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Managing Group Risks

Managing Group Risks. Mohammad Azmatullah, FSA, FPSA Head of Pricing and Takaful, GCC – Life Munich Re and Pakistan Society of Actuaries Actuarial Seminar Karachi, August 20, 2013. Topics. What is Group Insurance Case Study 1 (Employer-employee Scheme) Case Study 2 (Credit-card Scheme)

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Managing Group Risks

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  1. Managing Group Risks Mohammad Azmatullah, FSA, FPSA Head of Pricing and Takaful, GCC – Life Munich Re and Pakistan Society of Actuaries Actuarial Seminar Karachi, August 20, 2013

  2. Topics • What is Group Insurance • Case Study 1 (Employer-employee Scheme) • Case Study 2 (Credit-card Scheme) • Concluding Remarks

  3. Topics • What is Group Insurance • Case Study 1 (Employer-employee Scheme) • Case Study 2 (Credit-card Scheme) • Concluding Remarks

  4. Group Insurance Which of the following would you regard as groups? • People waiting at a taxi rank • Subscribers to a newspaper • Holders of a certain credit-card • Customers of a shop • Employees of a company

  5. Group Insurance All of the previous examples are therefore groups A group is a collection of people or objects with a unifying characteristic. In its broadest term, group insurance can be defined as the provision of insurance to any group. In “Group Insurance”normally schemes are administered under a master-contract. Although (by definition) all such business is administered on a group basis, the underlying risk characteristics can vary considerably, hence, the risk management and pricing practices may be different.

  6. Topics • What is Group Insurance • Case Study 1 (Employer-employee Scheme) • Case Study 2 (Credit-card Scheme) • Concluding Remarks

  7. Case Study 1 A bank is looking to offer group life cover to its 30 000 employees, for the first time. The scheme is to have the following characteristics: • Eligibility Requirements: • Full-time members of staff • Located in Country • Actively at work at the cover commencement date • Nature of Cover • Annually renewable ( or YRT) • Compulsory (premiums paid by bank) • Sum Assured = 36 times Basic Annual Salary • Options: None (i.e., the members are not allowed the choose the level of coverage and benefits)

  8. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • If so: • what eligibility criteria would you set? • how would you expect lives with cover in excess of the FCL to be underwritten • Would you charge a unit rate for this scheme? • If so, what constraints would you set? • What other pricing considerations apply: • in all scheme years? • in renewal scheme years?

  9. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • If so: • what eligibility criteria would you set? • how would you expect lives with cover in excess of the FCL to be underwritten? • Would you charge a unit rate for this scheme? • If so, what constraints would you set? • What other pricing considerations apply: • in all scheme years? • in renewal scheme years?

  10. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • Yes, since: • cover is compulsory • the cover amount is fixed by an objective formula (36 times Basic Annual Salary) • cover is yearly renewable • lives are known to be actively at work Also: Not practical to underwrite ALL 30,000 Lives Also: Lesser concern of Anti-Selection

  11. Case Study 1 So how would you offer the Free Cover Limit Free Cover Limit = Min Ave SA × Factor Currency Maximum Factor Maximum # Members 1 to 24 0% 0 25 to 49 100% 50 000 150% 50 to 99 100 000 100 to 499 200% 200 000 500 to 999 300% 300 000 1 000 to 4 999 400% 400 000 5 000 to 9 999 500% 500 000 10 000 plus 600% 500 000

  12. Case Study 1 Above the Free Cover Limit, a standard underwriting table would apply. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 Up to 150 000 NM NM Med Med 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, TMX, MU, Blood, CXR Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  13. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • Yes, since: • cover is compulsory • the cover amount is fixed by an objective formula (36 times of Basic Annual Salary) • lives are known to be actively at work • cover is yearly renewable • If so: • what eligibility criteria would you set? • free cover is available until normal retirement age (a maximum of age 65)

  14. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • Yes, since: • cover is compulsory • the cover amount is fixed by an objective formula (36 times of Basic Annual Salary) • lives are known to be actively at work • cover is yearly renewable • If so: • what eligibility criteria would you set? • free cover is available until normal retirement age (a maximum of age 65) • how would you expect lives with cover in excess of the FCL to be underwritten on subsequent renewals (e.g. Increase in SA)? • Forward Underwriting practices could apply, since: • the cover amount is fixed by an objective formula • cover is linked to salary • cover is yearly renewable Theoretical Approach

  15. Case Study 1 • Forward underwriting is a practice aimed at: • enhancing client satisfaction by streamlining the renewal process • reducing underwriting costs for the insurer. It recognises that cover amounts are likely to increase over time and therefore underwrites the life assured for a higher amount at the outset, enabling future increases to be granted without further underwriting. Forward Underwriting  Underwrite a higher amount at the outset.

