moderator: presenters: robert t. eaton, fsa, maaa …nefissa sator, iaf, maaa . soa 2015 annual...

Session 20 OF, Joint Society of Actuaries and Institut des Actuaires Long Term Care

Insurance Project

Moderator: Etienne Dupourque, FSA, MAAA

Presenters:

James C. Berger, FSA, MAAA Robert T. Eaton, FSA, MAAA

Vincent Lepez, IAF, Ph.D. Nefissa Sator, IAF, MAAA

SOA 2015 Annual Meeting & Exhibit US and France project on Long Term Care

October 12, 2015

Etienne Dupourqué, FSA, [email protected]

Vincent Lepez, PhD, IA; [email protected]

Néfissa Sator, IA, MAAA, CERA; Forsides [email protected]

James Berger, FSA, MAAA; [email protected]

Robert Eaton, FSA, MAAA; [email protected]

US and France project on Long Term Care

1 2 3 4

79%

7%4%11%

1. YES2. NO3. DO NOT KNOW4. NO OPINION

SHOULD THERE BE A LONG TERM CARE SPECIFIC ACTUARIAL METHODOLOGY?


1 2 3 4

56%

7%4%

33%

IF THE ANSWER TO THE FIRST QUESTION IS “YES” SHOULD OR COULD THE RESEARCH BE DONE

JOINTLY WITH OTHER COUNTRIES?

1. COULD2. SHOULD3. DO NOT KNOW4. NO OPINION

Demographic profiles are similar

US FrancePopulation 317,000,000 65,000,000Over 65: 14% 18%Death rate /1,000 @65: 8 9Male to Female @65: .97 .96Life expectancy @65: 19 years 21 years


Government Coverage in France

• 2002: 605,000 €2Billion • 2013: 1,228,000 100% €7Billion 250%

(2002-2013 inflation: 22%)

• Income tested, not means tested• Claim evaluation system: Autonomie

Gérontologique Groupes Iso-Ressources



2014 Long Term Care Insurance In France

Loss Ratio

Million % €Mill ion % €mill ion % %Sociétés d'assurance 3.4 46 533 80 243 92 46Mutuelles 3.6 50 100 15 20 7 20Institutions de prévoyance 0.3 4 32 5 2 1 6

Total 7.3 665 265 40Individual (underwritten) 6.6 91 611 92 251 95 41Group 0.7 9 54 8 14 5 26Total 7.3 665 265 40Stand Alone 1.9 26 565 85 245 92 43Supplement / Hybrid 5.4 74 100 15 20 8 20Total 7.3 665 265 40

Insured Premium Benefit


Long Term Care Insurance in France

• Level lifetime premium• Monthly life annuity with Nonforfeiture and Full/Partial benefits• High ADL threshold and Waiting Period + Elimination Period• No regulatory preapproval, frequent audits• Premium can vary as stated in contract• Mandatory Group Insurance coverage• Distribution: Salaried agents, Bancassurance: 80-90% sales non commissionable• Low amounts (figures for Stand Alone contracts):

2014: - €358 average annual premium (~€30/month)- €584 average monthly benefit (~€7,000/year)

Long-Term Care in FranceThe context of Public Care

Vincent Lepez, PhD, IAFSCOR Global Life Chief Pricing Actuary

Populations of most developed countries are ageing, ageing, and ageing…

Percentage of people over 65 in the population

10%

15%

20%

25%

30%

2000 2010 2020 2030

ItalySpainGermanyFranceUSA

Source : EUROSTAT, DREES-OFCE and U.S. Bureau of the Census, current Population Reports

• In in 2005, 1 in 5 was over 60 years old• In 2050, it will be 1 in 3 and…

– the number of people over 60 will double– the number of people over 75 will triple– the number of people over 85 will quadruple

1996 : • 0.20 million recipients (but

only around 0.05 above 60)

2001 : • 0.15 million recipients

2011 : • Benefits paid : €7 bn• 1.2 million recipients

2004 : • Benefits paid : €4.2 bn• 0.85 million recipients

History of French Social Protection System benefits

Evolution of benefits provided by Social Protection System

ATP - ALLOCATION COMPENSATRICE TIERCE PERSONNE

PSD - PRESTATION SPECIFIQUE

DEPENDANCE

APA ALLOCATION PERSONNALISEE

D’AUTONOMIE

• Covering severe disability, with need of nursing Care

• Whatever the age• More designed as a social help for handicap…

• Started in 1997• Specific to people ≥ 60 years old• Level of LoA defined with a dedicated scale (AGGIR)

• Only severe LoA covered (GIR1, 2 & 3)• Potential recourse on legacy• Level of benefits defined locally with potential regional disparities

• Income ceiling

• Since 07/2001, slightly amended in 2003• Less severe LoA coverage (GIR4-)• National benefits scale• No more income ceiling, but benefits adjusted given the level of Income

