Learning Objectives 1 & 2 - Group Life, Group Disability, & LTC

Question 1

Possible payments when a loss is the result of a covered accident (AD&D)

Answer 1

1. 100% payable if the employee dies
2. 50% (usually) if the employee loses a member (hand, foot, sight of an eye)
3. 100% if the employee loses more than 1 member
4. Total benefits are usually capped @ 100%

Question 2

Survivor Income Benefits definition

Answer 2

provides a monthly payment in lieu of a lump sum death benefit

~benefit is typically a % of the employee’s monthly earnings, such as 25% for a spouse and 15% for a child.

Question 3

possible benefit payment provisions for survivor income policies

Answer 3

1. guaranteed benefit period, regardless of the surviving spouse’s death or remarriage
2. a maximum death benefit.
3. a remarriage provision
4. dowry provision, providing a lump sum benefit upon remarriage of the spouse (to reduce the incentive to not remarry)
5. offset of Social Security survivor benefits
6. last survivor provision, where benefits depend on the number of eligible survivors

Question 4

continuity of coverage for group life

Answer 4

allows insured to convert to an individual plan upon termination of employment

Question 5

TRUE or FALSE

life insurance death benefits are taxable

Answer 5

FALSE

Question 6

difference between Group Universal Life policies (GUL) and Group Variable Universal Life policies (GVUL)

Answer 6

GVUL plans have several investment options (including equities) for the cash accumulation fund.

Question 7

Types of group life insurance benefits

Answer 7

1. Basic Group Term Life (most common) - provides employees a common level of basic insurance protection.
2. Group supplemental (or optional) life - provides additional insurance beyond basic group term life. Typically employee-pay-all with unisex rates in 5-year age brackets.
3. Group Accidental Death and Dismemberment (AD
   &D) - typically offered as a companion to group term life and with the same face amount.
4. Dependent Group Life - multiple coverage options are usually provided, offering coverage of up to $100,000 on the spouse and $10,000 on each child.
5. Survivor Income Benefits - provides monthly payment in lieu of a lump sum death benefit
6. Group Permanent Life - plan types are single-premium group paid-up life, group ordinary life, and group term and paid-up
7. Group Universal Life (GUL) - consists of a term life component and a side fund that accumulates with interest to provide tax-favored savings and long-term insurance protection
8. Group variable universal life - same as GUL except several investment options are available
9. Living Benefits

Question 8

Typical Basic Group term life plan designs

Answer 8

To minimize adverse selection, none of these designs allow individual selection of insured amounts:

1. Flat dollar plans - such as $10,000 for all employees
2. Multiple of Earnings plans (most common) - such as 1 or 2 times earnings
3. . Salary Bracket Plans - salary ranges are established and benefits vary by range
4. Position plans - benefits vary by based on the employee’s position in the company (ie. hourly, non-officer management, management.)

Question 9

Group term life disability provisions

Answer 9

Most plans contain one of the following:

1. Waiver or Premium - coverage continues without premium payment when an employee becomes totally disabled, as long as he or she is less than a certain age, typically 60 or 65.
2. Total and permanent disability - a monthly benefit is paid when an insured becomes totally and permanently disabled. On death, the original death benefit is reduced by any disability payments made.
3. Extended Death Benefit - pays the death benefit if the insured’s coverage terminates upon total disability prior to age 60 and the insured remains disabled and dies within one year.

Question 10

Formula for group term life imputed income

Answer 10

Employees are taxed on the value of employer-provided group term life insurance in excess of $50K

This value is determined form Table 1 (rates may vary by age)
Monthly imputed income = [Table 1 rate * (Coverage amount - $50K)/$1,000] - employee contributions

Question 11

features of group life insurance to minimize the effect of selection

Answer 11

1. eligibility rules (such as actively working)
2. minimum participation requirement
3. waiting periods

Question 12

Group life insurance for medium & large groups are generally offered without evidence of insurability, except for:

