session 11 panel discussion: the disability reinsurance market - soa · • “relatively”...

Session 11 PD, The Disability Reinsurance Market

Moderator: Tasha S. Khan, FSA, MAAA

Presenters: Jeff Babino Curt Zepeda

GUY CARPENTER

GC SMITH GROUPDISABILITY SEGMENTSOUTH PORTLAND, ME

Navigate Emerging Issues

• Slow organic growth – NBOC, NLOC, low salary increases – improving over 2011-2014

• Persistency improving – x for companies “flushing” book via aggressive renewal actions

• Consolidation – more buyers than sellers• VLTD – Worksite – fueled by private exchanges -ACA• Integrated STD/LTD experience disappointing – FMLA

resulting in increased STD • WOP integration leads to more WOP claims• Profits improving – ROE still below expectations • Increased cost shifting among employee benefits• Average premium per life up slightly• Cross subsidization of core / buy up is emerging for

LTD – previously a Life issue• Significant management changes • Investment income down• Aging of population

State of the Group LTD Direct Market

• Market is limited to a few key players─ Retraction of retro capacity ─ Organic growth Issues

• Hardening of rates, terms, conditions─ European Accounting Standards / Solvency II

• Moving to exposure based rating─ Matrix – SIC, Maximum, EP

• Increased retention─ Access to MGU consulting services

• Little product development─ Major disability carriers want volatility protection

State of the Group LTD Reinsurance Market

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• Pressure on in-force rates: ─ Aging of the population─ Investment return─ Social Security awards

• STD on the front-end of LTD• “Or” – definition of disability• Increased value assigned to gross-ups (100% Contributory)• Replacement ratio – plan designs / taxability• Greater spread between low and high salaried employees• Simplified or eliminated “occ” coding• Use of Predictive Analytics

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Group LTD Rate Trends

• Automatic Excess• Private Label / Turnkey• Non-traditional Reinsurance

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Disability Reinsurance Market Overview

Turn-Key Reinsurance SolutionsFeatures and Benefits

• Full transactional and support service • Allows new market entry without overly

burdensome development costs• Valuable offering for LTD

accommodation products

• “Relatively” inflexible - one size fits all • Primary company cedes 50% or more

of the risk• No multinational offering currently

available• Potential channel conflict with

reinsurers

Full service offering, including pricing, valuation, underwriting, product development, product filing and compliance, comprehensive claims

management, sales training, etc.

Advantages Disadvantages

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• Disability RMS – Sun Life • Group Reinsurance Plus (GRP) – Hartford• Custom Disability Services (CDS) - Reliance Standard Life

Turn-Key Reinsurance SolutionsReinsurance Markets

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Excess of Loss Reinsurance SolutionsFeatures and Benefits

• Flexible reinsurance arrangement –“follow the fortunes”

• Access to consulting services with minimal risk transfer

• Ability to customize relationship and support services to meet objectives - fill holes, strengthen shortcomings

• PPXOL cover - mitigates shock claims, smooths underwriting results

• Little or no transactional support within treaty parameters

• Multinational offerings are under-developed

• Minimal volatility protection

Automatic treaty with specific operating parameters supported by a suite of consulting services, including actuarial, market research, filing /

compliance, complex claim management, competitive intelligence

Advantages Disadvantages

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• Swiss Re • RGA• Munich Re• General Re

Excess of Loss Reinsurance SolutionsReinsurance Markets

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The Excess Disability Reinsurance Market

Society of Actuaries Meeting June 15, 2016

Curt ZepedaVice President

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Key Takeaways

Irrational behavior in the market affects reinsurance costs 1

There are different ways to pay for reinsurance; however some are more costly than others 2

Contributing factors to reinsurance volatility 3

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Excess Reinsurance

Risk selection

Reinsurance pricing basis

Volatility

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Risk Selection

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Risk Selection

Ceding company is allowed to automatically bind reinsurer up to certain maximum monthly benefit. Higher benefit amounts require reinsurer review and approval, i.e. facultative underwriting

RGA performed approximately 800 facultative reviews in 2015

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection

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Risk Selection Small groups (<100 lives)

• Clinics, small law and financial firms

• Either relatively few number of people who qualify for larger maximum or carve-out cover for professionals only

• Variable compensation

• High earners tend to be male, age 50 - 70

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Risk Selection Large groups (1000+ lives)

• Especially law firms and health care systems have a large number of employees who qualify for a high maximum.

