are your ltd results saying what you think they are? joel cornberg cia general meeting 19 october...

Are your LTD results sayingwhat you think they are?

Joel CornbergCIA General Meeting19 October 2006

Agenda

Relevance of the topic

2006 group life & LTD survey

A concrete example

Incurral year analysis

Embedded value

Where to go from here

Questions



Stems from conversations with many carriers

Variety of opinions on how to monitor LTD

Ongoing tough competition

False confidence could be expensive



Swiss Re’s biannual survey of group carriers

To be released in the coming weeks

Broad industry participation

Covers many functional areas

CIA presentation includes responses from 20 carriers



What tools do you use to monitor the financial performance of your LTD portfolio?Select all that apply:

Tool % using

Calendar year results 80%

Incurral year results 60%

Reserve adequacy testing 50%

Embedded value 20%

Other 5%Joel CornbergCIA General Meeting19 October 2006


What profit measures do you use in pricing?Select all that apply:

Measure % using

Per cent of premium 85%

Return on equity 55%

Internal rate of return 10%

Other 0%



Many companies are relying on one type of analysis

More variety could be useful


A concrete example


A concrete example

ABC Life has a stable block of business

Annual premium is $1 million

Reserves are $5 million

Required capital is $1 million

Incidence & termination similar to industry studies

Investment income is 5%

Income tax is 33%

Target post-tax profit is 5% of premiumJoel CornbergCIA General Meeting19 October 2006

A concrete example

Income statement for ABC Life ($ 000)

Premium 1 000

Expenses (150)

Claims (1 075)

Reserve change 0 (reserves are stable)

Interest 300

Pre-tax profit 75

Income tax (25)

Post-tax profit 50 (5% of premium)


A concrete example

Most carriers look at

Profit as % of premium

Calendar year results

Everything is fine, end of story?

Let’s take a closer look!



Income statement

Premium 1 000

Expenses (150)

Claims (1 075)

Reserve change 0

Interest 300

Pre-tax profit 75

Income tax (25)

Post-tax profit 50



Income statement 2006 incurrals Prior year runoff

Expected Actual Expected Actual

Premium 1 000 1 000 0 0

Expenses (100) (100) (50) (50)

Claims (60) (65) (1 015) (1 010)

Reserve change (910) (980) 910 980

Interest 25 25 275 275

Pre-tax profit (45) (120) 120 195

Income tax 15 40 (40) (65)

Post-tax profit (30) (80) 80 130



Calendar year results can be split by incurral year

Incurral Profit

year during 2006

1990 $a

1991 $b

… …

2006 $y

Total $z reconciles to 2006 financials

Easier to identify areas for investigation, e.g. poor terminations

Clearer picture of reserve strain and margin releases



Triangular results since inception can be built

Incurral Profit by calendar year Cumulative

year 1990 1991 … 2006 profit

1990 $ $ … $ $

1991 $ … $ $

… … … …

2006 $ $

Total $ $ … $ $

Group actuaries could benefit from P&C concepts

– Why do we apply them only for medical?Joel CornbergCIA General Meeting19 October 2006


Challenges with incurral year methods

Need for care in allocating

– Investment income

– IBNR

Excessive reliance on formulas

– Day-to-day business knowledge is still key


Embedded value


Embedded value

Origins

European companies, 1980’s

Used by investment analysts

Publicly disclosed by many large L&H insurers


Embedded value

Definition

Present value of future profits on inforce business

Plus required capital

Minus cost of tying up capital


Embedded value

Related concepts

IRR-style approach

Requires identification of a hurdle rate

EV > 0 implies value creation

Economic profit is a hot issue

Source of earnings analysis

Inforce versus new business


Embedded value

Challenges with embedded value analysis

Complicated

Requires some corporate finance expertise

–hurdle rate

–investment assumptions

Definition of new business for Group

Again, no substitute for knowing your business



Current simplistic analysis may not be sufficient

Consider other approaches

Incurral year and EV offer useful insights

Multiple tools are needed

We can’t stand still


Questions


are your ltd results saying what you think they are? joel cornberg cia general meeting 19 october...

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