Session 181 L, Closed Block Strategies: Manage Internally, Outsource and Divest. Moderator: Brad S. Rokosh, ASA, MAAA

Transcription

1 Session 181 L, Closed Block Strategies: Manage Internally, Outsource and Divest Moderator: Brad S. Rokosh, ASA, MAAA Presenters: Robert T. Eaton, FSA, MAAA Benjamin Lawrence Keslowitz, FSA, MAAA Brad S. Rokosh, ASA, MAAA

2 Closed Block Strategies: Internal Management 1

3 Internal Management Internal Management Operations Claims Financial Management Rate Increases 2

4 Internal Management Operations Efficiencies with other business units Life Wealth Management Long-tailed morbidity Administrative systems Group and Individual New group enrollees Rate Increases & Landing Spots Other benefit buydown 3

5 Internal Management Claims Processing Data collection Fraud 4

6 Internal Management Claims Eliminating Leakage Root causes of claim leakage associated with claims administration Timely and accurate reporting Claim management oversight Identify gaps between observed claims management practices and industry leading practice Provide specific recommendations for immediate and long term impact Prioritize all recommendations based on level of effort, risk, potential short and long-term financial benefit, and ability to implement. Assess overall value of recommendations considering internal and marketplace barriers 5

7 Internal Management Financial Management Reporting bases Stat Tax GAAP IFRS Future reporting requirements Valuation platforms First principles modeling Investment strategies 6

8 Internal Management Financial Management Experience analysis Annual or bi-annual Tracking key assumptions Policy terminations (deaths and voluntary lapses) Transitions between sites of care delivered Benefit exhaust rates Incidence rates Claim continuance Feedback loop to (re-)pricing 7

9 Internal Management Financial Management 8

10 Internal Management Financial Management CFO Dashboard A / E basis (monthly, quarterly) Claim rates Causes of claim Lapsation Continuance Rate Increase implementation 9

11 Internal Management Rate Increases Projection Models First principles Consistency with experience assumptions Aggregated claim costs May be difficult to track granular Demonstration of shortfall Lifetime loss ratio Rate Stability requirements: opportunities and challenges 10

12 Internal Management Rate Increases Recent Industry History Count of Rate Increases 5,000 4,000 3,000 2,000 Filed RI Approved RI 45% 40% 35% 30% 25% 20% 15% Rate Increase Amount 1,000 Count of rate increases Source: California DOI data, compiled 10% 5% 0% 11

13 Internal Management Rate Increases Increase from adverse experience: Morbidity Mortality Lapse Interest rate Expenses Projection Models: first principles Consistency with experience assumptions Transitions between sites of care 12

14 Internal Management Rate Increases Statutory requirements Vary widely Constantly changing 2014 model regulation update Responding to increase objections Some states have 50+ questions Others never ask 13

15 Internal Management Rate Increases Annual filing requirements NC, TX, VA, Show A/E Provide updated projections IIPRC Policies filed initially with the Insurance Compact Quicker filing of rate increases 15% Approval pushed to all member states Increases > 15% to be filed with individual states 14

16 Transactional Benefits of Reinsurance / M&A Benjamin Keslowitz, FSA MAAA Beechwood Re Holdings, SVP & Head Actuary October 14, 2015

17 Transactional Value Elements - Seller Capital Economics Functional Expertise Product Development, Pricing, Valuation, Administration, Distribution Regulatory Requirements Data Experience Optics 2

18 Transactional Value Elements - Buyer What are companies willing to pay for? What are companies not willing to pay for? Additional pricing considerations 3

19 Transactional Value Elements What are companies willing to pay for? Investable Cash and Asset Transfer Unlockable Liability Margins Company Licenses, Distribution, Name & Rating 4

20 Investable Cash and Transferred Assets Dependent on investment restrictions and assets transferred Challenges due to low interest rates and ALM requirements Challenges due to market value trust reserve credit requirements 5

21 Unlockable Liability Margins Actuarial reserves may include significant margins Prescribed assumptions Intended conservatism Locked-in accounting treatment 6

22 Licenses, Distribution, Name and Rating Purchasing company with licenses could lead to future new business optionality Purchased distribution channels can supplement existing ones or expedite entry into a market Completing transaction with well-known company can boost industry exposure and help future sales Acquiring highly rated company may lead to uptick in future sales and quicker speed to market, but will also require excess capital 7

23 Transactional Value Elements What are companies not willing to pay for? Non-Guaranteed Fees Mortality / Morbidity Improvement Expected Experience 8

24 Non-Guaranteed Fees (e.g., Rate Increases) Filing Efforts Expensive / Time-consuming Uncertain Results Trends Recent decreases in increase approvals Unintended Consequences Higher fees/premiums may lead to unfavorable experience 9

25 Mortality / Morbidity Improvements Lack of comprehensive information Studies not completed on insured population Is morbidity improvement keeping up with mortality improvement? New Technology and Options (e.g., Assisted Living Facility Utilization) 10