• Again, high earners tend to be male, 50 – 70, with variable compensation

• Underwriters at insurance companies tend to give more credence to good experience and ignore large exposure risk

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Risk Selection Group is looking to enrich the plan design on roughly 25% of our

facultative reviews

• Increasing the maximum benefit

• Adding own specialty definition of disability

• Changing the definition of covered earnings

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Risk Selection Census updates

• Long periods of time between census collection

• Little to no audit of the census

• Changing definition of covered earnings

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Name2015 Reins Exposure

2016 Reins Exposure

2015 Census Date

2016 Census Date Notes

Co. 1 8,756,239 10,776,969 01/25/2012 1/25/2012 Change in maximum from 15k to 25k

Co. 2 6,630,096 8,326,624 08/21/2012 8/21/2012 Change in benpct from 60% to 67%

Co. 3 2,239,970 4,556,331 07/22/2010 1/1/2016 New census

Co. 4 3,309,530 5,102,405 11/15/2011 1/1/2016 New census

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Name2014 Reins Exposure

2015 Reins Exposure

2016 Reins Exposure

2014 Reins Lives

2015 Reins Lives

2016 Reins Lives

Co. 1 4,381,147 4,381,147 5,101,590 421 421 458

Co. 2 2,400,782 2,400,782 2,400,782 296 296 296

Co. 3 2,057,401 2,057,390 2,057,390 366 366 366

Co. 4 423,624 1,759,708 1,759,708 65 233 233

Co. 5 269,388 1,510,887 1,294,743 72 466 394

Co. 6 430,228 1,233,947 803,719 137 361 224

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Name 2012 Reins Lives 2013 Reins Lives2012 Reins Exposure 2013 Reins Exposure

Co. 1 1395 2,002 7,721,968 10,644,989

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Reinsurance Pricing Basis

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Exposure based rate • Per $100 of reinsured monthly benefit; e.g. $0.85/100 of reinsured

monthly volume• Table rates which vary by age, gender, elimination period

Percent of premium rate• Percent of total insured premium; e.g. 1.25%• Percent of insured premium for groups with maximums greater than

the excess level; e.g. 15.70%

Set of table rates where the percent of premium varies based on industry and plan maximum.

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Table Rates

10k - 15k max 15k - 20k max 20k - 25k max 25k < maxHealthcare 25% 30% 34% 35%Investment 10% 20% 30% 33%Lawyers 4% 8% 15% 20%Other 1% 3% 5% 7%

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Exposure based rate - reinsurance premium tracks with changes in the reinsured exposure

Percent of premium rate - reinsurance premium does not accurately reflect changes in reinsured exposure• Not an insurance risk • Additional risk margin required• Introduces leverage trend into the reinsurance pricing model

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Group 1 Group 2

Same percent of premium rate applies to both


Age Gender Occ Salary Benefit61 M Physician $728,000 $15,00054 M President & CEO $630,573 $15,00058 M Physician $599,997 $15,00057 M Physician $599,997 $15,00049 M Physician $599,997 $15,00056 M Physician $550,014 $15,00047 M Physician $536,702 $15,00061 M Physician $450,008 $15,00055 M Physician $450,008 $15,00039 M Physician $450,008 $15,00048 M Physician-Hospitalist $426,400 $15,00061 F Physician (w/accrual $400,005 $15,00055 M Physician $377,000 $15,00056 M SVP & Chief Financia $358,758 $15,00034 M Physician $350,002 $15,00036 M Physician $350,002 $15,00058 M Physician $350,002 $15,00060 M Physician $350,002 $15,00042 M VP- Dek Med Physici $345,238 $15,00047 M Exec VP - COO $343,117 $15,00056 M Medical Dir- Hospita $312,000 $15,00066 M Physician-Hospitalist $309,587 $15,00058 F Physician $299,998 $15,00053 F Physician $295,027 $14,75134 M Physician-Hospitalist $276,723 $13,836