Answer 12

1. high amounts of coverage
2. late entrants
   3 some optional benefits

Question 13

most significant pricing component for group life

Answer 13

Age & Gender

~ however, every member of the group is charged the same premium

Question 14

Considerations in developing a manual table for life insurance

Answer 14

1. Two approaches can be used:
   a. Manual premium tables - calculate the manual premium rate, then adjust for group size. The adjustment will reflect the margin, profit, and expense appropriate for the group size, relative to the average built into the table.
   b. Manual claims table - calculate the manual claim rate, then add the appropriate margin, profit, and expenses
2. Data sources - could use SOA studies, industry mortality tables, population statistics, or won company experience (which is best source, if credible)
3. Changes in Mortality - expected future mortality improvement should be reflected
4. Reinsurance - the net cost of reinsurance should be factored into the claim table or expenses
5. Conversions to individual life policies - these create severe antiselections, which should be reflected in the manual rates
6. Manual adjustments are made for group-specific traits
7. Rates for the group are based on age and gender mix, but groups typically end up charging a composite rate to all employees

Question 15

Uses of general population data for pricing life insurance

Answer 15

1. Estimating annual improvements in mortality
2. Determining ratios of mortality by age bracket
3. Comparing male and female mortality
4. Developing rates for the very young and the very old (non-working population)

Question 16

Group rating characteristics for life insurance

Answer 16

1. Disability Factors - an adjustment is neede if a group has a different waiver of premium approach than is assumed in the manual rate.
2. Effective date adjustment - adjustment needed if the central date of the policy is not July 1
3. Industry Factors - based on SIC codes (Standard Industry Classification)
4. Regional Factors
5. Lifestyle Factors - ex. adjustments based on the % of employees that smoke
6. Marketing Conditions - ex. a 5% discount if the employer pays the entire premium (reduces antiselections)
7. Case size factors and volume adjustments - larger groups may have lower mortality or expenses
8. Plan Options - optional benefits and allowing lots of employee choices will create antiselection

Question 17

Types of Living Benefits for life insurance

Answer 17

This benefit (also called accelerate death benefits) pays a portion of he face amount prior to death, with the remaining benefit paid @ death.

1. LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home.
2. Critical Illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer
3. Terminal Illness Benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with a terminal illness with less than 6 or 12 months to live.

Question 18

Benefit provisions for group disability income

Answer 18

1. definition of disability
2. Elimination period - the period of time the employee must be disabled before collecting disability benefits. Commonly 3 months or 6 months for LTC. For STD, commonly 8 days and may be shorter for accidents than for sickness.
3. Benefit period - commonly 2 years, 5 years, or to age 65 for LTD. For STD, typically 13 or 26 weeks to coordinate with LTD elimination period.
4. Benefit amounts - benefits paid monthly for LTD and weekly for STD. Replaces a % of pre-disability earnings (such as 60% for LTD and less for STD). A maximum benefit amount may further limit payments.
5. Benefit offsets - benefits are reduced by income from other sources, such as Social Security, retirement benefits, workers’ compensation, and part-time work
6. Limitations and exclusions - benefits for mental illness and substance abuse are usually limited to the first 2 years of disability. Disabilities resulting from an act of war or intentionally self-inflicted injury are usually excluded.
7. Optional benefits

Question 19

Typical definition of disability for group disability income

Answer 19

1. LTD - as a result of sickness or accidental injury, the employee is unable to perform some or all of the material and substantial duties of an occupation, and has a loss of a % of pre-disability income.
   a. During the 1st 24 months after the elimination period, the occupational duties are based on the employee’s own occupation, and the loss of income % is 20%.
   b. after the 1st 24 months, the occupational duties are based on any gainful occupation for which the employee is reasonably suited by education, training, and experience, and the loss of income is 40%
2. STD - the employee is unable to perform all of the duties of his or her own occupation. Coverage is typically for only non-occupations (occurring outside of the workplace) accidents or sickness to avoid overlap with worker’s compensation.

Question 20

Methods for reducing benefits for income earned during a disability

Answer 20

1. Proportionate Loss formula - calculates the % of lost earnings due to the disability and applies it to the benefit otherwise payable.
2. 50% offset - reduced the benefit by $1 for every $2 of work earnings
3. Work incentive benefit - ignores all earnings during an initial period (such as 12 months), except benefits are capped so that work earning s plus benefits do not exceed pre-disability earnings. After the initial period, either the proportionate loss formula or 50% offset is used.

