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Society of ActuariesNew Orleans Health/Pension Meeting

June 15 - 17

Session 28 PD

Long Term Disability Experience Committee Update

2

LTD Experience Committee

Agenda

Recap of Experience Table Development

Challenges Facing the Experience Committee

Valuation Table versus Experience Table

Measuring & Monitoring Claim Management Results

The Challenge of Interpreting Results

SOA 2005 June Spring Meeting - 28PD, Long-Term Disability Experience Committee Update


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Presenters

Roger Martin, UnumProvident

Rick Leavitt, Smith Group

Tom Casalena, Reliance Standard

4


Participating Companies

AIG/American General Lafayette Life

American United Life Insurance Co. Liberty Mutual

Anthem Life Insurance Company MetLife Ins. Co.

Assurant Mutual of Omaha Insurance Co.

CIGNA Group Insurance Principal Financial Group

CNA Insurance Co Prudential Financial

Florida Combined Life Reliance Standard Life Ins. Co.

Genworth Safeco Insurance Co.

Guardian Life Insurance Co. Standard Insurance Co.Hartford Life Insurance Co States West

Jefferson Pilot Financial UnumProvident Corp.



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Experience Committee Members

Edd Bailey - Assurant Rick Leavitt - Smith Group

Dennis Brewer - Hartford Allen Livingood - UnumProvident

Warren Cohen - Relaince Standard Jack Luff - SOA

Tom Corcoran - Tillinghast Roger Martin - UnumProvident, Chairman

Pat Fay - MassMutual Chuck Meintel - JHA

Deb Fredricks - MetLife Eric Poirier - UnumProvident

Steve Garfield - Standard Ray Siwek - Prudential

Paul Hitchcox - ULR Nick A. Smith - CIGNA

Beth Horvath - Hartford Katie Ward - CIGNA

6


Profile of Initial Review

19 companies participating.

More than 1.7 million claims submitted with more than 1.0 million currently in

experience study.

Not all data submitted by each company was in sufficient detail to be included in

this initial review most notable exclusion was by calendar year.

25 million months of claim exposure over 10+ calendar years.

Dampening factors will be applied to reduce the influence of those companies

supplying the largest exposures.

Initial variables reviewed include age, gender, elimination period, duration,diagnosis of claim, definition of disability, and gross benefit amount.

Analysis of raw recovery and death rates along with actual to expected ratios

relative to Table95A (t95a).



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Recovery Rate - Company Distribution

0.01%

0.10%

1.00%

10.00%

100.00%

1-67-

12

13-18

19-24

25-30

31-36

37-42

43-48

49-54

55-60

61-66

67-72

73-78

79-84 96 10

8120

132

144

156

168

180

192

20421

622

8

240+

Claim Duration

TerminationRate

Min 25%-ile Median 75%-ile Max

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Recovery Rate - EP 180

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6 18 30 42 54 66 78

Monthly Claim Duration

TerminationRate

Actual Recovery

Expected Recovery - t95a



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Death Rate

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

4 16 28 40 52 64 76

Monthly Claim Duration

TerminationRate

Actual Death

Expected Death - t95a

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Industry Termination Summary

96%

114%

141%

79% 77% 82% 79%85% 88% 87% 83%

96%

102%

114%

73%

141%

110%

108%

160%

103%

131%

79%

102%

84%

97%

50%

100%

150%

200%

1-3 mo 4-6 mo 7-9 mo 10-12

mo

Yr 2 Yr 3 Yr 4 Yr 5-7 Yr 8-10 Yr 11-

14

Yr 15+ All

Claim Duration

%t

95a

A/E Recovery A/E Death 'Combined' A/E



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Recovery Rates by Calendar Year & Duration

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

90-92 93-95 1996 1997 1998 1999 2000 2001 2002

Calendar Year

TerminationRate-Yrs>1

0%

1%

2%

3%

4%

5%

6%

7%

8%

TerminationRateYr1

Yr 2 Yr 3 Yr 4 All Yr 1

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Death Rates by Calendar Year & Duration

0.25%

0.50%

0.75%

1.00%

90-92 93-95 1996 1997 1998 1999 2000 2001 2002

Calendar Year

TerminationRate

Yr 1 Yr 2 Yr 3 Yr 4 All



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Initial Output:

Raw Experience Rates, tabulated by various segments

Desired Output:

Experience Report what is important?

