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LTD Market LTD Market
Rich ClementRich Clement
GUAA – Amelia IslandGUAA – Amelia Island
November 14, 2007November 14, 2007
OutlineOutlineOutlineOutline
My Perspective on the LTD marketMy Perspective on the LTD market
LTD manual rate comparisonsLTD manual rate comparisons
Underwriting in a slumping economyUnderwriting in a slumping economy
Keys to successKeys to success
Questions and discussionQuestions and discussion
Why is LTD Difficult?Why is LTD Difficult?Why is LTD Difficult?Why is LTD Difficult?
Loss Experience is VolatileLoss Experience is Volatile-Many time-dependent external influencesMany time-dependent external influences-Hard to distinguish random from systematicHard to distinguish random from systematic
Loss Takes a Long Time to DevelopLoss Takes a Long Time to Develop
-Reserving Issues may cloud risk dynamics-Reserving Issues may cloud risk dynamics
High Product ComplexityHigh Product Complexity
- Many Plan Options- Many Plan Options
- Contract differences across carriers- Contract differences across carriers
Why is LTD Difficult? Why is LTD Difficult? (Cont)(Cont)Why is LTD Difficult? Why is LTD Difficult? (Cont)(Cont)
High level of Underwriter DiscretionHigh level of Underwriter Discretion-May provide subjective underwriter May provide subjective underwriter intelligence, but leads to loss of control and intelligence, but leads to loss of control and poor tracking.poor tracking.
Irrational Marketplace: Some Companies …Irrational Marketplace: Some Companies …- are buying market share- are buying market share- are subject to underwriting cycles- are subject to underwriting cycles- have poor underwriting control- have poor underwriting control
- lead with other products (dental, life, etc) - lead with other products (dental, life, etc) - have old and/or invalid rates- have old and/or invalid rates
Smith Group LTD Smith Group LTD Manual Rate SystemManual Rate System
Smith Group LTD Smith Group LTD Manual Rate SystemManual Rate System
Database of 12 Top LTD CarriersDatabase of 12 Top LTD Carriers
Manual Rates calculated as publicly filedManual Rates calculated as publicly filed
Batch Rates on over 20,000 actual LTD CasesBatch Rates on over 20,000 actual LTD Cases
LTD Manual Rate LTD Manual Rate ObservationsObservations
LTD Manual Rate LTD Manual Rate ObservationsObservations
Several Main Characteristics determine how your rates Several Main Characteristics determine how your rates function in the marketplacefunction in the marketplace
1.1. Rate Level Rate Level
2.2. Rate Volatility (variance of your rates to those charged by Rate Volatility (variance of your rates to those charged by other carriers)other carriers)
3.3. Rate Structure (are you high or low in the right spots?)Rate Structure (are you high or low in the right spots?)
4.4. Discount Authority Discount Authority
SG LTD Manual Rate DistributionsSG LTD Manual Rate DistributionsSG LTD Manual Rate DistributionsSG LTD Manual Rate Distributions
Distribution of LTD Manual Rate Ratios
0%
5%
10%
15%
20%
25%
1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 4
Highest Rate / Lowest Rate
Highest 3 Rates / Lowest 3 Rates
The average of the three highest rates is more than 60% higher than The average of the three highest rates is more than 60% higher than the average of the three lowest rates on 85% of casesthe average of the three lowest rates on 85% of cases
Actual Manual RatesActual Manual RatesRate Level DistributionsRate Level DistributionsRate Level DistributionsRate Level Distributions
Percent of CasesPercent of Cases
““In the Hunt”: Within 10% of the average of the lowest three CarriersIn the Hunt”: Within 10% of the average of the lowest three Carriers
““Tough Sell”: Between 10% and 30% above the lowest threeTough Sell”: Between 10% and 30% above the lowest three
““Embarrassed to Quote”: More than 30% above the lowest threeEmbarrassed to Quote”: More than 30% above the lowest three
A B C D E F AverageIn the Hunt 9% 9% 5% 13% 16% 30% 15%Tough Sell 16% 19% 16% 21% 20% 29% 20%Embarrassed to Quote 76% 72% 79% 65% 64% 41% 65%
A B C D E F AverageIn the Hunt 8% 19% 22% 26% 13% 16% 16%Tough Sell 14% 23% 26% 24% 19% 27% 21%Embarrassed to Quote 78% 58% 52% 50% 67% 57% 64%
Raw Manual Rates: No Discounting
Raw Manual Rates: With Discounting
Rate Level DistributionsRate Level DistributionsRate Level DistributionsRate Level Distributions
Volatile Rates Produce “Best Ball Effect”:Volatile Rates Produce “Best Ball Effect”: (average sold rate much lower than average manual rate)(average sold rate much lower than average manual rate)
Sales/Underwriting Loses faith in the ManualSales/Underwriting Loses faith in the Manual
