can go wrong? Big data and portfolio management Pictures: Josef Kirchmaier-Gilg-fotolia Andreas Heider Andreas Heider Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

35 A typical German word Berufsunfähigkeitsversicherung Berufsunfähigkeitszusatzversicherung stands for the typical product in the German DI market. Occupational Disability Insurance Berufsunfähigkeit is defined by 172 (2) Insurance Contract Act: Someone is disabled who, in consequence of illness, bodily injury or a greater loss of strength than is appropriate for their age, is, wholly or partially, and probably permanently, unable to perform the tasks which they performed without any health impairments in their most recent occupation. In the event of disability of degree at least 50%, (private) disability insurance pays out a monthly benefit of the agreed amount (e.g. 70% of net income) until the agreed expiry age (e.g. 60 or 65) the insured usually pays monthly or annual premiums. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

36 Some characteristics of the German DI Long term disability income insurance Own occupation is protected (used to be own or suited in former times) No deferred period but: doctor has to certify that the claimant is presumably unable to work for at least 6 months (used to be 3 years in former times) Monthly benefit (average about 1,100 ) as long as person stays disabled (and alive) - also possible: Waiver of premium only (in case of disability only the premium for the main policy, e.g. old age annuity or endowment, is paid out but no cash benefit) Level premium with immediate discount for profit participation Mostly individual business Occupational class differentiation: formerly typically 4 occ. classes nowadays more (e.g. 10 classes) Picture: Andreas Heider Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

37 Stable new sales figures in Germany 160, , , ,000 80,000 60,000 40,000 20,000 New DI sales / million sum insured * 0 Term Life 32% Product mix in new protection business in Germany Long Term Care 3% Other 1% DI stand alone DI rider total * sum insured = 12-fold annual pension Disability 64% Source: GDV German insurers association, Gen Re analyses Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

38 In-force DI business Germany In-force policies in million Germany has a working population of about 45 million Thus the market penetration for Long Term DI is higher than in most other markets DI rider DI stand alone But: For riskier occupations (e.g. bricklayer, roofer) this cover is often too expensive. Source: GDV German insurers association Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

39 Premium differentiation by occ. class The standard has been 4 occ. classes in many markets for a long time. There is a considerable premium differential. For simpler products one could also think of only 2 occ. classes. But for comprehensive products there has been a trend towards more occ. classes in the last years. This is true in particular for Germany, but also for South Africa and the UK 2,000 1,500 1, Yearly premium by occ. class for 12,000 benefit* * Level net premium indication for German DI, 12,000 yearly benefit, age 30 end age 60 A B C D Classical 4 classes Class A: Academics, professionals, clerical occupations, university educated, certain administration employees and skilled non-manual workers. Example: actuary Class B: Simple office occupations, possibly including to some extent physical, manual or creative tasks, not exposed to any additional special risks or accident risks. Example: secretary Class C: Skilled manual workers. Example: carpenter Class D: Physical hard work, high risk occupations. Example: bricklayer Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

40 Alternative: Functional DI Body Head Care CI / DD Walking Using arms Using hands Kneeling / bending Sight Hearing Speaking Balance (Memory / Mental Ability) LTC (3 out of 6 ADLs) Cancer Heart attack Stroke MS Coma Tetraplegia This stricter DI product has also become very popular in recent years. Annuity: up to age 67 Lump sum or 12 monthly annuity payments Definition sounds more objective than for the Standard DI The claimant must be unable to perform the tasks (body, head) even with the use of assistive or corrective devices. Only 2 occupational classes More affordable especially for blue collar workers Up to now: good sales and good claims experience! Picture: Fotolia, Erwin Wodicka Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

41 Example: Functional DI by Allianz Introduction in 2011 Allianz is the market leader Alternative for risky occupations Annuity payments for loss of 1 essential ability ( body or head ) or if in need of care (LTC benefit trigger) 2 occupation classes Successfully sold to target group of physically working people ( > 80%*) From head to toe the more favorable income protection * Source: Franke & Bornberg 2013 Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

42 Example: Essential Abilities Cover by Zurich Life is movement Introduction in 2015 No CI component Body Head Care CI / DD Walking Using arms Using hands Kneeling / bending Sight Hearing Speaking Balance Memory / Mental Ability LTC (3 out of 6 ADLs) Cancer Heart attack Stroke MS Coma Tetraplegia Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

43 Example: Functional DI by Volkswohlbund Introduction in 2014 Similar to Allianz product The essential ability cover ( body and head ) is the base product, LTC and CI are optional extensions Body Head Care CI / DD Walking Using arms Using hands Kneeling / bending Sight Hearing Speaking Balance Memory / Mental Ability LTC (3 out of 6 ADLs) Cancer Heart attack Stroke MS Coma Tetraplegia Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

