Experience Trends for Income Protection International Congress of Actuaries Paris, France June 1, 2006

Experience Trends for Income Protection Panelists Daniel Skwire Milliman, Inc. (U.S.A.) Edward Fabrizio General Reinsurance Life Australia Ltd Denis Garand Denis Garand and Associates (Canada)

Experience Trends in the United States (Individual Disability Insurance) Daniel D. Skwire, FSA Principal and Consulting Actuary Milliman, Inc.

1985 Commissioner’s Individual Disability A Table (1985 CIDA) Most recent published table for individual disability Experience from 1970’s and early 1980’s Required table for some reserve calculations Expected basis for recent intercompany study

Characteristics of 1985 CIDA Sex-distinct Not smoker-distinct Four occupation classes –Class 1: Executive and Professional –Class 2: Clerical and Office –Class 3: Light manual duties –Class 4: Heavy manual duties Accident, sickness, and combined causes

Society of Actuaries Individual Disability Experience Committee (IDEC) Intercompany Study Twelve contributing companies About 64% of total inforce premium Incidence Study: Claims incurred Claim Termination Study: Claims paid Results show Actual-to-Expected (A/E) Ratios relative to 1985 CIDA

1990 – 1999 IDEC Study

1990 – 1999 IDEC Study Claim Incidence Rates Non-Medical Occupations (ranked by exposure) OccupationA/E Ratio Executives & Managers61% Lawyers63% Other Sales65% Accountants62% Engineers57% Insurance Sales101% Stockbrokers142% Teachers57% Other Occupations64% Total Non-Medical Occupations64%

1990 – 1999 IDEC Study Claim Incidence Rates Medical Occupations (ranked by exposure) OccupationA/E Ratio Physicians & Surgeons87% Dentists62% Psychologists53% Nurses100% Pharmacists51% Chiropractors139% Veterinarians60% Podiatrists73% Other Medical Occupations80% Total Medical Occupations88%

1990 – 1999 IDEC Study Claim Termination Rates 1985 CIDA known to have outdated claim termination rates Regulators adopted 1985 CIDC table as temporary measure 1985 CIDC consists of adjustments to 1985 CIDA Age of ClaimAdjustment Months % Months % Months % Months % Year 3137% Year 4120% Year 5120% Year 6+100% IDEC Study measures experience relative to 1985 CIDA

1990 – 1999 IDEC Study

IDEC Study Key Conclusions Medical occupations have distinct experience from Class 1 Lifetime benefit periods have poor experience Incidence trends are favorable in aggregate, with lots of variation Claim termination rates are generally lower (less favorable) than those in 1985 CIDA

Australia & NZ Disability Income Experience Edward Fabrizio Deputy General Manager and Chief Actuary General Reinsurance Life Australia Ltd

Australian & NZ Market Benefit is a monthly annuity style benefit whilst person remains disabled Benefit based on income at time of underwriting (generally to max of 75% replacement) and is taxable Majority (90%) is annual renewal business (age rated based on age at renewal) Non-guaranteed rates Full offset if person earns income whilst disabled Agreed Value and Indemnity benefits are available

Australian & NZ Market Most common deferment periods are 30 and 90 day Benefit period is generally to Age 65, but 2 and 5 year periods also common for blue collar workers Many extras added : –Hospital benefit (pays benefit whilst in hospital during deferment period) –Rehabilitation benefits –Payment of minimum benefit period on certain accidents / illnesses

IAD Standard Table Experience Reports for Australia and New Zealand are done on basis of comparing actual results to a standard table – IAD89-93 IAD89-93 developed by the IAAust based on the Australian disability income experience for this period Incidence rates graduated by age/sex and 4 occupation classes Termination rates based on % of the US CIDA85 termination rate tables

IAD Standard Table 4 Occupation classes –A : Professional and white collar –B : Other sedentary (light manual technical) –C : Light Manual (qualified trades persons) –D : Moderate to Heavy Manual

Australian Experience WARNING Experience results presented for Australia are preliminary only at this stage and are still going through a checking process which may alter the final results

Australia – Latest Experience Experience – Trends Claim cost in first 3 years of claim : 1 mth deferment

Australia – Latest Experience Incidence Experience - Males

Australia – Latest Experience Incidence Experience - Females

Australia – Latest Experience Occupation Relativities

Australia – Latest Experience Amount vs Number of Claims Preliminary results for continuing companies only Ratio of A/E amounts versus A/E number for Incidence of Claim Occ ClassMALEFEMALE A108% B104% C109%112% D113%117%

