Do the Math! An Actuarial View of Underwriting
2004 Long Term Care International Forum
Newport Beach, California
April 21-23, 2004
Amy Pahl, FSA, MAAA
Minneapolis, Minnesota
(952) 820-2419
Deborah Grant, FSA,MAAA
Chicago, Illinois
(312) 499-5575
Topics
z The Cost of Being Wrong
z Underwriting Wear-off
z Making Refined Decisions
Milliman USA
2
Opportunities to Miss
z Accept applicant who will claim
early
z Decline someone who never
claims
z Accept applicant that becomes a
long claim
z Place in “wrong” risk class
Milliman USA
3
A few Actuarial Basics
z Product pricing includes a three-
part morbidity assumption
– Frequency of claim
– Dollars spent while on claim
– Length of claim/stay (LOS)
Referred to together as the “claim cost”
z Data is limited and “piece-meal”
Milliman USA
4
Underwriting Impact
z Delay / eliminate claims Æ
affects
frequency
z Eliminate long claims Æ affects
length of claim
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5
Claims / 1000 for IA 62
Duration
1
2
3
5
9
10
15
Premium
“Ultimate”
Frequency
1.7
1.9
2.1
2.8
4.9
5.7
15.7
$ 2,092
Milliman USA
“Tight”
Underwriting
.4
.7
1.0
1.7
4.3
5.2
15.7
$ 2,005
6
If Miss in Year 1
Duration
1
2
3
5
9
10
15
Premium
Original
Underwriting
.4
.7
1.0
1.7
4.3
5.2
15.7
$ 2,005
One
Extra
1.4
.7
1.0
1.7
4.3
5.2
15.7
Two
Extra
2.4
.7
1.0
1.7
4.3
5.2
15.7
$ 2,022
$2,039
Milliman USA
7
If Miss in Years 1 to 5
Duration
1
2
3
4
5
9
10
Premium
Original
Underwriting
.4
.7
1.0
1.4
1.7
4.3
5.2
$ 2,005
Milliman USA
One
Extra
1.4
1.7
2.0
2.4
2.7
4.3
5.2
$ 2,063
8
“Make Up” for Miss
Can’t just be “right” to return to
18% IRR, must be BETTER than
original frequency
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9
“Make Up” Frequency
Duration
1
2
3
4
5
9
Profit IRR
Original
Underwriting
.4
.7
1.0
1.4
1.7
4.3
18.0%
Milliman USA
One
Extra
1.4
.7
1.0
1.4
1.7
4.3
1 Extra
17.5%
“Make-up
Frequency
.2
.4
.7
1.1
1.4
4.3
1.4 Fewer
18.5%
10
Decline an Acceptable Risk
z Underwriting expense is incurred
z Slower growth to critical mass
z Opportunity cost
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11
Accepting a “Long” Claim
Month on
Claim
0
Original
Continuance
1,000
With an Extra
“Long” Claim
1,000
1
6
12
837
591
431
837
591
431
36
120
202
22
203
23
Average LOS
810
Milliman USA
843
12
Risk Class Premium
z $2,005 is a “composite” premium
– Assume have Standard & Preferred
– 30% Issued Preferred w/ 20% discount
30% * 80% Std + 70% * Std = $2,005
Standard Rate = $ 2,133
Preferred Rate = $ 1,706
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13
Impact of Misclassification
z Assume issue 1,000 lives
– 710 are Standard risk
– 290 are Preferred risk
z Misclassify 10 of Standard
– 700 classified as Standard
– 300 classified as Preferred
Æ Premium Impact = $ 312,000 (.8%)
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Underwriting Intensity
z Loose
z Moderate
z Tight
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15
Sample Selection Factors
Duration
Loose
Moderate
Tight
1
2
3
4
5
6
7
8
9
15
.40
.60
.80
1.10
1.25
1.35
1.45
1.50
1.50
1.50
.30
.40
.50
.60
.80
.90
.95
.98
1.00
1.00
.22
.36
.47
.56
.61
.74
.79
.83
.87
1.00
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16
Does Selection Wear Off?
Duration
1
2
3
4
5
6
7
8
9
15
Loose
.40
.60
.80
1.10
1.25
1.35
1.45
1.50
1.50
1.50
Moderate
.30
.40
.50
.60
.80
.90
.95
.98
1.00
1.00
Milliman USA
Tight
.22
.36
.47
.56
.61
.74
.79
.83
.87
1.00
17
Refinements
z Making refined decisions
z Challenge – need better data
z Impact on risk classification
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18