Some Pointers On Pricing Large Case LTD For Profitability
Many group disability carriers continue to struggle to find an effective way to hit target profit margins in the large case, experience-rated LTD market.
The issues, and the struggle, have importance to anyone in the market, whether buyer, producer or insurer.
Among the things plaguing group LTD carriers today are: the lack of solid manual rates, inaccurate risk exposure information, and unknown variables underlying the risk. Only when these factors are understood can a company profitably price group LTD, paving the way for a healthy and vigorous industry.
The challenge is that any one of these factors can be influenced randomly and unexpectedly, making pricing LTD a significant challenge. Lets look at the key variables affecting LTD profitability. They are: exposure information; experience data in pricing; and marketplace competitiveness.
Getting accurate exposure information, and in turn calculating an expected claim cost, can be tricky business. But estimating future claim costs based on historical experience can be even trickier.
Naturally, the idea behind experience rating is to rely on historical claim costs to project future claim costs. And when historical experience differs from expected (i.e. manual claim costs), it is "believed," to a certain degree, based on how credible the case is. The challenge is understanding all of the pricing impacts.
Lets look at an example. Well take a hypothetical 3,000-life case, and we will use Monte Carlo simulation techniques. These techniques assess random influences on pricing scenarios. In our example, we will use these techniques to show how LTD claim costs are distributed unevenly around the average (mean). This is why pricing LTD requires expertise.
The graph below shows the random nature of LTD loss distribution. It also shows the significant range of losses possible around the mean. In reality, actual claim costs will never be exactly equal to expected claim costs; sometimes they will be more, but more often they will be less.
The concept to understand is that in a product like LTD, more often than not, the losses will be less than expected. However, this will be offset by the years when claim costs are greater than expected losses. This pattern will occur, regardless of whether there is any change in the underlying risk of the group.