  16. Case Study 1 As indicated above, a typical underwriting table might look as follows. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 Up to 150 000 NM NM Med Med 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  17. Case Study 1 Consider now a new member (aged 47) with cover of 400 000. If the scheme has a FCL of 300 000, then the member’s cover exceeds the FCL by 100 000 and a medical exam would be required. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 Up to 150 000 NM NM Med Med Med SA – FCL =400K – 300K =100K 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  18. Case Study 1 In the forward underwriting approach, the same underwriting table is used, but with one difference. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 plus FUB Up to 150 000 NM NM Med Med 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  19. Case Study 1 FUB = X% of FCL The Forward Underwriting Band (FUB) is generally expressed as a percentage of the Free Cover Limit. For our example, let us assume that the FUB is 30% of the FCL i.e. FUB = 30% x 300 000 = 90 000.

  20. Case Study 1 Now, our new member (aged 47) with cover of 400 000 is underwritten using an amount equal to 400 000 (SA) less 300 000 (FCL) plus 90 000 (FUB), in other words 190 000. A medical examination and an ECG are called for. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 plus FUB Up to 150 000 NM NM Med Med 150 001 to350 000 NM Med Med, ECG Med, ECG Med, ECG SA – FCL + FUB =400K–300K+90K =190K 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  21. Case Study 1 12 months (aged 48) later, the member’s cover increases to 420 000 (due to salary increase). The insurer checks whether the cover exceeds the amount for which the member was previously underwritten (i.e. 490 000). No further evidence is required. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 plus FUB Up to 150 000 NM NM Med Med Check: New SA < Underwritten SA 420K < 490K No further UW is required. 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  22. Case Study 1 In the third year (aged 49) , the member’s cover increases to 470 000. Again this is less than the amount for which he was previously underwritten (490 000) so no further evidence is required. SA less FCL 16 to 30 31 to 45 46 to 60 61 to 65 plus FUB Up to 150 000 NM NM Med Med Check: New SA < Underwritten SA 470K < 490K No further UW is required. 150 001 to350 000 NM Med Med, ECG Med, ECG 350 001 to499 999 NM, ECG, MU Med Med Med, ECG Med, TMX, MU, Blood, CXR 500 000 to1 000 000 Med, MU, HIV Med, MU, HIV Med, TMX, MU, HIV Med, ECG, MU, Blood, CXR Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR, APS Med, TMX, MU, Blood, CXR , APS 1 000 001and above

  23. Case Study 1 • In summary, instead of: • the member being required to present himself for underwriting every year • the insurer incurring the cost of medical examinations and ECG every year • with Forward Underwriting: • the member needs present himself for underwriting only once • the insurer saves on the cost of repeated medical examinations.

  24. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • If so: • what eligibility criteria would you set? • how would you expect lives with cover in excess of the FCL to be underwritten • Would you charge a unit rate for this scheme? • If so, what constraints would you set? • What other pricing considerations apply: • in all scheme years? • in renewal scheme years?

  25. Case Study 1 Don’t Calculate Unit Rates using Summarised Data • Questions: • Would you charge a unit rate for this scheme? • Yes, since: • cover is compulsory • the cover amount is fixed by an objective formula (36 times of Basic Annual Salary) • the number of lives is large (30 000) • How would you calculate the unit rate: avg age, summarised data?

  26. Case Study 1 ì í î Correct Average Rate PREMIUM Shortfall “Summarised” Average Rate 35 45 55 AGE

  27. Case Study 1 Want to see how? 2 lives, Average Age = 45 (= [35+55]/2) Total Cover = 600 000 50% are female “Summarised” Average Premium = 1 098 What if…… So, lifeis not that simple, nor is life ins Female Life Female Life Female Life Premium Premium Premium Male Life Male Life Male Life Age 55, 450 000 Age 55, 400 000 Age 55, 450 000 Age 35, 200 000 Age 35, 150 000 Age 35, 150 000 1 755 1 630 1 755 Age 55, 150 000 Age 55, 200 000 Age 55, 150 000 Age 35, 450 000 Age 35, 450 000 Age 35, 400 000 1 005 1 130 1 005 Age 35, 450 000 Age 35, 400 000 Age 35, 450 000 Age 55, 150 000 Age 55, 150 000 Age 55, 200 000 1 254 1 254 1 564 Premiums are based on M99/03 Table Age 35, 150 000 Age 35, 150 000 Age 35, 200 000 Age 55, 450 000 Age 55, 400 000 Age 55, 450 000 2 804 3 114 3 114

  28. Case Study 1 • Questions: • Would you charge a unit rate for this scheme? • Yes, since: • cover is compulsory • the cover amount is fixed by an objective formula (36 times of Basic Annual Salary) • the number of lives is large (30 000) • If so, what constraints would you set? • The unit rate would cease to apply: • if a major change in the workforce takes place (mass retrenchment, merger, etc.) • to any member whose cover exceeds the free cover limit

  29. Case Study 1 • Questions: • Would you offer a free cover limit for this scheme? • If so: • what eligibility criteria would you set? • how would you expect lives with cover in excess of the FCL to be underwritten? • Would you charge a unit rate for this scheme? • If so, what constraints would you set? • What other pricing considerations apply: • in all scheme years? • in renewal scheme years?