Age Gender Occ Salary Benefit61 M Physician 728,000$ 15,000$ 54 M President & CEO 630,573$ 15,000$ 58 M Physician 599,997$ 15,000$ 57 F Nurse Manager 109,158$ 5,458$ 40 F Interim Manager 108,514$ 5,426$ 53 F Pharmacist 7On/7Off 108,514$ 5,426$ 61 F Manager Practice II 108,118$ 5,406$ 52 F Nurse Manager 107,910$ 5,396$ 43 F Dir Patient Access 107,640$ 5,382$ 63 F Nurse Admin Superv 107,141$ 5,357$ 34 F Pharmacist Clinical 106,995$ 5,350$ 64 F Nurse Manager 106,205$ 5,310$ 36 F Nurse Manager 106,101$ 5,305$ 37 F Physician Assistant ( 106,038$ 5,302$ 55 F Nurse Manager 105,997$ 5,300$ 42 F Patient Account Rep 35,339$ 1,767$ 64 F Medical Technologis 35,318$ 1,766$ 42 M HIM Operations Team 35,298$ 1,765$ 33 F Front Office Coord/M 35,252$ 1,763$ 35 F Intake/Referral Rep 35,214$ 1,761$ 59 F Surgical Technologist 35,212$ 1,761$ 45 F Front Office Coordin 35,188$ 1,759$ 44 F Coder I - Medical Rec 35,173$ 1,759$ 38 F Patient Account Rep 35,173$ 1,759$ 59 F Patient Service Coord 35,173$ 1,759$

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5% increase in payroll, benefit, & monthly insured premium

Year 1 - Insurance

$10,000 covered monthly earnings

X 60% LTD benefit

= $6000 monthly benefit if disabled

Ins. rate = .50/100 of CME

$50 monthly insured premium

Year 2 - Insurance

Assume 5% salary increase

$10,000 x 1.05 = $10,500

X 60% LTD benefit

= $6300 monthly benefit if disabled

Ins. rate = .50/100 of CME

$52.50 monthly insured premium

Leveraging associated with % of premium


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Reinsured premium increased by 5% but reinsured benefit increased by 30%

Year 1 - Reinsurance

Assume reinsurance rate = 6.5% of insured premium

$50 monthly insured premium x 6.5% = $3.25 monthly reinsured premium

$6000 monthly insured benefit

Assume $5000 retained by ins. co.

$1000 monthly reinsured benefit

Year 2 - Reinsurance

Assume reinsurance rate = 6.5% of insured premium

$52.50 monthly insured premium x 6.5% = $3.41 monthly reinsured premium

$6300 monthly insured benefit

Assume $5000 retained by ins. co.

$1300 monthly reinsured benefit

Leveraging associated with % of premium


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Volatility

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Volatility

We measure reinsured volatility through Monte Carlo simulation – typically 10,000 simulations

Only models statistical volatility of incurred claims

Risk margin based on reinsured volatility and rate basis

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Volatility Monte Carlo Simulation Results

