lotter actuarial partners 1 by: johan l lotter fia asa maaa managing partner: lotter actuarial...
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1Lotter Actuarial Partners
By: Johan L Lotter FIA ASA MAAAManaging Partner: Lotter Actuarial Partners Inc.October 2002
Web: lotteract.com
Critical Illness
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Provides Lump Sum on Diagnosis of any of the following “Big Five”
• Cancer• Heart Attack• Stroke• End Stage Renal Disease• Organ Transplant
What Does CI Insure?
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Many insurance companies cover other diseases too:
Multiple Sclerosis, Alzheimer’s, Blindness, Coma, Diabetes, Liver Failure, Deafness, Loss of Speech, Motor Neuron Disease, Paraplegia, Rheumatoid Arthritis, Severe Burns, Systemic Lupus, Total and Permanent Disability.Partial Benefits are often provided in case of heart surgery: Bypass, Angioplasty, Valve Surgery, Aorta Graft
What Does CI Insure?
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• Product Design and Pricing• Marketing and Distribution• Valuation• Regulation
Critical Illness
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• Product Invention
• Formulas
• Data
• Underwriting
CI Product Design and Pricing
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xi xq and
Product Design: Binomial Similarity
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One To One Correspondence
• Life Policy And Critical Illness Policy
• Critical Illness Rider
Unlimited Invention And Design Possibilities
Product Design
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Pricing Issues• Cost Of Raw Material
• Contract Terms Embedding Raw Material
xi
Pricing Issues
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Contract Terms Embedding Raw Material
•Term•Whole Life•Universal Life•Rider To Life Policy•Anything You Would Care To
Invent
Product Design
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Formulas
Two Major Formulas.
• Stand-Alone Product• Rider Benefit
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Formulas
• Stand-Alone Product.
• (Amount At Risk) * ix
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Acceleration Rider.
(Amount At Risk) X (ix +qx –kxqx)
= (Amount At Risk) X {ix
+(1 –kx)qx}
Formulas
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Data Edmund HalleyBorn 11-08-1656Died 01-14-1742Astronomer(Halley’s Comet)Actuary(Mortality TablesCity of Breslau)Deputy Controller(Royal Mint)Captain, Royal NavyHMS: Paramore PinkProfessorGeometrySavilian (Oxford)
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Data
• Insured Lives Data Overseas• No Insured Lives Data in USA• Population Data
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Insured Lives Data Overseas
• South Africa• United Kingdom• Australia• Canada
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Data
• “New” Product Everywhere • Overseas Insured Data Too
Thin• No Insured Lives Data in USA• Foreign Data Unsuitable• Population Data Available
Everywhere
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Data
• Use Population Data• Population Data in USA
– Cancer: SEER– Heart Attack: Framingham– Stroke: Framingham – End Stage Renal Failure: NIOH– Organ Transplant: UNOS
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Data Cancer: SEER
• Voluminous Data• Incidence Rates On Base of Well
and Sick• Over 41 Separate Cancer Sites
Covered• Over 14% of US Population in
Exposure
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Data Heart Attack, Stroke: Framingham
• Small Study• Old Study• First Class Data• Dawber Analysis Flawless
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Data: ESRD
• Medicare
Statistics
• University of
Michigan
ESRD Annual Incidence Rates (all ethnic groups)(1995)
Age Band Rate per Million0- 19 1320- 44 10945- 64 50865- 74 1,09775+ 1,035
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Data: Organ Transplant
– UNOSNumber of U.S. Transplants by Age Group: 1995
Age Heart- Heart Kidney Kidney- Liver Lung Pancreas Total
Lung Pancreas
N/A 1 1
1 1 72 7 0 121 1 0 202
1-5 1 22 117 0 201 0 0 341
6-10 3 17 146 0 61 1 0 228
11-17 2 41 367 0 71 1 0 482
18-34 29 187 2,696 177 323 21 36 3,469
35-49 27 501 3,198 153 739 37 42 4,697
50-64 4 824 1,917 4 639 32 5 3,425
65+ 0 41 206 0 46 0 0 293
Total 67 1,705 8,655 334 2,201 93 83 13,138
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Key Techniques
1. Population Statistics2. Converting SEER to Healthy
Denominator: Pollard Methods3. Converting Population Statistics
to Insured Lives Statistics: Portfolio Calibration
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Pollard Methods
People Get Critical Illnesses And Die. • Gathering Statistics• Model Interaction Of Illness And
Death
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Population Model Of Critical Illness
xl
xd Dx(aid) O
x(aid)
x(al)
n
x(ail) x (ail)
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Formulas: Population Model Of Critical Illness
21 xx
x mm
q
Lkmaid
Lmiail
llL
dll
lqd
xDx
xxnx
xxx
xxx
xxx
