Group Chap 24: Estimating Life Claim Costs

Question 1

Risk Selection

Answer 1

1. Groups covered
   a. Employees of a single employer
   b. Multiple-employer trusts
   c. Negotiated welfare funds
   d. Union groups
   e. Fraternal associations
2. For forming groups, the insurance must be incidental to group’s existence and to insured’s membership in the group (i.e. not formed just to get insurance)
3. Risk selection considerations for group life different from individual
   a. Individual life freedom of choice when to buy, amount, type of coverage
   b. Individual underwriting - application questions, medical exams, lab tests to assess health, avoid antiselection and achieve stable and preditable level of claims
4. Group
   a. Rely on program design (not underwriting) to minimize effects of antiselection

b. Features to minimize effect of selection: eligibility rules, benefit design, rate structure
- less choice in plan features and benefit amounts than individual life insurance
- Most plans have:
(1) Employer-paid component with fixed benefit formular (dollar amount or multiple of salary)
(2) Optional employee-paid component of additional coverage

c. Minimum participation rates to minimize antiselection

d. Require employee be actively at work on date effective

e. New employees not eligible until they complete a waiting period

f. For medium and large groups, offered without evidence of insurability, provided amount is moderate

g. Some individual medical underwriting required for high amounts, late entrants, small groups, and certain optional benefits

h. Group life does not exhibit select and ultimate mortality patterns (as in individual plans)

Question 2

Premium Structure

Answer 2

1. Premium composed of: Expected claim cost, margin for adverse fluctuations, expenses, risk charge, profit charge
   a. Risk and profit charges vary by size of group, type of benefits, and whether group participates in its own experience (though premium stabilization reserve or something similar)
2. While recognition of gender in developing rates is necessary, employee contributions must be same for males and females
3. Typically rates expressed as average monthly premium per $1,000 of insurance regardless of insured’s age or gender (e.g. $0.14 per month per $1,000)
   a. Premiums for employee-paid coverage usually vary by attained age band but not gender
4. Rate Manuals
   a. Develop premiums by calculating expected mortality cost and then explicitly adding expense, risk and profit elements
   - Some companies include risk margin in expected mortality and others use explicit provisions elsewhere in the rate manual

Question 3

Developing Expected Mortality Costs

Answer 3

1. Problem is finding appropriate and current group experience
2. Detailed information rely on studies by SOA and CIA, together with their own experience and population statistics
3. Limitations include treatment of disability, completeness of accidental death experience, combined male and female data, experience only on single employe groups, and improvements in mortality
4. Industry Studies
   a. SOA
   - Principal sources of group life insurance mortality data
   - 2016 Study excluded: group universal life, group variable universal life, groups for which all was medically underwritten, conversions, waiver reserve buyouts, paid up coverage, dependent coverage, mass-marketed, standalone AD&D, reinsurance assumed
   - Variety of disability provisions
   * Disabled prior to age 60, and benefits to age 65
   * Disabled employees payable as active, or with one-year extended death benefit
   * Disabled employees not covered
   * Unknown provisions or more than one definition
   - 2016 Study provides unadjusted waiver incidence rates
   - 2016 Study categories (age, sex, industry, disability provision, exposure type, coverage type, region, salary band and face amount band)

b. CIA
- Studies of group life experience, including waiver of premium

c. Use of Actual to Expected or Tabular Ratios
- For example, to see which size groups have better experience
- Be careful because expected claims may not reflect all variables

d. Population Statistics
- Mortality in general population higher than group plans - this is due to flow of healthy individuals into group, while odler and unhealthy drop out
- Useful estimating improvements in mortality, ratios of mortality by age, comparing male and female, developing rates for very young and very old
- Extending claim rates by comparing three sources: NCHS, Social Security Administration, and US Decennial Life Tables

5. Company Experience
   a. Determining number of claims per unit exposed
   - Exposure units based on lives or amounts of insurance
   - These studies are best source of mortality because reflect carrier’s underwriting and marketing

b. Published table can be basis for graduation
- Ratio of total study to tabular base adjusts results into a smooth progression
- Relationship between carrier’s and intercompany experience useful for assessing business practices - Changes in marketing or benefit design

6. Changes in Mortality
   a. If used on experience, do ongoing studies to adjsut claim table every two to four years
   b. Another approach is to calculate improvements between two known tables for each age bracket
   c. 2016 Study comments: use caution when applying historical results to pricing or other forms of actuarial work
   d. Another approach is to analyze changes in general population mortality
   e. New developments on mortality needs considered
   - Opioid crisis - impacts mortality trends
   - COVID 19 - unfavorable impact on 2020 mortality and uncertain outlook going forward
7. Reinsurance
   a. Excess reinsurance - carriers limit coverage they retain on any one individual above a given limit per life
   b. Following Sept 11 attack, availability of catastrophe reinsurance reduced
   c. Net cost of reinsurance factored into expected mortality costs or expense charges
8. Conversion to Individual Life Policies
   a. Many companies do not provide disability or accidental death under converted policy, allow conversion of reductions due to retirement or age, or pay commissions on converted policies
   b. Subject to severe antiselection
   - Excess cost needs to be recovered from group policies
   c. Expected mortality costs adjusted to include ecess cost of conversions
   - Conversion Charge - when conversions occur, PV(expected excess cost) over life conversion policy paid from group life of business to individual line of business
   d. Some offer portability along with conversion option
   - Lower cost of term insurance versus permanent should attract some healthier terminating employees

