quantitative impact of the unisex ruling
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Quantitative Impact of the Unisex Rulingof the Unisex Ruling
Dr. Ralf Krüger
Warsaw, 30th May 2012
� Pricing challenges
Agenda
� Pricing strategy /
requirements for success
� New product opportunities
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 2Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 2
Where to set the unisex rate?
Average life expectancy at birth (EU 27 countries) if born in 2008:
Males 76 Females 82
Female/male relative risk of death by age – German population:
Women on
average less than
half the risk of
Source: Eurostat Newsrelease for International Women's Day - 5th May 2010
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
Source: German Statistical Bureau, population table 2004-2006
half the risk of
men during
insurance ages
3
Where to set the unisex rate?
Male
risk / price
Female
The average price?
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 4
Female
risk / price
Alas not so easy…
Factors influencing gender mix
Basically the gender mix may vary with every differentiation factor and
product feature.
� company
� age at entry
� age attained
� sum insured
� distribution channel
� smoker status
� occupational group
� lump sum settlement and other
options
� changes over time
(competitor behaviour, changes in
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� duration of insurance
� postcode
(competitor behaviour, changes in
the general framework)
5
History of the Swiss Re -Bestandsmonitoring in Germany
1996: First portfolio analysis
– 14 direct insurance companies
– tariffs: endowments, term life, disability riders, annuities
– roughly 6 million data sets
2011: 16th client event
– 31 direct insurance companies (one third of Germany's direct
insurance market)
– 20 tariffs (… + special annuities, stand-alone disability insurance, LTC
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 6
– 20 tariffs (… + special annuities, stand-alone disability insurance, LTC
etc.)
– 35 million data sets
6
Number of policies of key products
Male Female Total
Term life 2.4 1.4 3.8
Endowments 6.8 4.6 11.4
Unit-linked 1.5 1.1 2.6
Annuities 4.2 3.8 8.0
Disability rider 2.5 1.3 3.8
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 77
Stand-alone disability insurance 0.8 0.4 1.2
Figures in million policies
Influencing factor: sum insured
Male Ratio, by classes of sum insured, new business (2005 – 2009)
100%
25%
50%
75%
100%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 8
0%
25%
5.000 12.500 25.000 37.500 50.000 100.000 150.000 250.000 500.000 >
500.000
Endowment Term life Unit-linked
100%
Influencing factors: age at entry and company
Term Life - male ratio, weighted by si, new business (2005 – 2009)
25%
50%
75%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
25%
20 30 40 50 60
25%-Quartile Median 75%-Quartile Maximum Minimum
9
75%quartile – 25%quartile: 11%pt
maximum - minimum: 44%pt
age at
entry
100%
Influencing factors: age at entry and company
Disability Rider - male ratio, weighted by si, new business (2005 – 2009)
25%
50%
75%
100%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
25%
15 25 35 45 55 65
25%-Quartile Median 75%-Quartile Maximum Minimum
10
75%quartile – 25%quartile: 12%pt
maximum - minimum: 44%pt
age at
entry
100%
Influencing factors: age at entry and company
Conventional Annuity - male ratio, weighted by si, payment period, new business (2005 – 2009)
25%
50%
75%
100%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
25%
50 55 60 65 70 75 80
25%-Quartile Median 75%-Quartile Minimum Maximum
11
75%quartile – 25%quartile: 23%pt
maximum - minimum: 60%pt
age at
entry
100%
Influencing factor: sales channel
Term Life -male ratio, weighted by volume, new business (2005 – 2009),by sales channel
25%
50%
75%
100%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
25%
20 30 40 50 60
Agent Broker Pyramid Bank Direct
12
age at
entry
75%
Influencing factor: region (postcode)
Term Life -male ratio, weighted by volume, new business (2005 – 2009), by region
25%
50%
75%
Leipzig, Dresden
Berlin, Brandenburg
Bremen, Hamburg
Central Germany
Very West
Cologne
Frankfurt, Main
+7%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
25%
20 30 40 50 60
Frankfurt, Main
South West, Stuttgart
Munich
Franconia
13
age at
entry
� Variability between companies is considerable
– gender ratios have to be specifically determined for every company
What does this tell us so far?
