1. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois
Canadian
Institute of
Actuaries
L’Institut canadien
des
actuaires
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois

2. Group Disability Reserving Unleash the Power of the 21st Century Canadian Institute of Actuaries October 20, 2006
Barry Senensky FCIA

3. Agenda Evolution of reserve calculations Where are we today?
How can we improve the process?
Summary

4. Evolution of Reserve Calculations
Comments – closely, but FAR from perfectly, aligned to evolution of computer performance – want to talk to you about this….

5. Computer Performance Measure IBM 7094 c. 1967 Laptop c. 2004 Change
Processor Speed (MIPS)
.25
2,000
8,000-fold increase
Main Memory
144 KB
256,000 KB
1,778-fold increase
Approx. Cost ($2003)
$11,000,000
$2,000
5,500-fold decrease
Barry – you could mention here that you didn’t make a bar-graph of this chart, because it would be almost impossible – you’d need a screen the size of an IMAX in order to show the difference between the two sets of figures

6. 1960’s

7. 1960’s Mainframe/manual Technology Simplified formulas
Evolution of Reserve Calculations
1960’s
Mainframe/manual
Simplified formulas
Conservative assumptions
Infrequent experience and table updates
Technology
Paper
Very early computers
Tapes, disks

8. Evolution of Reserve Calculations

9. Evolution of Reserve Calculations
PC jr!

10. Evolution of Reserve Calculations
1970’s ’s
Mainframe calculations
Move to basic principles calculations
Conservative assumptions
Technology
Improved mainframes
PCs

11. 1990’s Tim Berners-Lee Ignites the Internet
Evolution of Reserve Calculations
1990’s
Tim Berners-Lee
Ignites the Internet

12. 1990’s Mainframe/PC calculations Basic principles calculations
Evolution of Reserve Calculations
1990’s
Mainframe/PC calculations
Basic principles calculations
Expected assumptions with explicit margins
Deterministic scenario testing
Technology
Faster computers, more storage
Online processing
Internet

13. Today PC-based calculations Basic principles Stochastic modeling
Evolution of Reserve Calculations
Today
Technology
Advanced software algorithms
Powerful computers with more storage, faster processing,
Access to large databases of historic information
PC-based calculations
Basic principles
Stochastic modeling
Expected assumptions with explicit margins

14. What Have We Accomplished?
Tremendous progress due to evolution of computer power
Calculations now explicit and seriatim
Scenarios sensitivity-tested to better evaluate risk

15. What do we still need to do?
For group disability reserving, need appropriate reserve for each disabled life
Benefits
Profitability of the business is not distorted from period to period
Eliminates cherry picking at quarter-ends
More understandable to stakeholders
Immediately captures business mix changes
Better alignment of claims and management personnel

16. What are the specific requirements?
Termination rates to reflect each disabled life’s:
diagnosis
residence
monthly benefit
tax status
reporting lag
Offsets and probability of offsets appropriate to each claim

17. Using Predictive Modeling to Calculate Reserves Appropriate for Each Claim

18. Claims Scoring Claims scored from 1 to 10.
Scores show likelihood of return to work within a given timeframe.
Scores are calibrated:
Score of 1 indicates 0 – 10% chance of recovery within given timeframe, score of 2 indicates 10 – 20% chance of recovery within given timeframe, and so on.
J. Spratt Score: 4 #
J. Loe Score: 6 #
P. Chang Score: 8 #

19. Scoring Report
Q.P. … … … … …

20. Five steps to developing LTD termination rates for Dave
with claim scoring
Dave

21. About Dave Sex Male Age 44 QP 90 days Diagnosis Osteoarthritis
Developing termination
rates for Dave
About Dave
Sex
Male
Age 44 QP
90 days
Diagnosis
Osteoarthritis

22. 3 months 5.9 6 months 14.7 12 months 27.5 24 months 34.5
Developing termination
rates for Dave
Dave’s claim scores
Likelihood of RTW (%)
3 months
5.9
6 months
14.7
12 months
27.5
24 months
34.5

23. Dave’s claim scores Likelihood of RTW (%) Developing termination
rates for Dave
Dave’s claim scores
Likelihood of RTW (%)

24. Cumulative RTW Probabilities
Developing termination
rates for Dave
Step One
Cumulative RTW Probabilities
cumulative RTW Probabilities, 1-24 Months after EP
expressed as % 1 2 3 4 5 6 7 8 9 10 11 12
5.9
14.7
27.5 13 14 15 16 17 18 19 20 21 22 23 24
34.5

25. Interpolate between months
Developing termination
rates for Dave
Step Two
Interpolate between months
choose uniform distribution, constant force or Balducci
here, used uniform distribution
expressed as % 1 2 3 4 5 6 7 8 9 10 11 12
2.0
3.9
5.9
8.8
11.8
14.7
16.8
19.0
21.1
23.2
25.4
27.5 13 14 15 16 17 18 19 20 21 22 23 24
28.1
28.7
29.3
29.8
30.4
31.0
31.6
32.2
32.8
33.3
33.9
34.5

26. Step Three Mortality rates 1 2 3 4 5 6 7 8 9 10 11 12 .27 .32 .40 .45
Developing termination
rates for Dave
Step Three
Mortality rates
Canadian Group LTD experience /1000 shown here
alternative is company experience
may want to make adjustments, e.g. improvement from mid-point of study 1 2 3 4 5 6 7 8 9 10 11 12
.27
.32
.40
.45
.49
.51
.52
.53
.50 13 14 15 16 17 18 19 20 21 22 23 24
.47
.46
.44
.42
.40
.38
.37
.35
.34
.32
.31
.29

27. Step Four
Convert cumulative RTW probabilities to month-to-month RTW rates
Developing termination
rates for Dave
# of claimants who will recover in period. 
TM cumulative RTW - LM cumulative RTW
1 - LM cumulative RTW - LM cumulative death rate
# of claimants still on claim at start of period.   1 2 3 4 5 6 7 8 9 10 11 12
1.97
2.00
1.99
2.96
2.98
2.97
2.15
2.12
2.11
2.10
2.09 13 14 15 16 17 18 19 20 21 22 23 24
.57
.56
.55

28. Calculate Termination Rates
Step Five
Calculate Termination Rates
Termination rate = recovery rate + mortality rate
Developing termination
rates for Dave 1 2 3 4 5 6 7 8 9 10 11 12
2.24
2.32
2.39
3.41
3.47
3.48
2.67
2.65
2.64
2.62
2.60
2.58 13 14 15 16 17 18 19 20 21 22 23 24
1.04
1.02
1.00
.98
.96
.94
.92
.90
.88
.87
.85
.84

29. What to do after 24 months
Produce scores for 24 months, then use traditional methods thereafter
Produce scores for all future terms

30. This is realizable today.
Summary
Significant progress has been made in calculating reserves.
Still needed in Group Disability reserving:
DLR’s that reflect the specific factors of each claim
This is realizable today.