Australia – Latest Experience Termination Rates Preliminary results for continuing companies only Ratio of A/E Number of Terminations Occ ClassMALEFEMALE A81% 77%80% B73%77%72%74% C84%88%77% D88%84%72%64%

Australia – Latest Experience Termination Rates – Male: Occ A: 1 mth deferment

Australia – Latest Experience Termination Rates – Female: Occ A: 1 mth deferment

Australia – Latest Experience Termination Rates Preliminary results for continuing companies only Actual Termination Rates of Claim by duration of claim

Australia – Latest Experience Amount vs Number of Terminations Preliminary results for continuing companies only Ratio of A/E amounts versus A/E number for Termination Rates of Claim Occ ClassMALEFEMALE A96%98% B95% C D93%97%

Australia – Latest Experience Variation in Experience by Company Preliminary results

Summary for Australia Experience has improved significantly –Driven by lower incidence experience (although there are concerns over quality of data used in the investigation) Termination rates during first year of claim continue to deteriorate, however, this is being compensated by better termination rates at later durations Incidence and termination rates by amounts are worse than by number (total claims cost by amounts about 15% higher than by number), need to be careful in setting pricing and reserving assumptions – especially for reinsurers on a surplus basis

New Zealand – Latest experience Incidence Rate Experience

New Zealand – Latest experience Termination Rate Experience

New Zealand – Latest experience Claim Duration Experience Ratio (%) of actual to expected claim length by deferment period and investigation period Ratio (%) of actual to expected claim length by occupation class and investigation period

New Zealand – Latest experience Important feature of NZ Experience is the interaction with the government accident compensation scheme (ACC) ACC provides benefit up to 80% of taxable salary (with maximum dollar cap) in event a person is injured and unable to work Covers most forms of accidental injury (work and outside work) and can sometimes overlap with what would normally be considered a sickness

Paid ratio (%) by cause of claim and investigation period Paid ratio by claim cause and occupation class in New Zealand – Latest experience

Contribution of each component to total change in claim cost from to

New Zealand – Latest experience Comparison of ratios (%) of actual to expected results in weighted by numbers and amounts

New Zealand – Latest experience Warning: smoking hazardous to your health Ratio (%) of actual to expected incidence for smokers over non- smokers in Ratio (%) of actual to expected claim cost for smokers over non- smokers in

New Zealand – Latest experience Agreed Value benefits versus Indemnity

New Zealand – Latest experience Self-employed versus Employed

New Zealand – Latest experience Variation in experience by company Bubbles show claim cost

Summary for New Zealand Experience has improved –Driven by increased termination rates Difference between self-employed and employee can be an important rating variable – is just as important as smoker status Incidence and termination rates by amounts are worse than by number, need to be careful in setting pricing and reserving assumptions – especially for reinsurers on a surplus basis Experience varies greatly by company

Denis Garand Denis Garand & Associates Experience Trends in Canada

Fraser Garand Study Proprietary study Financial and technical support from: –Munich Re –Optimum Re –RGA Re –SCOR Re –Swiss Re

13 companies –Small group market, average size 41 employees –2,600,000 exposure from 2000 to 2004 –26,000 claims of which 18,000 terminate in first 2 years –one province Quebec, overrepresented These companies represent: –34% of the market, groups less than 1000 employees

Demographic data FemaleMale Average age Distribution in % 40%60% Growth of portfolio higher in earlier years of the study 72% 119 day elimination period 91% initial own occ definition

Fraser Garand Table 4 month elimination Own Occupation Benefit to age 65 Tables by 5 year age band and gender –Quebec, – Canada except Quebec

Incidence per 1000, study population Canada 8.4 Canada, except Quebec 6.2 Quebec15.1 SOA GLTD 1987 Basic “4 months” expected 4.6

Variation Actual /Expected (F-G) By age (compare to SOA 87) –Younger female higher incidence –Older males lower incidence By amount insured –Lower benefits higher incidence –Higher benefits lower incidence By industry (50% to 150%)

Variation Actual /Expected (F-G) By region –Some provinces better (no control on industry) By cause of disability –Variations by Mental and Nervous, Musculoskeletal and all other causes By year of disability –2000 highest, 2003 best By participating company (~70% to 125%)

Termination study 18,000 terminations within the first 24 months of duration. Produced termination rates for duration months. –159% versus SOA87 Basic 3 month Analysis of claims duration to 24 months by three major causes of disability. –Substantial variation in termination rates.

Caveats Study not adjusted for industry. Short period of study was in a favourable economic cycle. Termination study requires more data

Uses of study Improve pricing for current environment (most companies operated on “old” data) Adjust valuation reserves for key parameters of region and cause of disability. Benchmark company versus industry