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1
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xxDx Lkmaid
xx
Dx
nx
x
xxOx
kmm
aidail(ail)
kmmaid
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Formulas: Population Model of Critical Illness
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Formulas: Population Model Of Critical Illness
x
nx
x (al)
(ail)i
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Rate Calibration
• Every Market Place Unique• Every Underwriting Regimen
Unique• Population Incidence Rates Cannot
be Used Without Calibration to Your Own Portfolio
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Calibration Technique
If you have: • Reliable population incidence rates • Reliable population death by cause
rates• Reliable portfolio death by cause
rates
AND
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Calibration Technique
If you know the Calibration formula
THENYou can make accurate rates
for any indigenous insurance portfolio
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Calibration Technique : Things We Know• Population Critical Illness Incidence
Rate
•Population Critical Illness Death Rate Proportions
Pxk
Pxi
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Calibration Technique : Things We Know
Insured Portfolio Critical IllnessIncidence Rates
Insured Portfolio GraduationFactors
Population Graduation Factors
Gxi
Pxw
Gxw
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Calibration Technique
The Calibration Formula
P
x
P
x
P
x
G
x
G
x
G
x
P
xG
x qkw
qkwii
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Calibration Technique
)
xl
s
xl
(1
)
xq
xk
D2
xq
xl
s
xl
(1
D1
xq
1
xw
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Underwriting and Calibration
Use the Calibration formula totransition from:
• Aggregate to smoker- non-smoker• Standard to substandard• Aggregate to Select and Ultimate
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Why Do All This Work?
• Why not just use rates already developed overseas?
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Why Do All This Work?
• “Fabric” of Foreign CI Experience Is Different
• Climate and Environment• Diagnostic Practice and Equipment• Integrity of Statistical Research• Availability of Treatments
– Bypass Surgery– Organ Transplant Expertise
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Special Considerations For Reinsurers
• Diversity of Definitions• Diversity of Elimination Periods• Diversity of Benefit Structures• Diversity of Portfolios
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Special Considerations For Reinsurers
• Diversity of Underwriting Considerations
• Anti-Selection in Large Policies• No Catastrophic Exposure• No “Suicide Risk”
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Marketing Considerations
• Stand-Alone• Rider
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Marketing Considerations:Standalone
• Affordability• Elimination Periods Unpopular• Health Insurance Filing• Loss Ratio Requirement• Benefits Lost on Death
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Marketing Considerations. Rider
• Affordability• Similarity to Acceleration on
Diagnosis of Only 12 or 24 Months to Live-”CI Light”
• Closes Apparent “Holes”• Elimination Period Not Needed
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Marketing Considerations. Successes and Failures
South Africa• Acceleration Rider• Affluent Policyholders• Usually Rider to Whole Life or
Endowment Policy
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Marketing Considerations. Successes and FailuresUK• Great Success to Date• Acceleration Rider 86% of UK sales• 14% Of UK Sales Standalone• 70 Companies Offer CI • $80 Billion Of In Force Business• Twice Size of Disability Market
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Marketing Considerations. Successes and FailuresUK• 3%-4% Of Population has Benefit• Parsimonious UK Social Medicine
System • Rider Products Usually Rider to
Mortgage Endowment
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Marketing Considerations. Successes and Failures
Australia• Acceleration Rider• Affluent Policyholders• Usually Rider to Whole Life or
Endowment Policy
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Marketing Considerations. Successes and Failures
Australia• Essential to Sales of Life Insurance• 31 of 33 Companies Offer CI• 2% Of Population has Benefit
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Marketing Considerations. Successes and Failures
Japan
• Very Popular• 4% Of Population Has Benefit
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Marketing Considerations. Successes and Failures
Europe• Standalone• To Date No Big Success• Social Security Lessens Needs For
Private Insurance• European Conservatism• Only German and Swiss Leadership
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Marketing Considerations. Successes and Failures
USA• Standalone• Usually Worksite Marketing• Moderate Success to Date• Optimistic Projections $3 Billion to $5
Billion Premium (to date) by 2010• Product Too Revolutionary?
