CIA Annual Meeting
Assemblée annuelle de l’ICA
June 29 & 30, 2006  Les 29 et 30 juin 2006
Ottawa, Ontario
Individual & Group Style Pricing
CIA Annual Meeting  Assemblée annuelle de l’ICA
Living Benefits
Session GRP/IND-5
Presenter: Jeff Neufeld, FSA, FCIA
Assistant Vice-President, Group Valuation and Pricing
The Great-West Life Assurance Company
CIA Annual Meeting  Assemblée annuelle de l’ICA
Individual Style Pricing
vs.
Group Style Pricing
CIA Annual Meeting  Assemblée annuelle de l’ICA
• Traditional “Individual” Style Pricing
– bottom-up, micro approach.
– product costs are dissected.
– determine assumptions for incidence, termination,
offsets/co-ordination, interest, expenses, etc.
– use models to put the assumptions back together and
build up tables of rates.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• Traditional “Group” Style Pricing
– top-down, macro approach.
– not necessarily concerned with performance of each
individual assumption.
– product costs are not dissected by assumption type,
but may be dissected by business type.
– calibrate pricing and valuation to profitability or A/E
claim cost.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• “Individual” Style Pricing
Advantages:
– does not require a mature, credible block of business
– easier to incorporate industry or population
information
– helps to differentiate prices by various factors
– consistent with our actuarial training.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
– “Individual” Style Pricing
Disadvantages:
– poor response time (takes time to measure and
develop all assumptions).
– difficult to confirm that nothing was missed (eg. lump sum settlements?)
– difficult to verify that data was interpreted correctly.
– difficult to find credible data for all the breakdowns
of all the required assumptions.
….cont’d.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
– “Individual” Style Pricing
Disadvantages:
– difficult to get accurate exposure data (e.g. self
accounting groups)
– smoothing of assumptions can compromise results
– difficult to account for correlation.
– a complex model is required to re-assemble all the
assumptions.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• “Group” Style Pricing
Advantages:
– quick response time to profitability or competitive
concerns.
– calibrating to actual profitability or experience acts as a
“catch-all” mechanism to ensure nothing is missed. (No
surprises after implementation of new rates).
– studying total profitability rather than each fundamental
assumption separately, reduces problem of poor data
credibility and reduces the need for smoothing.
….cont’d.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• “Group” Style Pricing
Advantages:
– exposure data precision is much less important than for
bottom-up pricing.
– easier to account for correlation.
– easier to explain results to non-actuarial management
– reduced distractions caused by differences within
individual assumptions (i.e. poor LTD incidence rates in
Quebec).
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• “Group” Style Pricing
Disadvantages:
– requires a mature credible block of business.
– easier to overlook legitimate price differentiating factors
and simply price for the average.
– difficult to determine precisely why experience changes
occur.
– does not satisfy our actuarial instincts to measure each
assumption.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Product Differences
• Different products are better suited for each style.
• Different styles have traditionally been used for each
product.
• Are the best styles being used for each product?
• Can we gain an improved understanding from considering
different styles than we have traditionally used?
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Insurance
• Life Insurance has historically been the domain of the
Individual pricing style.
• Easy to price Life Insurance by determining assumptions:
– mortality rates
– interest rates
– lapse rate (if necessary)
• Individual Style disadvantages are not significant.
• Group style pricing offers little to improve upon the
Individual style for Life Insurance.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
CI
• Critical Illness Insurance pricing is similar to Life Insurance
pricing
– just need assumptions for incidence, interest and lapses
to get started.
– Individual Life pricing actuaries are comfortable with this
kind of pricing.
– this may explain why many companies have introduced
CI even if they do not have other individual Health or
Disability products.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
CI
• Similar to Life Insurance, Group Style pricing can offer little
to improve upon CI pricing:
– especially since CI is still too new for any company to
have credible experience upon which to base their
pricing.
– at my company, the Group CI pricing depended
completely on the expertise of our Individual division.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Health & Dental
• Health & Dental Insurance has historically been the domain
of Group Style pricing.
• Total claims experience is measured and compared to
premium rates and to prior experience.
• New premium rates are set based on total expected future
claims by policy type.
• Individual or certificate level experience is studied less
frequently.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Health & Dental
• Using pure Individual Style pricing would be futile.
• Too many different assumptions required (every type of
drug, dental procedure, etc.).
• Plus each assumption is a moving target due to inflation
and utilization changes.
