Session 106 PD, Profitability Trends for Disability Insurance. Moderator: John R. Murphy, FSA, MAAA

Transcription

1 Session 106 PD, Profitability Trends for Disability Insurance Moderator: John R. Murphy, FSA, MAAA Presenters: Scott D. Haglund, FSA, MAAA John R. Murphy, FSA, MAAA Robert F. Wade, FSA, MAAA

2 2015 Society of Actuaries Annual Meeting Scott D. Haglund, FSA, MAAA, FLMI 106PD: Profitability Trends for Disability Insurance Tuesday, October 13, 2015

3 Individual Disability Industry Trends Annual statement data IDEC Report Blue collar market special considerations 2

4 Industry Trends Annual Statement Data Used annual statement information for top 39 companies. Followed their results over a ten year period In 2014, the 39 companies represented 99% of the industry premium Statement pages used Schedule H, Non-Cancelable Exhibit of Number of Policies, Accident & Health, Other Analysis of Operations Assets 3

5 Industry Trends Annual Statement Data Growth in Net Earned Premium (Schedule H, Non-Cancelable) 4,000, % 3,500, % Net Earned Premium, in Thousands 3,000,000 2,500,000 2,000,000 1,500,000 1,000, % 5.0% 4.0% 3.0% 2.0% Annual % Growth Rate 500, % % Net Earned Premium % Growth 4

6 Industry Trends Annual Statement Data Average Growth Rate 2004 to 2014, Direct Earned Premium, Census Area Groupings, Non-Cancelable A&H 6.0% 5.0% % of Net Earned Premium 4.0% 3.0% 2.0% Average 3.3% 1.0% 0.0% East North Central East South Central Mid Atlantic Mountain New England Pacific South Atlantic West North Central West South Central Non-Census 5

7 Industry Trends Annual Statement Data Incurred Losses as % of Net Earned Premium (Schedule H, Non-Cancelable) 70.0% 68.0% 66.0% % of Net Earned Premium 64.0% 62.0% 60.0% 58.0% Average 65.3% 56.0% 54.0%

8 Industry Trends Annual Statement Data Commissions and Expenses as % of Net Earned Premium (Schedule H, Non-Cancelable) 45.0% 40.0% 35.0% % of Net Earned Premium 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Total Expenses Commissions 7

9 Industry Trends Annual Statement Data Incurred Losses, Commissions and Expenses as % of Net Earned Premium (Schedule H, Non-Cancelable) 120.0% 100.0% % of Net Earned Premium 80.0% 60.0% 40.0% 20.0% 0.0% Inc Loss Ratio Expense Ratio 8

10 Industry Trends Annual Statement Data Underwriting Gain, Before Dividends, as % of Net Earned Premium (Schedule H, Non-Cancelable) 0.0% -2.0% % % of Net Earned Premium -6.0% -8.0% -10.0% -12.0% -14.0% -16.0% 9

11 Industry Trends Annual Statement Data % Growth in Inforce Policies (Exhibit of Number of Policies, Accident & Health, Other) 1.5% 1.0% 0.5% 0.0% -0.5% % -1.5% -2.0% -2.5% Average -1.8% -3.0% -3.5% -4.0% 10

12 Industry Trends Annual Statement Data Net Yield on Invested Assets % Net Yield on Invested Assets

13 Industry Trends 2012 IDEC Actual to Expected Incidence Ratios (2012 IDEC as Expected), By Study Period Class M Class 1 Class 2 Class 3/4 12

14 Industry Trends 2012 IDEC Actual to Expected Incidence Ratios, By Issue Year Pre Employer Sponsored Individually Sold 13

15 Industry Trends 2012 IDEC Actual to Expected Incidence Ratios, By Issue Year Pre California Florida Other 14

16 Industry Trends 2012 IDEC Actual to Expected Claim Termination Ratios, All Durations (Calendar Year of Issue) Pre

17 Industry Trends 2012 IDEC Actual to Expected Claim Termination Ratios, By Monthly Indemnity, All Durations California Florida Other States 16

18 Blue Collar / Small Employer Market Market is unique for several reasons Motivation Usually highly motivated so business can keep doors open Need for the coverage Income replacement, but also to keep business doors open Market penetration Particularly in blue collar market, not called on as often 17

19 Blue Collar / Small Employer Market Challenges Business or industry financial condition May not be a business existing for claimant to recover to Reaching the owner For some industries, finding the office / owner may be difficult Replacing the right level of income At times, difficult to determine what earnings are that need to be covered 18

20 Industry Trends 2012 IDEC Actual to Expected Incidence Ratios (by Monthly Indemnity) Acc & Sickness Overhead Exp Disability Buy Out Key Person 19

