Claims and Underwriting Issues for Income Protection

International Congress of Actuaries

Paris, France

June 1, 2006

Claims and Underwriting Issues for Income Protection

Panelists

Alexander RouxMunich Re of Africaaroux@munichre.com

Edward FabrizioGeneral Reinsurance Life Australia Ltdefabrizio@genre.com

Daniel SkwireMilliman, Inc. (U.S.A.)dan.skwire@milliman.com

Risk Management in Group Income Protection

Alexander Roux, FIA

Member of Operational Management

Corporate Actuarial

Munich Re of Africa

Variation in Claim RecoveriesGroup Income Protection Policies

Deferred Period 26 weeks

0

10

20

30

40

50

60

70

Office1 Office2 Office3 Office4 Office5 Office6

100 A/E

Chart from CMI Report 20, page 275

Reasons for the Variation in Claims Recoveries

• Target Market

• Risk Management: Underwriting

• Product Variation

• Maturity of Claims Book

• Risk Management: Claims

Recovery Rates in Isolation of Incidence Rates

• High Recovery Rates

• Low Recovery Rates

Due to high incidence rates (?)I.e. Poor claims assessment (?)

Due to low incidence rates (?)I.e. Good claims assessment (?)

Risk Management Tools

• Underwriting – Selection and Assessment

• Claims Assessment & • Ongoing Claims Management

1. Environmental Assessments

1. Forensic Assessments

2. Case Management

3. Early notification Period

4. Absence Management

UnderwritingEnvironmental Assessments

• Potential Value

• More Information vs. True Intervention

– Benchmarking – Assistance in pricing

– Interventions – Risk Management

– Practical difficulties

– Skills

– Time & Cost

Claims Management (1)Forensic Assessments

- Quality of Initial Clinical Claims Assessment- General Work Ethic- Regulatory Environment

• Limited Potential

Depends on:

• Where did it Work?- Buying out of existing claims books- Messy by nature

Claims Management (2)Case Management

• A Relatively New Tool

• Level of Success Varied (thus far)

- Correct selection of cases that warrants in depth “hands-on” approach

Depends on:

- Employer Co-operation - Redeployment

- Define at outset Period & Budget(Discipline in avoiding overruns)

In depth, “hands-on” approach to claimant with the aim of ultimately achieving either good “medical management” of claimant or rehabilitation. Medical Management is the appropriate optimal treatment given the condition and the compliance to that treatment.

Definition:

Claims Management (3)Early Notification Period

• Potentially Valuable- Medical (physical impairment)

Intervention early enough – Reduce chances of later LTDE.g. Avoiding hypertension from becoming a cerebrovascular incident – leading to a chronic or terminal condition.

- Psychological (non-physical impact)

Intervention early enough – Improves desire to recoverE.g. Facilitation of relationship between employer and employee (out-of-sight is also out-of-mind)

Claims Management (4a)Absence Management

• A Relatively New Tool

• Two common forms of Absence Management1 Comprehensive Absence Management: Identifies all the causes of unscheduled absence (medical, psychological, social, and vocational factors)

The assessment of absence patterns due to the utilization of sick leave by employees and the consequent pro-active intervention mechanisms activated based on these patterns

Definition (In the South African Employment Context):

(A more sophisticated form of early notification period)

2 Selective Absence Management: Identify specific patterns only, where such patters serve as an expected precursor to eventual LTD

Claims Management (4b)Absence Management (continued)

Comprehensive Absence Management- Implementing a comprehensive program involves greater strategic

considerations than merely more affordable income protection and;

- Cost of a comprehensive program is likely to exceed any potential discount to disability insurance

- Hence introducing a comprehensive absence program attaching to insurance can be like a tail wagging the dog

- Designed specifically to fit into an insurance product/concept- Primary aim is to reduce incidences of (eventual) LTD- Ignores patterns of absence not expected to lead to eventual LTD

Selective Absence Management

Claims Management (4c)Absence Management (continued)

What are absence patterns?Sickness Absence RatioThe number of days sick leave taken divided by potential working days over a given period

Absentee Severity Ratio

Durations of sick leave (when taken) and the Implied severityE.g. A single event of more than 7 consecutive daysVs. Repeated periods of less than 5 days

Absence Frequency RatioPercentage of people taking sick leave, for a given time period(compared to the allowable working days over that period)

Claims Management (4d)Absence Management (continued)

Decision to Intervene

- Introduction of Absence Management with Employer(with regard to definition of disability)

- Poor Co-operation from HR (administration & suspicion)- Poor consequent claims experience (good information does not automatically

equate to a good intervention program)

Stumbling Blocks to Absence Management

- Based on Absence Data & Clinical Data Combined- Specific absence patterns should trigger need to acquire

clinical data- Cost of Intervention (e.g. Return to Work program)

vs. Cost of Benefit

Claims Management (4e)Absence Management (continued)

Benefits of Absence Management

- Reduce LTD incidences

Causes of subjectivity:(a) Inconsistent approach to diagnosis among medical professionals,

medical reports and intervention & treatment being applied(b) Subjectivity in description of symptoms and the degree of the

condition

Absence Management model can lead to a more consistent approach to diagnoses, medical reports and the proposed interventions applied

- Can eliminate some of the subjectivity in the more “manageable” causes of disability (psychological & spine)

(but not recovery rate!)