• No more recourse on legacy• Level of benefits defined locally with potential regional disparities

Specific definition in France for the public scheme: PSD, became APA in 2002 and used a specific and national so-called AGGIR grid It defines the level of loss of autonomy in order to determine the level of help the beneficiary will

need on a permanent and irreversible annuity basis There are 6 level of GIR (Groupe Iso-Ressource) that determine the amount of benefits (bw

about €100 and €1,300 per month), under resource and housing conditions. GIR1: most severe loss of autonomy GIR6: autonomous person

* AVQ stands for ADL

French LTC public schemeLoss of Autonomy definition

Total Loss of Autonomy

Partial Loss of Autonomy

• Groupes Iso-Ressources• Based on 6 levels, from GIR 1

to GIR 6

ADL Grid

• Activities of Daily Living• Definition based on loss of X

out of 4, 5 or 6 ADL

AGGIR Grid

The APA Public scheme demography:male and female, uneven against dependency…

(Source DREES)

Distributions show… On average, males are more severly dependent than females Some clearer degenerative pattern for females, alongside their tendency to be more

exposed to dementia However, males have a propensity to underdeclare their dependency state…

The APA Public scheme demography:…but both will “slowly boom”

Forecast of dependant people, GIR4 and below, from 2010 up to 2060 (source: DREES)

Some APA financials and the LTC gap in France

• APA currently represents €6Bn of annual benefits…– out of about €20Bn social benefits directed to broad loss of autonomy compensation

(incl. Handicap help, the Action Sociale…)– to be compared with yearly ~ €200Bn of health and ~ €220Bn of retirement social

benefits (for the record, French GDP is close to €2Tn)

• The average cost of LTC per person is about…– €3,000 per month (but could be much much higher)

• The average pension is roundabout…– €1,300 per month (and could be a little bit higher )

• The APA Public scheme grants:– €500 monthly on average

Gap to be financed: between €1,000 and €1,500 per month(but could be much much higher !)

Main drivers of the rise of LTCnon-public insurance

• Life Expectancy of elderly has increased up to ages where incidences are high• Both healthy life expectancy without severe disability• But also life expectancy with severe disability

• The number of informal caregivers will drop (spouse, children, neighborhood) in France from 2.5 to 2.1 people by 2040 as:

• The average size of the family is decreasing• The age of fertility is increasing, reducing the availability of the children when dependency

occurs• The labor participation of young and middle-aged women is rising

• LTC is one of the biggest threats to the wealth of the elderly• Only 15% of people think they can cover the future costs of LTC…

• Since 2002, the rise of the APA scheme created awareness and boosted the market…• Alzheimer Plan & Public debate about the new branch of Social Security for LTC could well be

the main LTC growth driver

• Shortfall of State benefits implied large needs for covering long-term care related costs

Significant development of non-public insurance

Thanks for your attention

Vincent Lepez, PhD, IAFSCOR Global Life Chief Pricing Actuary

LTCI in FRANCE

Market and Technical Challenges

Nefissa Sator, IA, CERA, MAAA

LTCI French Market > The Big PictureSource: FFSA

Implementation of the first contracts in the mid 80’s (1985) Concentration of players around some insurers only (about 25) Mostly reinsured market More than 7.3M of insured people in 2015 $665M of premium as of 2014/12/31 $5.1B of claim reserves (active lives + claims) as of 2014/12/31

46%

50%

4%

Insured people distribution

Traditionalinsurance

Mutual

Welfare80%

15%

5%

Premium distribution


Mutual

Welfare

84%

13% 3%

Reserves distribution


Mutual

Welfare

Development of Group covers

Medical underwriting requirements

lowered

Additional benefits to Family caregiver

Labeled offer

4th Generation

Development of more and more sophisticated offers (Total & Partial Loss of

Autonomy, various combination of Annuities and

Lumps sum…)

Development of LTC sold a compulsory rider to group products (Civil servants

Rise of risk premium offers)

Increasing presence of assistance services

Attempt to attract younger insured persons

3rd Generation

1st Partial Loss of Autonomy offers

Annuities + Lump sum

1st Group products

AGGIR Grid & ADL definition

Assistance services

Max issue age: 75

2nd Generation

Total Loss of AutonomyAnnuities

Individual products

Level-premiums

ADL definition

Max issue age: 70

1st Generation

Evolution of the Products Through Time

Individual Insurance Versus Group Insurance

Individual product Group: compulsory application

Application Optional Compulsory

Benefit level Choice between several guarantees with recommended limits Same benefits for each member

Entry age Usually between 40 y.o. and 75 y.o. Implicit limits

Elimination period Usually 90 days, absolute or relative Usually 90 days, absolute or relative