At the ExtremesRaw Manual Rates: No Discounting
A B C D E F AverageLowest Rate 5% 4% 2% 7% 8% 16% 8%Rate > 60% above Min 43% 44% 45% 36% 35% 16% 36%
Raw Manual Rates: With Discounting A B C D E F Average
Lowest Rate 4% 9% 11% 15% 7% 7% 8%Rate > 60% above Min 47% 32% 21% 25% 38% 25% 35%
Sample LTD Industry FactorsSample LTD Industry FactorsSample LTD Industry FactorsSample LTD Industry Factors
LTD Industry Load/Discounts
-40%
-20%
0%
20%
40%
60%
Wholesale Trade Manufacturing Insurance Carriers Construction
CausesCauses of Manual Rate Volatilityof Manual Rate VolatilityCausesCauses of Manual Rate Volatilityof Manual Rate Volatility
1.1. Product complexity with a large number of rating variablesProduct complexity with a large number of rating variables
2.2. Random variations baked into rating factorsRandom variations baked into rating factors
3.3. Product growth strategy executed through rate adjustmentsProduct growth strategy executed through rate adjustments
4.4. Significant risk and process impacts not captured in the ratingSignificant risk and process impacts not captured in the rating
a)a) External trendsExternal trends
b)b) Changes in underwriting and sales practicesChanges in underwriting and sales practices
c) c) Changes in claims processing Changes in claims processing
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
What Do Underwriters Really Do?What Do Underwriters Really Do? Study Data – If they have it.Study Data – If they have it.
Renewals should be complete picture.Renewals should be complete picture. Assess RiskAssess Risk Attempt to Predict the FutureAttempt to Predict the Future Interpret AssumptionsInterpret Assumptions Assign a CostAssign a Cost Negotiate with Sales Reps and Account Mgmt.Negotiate with Sales Reps and Account Mgmt. Partner with ActuariesPartner with Actuaries Collaborate with ClaimsCollaborate with Claims
What if the Economy What if the Economy Turned?Turned?
Planning and PreparationPlanning and Preparation: : Can the past help us understand the future?Can the past help us understand the future? What has happened in the past?What has happened in the past? Provides empirical boundariesProvides empirical boundaries
Within the last 20 years we have had two Within the last 20 years we have had two economic slow downs:economic slow downs:
’’91-’92 impacted white-collar employees91-’92 impacted white-collar employees Exacerbated by liberal plan designsExacerbated by liberal plan designs Many new claim diagnosis – CFS, Carpal TunnelMany new claim diagnosis – CFS, Carpal Tunnel
’’01-’02 impacted financial sector and 01-’02 impacted financial sector and telecommunicationstelecommunications Smaller employersSmaller employers
Many changes have occurred, i.e. claims Many changes have occurred, i.e. claims practices, contract rewritepractices, contract rewrite
Diversity of BookDiversity of Book
Pursue Industries that may not follow the Pursue Industries that may not follow the traditional economic cycletraditional economic cycle
MunicipalitiesMunicipalities Health-careHealth-care EducationEducation Other industriesOther industries
Plan designPlan design Conscious of replacement ratiosConscious of replacement ratios Avoid liberal salary definitions that depend on Avoid liberal salary definitions that depend on
large bonuseslarge bonuses Real EstateReal Estate
24 month M&N/Substance Abuse Limitation24 month M&N/Substance Abuse Limitation Subjective condition limit – understand value from Subjective condition limit – understand value from
claimsclaims
Impact on Smaller Impact on Smaller EmployersEmployers
Smaller groups can be more of a Smaller groups can be more of a concernconcernLess likely to have surplus – rainy Less likely to have surplus – rainy
day fundday fundHarder to borrow needed cash – Harder to borrow needed cash –
limited collaterallimited collateralLess RTW opportunities and Less RTW opportunities and
capabilitiescapabilitiesTrickle down effect Trickle down effect
Small consulting firms, housing Small consulting firms, housing marketmarket
Financial UnderwritingFinancial Underwriting
Pay greater attention to financial Pay greater attention to financial underwriting underwriting
Look for signs of weak financialsLook for signs of weak financials Avoid the mistakeAvoid the mistake Underwriters should keep up to date on Underwriters should keep up to date on
economic outlookeconomic outlook Industry experts to communicate Industry experts to communicate
positive and negative outlookspositive and negative outlooks Evaluate business segments for known Evaluate business segments for known
concentrationsconcentrations
Why is Financial Why is Financial Underwriting Important?Underwriting Important?
