Transcript IP25 Fraser Cutler

Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
2007 Annual Meeting ● Assemblée annuelle 2007
Vancouver
2007 Annual Meeting
Assemblée annuelle 2007
Preferred Products
- 10 Years Later
An Underwriter’s Perspective
Fraser Cutler
June 29th, 2007
2007 Annual Meeting
Assemblée annuelle 2007
Preferred Underwriting
Page 3
• Primary Tenets of Risk Selection
– Know the risk
– Predictability
2007 Annual Meeting
Assemblée annuelle 2007
Client Underwriting Audit Results
Page 4
2002 – 2006
192 Audits
Total Cases Reviewed
25,897
Preferred Cases Reviewed
12,500
Non-Preferred Cases Reviewed
13,397
Client Underwriting Audit Results
2007 Annual Meeting
Assemblée annuelle 2007
2002 – 2006
Preferred Disagreements
Top Five
Build
Total Cholesterol
Medical History
Waived Requirements
Lab Findings
0
5
10
Percentage %
Page 5
15
20
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 6
What Did We Agree On?
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 7
• Based on the client’s manual of record
– Reinsurers
– Direct writers
100%
91%
Yes
Yes
• Adherence to treaty guidelines
– Reinsurers
– Direct writers
85%
70%
Extremely important
Extremely important
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 8
Where Did We Disagree?
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 9

Adherence to Preferred Criteria
– Reinsurers
77%
Extremely Important
– Direct writers
46%
Extremely Important
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 10
• Adherence to Internal Guidelines
– Reinsurers
69%
Extremely Important
– Direct writers
32%
Extremely Important
2007 Annual Meeting
Assemblée annuelle 2007
Audit Survey Results
Page 11
• Business Decision Justification
– Reinsurers
– Direct writers
100%
Extremely Important
46%
Extremely Important
2007 Annual Meeting
Assemblée annuelle 2007
What Did We Learn?
Page 12
 Business decisions allowed
Survey
Reinsurers
92%
2% or less
Direct writers
51%
2% or less
Preferred
5.3%
Without offsets
Non-Preferred
4.2%
Greater than four
table deviation
Audit Results
2007 Annual Meeting
Assemblée annuelle 2007
What Did We Learn?
Page 13
 Compliance with Age/Amount
Requirements
Audit Results
Preferred
13.6%
Exceptions involved
waived requirements
Non-Preferred
23.3%
Exceptions involved
waived requirements
2007 Annual Meeting
Assemblée annuelle 2007
What Did We Learn?
 Adherence to Preferred Criteria
Survey
Reinsurers
100%
Extremely Important or Very
Important
Direct writers
89%
Extremely Important or Very
Important
Audit Results
Preferred Disagreements
Page 14
8.3%
Exception Rates By Age Band
Cumulative percentage of cases
2007 Annual Meeting
Assemblée annuelle 2007
Client Underwriting Exceptions
by Age
40%
35%
Major exceptions
30%
Minor exceptions
25%
20%
15%
10%
5%
0%
<30
30-39
40-49
50-59
60-69
Policyholder Age
Page 15
70-79
80+
2007 Annual Meeting
Assemblée annuelle 2007
What Did We Learn?
Page 16

Exceptions can be identified

Cholesterol and build are the primary
preferred exceptions

The APS is waived more than any other
requirement

Other medical history is sometimes ignored

Internal exception guidelines need to be
shared at the time of pricing

Overall, underwriting error is minimal
2007 Annual Meeting
Assemblée annuelle 2007
What Does It Cost?
Preferred Distribution
0.75
1.0
1.25
Premium
Actual/Expected
Super
Preferred
75¢
Page 17
Preferred
$1.00
Standard
$1.25
2007 Annual Meeting
Assemblée annuelle 2007
What Does It Cost?
Distribution With Exceptions
0.75
1.0
1.25
Premium
Actual/Expected
Super
Preferred
75¢
Page 18
Preferred
$1.00
Standard
$1.25
2007 Annual Meeting
Assemblée annuelle 2007
The Impact of Exceptions
Assume a hypothetical set of 200 policies with an 8%
exception rate
Policy Count
Class
Expected Mortality
Before
After
Exceptions Exceptions
Without
With
Exceptions Exceptions
Relative
Increase
Preferred
92
100
75.4%
77.7%
3.1%
Residual
108
100
121.0%
122.3%
1.1%
Overall mortality increase 2.1% (3.1% + 1.1% ÷ 2)
Page 19
2007 Annual Meeting
Assemblée annuelle 2007
The Impact of Exceptions
Hypothetical Reinsurance Pricing
Reinsurance Premium
80.0%
To cover mortality
12.5%
Expenses, cost of capital, reserves
7.5%
Pre-tax profit
Mortality 80% x 1.021 = An extra 1.7% of premium
1.7% ÷ 7.5%=
23.0%
Profits Reduce by 23%
YOUR COST…?
Page 20
2007 Annual Meeting
Assemblée annuelle 2007
Why Does it Happen?
Page 21