• At my company the Individual Health & Dental product is
priced and administered by the Group division.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Disability
• Disability Insurance has traditionally been priced using the
Individual pricing style. Assumptions are derived for
incidence, termination, interest, offsets, lapses, etc.
• Premium rates are often determined by the use of a model
which re-assembles all the assumptions.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Disability
• The Group pricing style may be under-utilized for DI/LTD
even in Group Insurance.
• As a result, pricing may be slow to respond to changing
morbidity levels.
• Also, without testing rates against actual total experience,
one can never be certain the rates are appropriate.
• How can Group Style pricing be used for Disability
Products?
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Testing DLR's (excluding PFAD's):
Claim
Duration
Beginning
DLR
+ Val.
Int.
- Paid
Claims
4
3
2
1
1,000
1,000
1,000
1,000
50
50
50
50
200
300
400
400
900
850
800
350
(50)
(100)
(150)
300
Total
4,000
200
1,300
2,900
0
Session GRP/IND-5
- End
DLR = Adequacy
CIA Annual Meeting  Assemblée annuelle de l’ICA
– Several years of experience can be layered on top of
each other to improve credibility.
– Splitting by duration is very important.
• in total, the DLR looks adequate.
• however, the duration results show that the
inadequacy is masked by strength in duration 1.
• this block of DLR’s would ultimately produce a loss
on run-off.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• The total termination rate assumption might be correct.
• However, maybe the assumption for offset changes,
reopens, or lump sum settlements was incorrect.
• This test ensures that everything is accounted for.
• DLR’s can be calibrated to this test.
• Using this test, an accurate DLR table could be built without
ever measuring each assumption (no termination rate
study).
• That is, the test can tell us how much reserve is needed at
the beginning of each duration to fund claim payments and
ending reserve (an iterative process).
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Determining the Required DLR (excl. PfADs)
Claim Beginning
Duration
DLR
End
DLR
Chg in
Req'd
Req'd Beginning
Adequacy End DLR
DLR
%
4
3
2
1
1,000
1,000
1,000
1,000
900
850
800
350
(50)
(100)
(150)
300
N/A
43
114
92
1,050
1,143
1,264
792
105%
114%
126%
79%
Total
4,000
2,900
0
249
4,249
106%
Assumptions should be revised to achieve the Required Beginning DLR
for each duration.
(Note this simplified example ignores the interest impact.)
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• This test can also be used to test other parameters (to
assist in pricing and valuation).
• For example, the table could be split into one table for
Quebec claims and one for claims outside Quebec. Quebec
tends to have better termination experience but, are offset
changes different, etc.?)
• Using these tests, one could confidently develop separate
DLR tables for Quebec vs. outside Quebec to be used for
pricing.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• This concept can be extended to pricing once appropriate
DLR & IBNR tables are developed.
Group example:
+ Risk Premium (excluding retention) – restated to
current basis
- Paid Claims
-  DLR
-  IBNR
+ Valuation Interest
= Morbidity Gain (expect zero)
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• Splitting this table by a parameter (such as Quebec vs.
other) will again indicate if the pricing differential is
appropriate.
• A number of experience years can be layered together to
increase credibility.
• Premium rates can be calibrated to the results of this
analysis.
• This test is really an extension of the previous DLR test to
include duration 0. Risk premium is used in place of
beginning DLR for duration 0.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
Testing ALR’s (Individual DI) - excluding PFAD’s
+ Total Premium
- Paid Claims
-  DLR
-  IBNR
+ Valuation Interest (on all reserves)
-  ALR
- Valuation Expenses
= ALR Adequacy (morbidity & lapse experience only)
• Similar to the Group example, splitting this test by various
parameters can test the adequacy of price differentials.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• With a credible block of business, one could theoretically
use this “Group Style” to develop LTD or DI rates without
ever studying incidence or termination rates.
• Experience years can be layered on top of each other to
increase the credibility of these tests.
• Even without full credibility, these tests can be used to
indicate areas of weakness or strength in the existing LTD
or DI rates.
Session GRP/IND-5
CIA Annual Meeting  Assemblée annuelle de l’ICA
• Since actuaries love to study incidence and termination
rates, a more practical use of Group Style pricing methods
for Disability products is as a test.
• Pricing and valuation tables can be initially developed using
assumptions derived from traditional methods.
• Resulting premium rates and/or reserves can be tested
using Group methods (splitting by all required parameters).
• Assumptions can be calibrated to the results of these tests.
Session GRP/IND-5