Medical underwriting Systematic No, if sufficiently large group

Waiting period Depends on the country but usually 3, 1 or 0 years No, if sufficiently large group

Duration of the cover Usually lifetime Annual

Premiums Level premium(based on the entry age) Risk premiums

Reviewable premiums Usually yes Yes

Paid-up value Usually yes Usually No

Surrender value No No

Reserving Premium reserve: reserve for increasing riskReserve for annuities in payment

Reserve for annuities in payment

Policy termination Annuities in payment are still paidPaid-up value for the other insured Only annuities in payment are still paid

The Insurance Offer

Average monthly paid benefit €600 for individual contracts Less than €300 for group contracts A minimum of €500 per month is now required by the market label GAD FFSA

Average yearly premium €400 for individual contracts

– Level premium depending on issue age

€60 for group contracts– Same amount of premium for all employees, doesn’t depend on employee’s age

(actuarial age of the group) and generally increase at retirement

Key Products Features When premium are paid

Main benefits

Lump Sum for the first expenses

New:Lump Sum

Injuries

Assistance services through the duration of

the contract

Life-time annuities300€ - 2000€

monthly

Key Products FeaturesIf premiums stop after a period of 5 or 8 years of contribution

Partial benefits

Lump Sumreduced

New:Lump Sum

Injuries

Assistance services through the duration of

the contract

Life-time annuitiesreduced

Multi-States Actuarial Modelling

More complex models exist, their development needs to progress specially in this multi-states context

Lapses sometimes taken into account, could be 0, average of 2% per year– Reduced benefits after 5 or 8 years of paid premium

Maximum interest rate: 75% 10Y French bond (average of last 24 months)– Technically, could be less (60%), or 0, but pricing marketing matter– Pricing + statutory reserves, other assumptions for Solvency II Capital requirement– Current max for liabilities duration less than 8 years = 1.25%– Current max for liabilities duration over 8 years (Life, LTC) = 0.50%

Active LivesCF premiums

LTCCF claims

Deathsno CF

Mortality probabilities for active lives

Incidence probabilities

Mortality probability for claimants

Legend:CF = Cash Flow

Many Risks Challenges

Complex risk to model Needs reliable and robust data to establish the different probability tables Prudential margins Requires multiple expertise to ensure the continuity of coverage over time: at the edge of

social, demographical and medical challenges

Requires a rigourous risk monitoring over time Risk still relatively young, trends unknown, not all ages are statistically observable Long-

term risk, has time to evolve, needs a long observation time before building robustexperience, sensitive to interest rate, inflation and insured behaviors

– Testing of all technical parameters with respect to the observed experience

Uncertainty margins on developments, evolution, makes the cost of capital uncertain andvolatile

– Revision and adjustment of the assumptions, pricing, level of reserves and capital

Few experts within the insurance industry– Partnering with other experts (reinsurance companies, administrators, working group, doctors …)

helps to reduce the uncertainties, be careful of the ‘systemic’ risk

Balance Sheet Management

Management of the balance sheet is crucial On liabilities

– Constitution of prudent reserves to cover the life-time liabilities of the insured population– Active Lives Reserves: a portion of future premium to cover the risk’s increase with age while premium are

constant and leveled– Reserves for future administrative costs (same principle as active lives reserves)– Reserves for current claims– Additional reserves for benefits revaluation, experience deviation

On asset– Generation of revenues above the interest rate used in the pricing and reserving– Sometimes sharing of the financial earnings with the insured population to increase the level of the

benefits (indexation) and claims (reevaluation)– Generation of unrealized gains to reduce the cost of capital

On both, via ALM– Matching the long duration of liabilities with the optimal assets allocation and cover the interest rate

assumption– Allow a reevaluation of the benefit over the time

Reinsurance Collaboration From the Beginning

Pool of reinsurers shared their own experience on both US and German markets A specific French experience started to be built There are different levels of cooperation, usually depending on the size of the

insurance company:

Top 5 insurer Medium Size Insurer Small insurer

Pricing Need validation Joint Reinsurer

Calculation of reserves Validation Joint Reinsurer

Wording No No Reinsurer

Medical Underwriting No Yes/No Reinsurer

Claims management No Yes/No Reinsurer

Monitoring No Yes Reinsurer

Feedback from Reinsurers Yes Yes Yes

Type of reinsurance pool of reinsurerssmall Quota-share (max

25%)

2 or 3 reinsurers with 1 leadingQuota share between 40%-60%

1 reinsurerQuota-share around 80%

Solvency II Increases Capital Requirement

Solvency II does not provide explicit technical specification for LTC Stress tests not calibrated for LTC No correlation between longevity and disability risks Very few Entity Specific Standard Formulas or Internal models yet developed and

implemented

This results in a much higher capital requirement

A study on one of the largest portfolio in the market shows thatSolvency II Capital = 12 x Solvency I Capital