Pressures to make exceptions
▫
Producers
▫
Cycle times
▫
Cost
▫
Competition
▫
Shareholder premium goals
2007 Annual Meeting
Assemblée annuelle 2007
What’s Next?
Page 22

Better understanding of pressures
and perspectives

Is there a better way to underwrite?

Evolving preferred underwriting

Re-examining How We Underwrite
the Elderly
2007 Annual Meeting
Assemblée annuelle 2007
Typical Preferred Criteria
1.
Smoking status?
2.
Parents survived to age 60?
3.
At or below average weight?
4.
Low cholesterol
5.
“Normal” lab values
6.
Normal blood pressure =<140/80
7.
No aviation
8.
No hazardous sports
9.
Less than 4 moving violations
10. No risky travel
Page 23
2007 Annual Meeting
Assemblée annuelle 2007
Page 24
Society of Actuaries 1997 and 2002
Preferred Surveys
Preferred criteria 1997 response
ranges (average)
2002 response
ranges
Participating
companies
54
54 (26 responded in
prior surveys)
Build: BMI (kg/m2),
example 45 y male
24 to 37
24 to 32
Cholesterol
200/5.2 to 400 /10.4
(mg/dL//mmol/L)
(249/6.4)
Cholesterol/HDL ratio 3 - 10 (5.8)
200/5.2 to 274/7.1
Blood pressure
(mmHg)
125/80 to 165/95
120/80 to 150/90
Exceptions
Underwriter (UW)
judgment 90%
No exceptions 18%,
Most common: build &
cholesterol, UW
judgment 72%,
4.0 to 6.5
2007 Annual Meeting
Assemblée annuelle 2007
Underwriting Facts
Page 25

The vast majority of deaths come from vascular
disease or cancer.

Accidental death rates have a barbell shape.
Younger people are most affected followed by older
people.

Independently verifiable data has increased value.
Questions are great but nothing beats a test or
report.

Applicants always know more than we do. This is
why early cancer deaths continue to be a difficult
problem to underwriter.
2007 Annual Meeting
Assemblée annuelle 2007
Underwriting Myths
Page 26

We can’t underwrite the cancer risk.
1.
What if no one qualified for preferred with one year of
smoking abstinence. It should be a minimum of three
for preferred and five for best preferred.
2.
Family history requirement should move up in age as
the applicant moves up in age.
3.
After certain key ages preferred should require regular
established medical care. Annual exams and cancer
screening such as colon exams and mammography.
2007 Annual Meeting
Assemblée annuelle 2007
Underwriting Myths
Page 27

An acceptable driving record should contain
no more than three violations in the past
three years.

More accurately… No moving violations is the
appropriate number.
2007 Annual Meeting
Assemblée annuelle 2007
Underwriting By Age
Age 35
Age 70
Apparently healthy
Suspect impairment
Known Impairment
Page 28
2007 Annual Meeting
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Causes of Death by Age
Page 29
Age
Cause of Death
(U.S. 2003)
Incidence
Lifestyle
Cancer
Environmental
Cardiovascular
20-39
Accident
Suicide
Assaults
70%
15%
15%
40-55
Heart disease
Cancer
Accidents
25%
40%
35%
56-70
Cancer
Heart disease
Lung disease
10%
42%
48%
> 70
Cancer
Heart disease
Stroke
8%
30%
62%
2007 Annual Meeting
Assemblée annuelle 2007
Cause of Death: Age 70 and Up
Page 30
Ages 60-79
Ranking
Male
Ages 80+
Female
Male
Female
1
Cancer
Cancer
Heart Diseases
Heart Diseases
2
Heart Diseases
Heart Diseases
Cancer
Cancer
3
Chronic
Respiratory
Diseases
Chronic Respiratory Cerebrovascular
Diseases
Diseases
Cerebrovascular
Diseases
4
Cerebrovascular
Diseases
Cerebrovascular
Diseases
Chronic
Respiratory
Diseases
Alzheimer’s
Disease
5
Diabetes
Diabetes
Influenza
Chronic
Respiratory
Diseases
2007 Annual Meeting
Assemblée annuelle 2007
Mortality in the Elderly
Age
20-39 Accident
Suicide
Assaults
40-55 Heart
disease
Cancer
Accidents
56-70 Cancer
Heart
disease
Lung disease
> 70
Page 31
Cause of
Death (U.S.
2003)
Cancer
Heart
disease
Stroke
Dementia
Influenza
Typical preferred exclusions:
• High cholesterol
•
Elevated blood pressure
•
Overweight
•
Hazardous activities

