Transcript PD-19-Schuh-Douglas-Fraser 4611KB Dec 10 2009 12:22:34 PM

Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
2009 General Meeting ● Assemblée générale 2009
Ottawa, Ontario ● Ottawa (Ontario)
Session/séance : PD-19 Impact of Recessions on LTD Experience
Speaker(s)/conférencier(s) : Jeff Schuh, Peter Douglas, Ken Fraser
2009 General Meeting
Assemblée générale 2009
Agenda
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Evolution of the U.S. recession
•
Historical connections between recessions and
Group LTD experience in the U.S.
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Canadian LTD metrics vs. Economic indexes
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Canadian LTD Profitability vs. Economic indexes
2009 General Meeting
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PD-19 Impact of Recessions on LTD Experience
Jeff Schuh, VP & Senior Actuary
ING Reinsurance
U.S. Economic Timeline
2009 General Meeting
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June 2007
2008
Sept 2009
Summer 2007 - “Beginning of the end”
•
Trouble brewing in the U.S. housing market
(prices dropping, inventories climbing, foreclosures up)
•
MBS quality drops
•
2 large Bear Stearns hedge funds go bankrupt
($1.6B) due to MBS exposure – despite AAA rating
•
First crack in the edifice
•
Cost of borrowing up, spreads increase
U.S. Economic Timeline
June 2007
2008
Sept 2009
2009 General Meeting
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March 10-16, 2008: “A very bad week”
Monday
•
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Rumors circulate that Bear Stearns is running out of cash
Stock begins to nosedive (slowed only by Spitzer scandal!)
Thursday
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Bear Stearns suffers run on bank as clients pull money
Needed emergency cash or file bankruptcy overnight, call to JP Morgan
JP Morgan and NY Feds send over analysts to look at the books
Friday
•
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JP and Feds discover enormity of problem: sub-prime exposure,
credit default swaps, interconnectedness with other banks
Feds propose a loan $30B to JP Morgan to fund Bear Stearns purchase
Saturday
•
JP offers Bear Stearns $8-12/share ($170 in 2007, $30 previous Friday)
Sunday
•
•
JP revises bid and offers $4/share
Treasury Secretary Henry Paulson worries about “moral hazard”, insists that JP lower offer
to $2/share to penalize Bear Stearns
Economy limps along until the fall…
U.S. Economic Timeline
2009 General Meeting
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June 2007
2008
Sept 9-16th, 2008: “The Week America’s Economy Almost Died”
Tuesday – Lehman Brothers stock drops 45% in one day
Wednesday – LB announces earnings early, to no avail
Thursday – LB computerized trading system freezes when JPMorgan
demands $5B collateral on short notice
Friday
•
•
•
Paulson insists there will be no bailout, citing “moral hazard” issues
Geithner declares “somebody needs to buy them”
BOA and Barclays interested – but BOA purchases ML instead,
Barclays drops out
Sunday – LB files bankruptcy
Tuesday
•
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LB goes under
Stock market nose dives
Banks unwilling to lend money, credit markets freeze up
AIG nationalized after stock drops 61%
Wednesday – Goldman Sachs and Morgan Stanley now teetering
Sept 2009
U.S. Economic Timeline
2009 General Meeting
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June 2007
2008
September 20
$700B bailout proposed
September 21
GS and MS turn themselves into bank
holding companies (all five major investment
banks are gone)
September 25
Washington Mutual becomes largest
bank failure ever
October 3
Congress passes bailout bill allowing
government authority to purchase
toxic assets or capital injections
Sept 2009
September & November, 2008
2009 General Meeting
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Lehman Bankruptcy
Bank of America acquires Merrill Lynch
Federal Reserve rescues AIG
Bailout Plan passed
Goldman and Morgan Stanley become banks
Washington Mutual seized
Wells Fargo acquires Wachovia
Fannie Mae/Freddie Mac bailed out
Car Makers (Detroit) seek bailout
President Obama elected
Speed of economic collapse was startling…
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Durations of Past U.S. Recessions
Dec 2007-????