Experience Table

Valuation Table

14

Challenges Facing the Experience CommitteeVolatility of Results

Raw Termination Rates: Male/Age 40-44/EP 90/ All Diagnosis

0%

1%

2%

3%

4%

5%

6%

12 22 32 42 52 62 72 82

Recov

Death



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Raw Termination Rates: Male/Age 50-54/All EP's/Cancer

0%

1%

2%

3%

4%

5%

6%

12 22 32 42 52 62 72 82

Recov

Death

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How Much Smoothing ?

We view graduation not merely as smoothing, but as the

more general process of estimating true rates which actually

prevail in the population

Kimeldorf and Jones Bayesian Graduation, TSA XIX 1967

12 Ages * 2 Genders * 7 Diagnoses * 3 Elims * 96 Durations *

2 Def of Dis = 96,768 buckets

Study includes: 382K recoveries and 127K Deaths



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Additional Considerations

How to handle Settlements?

How to handle change in definition?

Mental/Nervous Limits?

+

Additional Data validation?

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Challenges Facing the Experience CommitteeDefinition of Disability

EP 90 Day Recovery Rates: Own Occ Test by Duration

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

12 22 32 42 52 62 72 82

24 Mo

UnLimited



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Challenges Facing the Experience CommitteeClaim Settlements

All Claims - Monthly Termination Rates

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

48 54 60 66 72 78 84

Recov

Death

Settlements

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Challenges Facing the Experience CommitteeData Quality

Raw Death Rates: All Claims

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

20 22 24 26 28 30 32 34 36

EP-90

EP-180



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Reserve Margin:

87CGDT: Uses 90% of experience table term rates

Table95a: No Margin

Table 2005: ??

What is the right level of margin for a valuation table?

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Valuation Table:

Accurate Reserves on an existing block of claims

(STAT? GAAP? TAX?)

Pricing Table:

Will accurately reproduce total claim cost given claim

incidence

Experience Table

Matches observed termination rates given study

methodology



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Question:

When tabulating termination rates should you expose claims

from the beginning of the benefit period or from the date the

claims is submitted?

Answer:

Uh, it depends

Do you hold a reserve on claims in the elimination period?

Do you hold a reserve for claims that are not approved?

Do you include in your termination study claimants that returnto work before submitting a claim?

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One Approach:

No reserve on claims in the elimination period (captured in IBNR)

Pending claims get a denial rate times a full reserve

Termination study includes only claims with payments

Valuation Pricing

Expose Paid Claims from

Submit Date

Expose all claims from

benefit begin date

Do not include claims

closed when submitted

Claim incidence includes

all paid claims



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Dur

Term

Rates

Reporting

Pattern

1 3%

2 10%

3 20%

4 11% 30%

5 10% 20%

6 9% 8%

7 7% 3%

8 6% 3%

9 5% 2%10 4% 1%

11 4% 1%

12 3% 0%

Simple Model Observations

Almost 7% of claims

close before they

report

Claims on reserve have

a reduced expectation

of termination since

they have already

survived to that point

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Claim Termination Rates

0%

2%

4%

6%

8%

10%

12%

4 5 6 7 8 9 10 11 12Claim Duration (Mo)

Reserve Claims

All Claims



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Impact on Reserve Factor

30

35

40

45

50

55

60

4 5 6 7 8 9 10 11 12Claim Duration (Mo)

ReserveFactor

Experience Table

Valuation Table

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Valuation

Exposure designed to

match claims on reserve

Selection of exposure

depends on reserve

methodology

** Match your Method **

Pricing or Experience:

All paid claims count

towards incidence

Expose all claims from the

beginning of the benefit

period

We do not care when a

claim is submitted, only

how many months are paid.