44 Example: Essential Illness Income Protection Holloway Friendly (UK) Benefit trigger: classical DI, BUT: only if the inability to work results from one of the following diseases: - Cancer - Heart attack - Stroke - Kidney failure - Multiple sclerosis Own occupation cover End age between 50 and 70 Deferred periods of 4, 13, or 26 weeks Note: It is not enough to suffer from one of those critical illnesses it has also to be certified that the claimant is unable to work in his job! Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

45 Fierce competition in conditions and price Rating agencies for insurance products are comparing different tariffs They apply big pressure on companies to improve their conditions (i.e., make them more lenient) and to decrease the premiums. Morgen & Morgen as well as Franke & Bornberg provide product ratings and software tools used by brokers; Stiftung Warentest gives popular product reviews for end costumers. Terms and conditions in recent years - Regular updates to meet the requirements of product rating agencies and stay amongst the TOP 5 or 10 Price is now dominating the market - Premium reductions for certain occupational classes by increasing the profit participation - Rearrangement of occupational classes, i.e. shifting some occupations to a better class - Complete refinements of the occupational class system and introduction of more occupational classes Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

46 Agenda Introduction A story of success What can go wrong? Big data and portfolio management Pictures: Josef Kirchmaier-Gilg-fotolia Andreas Heider Andreas Heider Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

47 Every insurer should aim at writing as much new business as possible. writing as much profitable new business as possible. Product design Monitoring Pricing Risk management Claims Management Marketing/ Sales Underwriting Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

48 Monitoring An up-to-date monitoring helps companies recognize their own market position. identifies weaknesses in existing products. shows where improvements may be necessary. provides an impulse for new product developments. is essential to write profitable business in times of decreasing margins. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

49 Data pools Every year German companies send us their DI portfolio data. After getting the data clean we start both classical A/E analyses and GLM analyses - Incidence rates - Terminations rates - Lapse rates - Each company can compare own results with pool results. Standardized analyses guarantee objectivity. Company Market Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

50 Data basis Big data basis - More reliable analyses of claims experience - Less volatility Continuous process of monitoring conducted on an annually refreshed basis helps to detect trends. Data volume Exposure time / 1,000,000 yrs 66.0 Insured monthly benefit of all data records / 1,000,000, New claims / 1, Big Data analyses provide insights relevant for pricing, reserving, and independent (actuarial) risk management function. Picture: Thinkstock, zegers06 Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

51 Example 1: Trends in claims experience A/E by year of occurrence A E = actual claims expected claims Company X seems to have a worse trend in claims experience compared to the market trend - This should bring company X to initiate finer analyses to find out the reasons. Pool, males Company X, males Pool, females Company X, females The figures shown in this chart and in the following charts are illustrating examples only. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

52 Example 2: Selection effects Individual DI business is in general fully underwritten. New policies should hence show better claims experience. Indeed, these selection effects can be observed in our data pool: 100% Pool claims experience by policy year as % of ultimate ( = policy years 6+) 50% 0% But this overall pool experience will in general not be observed for all companies. There are companies where the claims pattern by policy year looks like this: Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

53 Example 2: Selection effects 120% 100% 80% 60% 40% 20% 0% Claims experience by policy year as % of ultimate Pool Market average Company X This example applies to all biometric products (Death, Disability, Dread Disease, ) which are fully underwritten. Possible reasons: - Lenient UW philosophy, simplified UW, gaps in application form, high UW limits, - Overburdened UW team (e.g. job cuts) - Distribution channel attracts antiselection Possible consequences: Rethink UW philosophy, check application forms. Train your UW team. Beware of the fact that not every product is appropriate for every distribution channel (e.g. simplified products for brokers). Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

54 Example 3: Relevant policy information Claims experience varies by company for different reasons. Company X s claims experience is better the pool average. - The conclusion might be that X s portfolio is well-managed, with good UW and effective claims management. 140% 120% 100% 80% 60% 40% 20% 0% A/E benchmarking, E set as industry standard table aggregate (i.e. no occ. differentiation) X 12Pool Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

55 Example 3: Relevant policy information Initially, X was unable to provide occupation information. Afterwards analysis shows that the occ. class mix of company X is different from the pool average: Occ. class mix, pool Occ. class mix, company X 21% 5% 32% A 15% 3% 42% B C 42% D 40% Remember that classes C and D have drastically higher disability risks than A and B. How can company X s claims experience be compared to the market average without being mixed up with effects of other variables (like the occ. class)? Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

