Managing Group Risks Mohammad Azmatullah, FSA, FPSA Head of Pricing and Takaful, GCC – Life Munich...

Managing Group RisksMohammad Azmatullah, FSA, FPSAHead of Pricing and Takaful, GCC – LifeMunich Re and Pakistan Society of Actuaries Actuarial SeminarKarachi, August 20, 2013

What is Group Insurance Case Study 1 (Employer-employee Scheme) Case Study 2 (Credit-card Scheme) Concluding Remarks

Topics

Which of the following would you regard as groups? People waiting at a taxi rank Subscribers to a newspaper Holders of a certain credit-card Customers of a shop Employees of a company

Group Insurance

A group is a collection of people or objects with a unifying characteristic.

In its broadest term, group insurance can be defined as the provision of insurance to any group.

In “Group Insurance” normally schemes are administered under a master-contract.

Although (by definition) all such business is administered on a group basis, the underlying risk characteristics can vary considerably, hence, the risk management and pricing practices may be different.

Group Insurance

All of theprevious examples are therefore groups


Topics

A bank is looking to offer group life cover to its 30 000 employees, for the first time. The scheme is to have the following characteristics:

Eligibility Requirements: Full-time members of staff

Located in Country

Actively at work at the cover commencement date

Nature of Cover Annually renewable ( or YRT)

Compulsory (premiums paid by bank)

Sum Assured = 36 times Basic Annual Salary

Options: None (i.e., the members are not allowed the choose the level of coverage and benefits)

Case Study 1

Case Study 1

Questions:– Would you offer a free cover limit for this scheme?

If so:– what eligibility criteria would you set?– how would you expect lives with cover in excess of the FCL to be

underwritten

– Would you charge a unit rate for this scheme?

If so, what constraints would you set?– What other pricing considerations apply:

– in all scheme years?– in renewal scheme years?

Case Study 1



underwritten?




Case Study 1


Yes, since:– cover is compulsory– the cover amount is fixed by an objective formula (36 times Basic

Annual Salary)– cover is yearly renewable– lives are known to be actively at work

Also:

Lesser c

oncern of

Anti-Selectio

n

Also:

Not practic

al to underw

rite

ALL 30,000 Lives

Case Study 1

Free Cover Limit = Min

Ave SA × Factor

Currency Maximum

1 to 241 to 24

25 to 4925 to 490%0%

100%100%

50 to 9950 to 99 150%150%

100 to 499100 to 499

500 to 999500 to 999200%200%

300%300%

1 000 to 4 9991 000 to 4 999 400%400%

5 000 to 9 9995 000 to 9 999 500%500%

10 000 plus10 000 plus 600%600%

00

50 00050 000

100 000100 000

200 000200 000

300 000300 000

400 000400 000

500 000500 000

500 000500 000

# Members# Members FactorFactor MaximumMaximum

So how would you offer the Free Cover Limit

Case Study 1

Above the Free Cover Limit, a standard underwriting table would apply.

SA less FCLSA less FCL

Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV

Med, ECG, MU, Blood,

CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV

Med, TMX, MU, Blood, CXR, APS

Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU

Med, TMX, MU, Blood, CXR , APS

Med, ECG

Med

Med, TMX, MU, Blood,

CXR

Case Study 1


Yes, since:– cover is compulsory– the cover amount is fixed by an objective formula (36 times of Basic

Annual Salary)– lives are known to be actively at work – cover is yearly renewable

If so:– what eligibility criteria would you set?

• free cover is available until normal retirement age (a maximum of age 65)

Case Study 1



Annual Salary)– lives are known to be actively at work – cover is yearly renewable

If so:– what eligibility criteria would you set?

• free cover is available until normal retirement age (a maximum of age 65)– how would you expect lives with cover in excess of the FCL to be

underwritten on subsequent renewals (e.g. Increase in SA)?• Forward Underwriting practices could apply, since:

• the cover amount is fixed by an objective formula• cover is linked to salary • cover is yearly renewable

Theoretical

Approach

Case Study 1

Forward underwriting is a practice aimed at:

• enhancing client satisfaction by streamlining the renewal process

• reducing underwriting costs for the insurer.

It recognises that cover amounts are likely to increase over time and therefore underwrites the life assured for a higher amount at the outset, enabling future increases to be granted without further underwriting.

Forward Underwriting

Underwrite a higher amount

at the outset.

Case Study 1

As indicated above, a typical underwriting table might look as follows.


Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med


CXR


Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med


CXR

Case Study 1

Consider now a new member (aged 47) with cover of 400 000. If the scheme has a FCL of 300 000, then the member’s cover exceeds the FCL by 100 000 and a medical exam would be required.

Med

SA – FCL

=400K – 300K

=100K

Case Study 1

In the forward underwriting approach, the same underwriting table is used, but with one difference.


Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med


CXR

plus FUB

Case Study 1

The Forward Underwriting Band (FUB) is generally expressed as a percentage of the Free Cover Limit.

For our example, let us assume that the FUB is 30% of the FCL

i.e. FUB = 30% x 300 000 = 90 000.

FUB = X% of FCL


Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med


CXR

Case Study 1

Now, our new member (aged 47) with cover of 400 000 is underwritten using an amount equal to 400 000 (SA) less 300 000 (FCL) plus 90 000 (FUB), in other words 190 000. A medical examination and an ECG are called for.

plus FUB

Med, ECG

SA – FCL + FUB

=400K–300K+90K

=190K

Case Study 1

12 months (aged 48) later, the member’s cover increases to 420 000 (due to salary increase). The insurer checks whether the cover exceeds the amount for which the member was previously underwritten (i.e. 490 000). No further evidence is required.

plus FUB SA less FCLSA less FCL

Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med


CXR

Check:

New SA < Underwritt

en SA

420K < 490K

No furth

er UW is

require

d.

Case Study 1

In the third year (aged 49) , the member’s cover increases to 470 000. Again this is less than the amount for which he was previously underwritten (490 000) so no further evidence is required.


Up to 150 000

150 001 to350 000

350 001 to499 999

500 000 to1 000 000

1 000 001and above

16 to 3016 to 30

Med

Med, MU, HIV


CXR

NM

NM

31 to 4531 to 45

Med

Med, MU, HIV


Med

NM

46 to 6046 to 60

Med, ECG

Med, TMX, MU, HIV


Med, ECG

Med

61 to 6561 to 65

NM, ECG, MU


Med, ECG

Med

plus FUB


CXR

Check:

New SA < Underwritt

en SA

470K < 490K

No furth

er UW is

require

d.

Case Study 1

In summary, instead of:

• the member being required to present himself for underwriting every year

• the insurer incurring the cost of medical examinations and ECG every year

with Forward Underwriting:

• the member needs present himself for underwriting only once

• the insurer saves on the cost of repeated medical examinations.Year 1 2 3

Age 47 48 49

SA 400K 420k SA↑ 470k SA↑

FCL 300k 300k 300k

FUB 90K - -

UW(SA) 490k 490K>420k 490K>470k

UW(Amount) 190k - -

UW Requirements Med, ECG No further UW No further UW

Case Study 1



underwritten




Case Study 1

Questions:– Would you charge a unit rate for this scheme?


Annual Salary)– the number of lives is large (30 000)– How would you calculate the unit rate: avg age, summarised data?

Don’t Calculate Unit Rates using Summarised Data

35 45 55AGE

PR

EM

IUM

Case Study 1

Correct Average Rate

“Summarised” Average Rate

Shortfall ìíî

Age 55, 450 000Age 55, 450 000

Age 55, 150 000Age 55, 150 000

Age 35, 450 000Age 35, 450 000

Age 35, 150 000Age 35, 150 000

Female LifeFemale Life

Age 35, 150 000Age 35, 150 000

Age 35, 450 000Age 35, 450 000

Age 55, 150 000Age 55, 150 000

Age 55, 450 000Age 55, 450 000

Male LifeMale Life

1 755

1 005

1 254

3 114

PremiumPremium

Case Study 1

Want to see how?2 lives, Average Age = 45 (= [35+55]/2)Total Cover = 600 00050% are female“Summarised” Average Premium = 1 098What if……

Premiums are based on M99/03 Table

Age 55, 450 000Age 55, 450 000

Age 55, 150 000Age 55, 150 000

Age 35, 450 000Age 35, 450 000

Age 35, 150 000Age 35, 150 000


Age 35, 150 000Age 35, 150 000

Age 35, 450 000Age 35, 450 000

Age 55, 150 000Age 55, 150 000

Age 55, 450 000Age 55, 450 000

Male LifeMale Life

1 755

1 005

1 254

3 114

PremiumPremium

Age 55, 400 000Age 55, 400 000

Age 55, 200 000Age 55, 200 000

Age 35, 400 000Age 35, 400 000

Age 35, 200 000Age 35, 200 000


Age 35, 200 000Age 35, 200 000

Age 35, 400 000Age 35, 400 000

Age 55, 200 000Age 55, 200 000

Age 55, 400 000Age 55, 400 000

Male LifeMale Life

1 630

1 130

1 564

2 804

PremiumPremium

So, lifeis not that simple,

nor is life ins

Case Study 1

Questions:– Would you charge a unit rate for this scheme?