Family history of longevity

Health maintenance - screening

Function testing – pulmonary, cardiac

Cognitive testing
New Criteria
Age Specific
Preferred Criteria
2007 Annual Meeting
Assemblée annuelle 2007
Underwriting
Criteria
Tobacco
40-49
50-59
60-69
> 70
No tobacco products
past 5 years
No tobacco products
past 5 years
No tobacco products
past 5 years
No tobacco products
past 10 years
No tobacco products past
10 years
Acceptable physical
exam within 5 years
No recent unexplained
weight loss
Acceptable physical
examination within 2
years, including ECG
and cancer screening
No recent unexplained
weight loss
Acceptable physical
examination within 2
years, including ECG
and cancer screening
No recent unexplained
weight loss
Annual physical
examinations, including
ECG and cancer
screening
No recent unexplained
weight loss
Physical
Examination
Albumin >3.6
Creatinine <1.5
Hb >13 (males) Hb >12
(females)
Nutritional/
Metabolic
Blood Pressure
(not under
treatment)
≤130/80
≤140/80
≤145/85
≤150/90
≤150/90
Build
BMI ≤27
BMI ≤28
BMI ≤29
BMI ≤30
BMI >22 ≤30
Total cholesterol < 220
Tchol/HDL ratio ≤5.0
Total cholesterol < 230
Tchol/HDL ratio ≤5.0
Total >100 and < 250
Tchol/HDL ratio ≤5.0
Total >100 and < 260
Tchol/HDL ratio ≤5.0
Total >100 and < 280
Tchol/HDL ratio ≤6.5
< 2.5 if available
< 2.5 if available
<3.5 *
<4.5 *
<6.5*
No family history of
cardiovascular, cancer,
or diabetes occurrence
or death prior to age
65
No family history of
cardiovascular, cancer,
or diabetes occurrence
or death prior to age 65
No family history of
cardiovascular, cancer,
or diabetes occurrence
or death prior to age 65
No family history of
cardiovascular, cancer,
or diabetes death prior
to age 65
At least one parent
survived to age 70
No history of chronic or
recurring mental illness
or depression
No history of treatment
for drug or alcohol
dependence
No history of chronic or
recurring mental illness
or depression
No history of treatment
for drug or alcohol
dependence
Cholesterol (not
under
treatment)
PSA Level
Family History
(include
grandparent
s where data
available)
Mental
Illness/Drug
Abuse
Page 32
20-39
No history of chronic or
recurring mental illness
or depression
No history of treatment
for drug or alcohol
dependence past 10
years
No history of chronic or
recurring mental illness
or depression
No history of treatment
for drug or alcohol
dependence past 10
years
No history of chronic or
recurring mental illness
or depression
No history of treatment
for drug or alcohol
dependence past 10
years
New Criteria
2007 Annual Meeting
Assemblée annuelle 2007
Age Specific
Preferred Criteria (Continued)
Underwriting
Criteria
20-39
Hazardous
Activities
No ratable occupations
No hazardous activities
including aviation
(commercial aviation
excluded), scuba
diving, extreme sports,
auto racing
No ratable occupations
No hazardous activities
including aviation
(commercial aviation
excluded), scuba diving,
extreme sports, auto
racing
No ratable
occupations or
avocations including
aviation (commercial
aviation excluded)
No ratable occupations
or avocations including
aviation (commercial
aviation excluded)
No ratable occupations or
avocations including
aviation (commercial
aviation excluded)
No moving violations
past 5 years
No DUI past 5 years
No more than 1 moving
violation past 5 years
No DUI past 5 years
No more than 1
moving violation past 5
years
No DUI past 5 years
No more than 1 moving
violation past 5 years
No DUI past 5 years
No moving violation past 5
years
No DUI past 5 years
Credit check clear
No bankruptcy past 7
years
No felony
conviction/probation last
7 years
Financially justified
Credit check clear
Financially justified
Credit check clear
Financially justified
Financially justified with
clear insurable interest
Financial/Miscell
aneous
Underwriting
Credit check clear
No bankruptcy past 7
years
No felony
conviction/probation
last 7 years
Financially justified
Employment
Verifiable employment
records without
frequent job changes
Verifiable employment
records without frequent
job changes
Verifiable employment
records if appropriate
Verifiable employment
records if appropriate
Verifiable employment
records if appropriate
Physical/Social
Activities
Physically active
including travel,
exercise, social
activities
Physically active
including travel,
exercise, social activities
Physically active
including travel,
exercise, social
activities
Physically active
including travel,
exercise, social activities
Physically active including
travel, exercise, social
activities
No ratable medical
impairments
No personal history of
cancer (except for nonmelanoma skin cancer)
No ratable medical
impairments
No personal history of
cancer (except for nonmelanoma skin cancer)
No ratable medical
impairments
No personal history of
cancer (except for
non-melanoma skin
cancer)
No ratable medical
impairments
No personal history of
cancer (except for nonmelanoma skin cancer)
No evidence of cognitive
impairment
No ratable medical
impairments
No personal history of
cancer (except for nonmelanoma skin cancer)
Driving
Personal History
Page 33
40-49
50-59
60-69
> 70
2007 Annual Meeting
Assemblée annuelle 2007
Parental Longevity and Mortality
Odds Ratio for
mortality in 2370
middle-aged patients
with both parents
still alive after 25
years of follow-up
Sex
Odds Ratio
Males
0.63
Females
0.42
American J of Epidemiology 1984
Page 34
2007 Annual Meeting
Assemblée annuelle 2007
Cancer Screening in the Elderly
Page 35