Question 21

Optional benefits that may be added to group disability contracts

Answer 21

For LTD:

1. COLA - cost of living adjustment to provide inflation protection for benefits.
2. survivor benefit - a lump sum benefit payable to the insured’s survivors upon death of the insured
3. Expense reimbursement for day care expenses
4. pension benefit - an additional benefit payment to replace lost contributions to retirement plans
5. Portability - allows an insured who leaves the group to continue group coverage.
6. Conversion option - insureds who lose coverage can convert to either group or individual disability coverage.
7. Catastrophic benefits - additional amounts for more serious disabilities, such as those resulting in total paralysis.

For STD:

1. 24 hour coverage - to cover both on-job and off-job disabilities
2. First day hospital coverage - elimination period is waived if the insured is confined in the hospital due to a disability
3. Survivor benefit (same as LTD)

Question 22

the statutory minimum reserve basis for LTD, adopted by the NAIC, is based on

Answer 22

Claims before 10/1/2016 - 1987 Commissioners Group Disability Table (CGDT)

Claims after 10/1/2016 - 2012 GLTD Valuation Table

Question 23

Data sources for estimating disability claims costs

Answer 23

1. A company’s own data is the best source if it is reliable and credible.
2. Rate filings of competitors
3. Research of governmental and business publications
4. Data from consulting firms and reinsurers
5. Insurer studies - such as loss ratio studies and actual to expected incidence or termination rates
6. industry data & tables
   a. 1987 Commissioners Group Disability Table - adopted by the NAIC as the statutory minimum reserve basis for LTD. Is still the most recent intercompany incidence rate study.
   b. SOA 2008 GLTD Experience Table - provides considerable detail on claim termination rates
   c. 2012 GLTD Valuation Table - will be replacing the 1987 CGDT for sue in developing minimum statutory reserves
   d. TSA reports - contain exposure and actual to tabular ratios by industry classification
   e. 1085 Commissioners Individual Disability Table A (CIDA) - the basis of active life and claim reserves for individual policies
   f. SOA Individual Disability Experience Committee 1990-2006 Study

Question 24

Types of disability income experience studies

Answer 24

1. Calendar year loss ratio study
   a. Compute the ration of incurred claims to earned premium for a given calendar year.
   b. Incurred claims are calculated as paid claims plus the increase in claim reserves
   c. May not provide a clear picture of historical trends because results are affected by reserve changes.
2. Incurral year loss ratio study
   a. Compute the ratio of incurred claims to earned premium for a given incurral year.
   b. Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve
   c. Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred.
3. Study of actual-to-expected incidence or termination rates - ratios of a company’s actual claim incidence or termination rates compared to expected rates from published industry tables or company data.

Question 25

Formula for disability income net monthly premium

Answer 25

~Net Monthly Premium = Incidence Rate * sum(Benefit (t) * Continuance (t) * Interest Discount (t))

• *The summation runs for the entire length of the benefit period
• *Offsets will also need to be reflected.

Question 26

Group Characteristics that impact disability income claim cost

Answer 26

1. Age & Gender
2. Occupation - may need to adjust claims cost for:
   a. Hourly v. salaried
   b. Blue collar v grey collar v white collar
   c. union v non-union
   d. commissioned sales personal
3. Industry - for group insurance, it is more appropriate to rate based on industry than on occupations
4. Average earnings per employee - claim rates decrease as average earnings increase
5. Area - claim costs vary due to the legal environment and the general attitude and culture of the area
6. Size of group - claim costs follow a “U” shaped curve, with higher costs for the largest and smallest employers

Question 27

Steps for manual rating of disability coverage

Answer 27

1. Determine the base rates/ premium (base premium = base rate * benefit amount)
   a. LTD: Base Rate (x,g,e,w) = I (x,g,e) * RSV (s, g,e,0) / 12
   i. RSV is the reserve @ time 0, I is the probability of claim)
   b. STD: Base Rate (x,g,e,w) = D (x,g,e) / 12
   i. D is the expected length of claim in weeks
2. Deduct offset credits - to get the net base premium
3. Demographic adjustments - adjust the net base premium to reflect the person’s salary, industry, occupation, and location.
4. Plan provision adjustments - adjust for the definition of disability, maximum or minimum monthly benefits, pre-existing clause, and antiselection
5. Non-claim adjustments (retention) - the prior steps give the final claims cost. Add loadings for commissions, expenses, and premium taxes.
6. Add profit - can be a % of premium or a needed ROI/ ROE