Helps to determine a client’s ability to pay Helps to determine a client’s ability to pay their insurance premium.their insurance premium.
An employer’s financial condition can have a An employer’s financial condition can have a major impact on claim incidence rates, the major impact on claim incidence rates, the worse the financial condition, the expectation worse the financial condition, the expectation the higher the claim incidence level.the higher the claim incidence level.
You You maymay find that a company’s positive or find that a company’s positive or improving financial condition improving financial condition couldcould point to an point to an improved claims trend going forward, may be a improved claims trend going forward, may be a situation where you can discount your quote situation where you can discount your quote rate (track decisions). rate (track decisions).
Why do companies with Why do companies with financial problems exhibit financial problems exhibit poor disability experience?poor disability experience?
Financial pressures often lead to layoffs/downsizing which increases claim incidence levels.
Remaining employees face higher stress levels and may be required to work longer hours leading to an increased number of claims.
Fear of the unknown, is there going to be another round of layoffs?
Employees on claim have less motivation to return to work
Why do companies with Why do companies with financial problems exhibit financial problems exhibit poor disability experience?poor disability experience?
Threat of downsizing may affect those employees who continue to work with medical conditions. When faced with potential unemployment, they may file a disability claim citing these latent medical conditions
Employer may not be as willing to accept disabled employees back to work.
Demographics of remaining employees could be worse. Often the younger, less experienced workers are the first to go.
Administration/ExecutionAdministration/Execution Limit (try to) Rate guarantees for STD and LTD
Aging population Monitor premium payment
Variance Reports for both premium and lives Change in lives kicker
Review census after sale of core/buy-up, voluntary, contributory case
Renewal Know concentration of risk Monitor reserving assumptions Claims support & feedback Renewal Strategy
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Invest in the Right Invest in the Right OpportunitiesOpportunities
Who is the competition? What have they Who is the competition? What have they done and what will they do?done and what will they do?
What do we need to do to write the case What do we need to do to write the case (without leaving money on the table?)(without leaving money on the table?)
Are we comfortable with our decision?Are we comfortable with our decision? Know when to walk away.Know when to walk away.
Emotionally invested.Emotionally invested.
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Invest in the Right Invest in the Right OpportunitiesOpportunities
Avoid the pitfallsAvoid the pitfalls Don’t back into your formula rate based Don’t back into your formula rate based
on competitive positioning.on competitive positioning. Do your analysis firstDo your analysis first Don’t overvalue the inforce and /or Don’t overvalue the inforce and /or
competitor ratescompetitor rates Trust yourself.Trust yourself.
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Invest in the Right OpportunitiesInvest in the Right OpportunitiesAvoid the pitfallsAvoid the pitfalls
Overly aggressive approach to weighing credibility, Overly aggressive approach to weighing credibility, shock claims:shock claims:
Does experience reflect high end exposure?Does experience reflect high end exposure? Pooling works two ways.Pooling works two ways.
Exercise caution when reviewing recent experience Exercise caution when reviewing recent experience periods.periods. Is data fully revealed? Is standard claim lag appropriate?Is data fully revealed? Is standard claim lag appropriate? Are all claims approved?Are all claims approved? What is likely claim termination rate?What is likely claim termination rate?