Excess Excess Excess

Percentile 6,000 8,000 10,000

0.0% 436,509 52,424 1,227

1.0% 808,579 235,478 35,462

2.5% 968,258 316,573 60,732

5.0% 1,158,662 409,522 91,810

10.0% 1,389,548 537,126 145,993

20.0% 1,737,815 731,626 238,168

30.0% 1,991,545 892,977 332,256

40.0% 2,239,322 1,058,970 428,967

50.0% 2,494,100 1,229,767 535,300

60.0% 2,756,970 1,411,661 651,752

70.0% 3,075,858 1,627,439 783,203

80.0% 3,436,000 1,895,579 970,534

90.0% 4,012,472 2,278,434 1,250,036

95.0% 4,526,378 2,683,856 1,496,720

97.5% 5,028,708 3,036,431 1,763,561

99.0% 5,555,886 3,456,986 2,109,766

100.0% 9,088,601 5,968,730 3,669,987

SUMMARY STATISTICS

Excess Excess Excess

6,000 8,000 10,000

Average Claims 2,622,184 1,342,412 631,133

Standard Deviation 1,040,477 707,490 454,424

Coeff of Variation 39.7% 52.7% 72.0%

Max Claim Year 9,088,601 5,968,730 3,669,987

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Volatility

Mix of business – exposure to certain industries; e.g. healthcare

Changes in retention (reinsured excess) level

Underwriting/claim practices

Reserve changes

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Volatility

Volatility year to year in reinsured claim experience • Typically less claim incidence but higher severity and longer

duration• Diagnosis based reserving especially on a small number of claims

Loss ratio by year can vary greatly: 20% - 250%

Over reliance on experience creates volatility

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Key Takeaways

Irrational behavior in the market affects reinsurance costs 1

There are different ways to pay for reinsurance; however some are more costly than others 2

Contributing factors to reinsurance volatility 3

©2016 RGA. All rights reserved.No part of this publication may be reproduced in any form without the prior permission of RGA. The information in this publication is for the exclusive, internal use of the recipient and may not be relied upon by any other party other than the recipient and its affiliates, or published, quoted or disseminated to any party other than the recipient without the prior written consent of RGA.

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ALTERNATIVE DISABILITY REINSURANCE PRODUCT DESIGNS

• The vast majority of LTD reinsurance for mature players in the Group LTD space has been per person excess of loss reinsurance

• New entrants and LTD writers without scale have tended to rely more on turn-key quota share reinsurance

• The group benefits reinsurance arena has not been a hotbed of innovation – Reinsurers do not want to cannibalize their inforce business – LTD product line is more complex increasing the barrier to entry for new reinsurers – Primary writers tend to look at what competitors are doing for validation – Alternative structures often require more refined exposure data

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Alternative Structural Design Considerations

Drivers of Reinsurance Product Designs

• Volatility management– Quarterly aggregate volatility– Quarterly product volatility– High maximum limits – Segment volatility (e.g., doctors and lawyers)

• Capital efficiency – Statutory capital– Economic capital

• Risk tolerance statements giving rise to reinsurance program design– Ratings agencies and ORSA driven

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Concept A: Portfolio Carving (by Volatility)

• Segments within the portfolio may have significantly different risk profiles• Retain stable segments / reinsure volatile segments• Could be done on a quota share, XOL or fac basis• Design consideration include mix of XOL and quota share, segment retentions and

profit commissions

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Segment D (e.g., Healthcare)

Segment C (e.g., Attorneys > $15,000/mo)

Segment A

Segment B Volatile Segment D

Quota Share (e.g., 60%)Retained

Concept B: Traditional Aggregate Excess of Loss

• Traditional aggregate excess of loss reinsurance provides protection for excessive: – Frequency; or– Severity; or– Both frequency and severity

• Design options include:– Calendar year basis– Risks attaching basis – Segment carve-out– Rolling four quarters

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Limit:10 Points

Retention:110% Expected Loss

Concept C: Quarterly Volatility Protection

• Aggregate product• Provides quarterly earnings volatility protection in the event of higher than expected

claim incidence• Quarterly reinsurance payout is determined by the number and size of claims reported • Minimum payout threshold along with quarterly and annual caps on total payout• Multiple year agreement with an experience refund

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Concept C: Quarterly Volatility Protection

• Public companies manage to quarterly earnings and some to within a targeted loss ratio range• Reinsurers may be unwilling to assume unlimited frequency and severity risk; concerns may

be alleviated with:– Dual triggers (frequency > 20% expected + UNL satisfied) maximum payout cap– Exposure based adjustments to flex retention based on business mix– Overfunding and experience refunds

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Concept D: Bifurcate Short and Long Tail Risk