– gender ratios have to be specifically determined for every company
– there is no single ratio/solution which will work for all
� And most important of all, past buying behaviour may change significantly
in face of major price changes
– and how much it changes may also be different by all the same factors
– e.g. sales channel: tied agent versus independent broker
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� A "competitive advantage" afforded by past high female customer ratios,
could turn out to be a cause of serious losses when more males start to
buy at that price
14
� Coordinate unisex pricing decision with marketing
e.g. if assuming high percentage of females, need to advertise heavily to women
Requirements for success
� Closely monitor new business, and also lapse rates
need to be sure that what you assumed is really happening
� Monitor what your competitors are doing
this will influence who buys your products
� Be ready to react fast
ensure actuarial and other resource available
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� Introduce new differentiated products early
it helps prevent the mutually destructive price spiral which is otherwise a risk
15
Going back to the earlier slide
If you did assume 50/50, apart from losing a lot of money what happens?
The newspapers report a 50% price
100 €
75 €
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 16
The newspapers report a 50% price
rise for women and only a 25%
reduction for men, i.e. you will
beaccused of profiteering whatever
you do
50 €
Possible modelling of the gender mix
� "Play it safe" (e.g. annuities: female table for all)
– calculation of premiums– calculation of premiums
– calculation of actuarial reserves
� Market-wide unisex aggregate mortality table
� Company specific gender mix of:
– current new business
– current business in force
– current new business with projection into the future (mortality and
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 17
– current new business with projection into the future (mortality and
lapses)
– projected business in force from current layers of new business
Lapse rates by gender
140%
German pool data - lapsefemale /lapsemale
40%
60%
80%
100%
120%
140%
Endowment
Term life
Unit-linked
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
policy
year
18
0%
20%
40%
1 3 5 7 9 11 13 15 17 19
Unit-linked
75%
Projection of male ratio, term life
German best estimate mortality and lapse experience
25%
50%
75%
20
30
40
50
age at
entry
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
20 30 40 50 60
50
19
attained age
75%
Projection of male ratio, term life
German best estimate mortality and lapse experience
with 1%pt-increase for females
25%
50%
75%
20
30
40
50
age at
entry
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
20 30 40 50 60
50
20
attained age
Projection of male ratio, annuity
German best estimate mortality and lapse experience
accumulation period
25%
50%
75%
20
30
40
50
age at
entry
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
20 30 40 50 60
21
attained age
Projection of male ratio, annuity
German best estimate mortality
payout period
25%
50%
75%
45
55
65
75
age at
start of pp
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0%
45 55 65 75 85 95 105 115
75
22
attained age
Lump sum option
Conventional annuities / German pool data
percentage of policyholders exercising the lump sum option
40%
60%
80%
100%males
females
upper quartile
of all
companies
median of all
Legend
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 23
0%
20%
40%
2002 2003 2004 2005 2006 2007 2008 2009 2010
median of all
companies
lower quartile
of all
companies
Example scenarios: changes of behaviour regarding lump sum option
Initial business in force 10.000 deferred policies, male ratio 60%
currently: transition to annuity payment period: 20% of insured lives
males: 6.000*20% =1.200
females: 4.000*20% = 800
male ratio of
annuitants: 60%
scenario1:
10% of the males currently accepting annuity payments now opt for lump sum
settlement
10% of the females currently deciding on lump sum settlement now go for annuity
payments
males: 1.200 – 120 = 1.080 male ratio of
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 24
males: 1.200 – 120 = 1.080
females: 800 + 3.200*10% = 800 + 320 = 1.120
male ratio of
annuitants: 49%
scenario 2: -20% males, +20% females: male ratio of annuitants: 40%
scenario 3: -50% males, +50% females: male ratio of annuitants: 20%
� Subject more complex than it first appears
� Multitude of factors have an impact on the gender mix
Where does this leave us?
� There isn't one solution for all companies.
� Static modelling not sufficient
� projection
� Strong recommendation:
– implement a monitoring process for gender mix
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
– closely monitor lapse rates, they can exert considerable influence on all
products
� How many tables can be implemented?
25
Future product opportunities
� Sell more cost neutral benefits, e.g. joint life policies
� Make products more cost neutral, e.g. differentiate benefits in ways which � Make products more cost neutral, e.g. differentiate benefits in ways which
compensate the lower risk gender
� Sell more to the lower risk group to reduce aggregate price
– marketing messages directed more (or exclusively) at lower risk gender
– direct marketing to existing insured lives of one gender only
– additionally reward your agents based on male/female ratio
� Male/Female products
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� Alternative segmentation, e.g. full preferred, or better use of known risk
factors (occupation, smoking, education, income, etc)
� Alternative risk selection, e.g. predictive underwriting
26
� No discrimination
� Easily and reliably captured in the application form
What attributes should differentiating factors possess?