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but Reality is always more complex

Claim termination rate depends on when the claim was

submitted.

Valuation method will work in aggregate, but will not work

for specific claims.

Simple method will over reserve for late reports and under

reserve for early reports

For pricing reserves pay attention to total benefit paid. Make

sure the termination rates produce accurate total claim cost.

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Other Issues:

Your company has a practice of closing out claims early with a lump

sum payment spanning several months. (Advance Pay and Close).

Question: should claims be exposed to the claim closure date? Or to

the end of the benefit period?

Valuation Experience

What is your practice? Do you

release reserve when the claim is

closed?

We do not care when the claim was

closed, only how much the claim

was paid.

Experience table will under reserve

remaining claims

Count as full termination at the end

of the paid benefit (Experience

Committee Method



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Handling of Advanced Pay and Close:

Two Options for Valuation

1. Hold a full reserve until the end of the paid benefit period

and use the pricing table approach of counting exposure

(Advanced Closures are used as a benefit management tool,

but have little impact on current reported income)

2. Release the reserve when the claim is closed and count each

closure as a fractional closure in that duration

Caution: Material change in practice may render current

termination rates inappropriate

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Measuring & Monitoring Claim Management ResultsExamples of Metrics and Related Uses

Overview

A/E Termination Rates

Net Closure Rates

Percentage of Claimants Receiving SS Awards



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A/E Termination Rates: Uses

Assess Reserve Adequacy

Develop Pricing Assumptions

Measure Loss Experience

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Net Closure Rates: Uses

Explain Variances in Financial Results

Assess Claim Management Performance



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Percentage of Claimants Receiving SS Awards:

Uses

Assess Claim Management Performance

Assess Financial Costs

Assess the Productivity / Value of SS Advocacy

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A/E Termination Rates:

Sample Report Template

Measurement Considerations

Parameters Under Study



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Sample Template #1

Actual to Expected Termination Results

Summary by Selecte d Variables: Claim Count Basisfor Claims Terminated Through 12/31/2004 , Developed Through 03/31/2005

Selected Paramater

Rolling N-year Observation Period

S el ect ed Pa ra mt er Ex pos ure ( yrs ) by Du ra ti on Mon th A/E Ra ti os by Du ra ti on Mo nth

Classifications


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Measuring & Monitoring Claim Management ResultsExamples of Measurement Techniques

A/E Termination Rates: Parameters Under

Study

Primary

Aggregate, EP, Gender and Diagnosis

Secondary

Gross Benefit, Net Benefit, Benefit %

Own-OCC period, Age Group, Industry

Case Size, Occupation and Other

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Net Closure Rates:






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Sample Template #1

LTD Net Closure Rate s *

By Calendar Quarter and Duration

Aggregate Results

Basis : Count Basis

S el ect C ou nt O f O pe n C la im s a s o f B OP B y C al en da r Q u art er C lo se d C la im % by C al en da r Q u art er

Duration Ranges 1q05 2q05 3q05 4q05 Total 1q05 2q05 3q05 4q05 Total

Basis : Reserve - Weighted

S el ect To tal O pe n Re se rve s a s o f B OP B y C al en da r Q u arte r Re se rve C ha ng e % by C al en da r Q ua rte r

Duration Ranges 1q05 2q05 3q05 4q05 Total 1q05 2q05 3q05 4q05 Total

* Net of Re-open claims

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Sample Template # 2

LTD Net Closure Rates *

Summary by Se lected Variablefor Claims Terminated During Q105

Selected Paramater

Basis : Count Basis

Selected Paramter Count Of Open Claims as of BOP By Duration Closed Claim % by Duration Normalized