March 2001-Nov. 2001
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July 1990-March 1991
July 1981-Nov. 1982
Jan. 1980-July 1980
Nov. 1973-March 1975
Dec. 1969-Nov. 1970
April 1960-Feb. 1961
Aug. 1957-April 1958
July 1953-May 1954
Nov. 1948-Oct. 1949
Feb. 1945-Oct. 1945
May 1937-June 1938
Aug. 1929-March 1933
Oct. 1926-Nov. 1927
May 1923-July 1924
Jan. 1920-July 1921
Aug. 1918-March 1919
Jan. 1913-Dec. 1914
Jan. 1910-Jan. 1912
May 1907-June 1908
Sept. 1902-Aug. 1904
0
5
10
15
20
25
30
35
40
45
50
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Recessions Are Not Equal Opportunity Events
2009 General Meeting
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(snapshot from early 2009)
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What does this have to do with
Group LTD?
•
•
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Potential for higher incidence rates
Potential for lower termination rates (longer durations)
Effect will vary by diagnosis, industry, occupation,
demographics
Statements above are logical and plausible, but
largely anecdotal. What proof do we have that this
linkage exists?
U.S. Evidence of LTD/Economy Linkage
2009 General Meeting
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Metrics
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M&A Impact on Group LTD Incidence (2000)
Unum 2004 Incidence Study
2008 SOA Termination Rate Study
ING Survey on Economic Impact (2009)
New Academic Papers
Profits
•
•
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1990 LTD Industry Profits
2008 Industry LTD Claims Review
Recent Results from Select Insurers (Unum, Standard, Met)
2009 General Meeting
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Impact of M&A on Group LTD
Study by one U.S. insurer found LTD incidence rates and
loss ratios increased immediately after M&A activity*
–
–
Incidence rates 10-15% higher after M&A date
Annual incurred claims per employee were 21% higher
Were these from employees who were very likely to be laid off? Does
this differ from current environment where employment is uncertain and
workers may be afraid to go on disability?
Will there be a disability “echo” during economic recovery as postponed
claims are filed and new claims arise from overworked staff?
*Source: ING Reinsurance Disability Forum, 2000, Vol. 7, No. 2
2009 General Meeting
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Unum Incidence Study
•
Presented at SOA 2004 Anaheim Health Spring Meeting
•
Unum LTD incidence rates from 1989-2003 mapped
against U.S. recessions of 1990 and 2001
•
Discovered correlations between incidence rates and
macro-economic indexes
•
Startling conclusion: incidence rates continued to rise
after the 1990 recession, and officially peaked
16 quarters after the recession officially ended
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Conclusions of Unum Study
Indicator
When Indicator is…
Unemployment Rate
less than 5.7%
5.7% or higher
100
112
Consumer Confidence
108 or higher
91 to 107
90 or less
100
105
111
less than 230 bp
230 bp or more
100
110
1.4% or greater
less than 1.4%
100
106
Spread Between
10-Year Treasury Yield
and Fed Funds Rate
Employment Growth
Pd. Incidence Avg
Based on UnumProvident Corporation's Total Paid Incidence 1Q884Q02 (60 Quarters) - indexed to 100
Implications are troubling given current economic indicators…
2009 General Meeting
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Oct-09
Oct-08
Oct-07
Oct-06
Oct-05
Oct-04
Oct-03
Oct-02
Oct-01
Oct-00
Oct-99
Oct-98
Oct-97
2009 General Meeting
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U.S. Consumer Confidence Index
160
140
120
100
80
60
40
20
0
Qualifications with Unum Study
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Actual values and claim rates not available
Correlations vs. causation
No linear relationships
Mix of business: results not corroborated by other insurers,
current Unum results not adversely affected by recession
(significant move down-market and concentration in “recession
resistant” industries)
2001 recession incomplete, inconclusive during study period
Not all recessions have similar effects
More to Group LTD profitability than incidence rates
However, the study served important role by generating
discussion and increasing awareness of LTD/Economy linkage
2009 General Meeting
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ING Reinsurance Industry Survey
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“Impact of the U.S. Economy on the Disability Market” – 9/2009
