GHDP 137-20: Short Term Disability Example

Question 1

Introduction

Answer 1

1. Article discusses resetting manual rate structure (including base rates and factors) for short-term disability company
   a. New manual rates combined with experience to underwrite a group
2. Assumptions
   a. Insurer offers only one STD plan
   ▪ Typically would have many plan choices and design for items such as benefit percentage, elimination period, pre-existing conditions, definition of disability, and riders

b. Assumes plan is not sold in a state with state-run disability plan

c. No utilization trend assumed (economy can play a role in this assumption)

3. Example uses small employer market (less than 100 employees)
   a. Small group market uses community rating, so no rating on employer’s own experience
4. Rating factors not normalized to 1.0 in this example
   a. Normalization takes place on the base rate

b. Non-disability example where rates aren’t normalized is 3:1 age curve in individual and small group plans

c. When rating factors are not normalized, base rate is not an average rate (and can be very far from the average rate)

5. Disability rates (not premiums) usually don’t trend due to cost inflation
   a. Benefits and premiums naturally inflate with salary inflation (unit of exposure is salary, so premiums increase over time as wages increase even if rates don’t change)

Question 2

Numerical Example

Answer 2

1. You are the actuary in 2019 determining base rate and rating adjustments for 2020
2. Company used same base rate for 2018 and 2019
3. Factors are highly simplified
4. Given current rating factors for:
   a. Retention loads, Age/Gender, Group Size, Area, Industry, and Contribution/Participation
5. Given 2018 experience separated by the same breakdowns, so you can compare actual to expected loss
   ratio and determine if adjustments to the factors are needed
6. See TIA video lessons for details

Question 3

Rating Factor Discrimination Concerns

Answer 3

1. In examples in the reading, each rating factor was reviewed on its own
2. In the real world, state regulators may request additional info on conjoint experience
   a. Ensure that experience from one factor isn’t affecting another factor
3. For example, groups like the medical industry with disproportionate share of women, many in small employer clinic offices could be affected
   a. Rating factors could be double or triple-counted in these groups, thus creating unfair, inequitable, discriminatory rating practices
   ▪ Actual loss ratio for certain classes could be materially, consistently lower than the target
   ratio
4. P&C regulators particularly concerned about racial inequity and discrimination in auto insurance
   a. Conjoint analysis needed (analyzing the factors together)
   ▪ Age, geography, vehicle type, income, credit history, education, etc. could be related to one another