Annual Salary)– the number of lives is large (30 000)

If so, what constraints would you set?

The unit rate would cease to apply:– if a major change in the workforce takes place (mass retrenchment,

merger, etc.)– to any member whose cover exceeds the free cover limit

Case Study 1



underwritten?




Case Study 1

Questions:– What other pricing considerations apply:

– in all scheme years?• active life mortality would apply

Case Study 1

Consider Health States in the General Population

Case Study 1

Disabled 1

Active

Case Study 1

Disabled 1

Disabled 2

ix

ActiveActive

Case Study 1

Deceased1

Disabled 1

Disabled 2

qhx

ix

ActiveActive

Case Study 1

q sx

Deceased 1

Disabled 1

Deceased 2

Disabled 2

qhx

ix

Active

Disabled 1

Case Study 1

q sx

Active

Deceased 1

q sxqh

x

ix

Disabled 1

Deceased 2Deceased 3

Disabled 2Disabled 2

Case Study 1

Now Consider Health States in the Given Scheme

Case Study 1

q sx

Active

Deceased 1

qhx

ix

q sx

Disabled 1

Deceased 2Deceased 3

Disabled 2

Case Study 1

Deceased 1

qhx

ix

q sx

Deceased3

Disabled 2

Active

Case Study 1

The dynamics of employer-employee group schemes are such that:

• disabled lives are no longer able to work and hence leave employment.

This gives rise to “Active Life Mortality”, provided that:

• cover under the scheme terminates with termination of employment.

Case Study 1


– in all scheme years?• active life mortality would apply• broad industry loadings may be required (based on knowledge of the

industry)• occupational loadings would apply on a member-by-member basis• health / avocational loadings would not be applied for amounts within

the free cover limit (even in respect of lives with cover in excess of the free cover limit)

Case Study 1


– in all scheme years?• active life mortality would apply• broad industry loadings may be required (based on knowledge of the

industry)• occupational loadings would apply on a member-by-member basis• health / avocational loadings would not be applied for amounts within

the free cover limit (even in respect of lives with cover in excess of the free cover limit)

– in renewal scheme years?• past scheme experience may be taken into account through

experience rating

Case Study 1

Experience Rating involves the application of Credibility Theory to pricing

Net Rate Charged = Z × Actual Past Experience + (1 – Z) ×

Expected Experience

Where:Z = Credibility Factor

=

= Expected number of claims

= Claims required for full credibility

NE

NF

N E

N F

– Summary of Key Conclusions

• A Free Cover Limit can be applied, since:‒ cover is compulsory‒ the cover amount is determined by an objective formula‒ lives are known to be actively at work‒ cover is yearly renewable

• Forward Underwriting can be applied, since:‒ the cover amount is determined by an objective formula‒ the cover amount is linked to salary‒ cover is yearly renewable

Under Group Schemes of the kind considered in Case Study 1:

Case Study 1

Case Study 1 – Summary of Key Conclusions

• A Unit Rate can be applied, since:‒ cover is compulsory ‒ the cover amount is determined by an objective formula‒ the number of lives is large

• Active Life Mortality can be applied, since:‒ cover terminates on leaving employment

• Experience Rating can be applied at renewal, provided:‒ the man-years of exposure are sufficient‒ the membership profile has remained stable over the period under

review

Under Group Schemes of the kind considered in Case Study 1:


Topics

In an endeavour to boost its credit-card portfolio and to protect itself against default on the death of a card-holder, a bank is looking to offer life cover to its credit-card customers:

Eligibility Requirements: new and existing holders of any of the bank’s credit-cards

aged 18 to 75

Nature of Cover Compulsory (with premiums paid by the bank)

Sum Assured = 100% of outstanding credit-card balance at time of death

Case Study 2

Case Study 2

Questions:– What are the key risks associated with this scheme?– What risk management controls would you put in place?– How would you set about pricing the scheme?

Case Study 2

Questions:– What are the key risks associated with this scheme?

At Entry:– Although the scheme is seemingly “compulsory”, the bank is advertising the

life cover and using it as a marketing tool. There is hence a significant risk of anti-selection in a new-entrant’s decision to apply for a credit-card

– The maximum issue age is high (75!!) – likely to be many impaired lives – What is the bank’s customer profile and target market?? (e.g. army

personnel?)