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Incidence Rates:
–
–
–
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Majority of participants felt economy had minimal impact on incidence
or that incidence had declined
“Some industries with increasing incidence rates are offset by
tendency of employees in other sectors to hang on to their
employment or RTW more quickly in order to avoid losing job”
“We have experienced more instances in which claims submitted were
not eligible because their hours were reduced below plan”
Recovery Rates:
–
–
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78% felt recession had not affected recovery rates, however…
56% felt recession has dampened employers’ willingness to support
RTW
“There is less willingness to hold jobs open or make accommodation
to allow some to return to work”
New SOA LTD Study:
Short Duration (<5 yrs) Termination Rates
2009 General Meeting
Assemblée générale 2009
140%
120%
100%
80%
60%
Rec A/E W/Bump
40%
Death A/E
20%
0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Speaker noted only modest drop in termination rates during 2001,
offset by increase in mortality
Source: “SOA Experience Table Update” – Edd Bailey, Eric Poirier (2009 JHA Dynamics of Disability)
New Academic Studies from the
University of Southern Maine
2009 General Meeting
Assemblée générale 2009
(Center for Business & Economic Research)
•
“Long-Term Disability Claims Rates and the Consumptionto-Wealth Ratio” published in the Journal of Risk and Insurance
[March 1, 2009]
–
–
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Purpose: investigate relationship between Group LTD claim rates
and the economic indicators. Explore the ability of the consumptionto-wealth ratio to predict LTD submitted claims rates.”
Option Theory utilized as LTD insurance treated as put option
Conclusion: “When the consumption-to-wealth ratio is low, claims
rates are high. We find that the connection is fairly strong and
robust”
Predicting SSDI submitted incidence using time series
(ARIMA) models
–
–
Preview given at SOA Annual Meeting (Oct. 28-28, 2009)
Relatively high predictive power
New Academic Studies from the University
of Southern Maine
2009 General Meeting
Assemblée générale 2009
(Center for Business & Economic Research)
The catch…
•
Consumption-to-Wealth Study:
–
–
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Examined only two industry sectors: manufacturing and wholesale/retail.
Based on Unum-only data
This is an academic paper - Dynamic Ordinary Least Squares Cointegrating
Regressions:
•
ARIMA Model:
–
Time series models are a black box, do not provide insight into reasons
for predictive ability.
2009 General Meeting
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U.S. LTD Industry Profits vs. 1990 Recession
- LTD experience does not track directly with recession. Lagged effect?
- Poor experience generally attributed to white collar lay-offs, liberal plan
designs (physicians/attorneys), rise of managed care, etc.
Source: Jan. 2009 GUAA presentation (Rich Clement – Smith Group)
2009 General Meeting
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Council for Disability Awareness:
2008 LTD Claims Review
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15 participating companies, representing 75% of U.S. disability
market.
•
Government Plan
•
–
Applications for SSDI benefits “surged” during 2008
–
SSDI approval rates continue to decline
Private Plans
–
LTD insurers report that over past several years, incidence and durations
have been declining
–
Almost without exception, participants report that the 2008-2009
downturn has not affected disability claims as of the reporting date
–
“The participating member companies generally expect to see some
influence on claims from the current economic downturn, although none
predict a severe impact.”
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StanCorp shows no adverse link between economy and
overall Group Benefit Ratio
Source: 9/10/2009 KBW Insurance Conference
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Drill-down into LTD-only benefit ratio yields similar results
Source: 9/10/2009 KBW Insurance Conference
2009 General Meeting
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StanCorp’s Quarterly Group Benefit Ratios
- through 3Q09
StanCorp Group Benefit Ratio
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
2007
1Q08
2Q08
Source: StanCorp’s quarterly earnings calls
3Q08
4Q08
1Q09
2Q09
3Q09
2009 General Meeting
Assemblée générale 2009
• Bad News: Unum shows uptick in LTD incidence rate during 3Q09.