� Easily and reliably captured in the application form
� Consistent over time
� Large number of people to meet the criterion
� High differential in the actuarial basis
� Good data
� Awareness of the interdependencies with other criteria (preferably no
correlation)
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
correlation)
Not all criteria will always be met simultaneously.
27
Smoker/non-smoker
300%
Smoker extra mortality / Germany
50%
100%
150%
200%
250%
300%
Males
Females
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 28
0%
50%
20 25 30 35 40 45 50 55 60 65
Source: German insurance table DAV 2008 Tage
Mortality level based on Swiss Re pool data for disability products
200%
Differentiation by occupational groups
Occupational0%
50%
100%
150%
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 29
Occupational
classes
Occupation exerts considerable influence on mortality – not currently reflected in
underwriting or price
0%
1 6 11 16
Claim ratio Men Smoothing Men
Claim ratio Women Smoothing Women
7
Differentiation by education
Life expectancy by education for Swiss Male: difference in years between lowest
(compulsory schooling) and three higher categories
2
3
4
5
6
7
Vocational training
Upper secondary education
University education
Ad
dit
ion
al li
fe e
xp
ecta
ncy (
ye
ars
)
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
0
1
30
Ad
dit
ion
al li
fe e
xp
ecta
ncy (
ye
ars
)
Age
(Life expectancy lowest class)
Source: Swiss Med Wkly 2006; 136: 145-148
Excess mortality according to family status
Longitudinal Studies Center - Scotland Max Planck Institut Rostock
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 31
Use this knowledge in designing new products / product riders, e.g. free children's
accident cover when you buy term assurance - the cost will be more than covered by
the better mortality of the parent (especially if sell joint life)
Summary
� The ECJ ruling represents a real loss for the industry and its customers
� Expect a volatile period for pricing, there may not be a "right" answer� Expect a volatile period for pricing, there may not be a "right" answer
� We have a great opportunity to think afresh how we assess risks and
design products
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 32
Quantitative Impact of the Unisex Rulingof the Unisex Ruling
Dr. Ralf Krüger
Warsaw, 30th May 2012
Thank you
Legal frameworkLegal framework
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012 34
Directive 2004/113/EC of 13 December 2004
� Article 5(1): Member States shall ensure that in all new contracts concluded after
Legal Framework
� Article 5(1): Member States shall ensure that in all new contracts concluded after
21 December 2007 at the latest, the use of sex as a factor in the calculation of
premiums and benefits for the purposes of insurance and related financial services
shall not result in differences in individuals' premiums and benefits.
� Article 5(2): Notwithstanding paragraph 1, Member States may decide before
21 December 2007 to permit proportionate differences in individuals' premiums
and benefits where the use of sex is a determining factor in the assessment of risk
based on relevant and accurate actuarial and statistical data.
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
European Court of Justice judgement 1 March 2011
"Article 5(2) of Council Directive 2004/113/EC of 13 December 2004 implementing
the principle of equal treatment between men and women in the access to and supply
of goods and services is invalid with effect from 21 December 2012."
35
� Ruling only affects contracts issued after 21 December 2012; contracts
issued before this date remain unaffected
� depending on national legislation
Guidelines of the European Commission (22 December 2011)
� depending on national legislation
� Gender can be used as a variable for the calculation of actuarial reserves
and for internal pricing to ensure the sustainability of the aggregate rate.
� depending on national legislation
� Reinsurance rates can be calculated with gender specific actuarial
assumptions if the rate offered to the consumer is independent of gender.
� Gender specific marketing and advertising is permitted.
no one must be refused access to a certain product purely because of
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� no one must be refused access to a certain product purely because of
their gender.
36
� Risk assessment of individual risks can still reflect the different risk
factors (e.g. state of health or family history). The physiological
differences between gender can be used in the process of individual risk
Guidelines of the European Commission (22 December 2011)
differences between gender can be used in the process of individual risk
assessment.
� Products or options tailored to facts concerning men or women
exclusively are possible.
� Risk factors which might have a gender specific component are still
possible as long as they are genuine and independent risk factors.
� Company pension schemes formally not affected by the decision
but a lot of specific issues will presumably be affected by unisex all the
Krüger | Quantitative Impact of the Unisex Ruling | 30th May, 2012
� but a lot of specific issues will presumably be affected by unisex all the
same
37
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