56 Generalized Linear Models GLMs GLMs (generalized linear models) help to separate the influence of different factors (like age, gender, occupational class) on the target variable (here number of observed new claims): Effects of different variables on the target variable will not get mixed up. We use Poisson regression, i.e. when the target variable yy is the number of new disability claims and the variables xx 1,, xx kk are the factors (age, gender, occupational class, ) then we have log(yy) = ββ 0 + ββ 1 xx ββ kk xx kk. Procedure in practice: - The target variable is the number of new disability claims. (We are here no longer looking at A/E s.) - The exposure time of active lives is used as weight. - For each variable a base expression is selected (e.g. gender: male, occ. class: A) - The data is analysed by the software tool R. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

57 GLMs description of a simple model Variables Values Base value age 20, 21,, gender male, female male occ. class A, B, C, D A year 2005, 2006,, company 1, 2,, 21 1 Target variable: number of new claims Weights: exposure of active life years All variables categorical (in more sophisticated approach one could change this e.g. for the age) Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

58 Back to example 3: Result of the GLM Incidence in % of company 1 250% 200% 150% 100% 50% 0% Claims experience as a result of the GLM X Exposure in million life years exposure in million years incidence 95% confidence interval The GLM shows us the actual influence of the company on the claims experience. Hence after normalizing for occupational class, company X has worse claims experience. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

59 Example 4: Mental diseases 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Percentage of disability claims causes in German social security Men % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Women Musculoskeletal system Cardio-vascular diseases Metabolic disorders Neoplasms Mental diseases Respiratory diseases Nervous diseases Skin diseases Others Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

60 Example 4: Mental diseases The effect of increasing mental cases can also be observed in private DI not only in Germany but in most developed DI markets. Possible reasons: - More stressful jobs - Fear of unemployment - No more stigmatization of mental problems nowadays - More women combine work and family life. - Trend to more fraudulent claims? Possible consequences: - Claims managers need to gain knowledge on mental illnesses. - Analyze which professions are especially exposed to these risks. - Adjust the pricing if necessary. - Think about products with exclusions of mental illnesses. Thanks to close monitoring the trend towards more mental diseases has been detected early in private insurance industry. In fact, the trend seems to have stopped for private disability covers. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

61 Excluding mental diseases Especially for simple / low priced products one can exclude mental and/or nervous diseases. - Either complete exclusion - or reduced benefit by restricting the benefit amount or period. While excluding all mental diseases may make sense one might wish to exclude only those nervous diseases which are very subjective in nature. - E.g. Multiple sclerosis would still be covered, others like migraine (sick headache) could be excluded. As an alternative, one may consider Essential Illness DI, where it is an additional necessary criterion that the disability has been caused by a dread disease. Picture: Mike Kiev - Fotolia.com Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

62 Example 5: Termination rates experience Termination rates experience should be separated into - mortality of disabled (can hardly be influenced by the insurer) - recovery rates (impact by claims and rehab management) For long term disability terminations are less important than incidences nevertheless one should pay attention to them. Data basis for terminations is often more difficult than for incidence rates. Consider the termination experience of two companies X and Y in the data pool: Foto:: Microsoft Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

63 Example 5: Termination rates experience 150% A/E termination experience, E due to standard industry table 100% 50% 0% Company X: Death of disabled Recovery Pool Company X Company Y There is no reason why death rates could be that much below pool average. This indicates bad data quality for X s termination data records. Hence one should also not trust the good recovery experience and first of all check and improve data quality. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

64 Example 5: Termination rates experience 150% A/E termination experience, E due to standard industry table 100% 50% 0% Death of disabled Recovery Pool Company X Company Y Company Y: Death rates on industry level, poor recovery experience Possible reasons: Possible consequences: - Weak claims / rehab philosophy - Claims team is too busy with new claim - Many subjective (e.g. mental) claims - Rethink claims management strategy - Also focus on rehab, not only on assessment of new claims - Regular advanced training for claims assessors to address recent problems as e.g. mental claims Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

65 Example 6: Lapse We show the lapse rate in % of the in-force polcies. In the first policy years, lapse rates are usually higher and they flatten out after the 10th year. Here, company X has significantly higher lapse rates the market. Possible reasons: - distribution channel (more brokers than tied agents) - the portfolio has an occupation mix with higher addiction to lapse 12% 10% 8% 6% 4% 2% 0% Lapse rates Policy year Pool Company X Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

66 Example 7: Assessment of occupations Consider the following occupation: Which risk class between 1 (lowest risk) and 10 (highest risk) would you assign to the baker? In former times, the assessments were solely based on the knowledge and experience of occupational experts at that time there were no data on claims experience for single professions available. Nowadays a great part of the data records of the disability data pool contain occ. information. Risk adequate assessments for about 7,000 occupations based on claims experience Picture: uriy solovyov - fotolia.com Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