STD deteriorated as well.
• Good News: Average size of claim decreased, claim volatility coming
from “non-economically sensitive sectors”.
Source: 9/9/2009 Annual Investor Meeting
Source: 9/9/2009 Annual Investor Meeting
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Source: 9/9/2009 Annual Investor Meeting
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Source: 9/9/2009 Annual Investor Meeting
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MetLife Underwriting Results
2009 General Meeting
Assemblée générale 2009
• The group disability morbidity ratio (96.4%) was above the
target range for the first time this year.
Disability Morbidity
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
2007
2008
1Q09
2Q09
3Q09
• “Disability claim incidence picked up in the third quarter after
several quarters of stable experience, although there was a
similar up-tick in the year-ago period.”
• “Recoveries, which have been lower than anticipated all year,
remained below expectations.”
Source: MetLife Q3 2009 Earnings Call - October 30, 2009
Links
2009 General Meeting
Assemblée générale 2009
2004 Unum SOA Presentation
http://www.soa.org/files/pdf/033_bk-anaheim04.pdf
2008 SOA Table:
http://www.soa.org/research/group-disability/2008-ltd-study.aspx
CDA 2008 LTD Claims Review:
http://www.disabilitycanhappen.org/surveys/CDA_LTD_Claims_Survey_2008.asp
University of Southern Maine – Center for Business & Econ
Research
http://www.usm.maine.edu/~cber/
LTD & Consumption to Wealth Ratio
http://www3.interscience.wiley.com/cgi-bin/fulltext/122192705/HTMLSTARTW?CRETRY=1&SRETRY=0
2009 General Meeting
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PD-19 Impact of Recessions on LTD Experience
Peter Douglas, Instructor
Math & Stats
University of Regina
2009 General Meeting
Assemblée générale 2009
PD-19 LTD During A Recession
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Statistical Analysis
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Historical Background
Data Sources
Impact on Incidence
Impact on Termination
US, Canadian and UK data
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Data Studies
All of this data free on the web!
But ideally we need longer Canadian LTD history.
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Historical Unemployment
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Canadian Economic
Indicators
CIA LTD Studies
2009 General Meeting
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Short history with key gaps
Termination Rates
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1988-97 Study released 2009
New study 2004-8 underway
Incidence Rates
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No study to date
Planned 2009 study on hold
2009 General Meeting
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CIA Terminations
A:E ratios generally improved over time
Regardless of changes in unemployment!
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CIA Terminations
Detailed Results
•
Correlation of A:E Ratio
•
Improvement over time more important
than job market
More terminations in poor job market?
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More soft claims (year 1 results)
Biggest impact in years 4-10?
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CPP Disability Approvals
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CPP Disability Approvals
2009 General Meeting
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CPP Approval Rates
• Subjective
– Politics
– Policy changes
– Current political pressure?
• Clear spikes when unemployment is
high
• Expect an increase in CPP approval
rates for 2009-10
2009 General Meeting
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WCB Statistics
• Results by province 1996-2007
– Some gaps
– Key stats added in 2000
– Not always consistent between WCBs
• Key Statistical Measures
– Number of Loss Time Claims
– Payroll
– % LTCs receiving benefits after 2 years
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Past WCB Studies
• Incidence Improves During a
Recession
– Fewer inexperienced workers
– Less safe equipment mothballed
– Hazardous industries worst hit by
economy
• Fear of job loss
– may increase or decrease incidence
claims
• No clear impact re cost per claim
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WCB Incidence Rates
($M adjusted payroll)
Incidence of time loss claims decreases over period
Unemployment generally decreases, but no clear link
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WCB Incidence Rates
(per 100 Lives)
More useful measure but shorter history
Again no clear link to unemployment
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WCB Continuance
(after 2 Years)
History is short and incomplete.