We need to honor any rate put on the tableWe need to honor any rate put on the table.. Be careful of shadow pricing.Be careful of shadow pricing. No such thing as “illustrative quote.”No such thing as “illustrative quote.”
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Invest in the Right OpportunitiesInvest in the Right Opportunities
Avoid the pitfallsAvoid the pitfalls Avoid the disaster!Avoid the disaster!
Look for the warning signs: Look for the warning signs: Financials:Financials:
Mergers, Acquisitions, Management Changes, Mergers, Acquisitions, Management Changes, FilingsFilings
Experience and Industry TrendsExperience and Industry Trends Data QualityData Quality Carrier HoppingCarrier Hopping
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Invest in the Right Invest in the Right OpportunitiesOpportunities
““In today’s economy, there are no experts, In today’s economy, there are no experts, no ‘best and brightest’ with all the no ‘best and brightest’ with all the answers. It’s up to each one of us. The answers. It’s up to each one of us. The only way to screw up is to only way to screw up is to notnot try try anything.anything.
Tom PetersTom Peters
Best Practices for Today Best Practices for Today and Tomorrowand TomorrowMaking the CallMaking the Call
It’s Your InvestmentIt’s Your Investment Common SenseCommon Sense Not Based On One Reason AloneNot Based On One Reason Alone Pure Business DecisionPure Business Decision Balance; it works both waysBalance; it works both ways CommunicateCommunicate Get It Back Into The Process: Get It Back Into The Process:
DocumentDocument
Best Practices for Today Best Practices for Today and Tomorrowand TomorrowSuccessful Case ReviewsSuccessful Case Reviews
1.1. Sound underwriting risk selection.Sound underwriting risk selection.
2.2. Include narrative and financial summariesInclude narrative and financial summaries Allows the underwriter to walk through the Allows the underwriter to walk through the
processprocess
3.3. Highlights include:Highlights include: Customer, Producer, Case History, OpportunityCustomer, Producer, Case History, Opportunity Data qualityData quality Underwriting AdjustmentsUnderwriting Adjustments Sales Strategy, competitors, etc.Sales Strategy, competitors, etc. Underwriting investmentUnderwriting investment Financial SummariesFinancial Summaries
Best Practices for Today Best Practices for Today and Tomorrowand Tomorrow
Future Lunch and Learn Future Lunch and Learn SessionsSessions
Topics, Timing and DistributionTopics, Timing and Distribution Suggested TimingSuggested Timing
One hour sessions, (90 minutes if with lunch)One hour sessions, (90 minutes if with lunch) Bi-WeeklyBi-Weekly
Suggested Distribution of Lunch and LearnSuggested Distribution of Lunch and Learn Underwriting Team meetingsUnderwriting Team meetings Held within 2 weeks of initial lunch and learn Held within 2 weeks of initial lunch and learn
information session.information session. Lunch is optional (non, brown bag, other)Lunch is optional (non, brown bag, other)
Actual Manual RatesActual Manual RatesOpinion: Keys to SuccessOpinion: Keys to SuccessOpinion: Keys to SuccessOpinion: Keys to Success
You need to learn to sell something other than priceYou need to learn to sell something other than priceKey: Good SalesmanshipKey: Good Salesmanship
Allow subjective risk decisions, but make sure underwriters learn from their decisionsAllow subjective risk decisions, but make sure underwriters learn from their decisionsKey: underwriter discipline, thorough documentation and trackingKey: underwriter discipline, thorough documentation and tracking
Account management needs to understand service modelAccount management needs to understand service modelKey: Pro-activity, keep yourself in front of the customerKey: Pro-activity, keep yourself in front of the customer
Understand market dynamics: price elasticity on prospects and renewals: How do rate Understand market dynamics: price elasticity on prospects and renewals: How do rate changes impact the sales process?changes impact the sales process?Key: Become a student of the group insurance marketKey: Become a student of the group insurance market
You need a detailed knowledge of other carriers’ pricing strategy. Sales should gather You need a detailed knowledge of other carriers’ pricing strategy. Sales should gather and track as much quote rate information as possibleand track as much quote rate information as possibleKey: Good Broker relationshipsKey: Good Broker relationships
QuestionsQuestions
Thank you for your time.Thank you for your time.
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