An internal model would lead to a better appreciation of the LTCI risks under Solvency IIand lower the solvency capital requirement

– Only few players, especially largest reinsurers players, are able to develop an internal model approach

ERM process is critical to produce solvent & profitable business

Solvency I & II & RBC Comparison

(*) Limitations: based on 1 study + publications but does not take into account internal model results

Formulas for LTCI RBC in year t Formulas for LTCI Solvency 1 in year t Formulas for LTCI Solvency 2 in year t

15.4% of premiums up to $50 MM 18% of premiums up to $10 MMMax reinsurance 50%

4.6% of premiums over $50 MM 16% of premiums over $10 MMMax reinsurance 50%

Adjusted LTC Claims = (LRt-1 + LRt) / 2 * premiumtAdjusted LTC Claims = (sum Paid Claimst-2,t-1,t + sum Change IBNRt-2,t-1,t) / 3

38.5% of adj. claims up to $35 MM 26% of adj. claims up to $7 MM

12.3% of adj. claims over $35 MM 23% of adj. claims over $7 MM

RBC = premium component + claims component average of last 2 years

S1 = max(premium component, adjusted claims component)

SCR = (Asset - Liabilities)central - (Asset - Liabilities)chocs

culty to implement very low very low very highk monitoring no incentive no incentive strong incentivequired capital 100% up to 350% if large player 3500% at least ! (*)

mments - Based on the premium for the first 10 years- No ALR, not prospective

- Based on the premium for the first 10 years- No ALR, not prospective

- Based on the risks but calibrations not adjusted to this risk category- ALR, prospective, economic approach

- ALM model need, economic balance sheet approach

- Cash flows of future premiums - future claims - future expenses

- Reinsurance fully taken into account

- Central scenario (BE assumptions) + chocs given by regulators

- Diversification effects

Jim Berger, FSA, MAAA

32Risk and LTCI

9/12/2015

33Risk and LTCI

9/12/2015

DISCLAIMER

This presentation and the views expressed within the oral presentation are being offered for your convenience and education and may contain opinions and viewpoints that are not the opinions and viewpoints of Union Fidelity Life Insurance Company, Employers Reassurance Corporation, General Electric Corporation or any of its affiliates. Union Fidelity Life Insurance Company, Employers Reassurance Corporation, General Electric and its affiliates make no representations or warranties of any kind, express or implied, regarding the accuracy, reliability, completeness, timeliness or applicability for a particular purpose of the information contained in this presentation and make no endorsement of the opinions of the presenter offered herein.

34Risk and LTCI

9/12/2015

Is LTCI Risky?

• Most would say “YES!!”

• In US, mostly formulaic risk controls- Statutory reserves, RBC- But the is the Add’l Actuarial Rsv

• ORSA is coming to US- Linked to Solvency II in Europe

35Risk and LTCI

9/12/2015

What Are Some Issues?

• Claim costs understanding- Improving- Always moving- Random volatility: -25%, +60%??

- Includes parameter misestimation- Mortality is developing- Lapse is low, but getting higher with age?

36Risk and LTCI

9/12/2015

Risk Management….• Determine what risks company can accept

– Mitigate the rest• How?

– Write less business more volatility– Write conservative business less sales– Raise premiums less sales– Reinsurance Also gain from expertise

37Risk Management and LTCI

4/17/2015

Reinsurance

• Most common is quota share• Perhaps 100% turnkey• Can do YRT in theory• Who keeps assets? Who wants long-tail

risk?


4/17/2015

Reinsurance

• But lapses can’t go much lower• Claim parameters are settling in• Alzheimer’s mitigation are touted• Is now the time?

– Won’t see many block transfers– Discount rate– Could see new business– Combo products


4/17/2015

Reinsurance• French use heavy reinsurance

for smaller companies• Polices sizes smaller; lower

risk• View on LTC responsibility

– French more societal– US more individual

• French National Solidarity Fund for Autonomy– Give one day/year to finance– ~40% fund to elderly; rest other disabilities


4/17/2015

Different Risks?

• French use indemnity; US reimbursement• French: once on claim, don’t leave

– Lowers need for claim management• US used formulaic reserves + additional

actuarial reserve (there is some change)• France has more flexible reserving system• Recognizes lack of knowledge up front


4/17/2015

Is Solvency II Coming to the US?

• If a company has European parent• Via economic capital??• LTC risk in Solvency II is a la disability

– 35% reduction in year 1 termination rates– 25% reduction thereafter

• French actuaries identified the problem– Doesn’t make sense– Need to defend an alternative – there still

is risk!

moderator: presenters: robert t. eaton, fsa, maaa …nefissa sator, iaf, maaa . soa 2015 annual...

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