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Marketing Considerations. Successes and Failures
USA PROBLEMS• Hard For Life Agents to
Understand?• There Are Few Individual Health
Agents.• Falls Between “Cracks” of Product
Development.
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Marketing Considerations. USA: What Will Work?
Rider Approach• Present as Acceleration Benefit
“Heavy”• Train Life Agents• Price Realistically• Underwrite Sensibly• Brand Benefit Under Name
Company
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Marketing Considerations. USA: What Will Work?
Standalone Approach• Present as Voluntary Health Insurance• Find Niches in Employee Situations• Worksite Marketing• Voluntary Benefits• Price Realistically• Underwrite Sensibly• Brand Benefit Under Name Company
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US Regulatory Constraints
• Standalone Product Approved in 46 States
• Holdouts (Sandy Meltzer)– Connecticut– Iowa– Pennsylvania– Utah
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US Regulatory Constraints
• Acceleration Rider Product• Approved in 50 States (Sandy
Meltzer)• Product Ready for Nationwide
Branding
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US Regulatory Constraints
• Six States Object to Waiting Period• 15 States Object to Elimination Period• Insured Must have Other Health Insurance
(CA)• Loss Ratios Vary From One State to Next
( 55% to 60%)• Not All States Allow Return Of Premium
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US Regulatory Constraints
Nationwide Introduction May Imply Some 30 State Variations
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US Regulatory Constraints
Internal Revenue Code• IRC Section 7702 Compliance
Acceleration Rider• Section 104(a)(3)
– Acceleration Rider– Standalone or Health Insurance Rider
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Foreign Critical Illness Experience (South Africa)
• South Africa (1991-1994 Investigation)• Largest Exposure To Date • Over 1.2MM Years Of Exposure• Three Companies In High End Of Market• Cause Of Claim Not Analyzed• Female Experience Better Than Male
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Foreign Critical Illness Experience (South Africa)
• South Africa• Confirms Select Period Rates
Lower• Large Policy Claims Worse Than
Smaller Policies• Non-Medical Marginally Better
Than Medical
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Foreign Critical Illness Experience (South Africa)
MalesDuration 0 Duration 1+ Dur 0/
Ages Claims Exposure Obs Rate Claims Exposure Obs Rate Dur 1+ 20-24 6 49,367 0.12 15 55,676 0.27 45% 25-29 13 56,397 0.23 37 108,560 0.34 68% 30-34 16 45,222 0.35 76 117,433 0.65 55% 35-39 29 30,510 0.95 122 96,027 1.27 75% 40-44 39 18,466 2.11 168 67,498 2.49 85% 45-49 25 9,272 2.70 143 39,716 3.60 75% 50-54 14 3,493 4.01 115 18,267 6.30 64% 55+ 6 682 8.80 56 6,188 9.05 97%All 148 213,409 0.69 732 509,365 1.44 48%
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CI Valuation Principles
• Not addressed separately by SVL• Standalone Consistent with Health
Regulation• Workable Rider Basis
– Consistency with Commissioner’s Life Basis
– Consistency with Rate Guarantees