67 Our occupation database Based on the 1992 classification of occupations (by the Federal Statistical Office) Occupations database currently contains approx. 30,000 occupations. Important requirements of an occupations database - Consistency, transparency, clarity, completeness Hierarchical structure featuring 3-, 4- and 6-digit codes Examples: Picture: Thinkstock, monkeybusinessimages Code Designation Code Designation 612 Physicist, mathematician 6123 Mathematician Actuary 401 Meat processing 4019 Other butchers Equine butcher Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

68 Supplementation by means of occupational science expertise Differentiated risk assessment for the entire occupations database necessary Point of departure: analyses at the 3-/4- and 6-digit level from our disability pool, also analyses from the statutory pension insurance fund The pure figures alone do not provide a full risk assessment particularly in the case of occupations for which insufficient statistically relevant information is available Actuarial analysis Occupational / vocational assessment Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

69 Examples of occupations in the 10 risk classes On the basis of our analyses 10 risk classes are defined here for best estimate purposes Risk class Example of occupation 1 computer scientist 2 bank clerk 3 dentist 4 teacher 5 retail salesman 6 electrician 7 motor mechanic 8 physiotherapist 9 painter 10 bricklayer Note that the assessment is not fixed for all times. Claims experience or other new findings may cause changes. Also, in many cases it is not only the pure risk assessment which determines the structure of the occ. classes. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

70 Distribution among the 10 risk classes according to gender 30% 25% 20% 15% 10% 5% 0% Distribution of the portfolio among the risk classes Men Women The stronger concentration of women in the risk classes 3, 4, 5 and 6 is noticeable, whereas they are less frequently represented at the edges. More even distribution among the risk classes in the case of men. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

71 Indication of premiums Claims levels of 10 risk classes, indication Men Women Note that this is only an example to illustrate how the premiums may depend on the risk class. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

72 Additional differentiation characteristics Additional criteria for reclassifications Over and above the occupational designation there are some other risk-relevant factors such as personnel responsibility, physical tasks Individual occupational reactions to additional characteristics improve risk-commensurate assessments - Only of relevance to some occupations since numerous occupations are adequately recorded along specific lines In dependence on the characteristic groups, improved classification on the basis of a basic assessment for every occupation Risk-neutral overall A link with a POS system enables these characteristics to be recorded effectively where necessary Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

73 Risk assessment characteristics Characteristic Occupational status Personnel responsibility / management function Highest training qualification Proportion of physical tasks / office tasks Nature of the employment relationship Group Employee / self-employed / civil servant / student / pupil / unemployed / intern / other Executive within the purport of the Works Constitution Act / personnel responsibility for x persons University degree / recognized vocational training qualification / qualified specialist employment (foreman) In percent, actual enquiries, e.g. physical tasks < 25%, office tasks > 75% Full-time permanent employment Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

74 Conclusion

75 Checklist for introducing Disability Income Insurance to new markets Product design Consider a simpler product design: Fixed payment period (no recovery to be considered) or Disability caused by dread diseases only Use a deferred period (e.g. 6 months). Be aware of the role of mental diseases (think about exclusion). Careful UW Occupational UW is of great importance (use an appropriate occupational class system). Avoid over-insurance. Adequate premiums Include more safety margin than for Mortality. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

76 Checklist for introducing Disability Income Insurance to new markets Professional claims management Act early and in direct contact with the claimant. For products with recovery: check regularly if claimants are still disabled. Close monitoring Keep control over as much policy information as possible. Detect problems in your portfolio early. Use up-to-date monitoring methods, e.g. GLMs. Inadequate pricing or anti-selection are unpleasant both for the insurance industry and for the consumer. We have Big Data. Let us use it for a deeper understanding of our biometric products. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

77 Proprietary Notice The material contained in this presentation has been prepared solely for informational purposes by Gen Re. The material is based on sources believed to be reliable and/or from proprietary data developed by Gen Re, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Thanks for your attention! Any questions? Die in dieser Präsentation enthaltenen Informationen wurden von der Gen Re lediglich zu Informationszwecken zusammengestellt. Das Material basiert auf zuverlässigen Quellen oder eigenen Daten der Gen Re. Dennoch übernehmen wir keine Haftung hinsichtlich ihrer Genauigkeit oder Vollständigkeit. Der Inhalt dieser Präsentation ist als allgemeine Information gedacht. Für Ihren konkreten Bedarf sollten Sie auf jeden Fall den Rat eines Spezialisten einholen. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August

78 Proprietary Notice The material contained in this presentation has been prepared solely for informational purposes by Gen Re. The material is based on sources believed to be reliable and/or from proprietary data developed by Gen Re, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Making Disability Business Successful and Profitable Dr. Andreas Heider Taipei 31 August