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Experience Trends
for Income Protection
International Congress of Actuaries Paris,
France June 1, 2006
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Experience Trends for Income Protection

Panelists Daniel Skwire Milliman, Inc.
(U.S.A.) dan.skwire_at_milliman.com Edward
Fabrizio General Reinsurance Life Australia
Ltd efabrizio_at_genre.com Denis Garand Denis
Garand and Associates (Canada) denis_at_garandnet.net

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Experience Trends in the United
States (Individual Disability Insurance)
Daniel D. Skwire, FSA Principal and Consulting
Actuary Milliman, Inc.
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1985 Commissioners Individual Disability A
Table(1985 CIDA)

• Most recent published table for individual
  disability
• Experience from 1970s and early 1980s
• Required table for some reserve calculations
• Expected basis for recent intercompany study

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Characteristics of 1985 CIDA

• Sex-distinct
• Not smoker-distinct
• Four occupation classes
• Class 1 Executive and Professional
• Class 2 Clerical and Office
• Class 3 Light manual duties
• Class 4 Heavy manual duties
• Accident, sickness, and combined causes

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Society of ActuariesIndividual Disability
Experience Committee (IDEC)1990-1999
Intercompany Study

• Twelve contributing companies
• About 64 of total inforce premium
• Incidence Study Claims incurred 1990-1999
• Claim Termination Study Claims paid 1990-1999
• Results show Actual-to-Expected (A/E) Ratios
  relative to 1985 CIDA

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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990 1999 IDEC StudyClaim Incidence
RatesNon-Medical Occupations (ranked by exposure)
Occupation A/E Ratio
Executives Managers 61
Lawyers 63
Other Sales 65
Accountants 62
Engineers 57
Insurance Sales 101
Stockbrokers 142
Teachers 57
Other Occupations 64
Total Non-Medical Occupations 64
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1990 1999 IDEC StudyClaim Incidence
RatesMedical Occupations (ranked by exposure)
Occupation A/E Ratio
Physicians Surgeons 87
Dentists 62
Psychologists 53
Nurses 100
Pharmacists 51
Chiropractors 139
Veterinarians 60
Podiatrists 73
Other Medical Occupations 80
Total Medical Occupations 88
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1990 1999 IDEC StudyClaim Termination Rates

• 1985 CIDA known to have outdated claim
  termination rates
• Regulators adopted 1985 CIDC table as temporary
  measure
• 1985 CIDC consists of adjustments to 1985 CIDA
• Age of Claim Adjustment
• Months 1-6 36-44
• Months 7-12 50-75
• Months 13-18 80-102
• Months 19-24 105-120
• Year 3 137
• Year 4 120
• Year 5 120
• Year 6 100
• IDEC Study measures experience relative to 1985
  CIDA

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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990 1999 IDEC Study
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1990-1999 IDEC StudyKey Conclusions

• Medical occupations have distinct experience from
  Class 1
• Lifetime benefit periods have poor experience
• Incidence trends are favorable in aggregate, with
  lots of variation
• Claim termination rates are generally lower (less
  favorable) than those in 1985 CIDA

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Australia NZ Disability Income Experience
Edward Fabrizio Deputy General Manager and Chief
Actuary General Reinsurance Life Australia Ltd
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Australian NZ Market

• Benefit is a monthly annuity style benefit whilst
  person remains disabled
• Benefit based on income at time of underwriting
  (generally to max of 75 replacement) and is
  taxable
• Majority (90) is annual renewal business (age
  rated based on age at renewal)
• Non-guaranteed rates
• Full offset if person earns income whilst
  disabled
• Agreed Value and Indemnity benefits are available

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Australian NZ Market

• Most common deferment periods are 30 and 90 day
• Benefit period is generally to Age 65, but 2 and
  5 year periods also common for blue collar
  workers
• Many extras added
• Hospital benefit (pays benefit whilst in hospital
  during deferment period)
• Rehabilitation benefits
• Payment of minimum benefit period on certain
  accidents / illnesses

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IAD 89-93 Standard Table

• Experience Reports for Australia and New Zealand
  are done on basis of comparing actual results to
  a standard table IAD89-93
• IAD89-93 developed by the IAAust based on the
  Australian disability income experience for this
  period
• Incidence rates graduated by age/sex and 4
  occupation classes
• Termination rates based on of the US CIDA85
  termination rate tables

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IAD 89-93 Standard Table

• 4 Occupation classes
• A Professional and white collar
• B Other sedentary (light manual technical)
• C Light Manual (qualified trades persons)
• D Moderate to Heavy Manual

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Australian Experience

• WARNING
• Experience results presented for Australia are
  preliminary only at this stage and are still
  going through a checking process which may alter
  the final results