Cl assi fi cations [0,6) [6,12) .. Total


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Net Closure Rates: Parameters Under Study

Primary

Aggregate, Duration and Calendar Period

Secondary

Gross Benefit, Net Benefit,

Diagnosis, Claim Office, Other

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Percentage of Claimants Receiving SS Awards:






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Sample Template #1

LTD Social Security Offsets *By Calendar Quarter

Developed Through 03/31/2005

Percentage of Claimants Receiving Awards

Quarter Gender Duration

Ending Male Female < 24 Months = 24 Month Total

2Q2000

3Q2000

|

|

1Q2005

* Includes Actual and Estimated Awards

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Sample Template # 2

LTD Social Security Offsets *

By Company, Duration, and Gender

As of 03/3 1/2005

Select Parameter:

Males Females Total Male and Female

Duration # Claims # Awards SS Offset % # Claims # Awards S S Offset % # Claims # Awards S S Offset %


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% of Claimants Receiving SS Awards:


Primary

Aggregate, Gender, Duration and Calendar

Period

Secondary

Claim Office, Other

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The Challenge of Interpreting ResultsExamples Of Potential Challenges

Internal/External Reasons

Significant Variance By Company

Converting Termination A/E into Implications for

Reserve Adequacy

Adequacy Weighted A to E



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The Challenge of Interpreting ResultsInternal / External Reasons

Data Integrity Issues

Changes in Claims Administrative Systems

Changes in Claims Administrative Practices

Changes in Business Mix

Economic Forces

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The Challenge of Interpreting ResultsInternal/ External Reasons

Some Action Steps For Consideration:

Incorporate Routine Data Audit Checks

Meet Regularly with the Disability Claim Managers

Normalize Results for Comparison Purposes

Assign Credibility Statistics to the Metrics

Review Specific Case Outliers

Compare to Industry Benchmarks



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The Challenge of Interpreting ResultsVariance by Carrier

Study Shows Significant Variance by Carrier

High Terms early followed by low terms in later durations

. Or Vice Versa

Causes?

Claims Management Business Mix

Approval Rate Blue versus White

Timing of Process w/ STD?

How Aggressive?

Quality of Data?

Caution:Aggregate Results may not match your companys experience

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The Challenge of Interpreting ResultsTermination A to E Report

Total Terminations: Report 1 Total Terminations: Report 2

Duration Actual Expected A to E Duration Actual Expected A to E

Year 1 6,152 5,127 120.0% Year 1 4,101 5,127 80.0%

Year 2 1,801 1,637 110.0% Year 2 1,473 1,637 90.0%

Year 3 1,017 1,130 90.0% Year 3 1,243 1,130 110.0%

Year 4 379 421 90.0% Year 4 506 421 120.0%

Year 5 206 187 110.0% Year 5 206 187 110.0%

Year 6 147 147 100.0% Year 6 147 147 100.0%

Year 7 103 114 90.0% Year 7 103 114 90.0%

Year 8 76 95 80.0% Year 8 90 95 95.0%

Year 9 58 83 70.0% Year 9 83 83 100.0%

Year 10 47 67 70.0% Year 10 67 67 100.0%

Year 11+ 219 364 60.0% Year 11+ 383 364 105.0%Total 10,205 9,373 108.9% Total 8,124 9,373 86.7%

Question: What are adequacy implications of the two reports?

For the entire block? For New Claims?



