Lotter Actuarial Partners 1 By: Johan L Lotter FIA ASA MAAA Managing Partner: Lotter Actuarial...

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

1

1

2

1

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xxDx Lkmaid

xx

Dx

nx

x

xxOx

kmm

aidail(ail)

kmmaid

21

1

22

xxxxxxx

Ox

Dx

nxxx

L(mi)Lkmmalal

aidaidailailail

1

1

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