Most provinces see increase in longer term claims over time.
No clear link to unemployment.
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SOA 1995 LTD Study
Slightly longer history over full cycle.
More data and results shown by quarter.
Terminations inversely correlated to unemployment.
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SOA 1995 LTD Study
Same data shown as XY Scatter plot.
Downward trend indicates A:E ratios↓ as Unemployment ↑
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SOA 1995 LTD Study
Regression models can be fit to data, but why?
Clearly results are driven by more than unemployment.
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SOA 2008 LTD Report
Recovery rates improved with both job market and time.
Not clear which is most important, implication for recession
2009 General Meeting
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SOA 1990-99 DI Study
Incidence Rates
Incidence rates improved with job market
Not clear they will get worse with job market.
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SOA 1990-99 DI Study
Incidence Rates
Same data as XY scatter plot.
Study does not look at termination A:Es by year
2009 General Meeting
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UK Experience
• UK Group Income ProtectionLTD
• Typically 13 or 26 week EP
• CMR20
– Termination Experience 1995-8
– Includes results from 1974-98
– Experience grouped into 4 year periods
– UK economic trends differed from US
and Canada over much of this period
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UK Group Experience
•No pattern based on employment or over time!
•A:E high in periods of high UE (91-4) and low UE (75-8)
•A:E low in periods of high UE (83-6) and low UE (95-8)
•Economic forecasts were grim in the early period covered
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What Does the Data Tell Us?
.
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What Does the Data Tell Us?
• Incidence rates
– Improved with job market in past
• Other factors at work?
– May deteriorate with job market
• Plausible causation (stress, anti-selection)
• Supporting data hard to find
• CPP disability approval rates
– Strongly correlated with unemployment
in past
.
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What Does the Data Tell Us?
• Termination rates ?!?!
– CIA LTD shows no clear link to
unemployment
• Increase in early months (soft claims)?
– SOA study indicates experience
worsens with job market
– UK study inconclusive
– WCB may not be applicable
– Crash when things are really bleak
.
• (UK 80s)
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Links
• CIA LTD
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http://www.actuaries.ca/members/publications/pub_index_2009_e.cfm
• SOA 95 LTD
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http://www.soa.org/research/group-disability/96-group-ltd-study-tables.aspx
• SOA DI
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http://www.soa.org/research/limited-disability/hlth-1990-99-individual-disability-experience-committee-report.aspx
• AWCBC
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http://www.awcbc.org/en/financialdataandkeystatisticalmeasuresksm.asp
• UK CMR
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http://www.actuaries.org.uk/knowledge/cmi/cmi_reports
• .OECD
–
http://stats.oecd.org/index.aspx
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PD-19 Impact of Recessions on LTD Experience
Ken Fraser, President
Fraser Group
Recession and LTD Results
2009 General Meeting
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Data Sources
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Fraser Group
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•
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Canadian Incidence and Continuance Study
Quick Profitability Survey
Sources of Profit Survey
Statistics Canada
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Gross Domestic Product
Unemployment Rate
Quick Profitability Survey
•
Survey of Group carriers
Data from 1992 to 2008
•
A simple question?
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Were your results satisfactory in LTD?