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Australia Latest Experience
Experience Trends Claim cost in first 3 years
of claim 1 mth deferment
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Australia Latest Experience
Incidence Experience - Males
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Australia Latest Experience
Incidence Experience - Females
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Australia Latest Experience
Occupation Relativities
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Australia Latest Experience
Amount vs Number of Claims
Preliminary results for continuing companies
only Ratio of A/E amounts versus A/E number for
Incidence of Claim
Occ Class MALE FEMALE
A 108 108
B 104 104
C 109 112
D 113 117
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Australia Latest Experience
Termination Rates
Preliminary results for continuing companies
only Ratio of A/E Number of Terminations
Occ Class MALE MALE FEMALE FEMALE
95-98 98-01 95-98 98-01
A 81 81 77 80
B 73 77 72 74
C 84 88 77 77
D 88 84 72 64
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Australia Latest Experience
Termination Rates Male Occ A 1 mth deferment
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Australia Latest Experience
Termination Rates Female Occ A 1 mth deferment
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Australia Latest Experience
Termination Rates
Preliminary results for continuing companies
only Actual Termination Rates of Claim by
duration of claim
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Australia Latest Experience
Amount vs Number of Terminations
Preliminary results for continuing companies
only Ratio of A/E amounts versus A/E number for
Termination Rates of Claim
Occ Class MALE FEMALE
A 96 98
B 95 95
C 95 95
D 93 97
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Australia Latest Experience
Variation in Experience by Company
Preliminary results
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Summary for Australia

• Experience has improved significantly
• Driven by lower incidence experience (although
  there are concerns over quality of data used in
  the investigation)
• Termination rates during first year of claim
  continue to deteriorate, however, this is being
  compensated by better termination rates at later
  durations
• Incidence and termination rates by amounts are
  worse than by number (total claims cost by
  amounts about 15 higher than by number), need to
  be careful in setting pricing and reserving
  assumptions especially for reinsurers on a
  surplus basis

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New Zealand Latest experience

• Incidence Rate Experience

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New Zealand Latest experience

• Termination Rate Experience

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New Zealand Latest experience

• Claim Duration Experience

Ratio () of actual to expected claim length by
deferment period and investigation period
Ratio () of actual to expected claim length by
occupation class and investigation period
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New Zealand Latest experience

• Important feature of NZ Experience is the
  interaction with the government accident
  compensation scheme (ACC)
• ACC provides benefit up to 80 of taxable salary
  (with maximum dollar cap) in event a person is
  injured and unable to work
• Covers most forms of accidental injury (work and
  outside work) and can sometimes overlap with what
  would normally be considered a sickness

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New Zealand Latest experience

• Paid ratio () by cause of claim and
  investigation period

Paid ratio by claim cause and occupation class in
2000-02
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New Zealand Latest experience

• Contribution of each component to total change in
  claim cost from 1997-99 to 2000-02

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New Zealand Latest experience

• Comparison of ratios () of actual to expected
  results in 2000-02 weighted by numbers and amounts

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New Zealand Latest experience
Warning smoking hazardous to your health

• Ratio () of actual to expected incidence for
  smokers over non-smokers in 2000-02

Ratio () of actual to expected claim cost for
smokers over non-smokers in 2000-02
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New Zealand Latest experience
Agreed Value benefits versus Indemnity
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New Zealand Latest experience
Self-employed versus Employed
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New Zealand Latest experience

• Variation in experience by company

Bubbles show claim cost
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Summary for New Zealand

• Experience has improved
• Driven by increased termination rates
• Difference between self-employed and employee can
  be an important rating variable is just as
  important as smoker status
• Incidence and termination rates by amounts are
  worse than by number, need to be careful in
  setting pricing and reserving assumptions
  especially for reinsurers on a surplus basis
• Experience varies greatly by company

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Experience Trends in Canada
Denis Garand Denis Garand Associates
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Fraser Garand 2000-2004 Study

• Proprietary study
• Financial and technical support from
• Munich Re
• Optimum Re
• RGA Re
• SCOR Re
• Swiss Re

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• 13 companies
• Small group market, average size 41 employees
• 2,600,000 exposure from 2000 to 2004
• 26,000 claims of which 18,000 terminate in first
  2 years
• one province Quebec, overrepresented
• These companies represent
• 34 of the market, groups less than 1000
  employees

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Demographic data

• Female Male
• Average age 39.7 40.1
• Distribution in 40 60
• Growth of portfolio higher in earlier years of
  the study
• 72 119 day elimination period
• 91 initial own occ definition

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Fraser Garand 2000-2004 Table

• 4 month elimination
• Own Occupation
• Benefit to age 65
• Tables by 5 year age band and gender
• Quebec,
• Canada except Quebec

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Incidence per 1000, study population

• Canada 8.4
• Canada, except Quebec 6.2
• Quebec 15.1
• SOA GLTD 1987 Basic 4 months expected
• 4.6

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Variation Actual /Expected (F-G)

• By age (compare to SOA 87)
• Younger female higher incidence
• Older males lower incidence
• By amount insured
• Lower benefits higher incidence
• Higher benefits lower incidence
• By industry (50 to 150)

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Variation Actual /Expected (F-G)

• By region
• Some provinces better (no control on industry)
• By cause of disability
• Variations by Mental and Nervous, Musculoskeletal
  and all other causes
• By year of disability
• 2000 highest, 2003 best
• By participating company (70 to 125)

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Termination study

• 18,000 terminations within the first 24 months of
  duration.
• Produced termination rates for duration 4-12
  months.
• 159 versus SOA87 Basic 3 month
• Analysis of claims duration to 24 months by three
  major causes of disability.
• Substantial variation in termination rates.

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Caveats

• Study not adjusted for industry.
• Short period of study was in a favourable
  economic cycle.
• Termination study requires more data

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Uses of study

• Improve pricing for current environment (most
  companies operated on old data)
• Adjust valuation reserves for key parameters of
  region and cause of disability.
• Benchmark company versus industry