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Tim Rozar FSA, MAAA, CERA Derek Kueker FSA Lapse and Mortality of Post-Level Period Term Plans International Actuarial Association.

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Presentation on theme: "Tim Rozar FSA, MAAA, CERA Derek Kueker FSA Lapse and Mortality of Post-Level Period Term Plans International Actuarial Association."— Presentation transcript:

1 Tim Rozar FSA, MAAA, CERA Derek Kueker FSA Lapse and Mortality of Post-Level Period Term Plans International Actuarial Association

2 Background 2

3 Introduction to Post-Level Term 10-Year Term: Premium Structure with Jump to ART $7,395 Duration 11 Premium 20 times Premium Jump $375 Level Premium 3

4  The Sick… Who Pays the $7,395 Rather Than Dropping Coverage or Getting a New Policy? 4  The Lazy…  The Unaware… …And ALL 3 have extra mortality risk!

5 Lapse Rate 2008 VBT Mortality Ratio Sharp increase in premium after level period leads to large anti-selective shock lapse. Mortality on persisting policyholders is substantially worse in the post-level period. 5

6 SOA/RGA Post-Level Term Study Lapse Study Experience Results 6

7 Shock Lapse Experience Results Overview 2000-2012 Policy-Year Study Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx 7

8 Shock Lapse Experience (Jump to ART) T10 By Duration 8 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

9 Shock Lapse Experience T15 By Duration 9 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

10 Shock Lapse Experience (Jump to ART) T10 By Premium Jump Ratio 10 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

11 Shock Lapse Experience (Jump to ART) T10 By Duration & Premium Jump 11 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

12 Shock Lapse Experience (Jump to ART) T10 By Duration & Premium Jump 12 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

13 Shock Lapse Experience T10 By Duration and Issue Age 13 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

14 Shock Lapse Experience (Jump to ART) T10 By Premium Jump and Issue age – duration 10 14 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

15 Shock Lapse Experience T10 By Duration & Face Amount Band 15 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

16 Shock Lapse Experience (Jump to ART) T10 By Premium Jump and Face Amount Band – duration 10 16 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

17 Shock Lapse Experience T10 By Duration & Gender 17 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

18 Shock Lapse Experience T10 By Duration & Risk Class 18 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

19 Shock Lapse Experience T10 By Duration & Premium Payment Mode 19 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

20 SOA/RGA Post-Level Term Study Mortality Study Experience Results 20

21 Mortality Experience Overview 2000-2012 Calendar Year Study 21 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

22 Mortality Experience (Jump to ART) T10 By Duration 22 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

23 Mortality Experience T15 By Duration 23 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

24 Mortality Experience (Jump to ART) T10 Duration 11 Mortality by Premium Jump 24 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

25 Mortality Experience (Jump to ART) T10 Duration 11+ Mortality by Issue Age 25 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

26 Mortality Experience (Jump to ART) T10 Duration 11+ Mortality by Face Amount Band 26 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

27 Mortality Study Experience Results – Jump to ART T10 Duration 11+ Mortality by Gender 27 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

28 Mortality Study Experience Results – Jump to ART T10 Duration 11+ Mortality by Risk Class 28 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

29 Mortality Experience (Jump to ART) T10 Duration 11 Mortality by Duration 10 Shock Lapse by Company 29 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

30 Practical Applications 30

31 Shock Lapse Experience Skewness of Lapses 31 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

32 Grace period creates mismatch between exposure basis for claims and premiums No duration 11 premium received, but effective duration 10 exposure extends into grace period. Premium-paying persisters must subsidize “free insurance” during the grace period for policyholders who intended to lapse on their anniversary. Much bigger impact with shock lapse Small number of premium-payers…lots of lapsers Magnitude increases for higher lapse rates or longer grace periods Grace Period Subsidy 32

33 Assumptions: Cohort mortality = 0.1 / 1000 monthly in durations 10 & 11 Lapse on anniversary at end of duration 10 All lapsers will passively lapse and enter the grace period 2-month grace period Grace Period Subsidy - Example 33

34 Grace Period Subsidy – Example 5% Lapse Rate; No Anti-Selection 34

35 Grace Period Subsidy – Example 60% Lapse Rate; No Anti-Selection 35

36 Grace Period Subsidy – Example 90% Lapse Rate; No Anti-Selection 36

37 Grace Period Subsidy – Example 90% Lapse Rate; 200% Anti-Selection 37

38 Mortality Experience Duration 11 Mortality by Month 38 Source: http://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspxhttp://www.soa.org/Research/Experience-Study/Ind-Life/Persistency/research-2014-post-level-shock.aspx

39 SOA/RGA Post-Level Term Study Assumption Survey Results 39

40  Sent to top 100 term providers based on 2012 term insurance sales  Responses from 41 companies  Responses represented 62% of 2012 term sales Assumption Survey Results Overview 40 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