  30. Case Study 1 • Questions: • What other pricing considerations apply: • in all scheme years? • active life mortality would apply

  31. Case Study 1 Consider Health States in the General Population

  32. Case Study 1 Active Disabled 1

  33. Case Study 1 Active Active i x Disabled 2 Disabled 1

  34. h q x Case Study 1 Active i Active x Disabled 2 Disabled 1 Deceased1

  35. s h q q x x Case Study 1 i Active x Disabled 2 Disabled 1 Disabled 1 Deceased 2 Deceased 1

  36. s s h q q q x x x Case Study 1 i Active x Disabled 2 Disabled 2 Disabled 1 Deceased 3 Deceased 2 Deceased 1

  37. Case Study 1 Now Consider Health States in the Given Scheme

  38. s s h q q q x x x Case Study 1 i Active x Disabled 2 Disabled 1 Deceased 3 Deceased 1 Deceased 2

  39. s h q q x x Case Study 1 i Active x Disabled 2 Deceased3 Deceased 1

  40. Case Study 1 • The dynamics of employer-employee group schemes are such that: • disabled lives are no longer able to work and hence leave employment. • This gives rise to “Active Life Mortality”, provided that: • cover under the scheme terminates with termination of employment.

  41. Case Study 1 • Questions: • What other pricing considerations apply: • in all scheme years? • active life mortality would apply • broad industry loadings may be required (based on knowledge of the industry) • occupational loadings would apply on a member-by-member basis • health / avocational loadings would not be applied for amounts within the free cover limit (even in respect of lives with cover in excess of the free cover limit)

  42. Case Study 1 • Questions: • What other pricing considerations apply: • in all scheme years? • active life mortality would apply • broad industry loadings may be required (based on knowledge of the industry) • occupational loadings would apply on a member-by-member basis • health / avocational loadings would not be applied for amounts within the free cover limit (even in respect of lives with cover in excess of the free cover limit) • in renewal scheme years? • past scheme experience may be taken into account through experience rating

  43. N E N F N E N F Case Study 1 Experience Rating involves the application of Credibility Theory to pricing Net Rate Charged = Z × Actual Past Experience + (1 – Z) × Expected Experience Where: Z = Credibility Factor = = Expected number of claims = Claims required for full credibility

  44. – Summary of Key Conclusions Case Study 1 • A Free Cover Limit can be applied, since: • cover is compulsory • the cover amount is determined by an objective formula • lives are known to be actively at work • cover is yearly renewable • Forward Underwriting can be applied, since: • the cover amount is determined by an objective formula • the cover amount is linked to salary • cover is yearly renewable • Under Group Schemes of the kind considered in Case Study 1:

  45. Case Study 1 – Summary of Key Conclusions • A Unit Rate can be applied, since: • cover is compulsory • the cover amount is determined by an objective formula • the number of lives is large • Active Life Mortality can be applied, since: • cover terminates on leaving employment • Experience Rating can be applied at renewal, provided: • the man-years of exposure are sufficient • the membership profile has remained stable over the period under review • Under Group Schemes of the kind considered in Case Study 1:

  46. Topics • What is Group Insurance • Case Study 1 (Employer-employee Scheme) • Case Study 2 (Credit-card Scheme) • Concluding Remarks

  47. Case Study 2 In an endeavour to boost its credit-card portfolio and to protect itself against default on the death of a card-holder, a bank is looking to offer life cover to its credit-card customers: • Eligibility Requirements: • new and existing holders of any of the bank’s credit-cards • aged 18 to 75 • Nature of Cover • Compulsory (with premiums paid by the bank) • Sum Assured = 100% of outstanding credit-card balance at time of death

  48. Case Study 2 • Questions: • What are the key risks associated with this scheme? • What risk management controls would you put in place? • How would you set about pricing the scheme?

  49. Case Study 2 • Questions: • What are the key risks associated with this scheme? • What risk management controls would you put in place? • How would you set about pricing the scheme?

  50. Case Study 2 • Questions: • What are the key risks associated with this scheme? • At Entry: • Although the scheme is seemingly “compulsory”, the bank is advertising the life cover and using it as a marketing tool. There is hence a significant risk of anti-selection in a new-entrant’s decision to apply for a credit-card • The maximum issue age is high (75!!) – likely to be many impaired lives • What is the bank’s customer profile and target market?? (e.g. army personnel?) • During Tenure: • Sums assured fluctuate monthly making premium calculation difficult • At Claim: • Card-holders may incur large medical expenses on their cards shortly prior to death • Terminally ill card-holders may exhibit moral hazard by increasing spending and holding back on credit-card repayments in order to increase cover • Those experiencing financial difficulty may resort to suicide!!? • Maximum per-life covers may be high, due to multiple cards

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