21 Industry Trends 2012 IDEC Actual to Expected Claim Termination Ratios, By Monthly Indemnity, All Durations Employer Sponsored 91.3% Individually Sold 102.6% 20

22 Summary Both favorable and unfavorable trends + Earned premium growth + Expense patterns + Incidence rates - Some challenges with underwriting gain - Lower investment returns - Challenges with policy growth Opportunities exist with blue collar / small employer market 21

23 GSI Profitability Trends SOA Annual Meeting, Austin, October 13, 2015 October 13, 2015

24 Agenda Introduction to GSI Market position and current sales trends Relation of GSI profitability to LTD and IDI profit patterns How current GSI trends may impact future profitability 23 October 13, 2015

25 Reasons for GSI from HR perspective Reverse Discrimination Recruitment and Retention Rate Stability 24 October 13, 2015

26 Income Protection Arrangements Public Plans Legislated Negotiated Uninsured Employer Plans Insured Employer Plans w/shorter Premium Guarantees Conditional Renewable Group Policy Form Individual Plans or Insured Employer Plan Longer Premiums Non-Cancellable Individual Policy Form Social Security State Paid Leave Workers Comp PERS PTO Sick Pay Plans ASO STD LTD Voluntary Worksite Association Medical UW 1 Life Multi-life No Med UW (GSI) Taxable Tax free 25 October 13, 2015

27 IDI Market Basics Features of IDI versus LTD Size (Sales) o Lower required loss ratios o Higher RBC o Longer premium guarantees $500 to $550 Million Growth (2010 to 2014) 2% Individual Disability Income Market Segments SEGMENT FEATURES MARKET SHARE '14 AGR Single Life Full medical & financial UW 40% 2% Multilife Full UW, Discounts, 3+ apps 15% 4% Worksite Short benefits, via employer 25% -2% GSI Case UW. No medical UW 20% 9% 26 October 13, 2015

28 Basic Theme - Current Status of GSI: IDI > GSI > LTD Pricing Points Morbidity Persistency Expenses? Where is this not true? Regulation: GSI aligns with IDI Markets: GSI aligns with LTD Distribution: GSI aligns with both 27 October 13, 2015

29 Pricing Points: IDI, GSI and LTD 28 October 13, 2015

30 Morbidity New IDI valuation table assigns a 79% incidence factor to Employer Sponsored Plans (e.g., GSI) Persistency GSI annual aggregate lapse rates 2% to 4% > IDI s LTD lapse rates 4% to 6% > GSI s Expenses Commissions Rates less for GSI than IDI but higher than LTD Operations less for acquisition, offset by lowering placement rates and higher maintenance costs 29 October 13, 2015

31 Current GSI Market Trends Greater competition Business model has succeeded Profitable and somewhat stable Internal and External Growing Riskiness Increasing income replacement rates Decreasing data quality and participation Experimentation 30 October 13, 2015

32 GSI Market Trends Competition Greater Competition Generate higher income replacement rates Other issues: AAW, Pre-X, Mental/Nervous External Competition Convergence with LTD Competition from surplus lines (Lloyd s) Internal Competition No new entrants Technology Investments Enrollment, Delivery, Billing 31 October 13, 2015

33 GSI Market Trends Risk Higher face amounts From $200 to $500/life Lower participation seen for voluntary cases What is the lowest acceptable participation level? Continuing experimentation in Case design, Technology applied, New markets (especially Employee paid) 32 October 13, 2015

34 GSI Future Profitability Positives If you bundle the right risks in the right way, you can waive medical UW & still keep long premium guarantees Sales growth continues Market likes rich benefits for executives and professional with easy placement Favorable impact of new technology to reduce costs Fewer competing carriers than in LTD and IDI Employer paid cases not particularly price sensitive, emphasis more on high benefit amounts Well designed LTD/GSI combo plans can act as a helpful damper on GSI morbidity 33 October 13, 2015

35 GSI Future Profitability Negatives Growth in GSI case churn puts pressure on carriers to accept mistakes of the past Morbidity more likely to rise than not Greater competition from LTD and Surplus Lines Great Recession showed GSI has LTD-like shock lapses Data uncertainty: Market wants ease of placement, like LTD. But inadequate data will damage profitability Intermediaries evolving fast to maximize their take Ease of entry can imply ease of exit so technology investments may increase lapsation 34 October 13, 2015

36 GSI Trends Conclusions Very interesting small market lying between two larger markets, inheriting attributes of each in dynamic, evolving ways This demands more experimentation than elsewhere Historically successful with growth and reasonable, but choppy, profitability Competition from internal players, adjacent markets, and intermediaries is increasing, eroding GSI margins Main risk vector is case design (UW) liberalization Must counter with UW discipline 35 October 13, 2015