41 Assumption Survey Results Post-Level Premium Structure  Dominant Structure is Jump to an ART Scale 41 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

42 Assumption Survey Results Expected Changes to Post-Level Premium Structure  No change expected for most term new business  Minimal changes reported to inforce term business 42 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

43 Lapse Assumptions Post-Level Lapse Rate Structure  Most companies assume only one shock lapse, generally grading down thereafter 43 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

44  Used a common pricing cell for consistent comparisons in upcoming charts Lapse Assumptions Factors impacting shock lapse assumptions 44 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

45 Lapse Assumptions Annual and cumulative lapse assumptions by duration, 10-year term 45 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

46 Lapse Assumptions Duration 10 lapse assumptions by issue age, 10-year term 46 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

47 Lapse Assumptions Post-Level Lapse Rate Assumption by Premium Jump, 10-year term  Broad range of assumptions by premium jump  Trend is somewhat inconsistent with experience 47 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

48 Mortality Deterioration Assumptions Post-Level Mortality Deterioration Structure  Assumptions vary broadly by structure of mortality deterioration 48 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

49  The same pricing cell that was used in the Lapse Assumptions charts is used in this section Mortality Deterioration Assumptions Factors impacting mortality deterioration assumptions 49 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

50 Mortality Deterioration Assumptions Post-Level Mortality Methodology  Dukes-MacDonald (or derivatives) and Flat Multiple are the primary assumptions used in developing mortality after the shock lapse 50 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

51 Mortality Deterioration Assumptions Annual mortality deterioration multiple, 10 year term 51 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

52 Mortality Deterioration Assumptions Post-Level Mortality Assumptions vs. Premium Jump  Mortality deterioration assumptions do not differ dramatically by premium jump, inconsistent with experience 52 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

53 Mortality Deterioration Assumptions Post-Level Mortality Assumptions vs. Premium Jump and Lapse Rate  When split by lapse rate, it does not appear assumptions vary dramatically by premium jump 53 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

54 Lapse Assumptions Skewness assumptions from the level period through the post- level period  Today’s skewness assumptions do not always follow past experience 54 Monthly Lapse Skewness During Level Premium Period Response Respondents Lapses are uniformly distributed 18 Lapses occur on premium payment modes 10 Lapses occur at the end of the year 7 Other 4 Monthly Lapse Skewness During Year of Shock Lapse Lapses are uniformly distributed 5 Lapses occur on premium payment modes 3 Lapses occur at the end of the year 17 Lapses graded toward end of the year with shock in month 1212 Monthly Lapse Skewness During Post-Level Period Lapses are uniformly distributed 6 Lapses occur on premium payment modes 7 Lapses occur at the end of the year 9 Lapses skewed to the beginning of L+1, Uniform thereafter8 Source: http://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdfhttp://www.soa.org/Files/Research/Projects/research-shock-lapse-survey-report.pdf

55 SOA/RGA Post-Level Term Study Assumptions vs. Experience 55

56 Survey Responses vs. Experience Study 56

57 Survey Responses vs. Experience Study 57

58 Survey Responses vs. Experience Study 58

59 Survey Responses vs. Experience Study 59

60 Survey Responses vs. Experience Study 60

61 SOA/RGA Post-Level Term Study Predictive Model 61

62  Multivariate Lapse Rate Model – T10 Duration 10 Shock Lapse  Model:  Generalized Linear Model (GLM)  Target variable follows distribution in the exponential family  Response variable = observed lapse count  Follows a Poisson distribution  Benefits:  Elimination of possible bias from a uni-variate approach  Systematic way of controlling lapse assumption complexity  Transparent insight into true drivers of lapse rates  Distribution of target variables Predictive Model 62

63 Predictive Model – Model 1 63

64 Predictive Model – Model 2 64

65 Predictive Model – Model 1 65

66 Predictive Model – Model 2 66

67 67

68  “Jump to an ART Scale” continues to be the dominant post-level structure, although some are considering changes  Wide range of lapes and mortality assumptions are currently being used in the post-level period  Many companies have not implemented appropriate skewness assumptions for lapses based on past experience 2013 SOA Post-Level Term Survey Report Key Takeaways 68

69  Lapse rates beyond the level period are largely driven by the level of the premium compared to the original level premium  Mortality in the post-level period is driven by the size of the shock lapse  Lapses are skewed towards the end of the last duration of the level period and the beginning of the first duration after the level period  Grace period can lead to excess mortality, especially at the higher shock lapse levels  Advanced analytics, such as predictive modeling, can be critical in understanding the correlations of the many drivers of post-level term experience 2014 SOA Post-Level Term Experience Report Key Takeaways 69

70 Questions? 70

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