Risk ManagementClosing Remarks

Analyzing Claims Management Process

is about trying to make sense of

Qualitative Information

• Not actuaries’ strong point

• Essential for appropriate pricing of disability income protection

?

Return To Work

Edward Fabrizio

Deputy General Manager and Chief Actuary

General Reinsurance Life Australia Ltd

Working is a realistic and positive option

• 90% of new claimants expect and want to work• 2/3rds claimants have manageable conditions (such

as back pain, depression, cardiovascular) where work should be realistic

• Work can improve health and well-being, and prevent deterioration

• However, many are treated as their working lives are at an end

• Obstacles to RTW are often non-health related, but include confidence, skills, financial incentives, availability of jobs

Department for Work and Pensions, British Government, November 2002: Pathways To Work

Potentially manageable conditions predominate

Department for Work and Pensions, British Government, November 2002: Pathways To Work

Incapacity Benefit Caseload by Diagnosis Group

Mental Disorder35%

Musculo-Skeletal22%

Circulatory & Respiratory

System11%

Others16%

Nervous System10%

Injury,Poisoning6%

Australian Snapshot….

• Significant utilisation of RTW strategies via Rehabilitation and Case Management programs

• Supportive product features – rehab / retraining benefits, partial disability benefits, recurrent disability benefit

• Value of internal rehabilitation programs doubted compared to external providers

• Claim professionals are generally not trained and educated in RTW skills strategies in any structured manner – varies by company

Product Features supporting RTW

• Vocational Rehab and RTW Assistance Benefits• Partial Disability Benefits• Recurrent Disability Benefits• Work-site Modification Benefits• Work Incentive Benefit• Loss of Profit Benefits• Business Expense Policies

Align contract provisions and product design with what we want to achieve – return to work

“Do it once, do it well…” Australian Life industry survey undertaken to examine

the current rehabilitation models and outcomes

Rehabilitation was defined as the use of vocational and occupational rehabilitation tools for the objective of Return To Work

Black, M & Winterbottom, L; “Rehabilitation – Working Models and Sustainable Outcomes.” Presented at the ALUCA Conference, 2004 Cairns, Australia.

Working Models

DECENTRALISED

> Claim Professional responsible for referrals

> Usually limited experience with rehabilitation, except for on-the-job training

> Usually minimal responsibility to track and measure all rehab outcomes

> Micro Approach

CENTRALISED

> One person responsible for all rehabilitation referrals

> Usually a Rehab Specialist with qualifications and experience in rehabilitation

> Usually sole responsibility to screen, manage, track and measure all rehab outcomes

> Macro Approach

Length of Rehabilitation Intervention and RTW Rate

0

2

4

6

8

10

12

14

2003 2004 2005

Ave Length of Rehab

Intervention (months)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

RTW Rate

Decentralised Centralised

Rehabilitation Cost and Benefit

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2003 2004 2005

Average Cost of Rehab

$0

$2

$4

$6

$8

$10

$12

$14

Reserve Released (m)

Decentralised Centralised

Referrals

0

50

100

150

200

250

300

350

400

2003 2004 2005

No. Referrals Made

0

20

40

60

80

100

120

140

160

No. Referrals Accepted

Decentralised Centralised

The Payoff Matrix2003 2004 2005

No. of referrals to rehabilitation service 386 474 1219

No. of referrals accepted by service 266 240 839

Medical cause of referral Musco-skel, Psych

Musco-skel (back)

Musco-skel/injury

Claims duration at time of rehab referral 21.9 months

20.4 months

22.6 months

Average length of rehab intervention 7.4 months 8.9 months 6.8 months

RTW outcomes of rehabilitation intervention RTW F/T New Occ

RTW F/T New Occ

RTW F/T Same Occ

Overall RTW rates 53.8% 64.5% 49.2%

Average cost of rehabilitation – external & internal

$1,854.66 $2,669.25 $1,814.40

Reserve Release $4,276,235 $3,444,832 $5,376,173

Implications and considerations The Centralised Model :

* lower cost, and

* more conducive to achieving sustainable outcomes Return to Work Philosophy and Programs must become an

integrated part of the companies culture in order to control claims costs

RTW programs must incorporate an integrated approach with all stakeholders with critical emphasis on date of injury/illness reporting and early intervention responses

Companies to be more stringent implementing / managing rehabilitation, training claims staff, and analysing their results.