37 TRENDS IN GROUP DISABILITY PROFITABILITY October 2015 John Murphy, FSA, MAAA

38 Topics 1. Morbidity 2. Social Security 3. Expenses 4. Economic environment

39 MORBIDITY TRENDS

40 Aging of the U.S. workforce Stable growth in average age over the past decade+ Baby Boomers Average Age of U.S. Workforce Average Age of US Source: US Bureau of Labor Statistics Workforce Source: US Bureau of Labor Statistics steeper Flatter recently Average aging per year Male Female Male Female Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 39

41 Age distribution of the U.S. workforce 30.0% Percentage of Workforce by Age Source: Bureau of Labor Statistics 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% < Workers under age 35 make up a lower % of the workforce Workers age 55+ now make up 22% of the workforce, compared to 14% in 2003 Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 40

42 Claim aging in 2008 SOA GLTD Experience Study Average Age of Open Claims Source: 2008 SOA GLTD Experience Study Average Age of Open Claims Source: 2008 SOA GLTD Experience Study Male Female Cancer Other M&N Aging in claim data consistent with BLS Female claims aging faster than males Varies by diagnosis Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 41

43 Population mortality improvement Population mortality improvement steady at 1% per year for working ages 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Male Avg Mortality Improvement Compressed Mortality File 1.3% Total % 2% 2% 1% 1% 0% -1% -1% -2% -2% Female Avg Mortality Improvement Compressed Mortality File 0.9% Total Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 42

44 Mortality rates by attained age and duration Excluding cancer, M&N and pregnancy 5.0 Mortality Rates by Attained Age and Duration Source: 2008 SOA GLTD Experience Study 500% % % % % 0.0 Q1 Q2 Q3 Q4 Year 2 Year 3 Year 4 Year 5 Year 6+ < Recovery as % of % Significantly higher mortality at older ages in Q1 and Q2 60+ mortality rates as % of age levels out at 200% starting in Q3 Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 43

45 Aging U.S. working population Q. Has your company measured an aging of LTD covered lives consistent with BLS data? A. Greater than BLS data B. Less than BLS data C. Haven t measured D. Can t measure 60% 13% 13% 13% A. B. C. D. Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 44

46 Incidence after 60 Q. What is the slope of incidence after age 60? A. Continues to go up B. Flattens out C. Goes down D. Can t measure 35% 43% 9% 13% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 45

47 Aging population why it matters A. Composite rating B. Rate guarantees C. Experience rating D. Renewing without census 38% 25% 25% 13% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 46

48 Effect of combo plans on LTD experience Q. Has your company measured the effect on LTD experience when LTD is packaged with STD? A. No difference from stand-alone LTD B. LTD experience is better when packaged with STD C. LTD experience is worse when packaged with STD D. Haven t measured 59% 29% 3% 9% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 47

49 SOCIAL SECURITY

50 Timing of Social Security approvals Q. Has your company seen a change in the length of time it takes for claimants to receive Social Security approval? A. Yes, the length of time has increased in the last few years B. Yes, the length of time has decreased in the last few years C. No change D. Haven t measured 66% 20% 7% 7% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 49

51 Rate of Social Security approvals Q. Has your company seen a change in the rate of approval for claimants applying for Social Security? A. Yes, the approval rate has increased in the last few years B. Yes, the approval rate has decreased in the last few years C. No change D. Haven t measured 19% 31% 23% 27% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 50

52 Effect of trust fund depletion Q. Has your company determined what the contractual requirements are regarding offsetting for Social Security for existing claimants if benefits are reduced pursuant to a trust fund depletion? A. Not required to change offsets on existing claimants B. Required to reduce the offset for existing claimants C. Haven t concluded yet D. Haven t thought about it yet 22% 48% 22% 7% Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved A. B. C. D SOA Annual Meeting - Austin, Texas 51

53 TRENDS IN INSURANCE COMPANY EXPENSES

54 Expense trends Expense optimization Focus on expense management since last recession Outsourcing gathering momentum Sceptical view of overhead allocation Expense investment Admin systems viewed as opportunity versus necessity Customer experience increasingly getting attention Big data needs better systems Data security is viewed as a business risk Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 53

55 ECONOMIC EFFECT ON LTD EXPERIENCE

56 LTD earnings trend Year over Year Earnings Trend for LTD Carriers Public Earnings Releases Q15 2Q15 Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Company 8 Company 9 Company 10 Company 11 Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 55

57 LTD earnings trend Number of LTD Carriers Reporting YoY Earnings Growth Public Earnings Releases Q15 2Q15 Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 56

58 U.S. economy The good news GDP above pre-recession peak Low unemployment Low inflation The bad news Home prices below pre-recession peak U6 unemployment higher than pre-recession Low interest rates Trends in Group Disability Profitability c 2015 Munich American Reassurance Company, all rights reserved 2015 SOA Annual Meeting - Austin, Texas 57