26 Expected Experience Conservatism already built into valuation Pricing team must review experience studies and determine if additional is required Must weigh competitiveness of quote against uncertainty of future Risky benefit types may increase cost of liability through policyholder optionality (e.g., anti-selection) or benefit extension (e.g., ROB, lifetime waiver) 11

27 Additional Pricing Considerations Capital required Investment Restrictions Structure Domicile Employees Taxes (DAC, Excise, NOLs) Product Distribution 12

28 Questions? 13

29 Closed Block Strategies: Retain, outsource or divest? Brad Rokosh October 14 th, 2015

30 LTC industry landscape Industry Issues Feature based competition Low interest rate environment Continuing concerns with emerging experience Changing care landscape Changing regulatory perspective Operational inefficiency and cost overruns Capital intensive Unintended consequences Increased scrutiny Rate increases Block Closures Page 2

31 Closed block characteristics? Typical closed block Page 3 Mature block of business Low operational demands Stable performance Declining reserve and capital requirements Long-term care closed block Immature block of business Increasing reserve and capital requirements High degree of operational risk Limited claims experience Uncertainty around long-term expectations Capital uncertainty

32 LTC industry landscape Closed block management complexities Considerations for actuaries Policyholder Services Claims Administration Experience Studies New Leadership Closed Block Rate Increases Reputation Management Strategies Expense Management Valuation and capital forecasting Regulator management Talent management Page 4

33 Functional considerations Functions more operational, less strategic in nature present opportunities The ideal functions for operational change are functions which meet the following characteristics: Repeatability: work is recurring in nature Leverageable: work can be handled by well-trained resources, freeing up management Non-subjective: work requirements clearly defined at onset, require little judgement Based on our experience, a candidate matrix of functions and their relative considerations is depicted below Operational Opportunity Low Medium High Product Product strategy and design Product management Pricing/re-pricing Rate filings Illustration actuary Experience studies Product tax Financial reporting Financial reporting basis changes Analysis of results Track hot topics In-force valuation Analysis and reconciliations Modeling Assumption selection Ad-hoc projections Decision support and analytics Model maintenance Production runs incl. projections Risk management Risk and capital framework Regulator management Reinsurance program reviews Profitability and risk analysis Capital projection ALM production Page 5

34 LTC actuarial functional considerations Evaluation of operational models involves at least two key dimensions Depending on organizational objectives, additional criteria may be added to reflect specific culture and value-based elements Business Benefits: Model characteristics: Quality Enables a culture with a focus on quality as a key driver of activities Scalability Enables future scalability to meet growth plans Customer Experience Drives improvements / maintains a positive customer experience whether internal or external Flexibility Enables flexibility to meet changing customer / regulatory changes Operational Efficiency Drives efficiency improvements, enabling faster processing / reduced staff - leveraged claim cost operating model Complexity to Implement Reduces - degrees of complexity to implement change e.g. significance of change, number of staff impacted, etc.. Operational Effectiveness Drives improved quality of handling / reduced errors in processing / better analysis Cost to Implement Reduces - Degree of cost to implement changes both funding and resource cost Page 6

35 Operating model continuum Sourcing can be used in varying degrees across operating model Operating model continuum In-house internal experts In-house with loan staffing Co-sourcing Full outsource Company Leadership Company Process Technology Leadership Vendor supplied Staff Company Leadership Company People Process Technology Outsourced LTC Actuarial (Vendor) Company subject matter experts Shared Services (Home Office) Company Leadership Vendor People Process Technology All LTC actuarial processes, technology and reports are maintained by a dedicated group within the Company No use of shared services or other enterprise resources Current controls, processes and existing technology All LTC actuarial processes, technology and reports are maintained and controlled by Company Vendor supplied staff supports actuarial department during quarterly valuation and financial reporting and during off quarter strategic analysis and experience studies Current controls, processes and existing technology Dedicated vendor management unit provides protocols and standards around selected processes Company subject matter experts utilize vendor supplied resources to perform repeatable processes (i.e., quarterly valuation) Company subject matter experts available to focus on strategic analysis required by Company management Dedicated LTC vendor management unit provides protocols and standards around all processes Vendor performs end to end quarterly valuation and financial reporting. Off quarter strategic analysis and experience studies. Company leadership acts in management capacity and retains decision making authority Page 7

36 Illustrative LTC outsourcing arrangement A well constructed co-sourced model is most likely to be successful Leadership Vendor provided support Assumption setting (Home Office) Strategic analysis and Financial planning (Home Office) Product development, pricing and rate filing admin (Home Office) Experience studies Valuation and financial reporting Projections Re-pricing Pricing Assumption data management Analysis to support decision making process Stat/GAAP/Tax Valuation Asset Adequacy Testing Evaluating Future Accounting Policy Changes Model development Model maintenance Decision support Financial planning support Rate filing Modelling support Product refresh Page 8