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Yes/No
•
2008 data from 17 companies, 91% market share
Sources of Profit Survey
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Survey of Group carriers
Data from 1996 to 2008
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Profit as Percent of Revenue
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2008 data from 12 companies, 81% market share
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Canadian Incidence and
Continuance Study
•
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Experience Study
Data from 2000 to 2003
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Exposure and Claim data from
employers < 1000 lives
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2003 data from 13 companies, 34% market share
14%
40000
12%
35000
10%
Economic Indicators
30000
GDP per capita
8%
25000
Unemployment Rate
6%
20000
2006
2004
2002
2000
2%
1998
10000
1996
4%
1994
15000
1992
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45000
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LTD Satisfactory
80%
70%
60%
50%
40%
30%
20%
10%
0%
Industry
Consolidation
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Total Industry Profit vs
Number "Satisfactory"
Total Profits
Number OK
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LTD Not Satisfactory
70%
60%
50%
40%
30%
20%
10%
0%
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70%
12%
60%
10%
50%
8%
40%
6%
30%
4%
20%
10%
2%
0%
0%
1992 1994 1996 1998 2000 2002 2004 2006 2008
LTD Not
OK
unemploy
ment
2008
2006
2004
2002
2000
1998
1996
1994
1992
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80%
5%
70%
4%
60%
50%
3%
40%
2%
30%
1%
20%
10%
0%
0%
-1%
LTD OK
change in
GDP
unemployment
LTD Not OK
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Negative
Posistive
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Direction of Movement
unemployment prior year
LTD Not OK
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Negative
Posistive
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Direction of Movement (lagged)
1.1
9%
8%
1.05
7%
6%
1
5%
4%
0.95
3%
2%
0.9
1%
0.85
0%
2000
2001
2002
2003
Incidence relative to avverage
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Incidence vs Economy
Unemployment
Change in GDP
LTD Incidence
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Conclusion
•
No obvious relationship of LTD results
to macro economic
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•
But we all believe there is one.
•
Why can’t we see it?
Problem with Financials
2009 General Meeting
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Reported LTD Financial results are not
tightly linked to economy.
–
–
–
Valuation models may distort the
direction, magnitude and timing of
economic impacts.
Management actions (underwriting and
claim management) may deflect
economic effects.
Structural changes in the Insurance
Industry may hide the economic impact
(e.g. consolidation, regulatory action)
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Problem with Financials
•
Don’t forget the revenue side
•
•
•
Under pricing as layoffs increase
average ages
Collectability of premiums
Anticipatory rate increases
Problem with Financials
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Theoretically better to look at claim
fundamentals rather than final financial
results
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•
Incidence
Recovery
Even so, management will employ
best efforts to modify impact.
–
–
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More selective underwriting
Tighter adherence to contracts
More investment in claim management
2009 General Meeting
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Problem with Macro Stats
•
•
Both economic and industry statistics
are averages of industry and regional
sectors.
For instance,
–
Downturn in high tech (1999)may have
different LTD impact than downturn in
manufacturing (2009)
Problem with our Models
2009 General Meeting
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•
•
Relationships are probably not linear.
There is probably more than one
independent variable
–
•
•
E.g. industry specific economic activity, financial
strength of plan sponsor, age and occupation of
employee, diversification of local economy
These variables may interact to amplify or
nullify effect on LTD
There may be threshold relationships
–
Little or no impact until a certain level is
exceeded (e.g. unemployment)
2009 General Meeting
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In summary
•
There is a great deal of anecdotal evidence
linking economic downturns to adverse LTD
results.
•
However, historical data does not show a
causal relationship between macro
economic measures and LTD financial
results.
2009 General Meeting
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In summary
•
Further research is needed and should
focus on
•
•
•
Claim fundamentals vs financial results
Narrow industry or regional segments
The effect of intervening variables
Sources
– Canadian Incidence and Continuance Study
2009 General Meeting
Assemblée générale 2009
• Fraser Group and Denis Garand & Associates
– Quick Profitability Survey
• Fraser Group
– Sources of Profit Survey
• Fraser Group
– Statistics Canada. Labour Force Historical Review 2007
(Table Cd1T46an). Ottawa,
• Statistics Canada, 2008 (Cat. No. 71F0004XCB).
– Real Gross Domestic Product (GDP) per capita, Canada,
1981-2007
• HRSDC calculations based on 1) Statistics Canada. Gross Domestic
Product (GDP), expenditure-based, provincial economic accounts,
annual (CANSIM Table 384-0002). Ottawa: Statistics Canada, 2008;
and 2) Statistics Canada. Estimates of population
2009 General Meeting
Assemblée générale 2009
Questions?