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Illustrative Purposes Only: Actual Impacts depend on

demographics of your block and the expected termination rates

Impact of 10% drop in Termination Rate

Duration of the Adjustment ===================>

Dur of

Claim Yr 11+ Yr 10 Yr 9 Yr 8 Yr 7 Yr 6 Yr 5 Yr 4 Yr 3 Yr 2 Yr 1

Year 1 0.30% 0.08% 0.09% 0.11% 0.14% 0.20% 0.35% 0.51% 1.00% 1.87% 1.30%

Year 2 0.35% 0.09% 0.11% 0.14% 0.17% 0.23% 0.41% 0.61% 1.19% 0.87%

Year 3 0.46% 0.11% 0.14% 0.17% 0.21% 0.30% 0.52% 0.75% 0.64%

Year 4 0.56% 0.14% 0.17% 0.21% 0.26% 0.35% 0.63% 0.39%

Year 5 0.64% 0.17% 0.20% 0.25% 0.31% 0.43% 0.34%

Year 6 0.75% 0.20% 0.24% 0.30% 0.37% 0.23%

Year 7 0.98% 0.24% 0.30% 0.36% 0.20%

Year 8 1.16% 0.29% 0.35% 0.21%

Year 9 1.49% 0.35% 0.21%

Year 10 1.74% 0.22%

Year 11+ 2.15%

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Adequacy Implications of Report 1Termination Report

Dura tion A to E Variance

Adequacy

Impact per 10%

Variance

Adequacy

Impact

Adequacy

Impact per 10%

Variance

Adequacy

Impact

Year 1 120% 20% 0.13% 0.26% 1.30% 2.59%

Year 2 110% 10% 0.36% 0.36% 1.87% 1.87%

Year 3 90% -10% 0.42% -0.42% 1.00% -1.00%

Year 4 90% -10% 0.31% -0.31% 0.51% -0.51%

Year 5 110% 10% 0.27% 0.27% 0.35% 0.35%

Year 6 100% 0% 0.19% 0.00% 0.20% 0.00%

Year 7 90% -10% 0.16% -0.16% 0.14% -0.14%

Year 8 80% -20% 0.16% -0.32% 0.11% -0.23%

Year 9 70% -30% 0.15% -0.45% 0.09% -0.28%

Year 10 70% -30% 0.14% -0.43% 0.08% -0.23%Year 11+ 60% -40% 0.82% -3.26% 0.30% -1.22%

Total 109% 9% -4.46% 1.20%

Entire Block Claims in Year 1



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Adequacy Implications of Report 2Termination Report

Duration A to E Variance

Adequacy

Impact per 10%

Variance

Adequacy

Impact

Adequacy

Impact per 10%

Variance

Adequacy

Impact

Year 1 80% -20% 0.13% -0.26% 1.30% -2.59%

Year 2 90% -10% 0.36% -0.36% 1.87% -1.87%

Year 3 110% 10% 0.42% 0.42% 1.00% 1.00%

Year 4 120% 20% 0.31% 0.62% 0.51% 1.02%

Year 5 110% 10% 0.27% 0.27% 0.35% 0.35%

Year 6 100% 0% 0.19% 0.00% 0.20% 0.00%

Year 7 90% -10% 0.16% -0.16% 0.14% -0.14%

Year 8 95% -5% 0.16% -0.08% 0.11% -0.06%

Year 9 100% 0% 0.15% 0.00% 0.09% 0.00%

Year 10 100% 0% 0.14% 0.00% 0.08% 0.00%

Year 11+ 105% 5% 0.82% 0.41% 0.30% 0.15%

Total 87% -13% 0.85% -2.15%

Entire Block Claims in Year 1

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Impact on Reserve Level of 10% drop in Terminations

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11+

Entire Block

Claims in Year 1

Illustrative Purposes Only. Actual Impacts depend on

demographics of your block and the expected termination rates



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Total A to E does not always align with reserve adequacy

Other Issues:

Claims in termination report may not be consistent with

claims used in a run-out study

Future may not match the past

Changes in external factors

Changes in claim practice

Data quality is an important issue

Reserve adequacy depends on more than claim terminations

Run-out Tests are the Best Method to Ensure Reserve Adequacy

58

Long Term Disability Experience CommitteeUpdate

Questions ??

028 combined new hlth05

Documents