Smoking cessation

Underweight and/or recent
weight loss

Decreased serum albumin

Anemia

Hematuria
2007 Annual Meeting
Assemblée annuelle 2007
Activity and Mortality in the Elderly
Activities
Social
Church attendance,
travel, movies and
restaurants
0.81
Fitness
Walking, sports or
swimming
0.85
Productive
Gardening, shopping,
community work,
employment
0.57
2,700 elderly
residents of
New Haven, CT
Hazard Ratio greater than 1.0 = increased
mortality
Page 36
Hazard Ratio
Glass BMJ 1999
2007 Annual Meeting
Assemblée annuelle 2007
Mobility and Mortality
Element
950 elderly with cognitive
impairment
Odds ratio for death within
2 years
Odds Ratio
Difficulty in dressing
2.08
Difficulty in getting about
1.69
History of falls
1.43
Abnormal gait
1.61
Abnormal motor strength
1.51
Odds Ratio greater than 1.0 = increased mortality
Chronic Diseases in Canada 2000
Page 37
2007 Annual Meeting
Assemblée annuelle 2007
Page 38
Underwriting Surveys
Old Age Underwriting
August 2005
48 respondents

80% indicated business over age 80 was less than 2%

One-third have no special elderly underwriting
guidelines

Three-quarters have no special preferred criteria over
60

Over one-half felt placement and persistency were
average

Over age 70, one-half had no limit on how high a
policy could be rated
2007 Annual Meeting
Assemblée annuelle 2007
Page 39
Underwriting Older Ages
in 2007

Things we do right
▫
Elderly questionnaire
▫
Lipid profiling
▫
Renal function
▫
ECG
▫
Exercise testing
2007 Annual Meeting
Assemblée annuelle 2007
Page 40
Underwriting Older Ages
in 2007

Things we would like to consider:
▫
Family history: longevity credits
▫
PFT Screening
▫
History of depression
▫
Labs
– Albumin
– Complete blood count
2007 Annual Meeting
Assemblée annuelle 2007
Conclusions
Page 41
1. Our studies indicate an opportunity
to evolve preferred criteria.
2. Age matters in underwriting.
3. We need a better understanding of
our underwriting tools.