Question 28

Steps for experience rating of disability coverage

Answer 28

1. determine the group’s manual rate with profit and expenses removed (final claim cost)
2. determine the experience based rate using the last 3-5 years of data
   a. discount claims and reserves to the midpoint of the experience period or to the actual date of disability
   b. divide by exposure to get the experience based claim rate
   c. if large claims are pooled, add a pooling charge.
3. Blend the manual rate and the experience-based claim rate
   a. Blended rate = Manual claim rate * (1-Z) + experience claim rate * Z
   b. Credibility (Z) = N / (N + K) where N = number of life years and K = constant (for example, 5,000 for LTD & 250 for STD)
4. Final case premium = blended rate/ target loss ratio

Question 29

Steps in the claim process for disability

Answer 29

1. Determine eligibility for coverage - is the claimant insured and actively @ work, is there a pre-existing condition?
2. determine if the definition of disability is met - this is the most difficult step of the process
3. determine the payment amount (usually straightforward)
   a. = Pre-disability income * benefit % - offsets
4. Get ongoing proof of disabilities
   a. STD - often approved for a specified period based on the type of disablement. Reviewed @ end of period
   b. LTD - reviewed annually, when the condition or treatment of disability changes

Question 30

Tools of the claim process for determining and handling disabilities

Answer 30

1. Medical evaluation - begins with an AS and can include independent medical exams
2. Rehabilitation plans - providing vocational training or physical rehabilitation
3. Financial evaluation of the claimant - verification of pre- and post-disability earnings
4. Settlements - these are risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation)
5. Fraud Review - check information for inconsistencies or alterations
6. Managed disability - techniques are used to “manage” disability and encourage a return to work.

Question 31

Types of LTC insurance plans

Answer 31

These are different approaches for paying benefits:

1. Service Reimbursement Model - pays the cost of LTC services, subject to fixed limits that vary by type of service (e.g., $150 per day for nursing home care and $90 per day for assisted living facility care)
2. Service indemnity model - a fixed benefit is paid for any day or week that formal LTC service are received, regardless of the actual charges incurred.
3. Disability or cash model - a fixed benefit is paid for each day an insured is eligible for benefits, whether or not services are actually received

Question 32

Plan provisions on LTC insurance policies

Answer 32

1. Benefit triggers
2. Elimination or waiting period - a time period during which the insured must remain disabled and benefit eligible before benefits are paid (commonly 90 days)
3. Covered services
4. Alternate plan of care - allows the insurer to pay benefits (at its discretion) for services not explicitly covered by the contract
5. Benefit limits - enrollees select a daily benefit max for institutional care. Other benefits are tied to this daily benefit. Lifetime max is administered as a pot of dollars - daily amount & 365 days * years of benefit purchased.
6. Inflation protection - increases the benefit limits as LTC costs increase over time.
7. Nonforfeiture benefits - sold as an optional benefit. Provides a reduced, paid-up benefit to insureds who lapse coverage.
8. Spousal riders and discounts - some plans offer a premium discount for individuals who are married.
9. Restoration of benefits - many plans restore the lifetime max benefit if an insured recovers before exhausting the plan’s benefits.
10. International coverage - some plans provide limited benefits for care received abroad
11. Shared lifetime max benefit pools - some plans allow an insured who uses all of his or her benefits to tap into any remaining benefits of a spouse’s policy
12. Policy exclusions - examples include pre-existing conditions or diseases, alcoholism and drug addiction, and treatment covered by other policies or Medicare.

Question 33

Types of nonforfeiture benefits on LTC insurance policies

Answer 33

1. Shortened benefit period - the min standard for tax-qualified plans. Pays the benefit amount and frequency in effect at the time of lapse, but lifetime max is reduced to the sum of premiums paid minus benefits paid.
2. Reduced paid-up - daily and lifetime maxes are reduced and coverage is extended for the life of the insured.
3. Extended term - benefit maxes do not change, but only disabilities that commence within a limited time period are covered.
4. Contingent nonforfeiture benefit - often provided to those who lapse due to a substantial premium increase and had not purchases a nonforfeiture benefit. Uses the shortened benefit period approach.