Rehabilitation risks becoming ineffective and a costly claims tool without adequate program planning

Pathways to WorkA British Government initiative 2002

1 Early skilled intervention critical

2Better specialist support including health focussed rehabilitation

3 Making sure work clearly pays

4Better support for people moving from incapacity benefit to Job Seekers Allowance

5GPs, healthcare professionals, employers, trade unions and insurers all play important roles

Pilot Areas

• Six pilot areas ending 31 March 2006 to trial for new claimants:– New framework of work focused interviews– Improved referral routes to disability employment

programs– New work focused rehabilitation programs in

conjunction with NHS

• Early results = Pilot programme doubled RTW rates within 5 months

More than just clinical intervention

• Behavioural intervention (psychologists)

• Coping with health conditions and disabilities (counsellors, occupational therapists, physiotherapists)

• Jobs/employability training (personal advisers)

It’s about putting the individual first

Other Vendors

Multi-Discipline Assessment Team

Occupational Therapists

Insurance Case Manager

Physiotherapists

Health Care Vendors

Workers

Employers Physician

Chiropractors

Shifting across the continentsLessons for international markets proposed by Pilot Programme included:

Change attitude of medical practitioners on RTW philosophy

Educate about therapeutic benefits of work Educate employer on maintaining employees

on partial basis and use of incentives Shift insurers’ focus from medical to psycho-

social rehabilitation

UK evolving as a life and health market and philosophy to “creative solutions”

“Work is a blessing not a curse.Work supports good health.”

Bar

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Being without work:

Increases mortality

Decreases social

interaction & self

esteem

Removes a sense

of identity and

purpose in life

Increases mental

health problems

Introduces

financial difficulties

and a lack of

security

SYDNEY1.3.2006

Multilife Disability Underwriting in the U.S.

Daniel D. Skwire, FSA

Principal and Consulting Actuary

Milliman, Inc.

Traditional Income Protection Products

Individual Products Group Products

Monthly Indemnity Benefit Type % of Salary

More Generous Benefit Level Less Generous

Yes Medical Underwriting No

Yes Portable if leave job No

Individual Policyholder Employer

Yes Guaranteed Renewability

No

Yes (Usually) Guaranteed Premiums No

Multilife Disability PlansDefinition

Multilife plans involve the sale of individual

disability policies to 3 or more employees of

a common employer.

Multilife Disability Plans

“Multilife” does NOT mean:

• Group Insurance

• Professional Associations

Multilife Disability PlansObjectives

• More flexible and generous coverage than group insurance

• Lower morbidity than traditional individual policies due to group risk selection

• Efficient administration through list billing and simplified underwriting

Multilife Disability PlansKey Features

• Plan Design• Premium Rates• Underwriting• Administration

Multilife Disability PlansPlan Design

Plan Type Group Individual

Stand-alone None Full Coverage

Carve-out For Non-executives For Executives

Combo or Top-Up 60% to $6,000/month 60% of salaries above $10,000 per month

Reverse Combo 60% of salaries above $5,000/month

Up to $3,000/month

Split-Funded Two-year maximum benefit

Two-year waiting period and benefits to age 65

Multilife Disability PlansPremiums

• Level issue-age rates with policy reserves• Unisex premiums to avoid discrimination• Discounts to reflect favorable experience• “List-billing” sends one bill to employer• Premiums paid by employer, employee, or both

Multilife Disability PlansUnderwriting Methods

• Traditional: Full medical and financial underwriting

• Guaranteed to Issue (GTI): Full underwriting, including substandard actions, but coverage may not be declined

• Guaranteed Standard Issue (GSI): No medical underwriting. All policies are issued on standard basis.

Multilife Disability PlansTypical Underwriting Methods

Case Size

Participation Rate

Underwriting Method

3-20 Lives 0-100% Traditional

20+ Lives <25% Traditional

20+ Lives 25-75% Traditional, GTI, GSI

20+ Lives >75% Usually GSI

Multilife Disability PlansSuccess Factors for GSI Underwriting

• Favorable risk classes• Uniform plan chosen by employer• Pre-existing condition exclusion• Actively-at-work requirement• High participation rate• Low maximum amounts• Limited time periods

Multilife Disability PlansAdministration

• Streamlined quote process using census data• Pre-filled applications• Documentation of underwriting offers• List-billing sends one bill to employer• Capture group-level data for experience analysis• Monitor participation rates

Multilife Disability PlansRecent Experience by Market

Actual-to-Expected Claim Incidence

Class Traditional Multilife Association

1 120% 96% 156%

2 72% 48% 101%

3 52% 46% 102%

4 76% 56% 92%

Total 105% 91% 151%

Source: Society of Actuaries, 1990-1999 Experience

Multilife Disability ExperienceRecent Experience by Underwriting Method

Actual-to-Expected Claim Incidence

Occupations Traditional GSI GTI

Medical 133% 101% 123%

Non-Medical 64% 61% 65%

Total 92% 77% 87%

Source: Society of Actuaries, 1990-1999 Experience

Multilife Disability PlansProblem Areas

• Professional Associations: Lack of employer involvement means little morbidity savings

• Unisex rates may attract cases with high female content (female rates generally exceed male rates)

• Use of GSI underwriting on cases with low participation

• Poorly–designed GSI programs