Question 4

Adjustments to Expected Mortality

Answer 4

1. Disability Factors
   a. Expected mortality costs must reflect waiver of premium provisions
   - No waiver, waiver terminating at age 65, waiver beyond age 65 but reduced amount, or waiver for life with no reductions
   - Group life manual include a full set of expected mortality costs for each provision

b. Expected Cost of Waiver
- Incidence rate
- Expected Claim Amount - Expessed as a a waiver reserve - net single premium for future death benefit payable to the disabled
i. Reserve priced either through direct calcualtion in each pricing cell or multiplying amount of group life insurance by aggregate reserve factor (such as 35% for terminating at age 65 up to 60% for lifetime coverage)

c. Recent experience in SOA 2005 Study and 2016 Study

d. Where life insurance for disabled provided by employer paying premiums, excepted claims initially lower than under waiver of premium because no disabled life reserve created
- Ultimate claim level will be same as if reserves were funded

2. Effective Date Adjustment
   a. Ages determined by substracting year of birth from the current year
   b. Manual claim table appropriate for rates effective on July 1 central date, or policy years that coincide with calendar year
   c. If rates effective on another date, rates adjusted by multiplying manual claim rates by a factor
3. Industry Factors
   a. Different mortality patterns, because of hazards of industry, socio-economic status, leisure activities, and health of employees
   b. Multiply manual claim rates by a factor
   - Factors assigned by SIC Code
   - Group may be declined
   c. White-collar exhibit better mortality than blue-collar, even within a given industry
   d. If only white-collar are to be covered, factor for that industry should be adjusted
4. Regional Factors
   a. Differences at working ages are small
   b. Some carriers make a specific adjustment but more do not
5. Lifestyle Factors
   a. A few companies adopted distinction between smokers and nonsmokers
   - Method provides for more favorable rate for groups with few smokers
   - Reduce manual claim rate by 5% for non-smokers, and increase by 30% for smokers
   b. Discounts for healthy lifestyles with respect to smoking, drinking, and exercise habits
   c. Difficult obtaining experience data for risk factors, and data from employees to price a group
6. marketing Considerations
   a. Some captive agencies have more favorable results
   b. Welfare funds and union groups worse experience than single employer
   c. If guaranteed longer than 1 year, additional charge should be made
7. Contribution Schedules
   a. Where employer pays full cost (non-contributory), antiselection is minimized
   - Some carriers apply discount to manual claim rates
   b. Under flat contribution approach, everyone pays same rate per $1000 of coverage
   - Discourages younger, healthier from enrolling
   - Produce less favorable results than non-contributory plans
   c. Under age-rated approach, rates that employees contribute vary by age groupings
   - Experience closer to the experience of non-contributory plan
   - Age-rated premiums are most common approach for employee-paid group life
8. Case Size Factors and Volume Adjustments
   a. Case size factors based on number of insured lives, to reflect anticipated differences in mortality
   b. Premium volume adjustments for cases with higher total premium amounts, to reflect lower expenses
9. Plan Options
   a. Plan options may cause experience to vary
   - Usually completely paid for by employee contributions
   - Imperative that age-rated approach be used
   - Participation of 25% or higher required

b. If only a single option, experience more favorable than plan that permits different coverage levels

c. Frequent changes from one plan option to another without evidence of insurability experiences higher claims
- If elections tied to modules in flexible benefit program, results better than under plans that allow an independent life election

Question 5

Other Coverages

Answer 5

1. Dependent Life
   a. Trend toward substantial amounts on spouses
   b. Child amounts small, with reduced amount during first year of life
   c. Expected claims not as favorable as employee experience
   - Dependents need not be actively-at-work
   - Dependent coverage is employee-pay-all and subject to antiselection
2. Accidental Death and Dismemberment Benefit
   a. Offered with group term life or on a standalone basis
   b. Usually, on-job and off-job (occupational and non-occupational) accidents covered (called 24-hour coverage)
   c. Industry most significant rating factor
   d. Gender important rating factor because female claim rates less than half of male
   e. High at younger ages, lower in middle years and high at older ages
   f. Most do not vary by age
   g. Popular coverage because of high benefits and low cost
3. Group Universal Life (GUL)
   a. Introduced on two different bases
   - First is term insurance with a side fund
   - Second is individual universal life based on group mortality
   i. Fund is individual universal life based on group mortality
   ii. Employees have less latittude in amount of their contributions
   b. Portable
   c. Employee-pay-all
   d. To encourage good participation, underlying employer-paid plan should provide no more than one times earnings
   e. Consider level of underlying group life, actively-at-work requirements, multiple of earnings options, level of guaranteed issue, type of health statement
4. Living Benefits
   a. Terminally ill need early access to life insurance proceeds
   b. Also called accelerated death benefits
   c. Three models which differ as to trigger events: Long-term care, catastophic illness, or terminal illness
   d. Long-term care
   - Typically monthly benefit of 2% of face
   - Paid until specified portion of death benefit is paid
   - Remaining portion of death benefit paid to beneficiary upon death
   e. Catastophic illness
   - Pay single amount, typically 25% of face
   - Listed disease: such as heart attack, stroke, cancer, coronary artery surgery, and renal failure
   - Difficult to precisely define some diseases and develop claim assumptions
   f. Terminal illness
   - Pay a single amount, from 25% to 50% of face
   - Physician certifies insured has less than 6 (or 12) months to live
   - Remaining death benefit paid to beneficiary upon death
   - Benefit cost
   i. Factored into manual claim rates or separate premium cahrge
   ii. May discount advance payment for interest, and make an adminsitrative charge. No premium charges under this appraoch

g. Should apply to all insureds, to avoid antiselection and administrative problems
- 30 day waiting period could be used