2006 General Meeting

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Canadian Institute of Actuaries
LInstitut canadien des actuaires

• 2006 General Meeting
• Assemblée générale 2006
• Chicago, Illinois

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Group Disability ReservingUnleash the Power of
the 21st Century Canadian Institute of
ActuariesOctober 20, 2006
Barry Senensky FCIA www.claimanalytics.com
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Agenda

• Evolution of reserve calculations
• Where are we today?
• How can we improve the process?
• Summary

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Evolution of Reserve Calculations
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Computer Performance
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1960s
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1960s
Evolution of Reserve Calculations

• Mainframe/manual
• Simplified formulas
• Conservative assumptions
• Infrequent experience and table updates

• Technology
• Paper
• Very early computers
• Tapes, disks

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1970s
Evolution of Reserve Calculations
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1980s
Evolution of Reserve Calculations
PC jr!
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Evolution of Reserve Calculations
1970s - 1980s

• Mainframe calculations
• Move to basic principles calculations
• Conservative assumptions

• Technology
• Improved mainframes
• PCs

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1990s
Evolution of Reserve Calculations
Tim Berners-Lee Ignites the Internet
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1990s
Evolution of Reserve Calculations

• Mainframe/PC calculations
• Basic principles calculations
• Expected assumptions with explicit margins
• Deterministic scenario testing

• Technology
• Faster computers, more storage
• Online processing
• Internet

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Today
Evolution of Reserve Calculations

• Technology
• Advanced software algorithms
• Powerful computers with more storage, faster
  processing,
• Access to large databases of historic information

• PC-based calculations
• Basic principles
• Stochastic modeling
• Expected assumptions with explicit margins

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What Have We Accomplished?

• Tremendous progress due to evolution of computer
  power
• Calculations now explicit and seriatim
• Scenarios sensitivity-tested to better evaluate
  risk

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What do we still need to do?

• For group disability reserving, need appropriate
  reserve for each disabled life
• Benefits
• Profitability of the business is not distorted
  from period to period
• Eliminates cherry picking at quarter-ends
• More understandable to stakeholders
• Immediately captures business mix changes
• Better alignment of claims and management
  personnel

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What are the specific requirements?

• Termination rates to reflect each disabled
  lifes
• diagnosis
• residence
• monthly benefit
• tax status
• reporting lag
• Offsets and probability of offsets appropriate to
  each claim

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Using Predictive Modeling to
Calculate Reserves Appropriate
for Each Claim
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Claims Scoring

• Claims scored from 1 to 10.
• Scores show likelihood of return to work within a
  given timeframe.
• Scores are calibrated
• Score of 1 indicates 0 10 chance of recovery
  within given timeframe, score of 2 indicates 10
  20 chance of recovery within given timeframe,
  and so on.

J. Spratt Score 4 452135
J. Loe Score 6 452009
P. Chang Score 8 451156
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Scoring Report
Q.P.





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Five steps to developing LTD termination rates
for Dave with claim scoring
Dave
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Developing termination rates for Dave
About Dave
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Developing termination rates for Dave
Daves claim scores
Likelihood of RTW ()
3 months
5.9
6 months
14.7
12 months
27.5
24 months
34.5
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Developing termination rates for Dave
Daves claim scores
Likelihood of RTW ()
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Developing termination rates for Dave
Step One Cumulative RTW Probabilities

• cumulative RTW Probabilities, 1-24 Months after
  EP
• expressed as

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Developing termination rates for Dave
Step Two Interpolate between months

• choose uniform distribution, constant force or
  Balducci
• here, used uniform distribution
• expressed as

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Developing termination rates for Dave
Step Three Mortality rates

• Canadian Group LTD experience /1000 shown here
• alternative is company experience
• may want to make adjustments, e.g. improvement
  from mid-point of study

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Step Four Convert cumulative RTW probabilities to
month-to-month RTW rates
Developing termination rates for Dave
of claimants who will recover in period. 
TM cumulative RTW - LM cumulative RTW
1 - LM cumulative RTW - LM cumulative death rate
of claimants still on claim at start of period.
 
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• Step Five
• Calculate Termination Rates
• Termination rate recovery rate mortality rate

Developing termination rates for Dave
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What to do after 24 months

• Produce scores for 24 months, then use
  traditional methods thereafter
• Produce scores for all future terms

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Summary
Significant progress has been made in calculating
reserves. Still needed in Group Disability
reserving

• DLRs that reflect the specific factors of each
  claim

This is realizable today.