Question 34

Underwriting styles that vary selection factors

Answer 34

1. Guaranteed issue or modified guaranteed issue for active employees.
2. Short-form or simplified underwriting for spouses
3. Full individual underwriting for all others

Question 35

Major effects of the year 2000 changes in the NAIC LTC Insurance Model Act

Answer 35

1. Requires disclosure of rating practices at the time of the application - e.g. including a statement that the policy may be subject to future rate increases.
2. Requires an actuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience.
3. Eliminates minimum loss ratio requirements in the initial rate filing.
4. Places limits on expense allowances in the event of a rate increases - if a rate increase is requested, the lifetime loss ration must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase.
5. Requires reimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates.
6. For policies in a rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting.
7. Authorizes the commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums

Question 36

Major effects of HIPAA on LTC

Answer 36

1. Defined qualified plans
2. clarified taxation of premium & benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes
3. Standardized benefit triggers
4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans

Question 37

Major stakeholders in the group LTC policy design process

Answer 37

1. Employer Group
   a. LTC is appealing because it complements other products (such as disability and life coverages) and relative to medical is a low-cost benefit with stable pricing
   b. May not be able to offer guaranteed issue to all active employees, since this could make the premiums more expensive than similar individual policies.
2. Insurance Company
   a. Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee
   b. Costs vary significantly by participation level, making this a key assumption
3. Employees
   a. May not yet be aware of the risk covered by LTC insurance
   b. concerned with the significant cost, which may even exceed the cost of individual policies.
4. Insurance Brokers - have found that group LTC insurance provides the opportunity to open the door to competitive life and disability markets

Question 38

Assumptions needed for a LTC pricing model

Answer 38

1. Voluntary Lapses - lapses rates are much lower for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection
2. Mortality - most companies use the 1994 Group Annuitant Mortality table
3. Morbidity - the major variables that impact claims costs are:
   a. Marital Status - costs are lower for married individuals because of the presence of a potential caregiver @ home
   b. Gender - females have significantly higher ultimate costs than males
   c. Benefit Triggers
   d. Area - utilization patterns of LTC services vary by geographic area
   e. Case management - companies using a case manager usually experience lower claims
4. Selection factors - to reflect underwriting wear-off. Depends on the level of underwriting preformed.
5. Expenses - start-up expenses are high relative to other types of businesses
6. Interest - the investment rate on assets is a key assumption because of the large amount of reserves.
7. Reserve basis - important considerations include the level of margins and how these margins are achieved
8. Other assumptions - including the average daily benefit and the premium mode.
9. Profit - typically based on lifetime goals for pre-tax profits, post-tax profits, return on investments, or return on equity.

Question 39

Misconceptions regarding LTC rate increases

Answer 39

1. These products are annually renewable
   a. LTC is guaranteed renewable and priced on an issue age basis
   b. Premiums are expected to remain level and cover all future costs.
2. Using historical loss ratios to determine performance is appropriate.
   a. Claims and loss ratios are low in early policy years, but this does not mean the product is profitable
   b. A large portion of early premiums need to be set aside as contract reserves to pre-fund future claims
   c. This can be addressed by including the change in contract reserves in the claims calculation
3. Companies have time to wait and see how experience will unfold
   a. As more time passes without a rate increase, the future premium base to which the rate increase would be applied shrinks
   b. this results in much larger increase needs in order to produce the targeted lifetime loss ratio

Question 40

LTC pricing assumptions that often drive the need for a rate increase

Answer 40

1. Morbidity - misses on this assumption may not become apparent for many years because of the gap between the average issue age and the average age of LTC claimants.
2. Persistency - higher persistency leads to significantly higher claims costs because more policyholders remain in later years when claim costs are extremely high
3. Interest - investments are key to ensuring that the contract reserves grow enough to support the company’s future liabilities. The recent economic recession has resulted in investment earnings that are much lower than what was assumed.