During Tenure:– Sums assured fluctuate monthly making premium calculation difficult

At Claim:– Card-holders may incur large medical expenses on their cards shortly prior to

death– Terminally ill card-holders may exhibit moral hazard by increasing spending

and holding back on credit-card repayments in order to increase cover– Those experiencing financial difficulty may resort to suicide!!?– Maximum per-life covers may be high, due to multiple cards

Case Study 2

Questions:– What are the key risks associated with this scheme?– What risk management controls would you put in place?– How would you set about pricing the scheme?

Case Study 2

Questions:– What risk management controls would you put in place?

At Entry:– Limit the max entry age to 65, say– Existing card-holders can be granted free cover– New card-holders (and card-holders applying for an increase in credit-

limit) would need to complete a short questionnaire covering health, occupation and avocation

– Card eligibility criteria might be used as a proxy for financial underwriting

– Impose a permanent suicide exclusion

At Claim:– Set the sum assured at the credit-limit, rather than the outstanding

balance – any excess can be paid to the life assured’s dependents– Or, the sum assured should be based on the unpaid balance from some

months prior to the date of death (e.g. 6 months) and an acceleration terminal illness benefit might be introduced

– To avoid problems with multiple cards, place a cap on the maximum benefit per life that will be paid

Case Study 2

Questions:– What are the key risks associated with this scheme?– What risk management processes would you put in place?– How would you set about pricing the scheme?

Case Study 2

Questions:– How would you set about pricing the scheme?

– Derive appropriate risk premium rates for each combination of age, gender, occupation, etc. – active life mortality should/should not be assumed???

– For each member, each month, – dollar premium = member’s cover amount X appropriate risk

premium rate– Review the profile of new entrants and the past claims experience

regularly to verify the pricing assumptions and to fine-tune the rates, where needed

Case Study 2

Other Considerations:– Ensure that you understand the bank’s objectives for putting

the cover in place, to protect your company from being anti selected

– Ensure that you understand the bank’s credit assessment practices:

– For new credit-card applications– For increasing credit-limits

– Ensure that you understand the bank’s practices:– For freezing credit

– Knowledge about the following would also help:– Posting credit transactions and repayments– For issuing credit-card statements– For accumulating interest and penalties


Topics

Concluding Remarks

• The term “Group Insurance” can be used to cover a wide variety of arrangements:

– Compulsory employer-employee schemes– Voluntary employer-employee schemes– Credit-life arrangements– Affinity group covers– etc.

• The more homogeneous the scheme (in terms of membership profile, as well as benefits offered) and the greater the barriers to entry, the greater the value of group underwriting

• Schemes which are heterogeneous (in terms of membership profile or benefits offered) or which have weak barriers to entry require a greater emphasis on individual underwriting

Concluding Remarks

• For compulsory employer-employee schemes there is a degree of homogeneity and there are well established risk management and pricing practices

• For other scheme types, the precise characteristics of the scheme will determine which risk management and pricing practices are appropriate – these can vary considerably

Concluding Remarks

Thank you for your attention

Disclaimer

Munich Re Group is not a legal, tax or accounting advisor and makes no representations as to the accuracy of any data or information gathered or prepared by Munich Re Group or advisors hereunder. Your company should therefore consult with its own tax, legal or other advisors and make its own independent analysis and investigation of the proposed transaction, as well as the financial, legal, accounting and tax consequences thereof, the creditworthiness of the parties involved and all other matters to the transaction prior to its own independent decision whether or not to enter into any agreements in connection with the transaction. This analysis and proposal contains indicative terms for discussion purposes only. Munich Re Group gives no assurance that any transaction will be consummated on the basis of these indicative terms and no specific issuer is obliged to issue any security or instrument on such indicative terms. This proposal does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into any transaction on such indicative terms. The data and analysis does not assure that securities can be issued at certain terms and conditions. All terms and conditions are subject to a mutually agreed engagement letter. This proposal is not intended to provide the sole basis for any evaluation by you of the transaction, security or instrument described herein and you agree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by you including consideration of the legal, tax accounting, regulatory, financial and other related aspects thereof. In particular, Munich Re Group owes no duty to you to exercise any judgement on your behalf as to the merits or suitability of any transaction, security or instrument. The information contained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you (other than to your professional advisors) without prior written consent.

Munich Re Underwriting Agents (DIFC) Ltd are Authorized and Regulated by the Dubai Financial Services Authority.

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Managing Group Risks Mohammad Azmatullah, FSA, FPSA Head of Pricing and Takaful, GCC – Life Munich...

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