Disability Income Insurance: Actuarial

Question 1

Challenges for pricing DI insurance (2)

Answer 1

1. Lack of substantial and reliable data

2. Estimating claim cost is very subjective

Question 2

Available DI Morbidity Data (5)

Answer 2

1. 1985 CIDA table for ind
2. SOA group LTD table
3. Social Security morbidity data
4. 1975 SOA group LTD study
5. 1987 Disability income study

Question 3

Variable factors associated with DI (3)

Answer 3

1. Pricing variables include subjective variables that require judgement to apply (i.e. motivation and stability factors)
2. Subjective factors impacted by changes in the environment and behavior
3. Morbidity experience takes many years to emerge in order to determine accuracy of assumptions

Question 4

Pricing challenges for DI policies (3)

Answer 4

1. Ability to adjust pricing assumptions based on social and econ changes
2. Need to understand cyclical nature of business - clms better than expected in good econ times
3. Do not ease assumptions when economy and experience is favorable unless warranted by experience studies

Question 5

Reasons that cause inappropriate easing or tightening of assumptions (4)

Answer 5

1. Lack of mature experience data
2. Actuaries and UW may have inappropriate experience in DI pricing
3. Competitive pressures
4. Steep claim cost curve for DI (i.e. immature nature of the DI)

Question 6

Pricing factors for DI pricing (6)

Answer 6

1. Morbidity
2. Persistency
3. Expenses - allocation of overhead expenses and taxes
4. Interest rate assumptions
5. Variation in premium volume by demographics (occupation class, age) and product type
6. Profit margin

Question 7

Reasons higher contingency margin required for DI relative to life (for profit margin) (4)

Answer 7

1. Volatility of block
2. Lack of reliable experience (morbidity) data
3. Impact of variable factors
4. More generous contract provisions

Question 8

Population Characteristics that have poorer persistency (6)

Answer 8

1. Lower occupation classes
2. Lower incomes
3. Younger ages
4. Lower premiums
5. Premiums made quarterly
6. Shorter benefit and elimination periods

Question 9

Types of reserves in DI insurance (2)

Answer 9

Significant reserves in DI include:

1. Active life reserves - exists for policies priced on a level-premium basis. Consists of the excess premiums charged in early years to cover the premium shortfalls in later years.
2. Disabled life reserves - established to cover each disability claims and its projected length. Reinsurance can be obtained to limit exposure.

Question 10

Experience studies in DI (5)

Answer 10

1. Historically, LR experience used to track claim experience but unreliable due to factors that impact DI (i.e. length of elimination and benefit prd)
2. Morbidity studies are more reliable method for tracking experience and for pricing - (based on A/E incidence and termination rates)
3. Subjective adj required to incorporate contract language and benefits
4. Diff in clm cost by sex - higher female morbidity up to age 50ish. Then, lower female morbidity at older ages.
5. Many years of experience required to properly eval appropriateness of pricing assumptions.