Bifurcation by Duration of Claim• Unpredictability of LTD claims

greatest when reserve is first set up• Reserves on seasoned claims tend

to be more stable • Distinct durations may attract entirely

new markets to the LTD space• Select reinsurers (Lloyd’s) have

appetite for short tail risk• Offshore mortality/longevity markets

have regulatory and tax advantages more advantageous for long duration/tail risk

• Modeling and quality of data is critical to understanding and presenting bifurcated risks

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Short Tail Reinsurer(s)

Retention

Long TailReinsurer(s)

Retention

< 5 year duration 5 year+ durations

Concept E: Financial Reinsurance for Statutory Capital Relief

• Statutory Reserves for Disabled Lives are subject to statutory prescription• As with many statutory approaches, the focus is on stability not economics so there are ways

to transfer the capital requirements to a third party reinsurer• Transaction can be fee based with recapture options for cedant or a permanent arrangement• Fee Based arrangements are attracting increased regulatory examination. Risk management

techniques such as caps subject to particular scrutiny• Every block is unique. Terms will reflect underlying conservatism inherent in the DLR block

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Concept E: Financial Reinsurance for Statutory Capital Relief

• Typical motivations for financial reinsurance include:– Enhanced ratings (via enhanced RBC ratios)– Increased capital flexibility– Improved return on capital

• Transaction designed to release statutory capital at a low economic cost (+/- 100 bps of ceded premium) using offshore reinsurer not subject to same regulatory capital requirements

• Key features of transaction:– Typically in form of modified coinsurance (up to 80%) with experience refund– Reserves, losses and investment risk ceded to reinsurer, but assets typically held in trust

for the benefit of the primary carrier– Open-ended term with bilateral termination rights– Excess of loss (e.g., 110% loss ratio) transferred to ceding company

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A

Retention

Private Placement

• Lowest quote and winner takes all

• Single reinsurer supports placement

• Encourages reinsurers to put out most competitive quote

• Difficult to build comfort with reinsurers that don’t support the program

• Most common placement method in the LTD market today

LTD Placement Strategies – Top tier carriers

Segmented Private Placement

• Break exposure into more homogeneous risk groups

• Reinsurers bid on separate treaties (e.g., Doctors / Attorneys vs All Other)

• Varying reinsurer appetite may yield more effective solution

• Could lower retention for segment with greater volatility

• Greater administrative intensity

SyndicatedPlacement

• Lead quoting market signed to the largest share and following markets offered a chance to participate and share the risk

• Allows customer to establish new market capacity and grow support as reinsurers’ comfort increases

Layered Placement

• Break program into separate layers

• Distinct layers may exploit reinsurer risk preferences

• Strategy could be executed with one reinsurer per treaty or a treaty could be syndicated if there’s enough premium.

• Strategy works best with detailed exposure for high excess layers

A

Ret.

B

Ret.

A

Retention

B CLayer 2

Retention

Layer 1

Reinsurer Selection Criteria

• Financial Security• In depth knowledge of primary industry best practices – comprehensive consulting services

– Actuarial – pricing, reserving, reporting– Claims– Underwriting– Product – Marketing sales strategies– Legislative, compliance, filing support

• Experienced and responsive service team• Ease of doing business

– Flexibility– Facultative support

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Reinsurance Program Considerations

• Cost effective risk protection – maximize financial value• Reduce concentration of risk or risk transfer• Minimize volatility of quarterly earnings• Integral part of capital management plan• Reduce surplus strain• Increase profitability of underlying products

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Smith LTD Management Group, Inc. is a disability and reinsurance consultant and a subsidiary of Guy Carpenter & Company, LLC, which is a global leader in providing risk and reinsurance intermediary services. Guy Carpenter is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital.

Smith Group provides this presentation for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Smith Group makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues.

Statements concerning tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal orregulatory advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Smith Group undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a resultof new information, research, future events or otherwise.

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session 11 panel discussion: the disability reinsurance market - soa · • “relatively”...

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