1
Morbidity Improvement and Its Impact on LTC Insurance Pricing
and ValuationEric Stallard, A.S.A., M.A.A.A., F.C.A.
Research Professor of Demographic StudiesDuke University
Society of Actuaries Anaheim Spring Meeting, Session 107 PD
Anaheim, CAMay 21, 2004
Objectives For the entire session –
• To quantify the nature of temporal trends in functional disability rates
• To illustrate the potential impact of these temporal trends on LTCI premiums and reserves
• To provide guidance in properly reflecting this information in LTCI pricing and valuation
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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ObjectivesFor my presentation –• To examine long-term trends in morbidity,
disability, and mortality rates among the elderly
• To examine short-term trends in disability and mortality rates among the elderly
• To examine the joint impact of disability and mortality rates in producing lifetime disability time (beyond age 65)
Objectives
For Ron Wolf’s presentation –• To present practical considerations
concerning the use of temporal trends in disability and mortality rates on– LTCI pricing
– LTCI valuation
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Objectives
For Scott Weltz’s presentation –• To discuss the current methodologies and
assumptions used to estimate LTCI morbidity (with and without reflecting potential improvements)
• To illustrate the impact that morbidity improvement has on projected LTCI morbidity estimates
Four Fundamental Issues
1. What changes have been documented in morbidity and disability rates?
2. Why are these changes occurring?
3. Will they continue?
4. What do these changes imply for LTCI pricing and valuation?
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Data for Long-Term Trends1900 & 1910 Medical Examinations from the Union
Army Pension Program– Covered 85% of UA veterans in 1900 and 90% in 1910
1985–1988 National Health Interview Survey (NHIS)– Random sample of noninstitutionalized male veterans
1988–1994 National Health and Nutritional Examination Survey (NHANES)– Random sample of noninstitutionalized white males
1960-2002: Various Reports from National Center for Health Statistics (NCHS)
Gender 1900 1910 1990 1999
Annual Rate of Decline
Male 10,612 6,154 0.55%Female 9,749 4,157 0.86%Total 10,079 4,898 0.73%
Male 10,444 6,526 0.59%Female 9,606 4,055 1.07%Total 9,937 4,986 0.86%
Source: Bell and Miller (2002, Table 1).
Table 1: Age-Adjusted Central Death Rates at Ages 65 Years and Older (per 100,000)
Year
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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ConditionUnion Army
1910
NHIS 1985-1988
Annual Rate of Decline
Digestive (Hernia/Diarrhea) 84.0 8.0 3.03%Genito-Urinary 27.3 8.9 1.45%Circulatory 90.1 40.0 1.06%CNS, Endocrine, Metabolic, or 24.2 12.6 0.85%
Blood DisordersMusculoskeletal 67.7 42.5 0.61%Respiratory 42.2 26.5 0.61%Cancer 2.2 9.2 -1.89%
Source: Fogel and Costa (1997, Table 3).
Table 2: Prevalence of Chronic Conditions Among Elderly Male Veterans Aged 65 Years and Older (%)
ConditionUnion Army
1910
NHANES 1985-1988
Annual Rate of Decline
Heart murmur 39.2 3.8 3.00%Irregular pulse 42.0 8.5 2.07%Decreased breath or adventitious 37.8 10.8 1.62%
soundsJoint pain/tenderness/swelling 55.0 35.2 0.58%
Source: Costa (2000, Table 1).
Table 3: Prevalence of Chronic Conditions Among Elderly Male Veterans Aged 60-74 Years (%)
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Age ConditionUnion Army 1900/19101
NHANES 1988-1994
Annual Rate of Decline
50-64 in 1900 or 1988-1994Paralysis 4.8 0.9 1.82%Difficulty bending 39.0 7.5 1.80%Deaf (either/both ears) 2.9 1.4 0.80%Difficulty walking 20.9 10.4 0.76%Blind (either/both eyes) 2.8 1.5 0.68%
60-74 in 1910 or 1988-1994Difficulty bending 49.7 16.1 1.38%Difficulty walking 30.9 13.8 0.99%Paralysis 6.0 2.7 0.98%Deaf (either/both ears) 3.8 2.7 0.42%Blind (either/both eyes) 3.8 3.1 0.25%
Note 1: Excludes wounded veterans, POW s, and disability discharges.Source: Costa (2002, Table 3).
Table 4: Prevalence of Functional Limitations Among Elderly Males (%)
Long-Term Trends• Except for cancer, chronic disease
prevalence declined at least as fast as mortality rates (~0.6% per year) for older males during 1910-1990 (Fogel and Costa, 1997)
• Except for sensory losses, functional limitation prevalence declined at least as fast as mortality rates for older males during 1910-1990 (Costa 2000, 2002)
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Quantitative Estimates 1900-1990
• 50% of decline in mortality predicted by changes in height and weight (Fogeland Costa, 1997)
• 29% of decline in chronic diseases due to occupational shifts (Costa, 2000)
• 18% of decline in chronic diseases due to declines in infectious diseases (Costa, 2000)
Quantitative Estimates 1900-1990
• 37% of decline in functional limitation due to reduced prevalence of chronic diseases (Costa, 2002)
• 24% of decline in functional limitation due to reduced debilitating effects of chronic diseases (Costa, 2002)
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Year Unisex Males Females
1960 14.3 12.8 15.81970 15.2 13.1 17.01980 16.4 14.1 18.31990 17.2 15.1 18.92000 17.9 16.3 19.22002 18.2 16.6 19.5
Rate (% per yr.; 42 yr.) 0.58% 0.62% 0.50%Rate (% per yr.; 22 yr.) 0.47% 0.74% 0.29%
1980 10.4 8.8 11.51990 10.9 9.4 12.02000 11.3 10.1 12.12002 11.6 10.4 12.5
Rate (% per yr.; 22 yr.) 0.50% 0.76% 0.38%
Source: NCHS (2003, Table 27); Kochanek et al. (2004, Table 6).
At Age 65
At Age 75
Table 5: Life Expectancy at Ages 65 and 75, United States, Select Years
Age 1960 2000
Annual Rate of Decline
65-74 3822 2399 1.16%75-84 8745 5667 1.08%85+ 19,858 15,524 0.61%
Source: NCHS (2003, Table 35).
Table 6: Unisex Death Rates (per 100,000) for All Causes, United States
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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AgeDeath
Rate
Percent of All
DeathsDeath
Rate
Percent of All
Deaths
Annual Rate of Decline in Death Rate
65-74 1741 46% 666 28% 2.37%75-84 4089 47% 1780 31% 2.06%85+ 9318 47% 5926 38% 1.13%
Source: NCHS (2003, Table 36).
Table 7: Unisex Death Rates (per 100,000) for Diseases of Heart, United States
1960 2000
AgeDeath
Rate
Percent of All
DeathsDeath
Rate
Percent of All
Deaths
Annual Rate of Decline in Death Rate
65-74 714 19% 816 34% -0.34%75-84 1127 13% 1336 24% -0.42%85+ 1450 7% 1819 12% -0.57%
Source: NCHS (2003, Table 38).
Table 8: Unisex Death Rates (per 100,000) for Cancer, United States
1960 2000
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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AgeDeath
Rate
Percent of All
DeathsDeath
Rate
Percent of All
Deaths
Annual Rate of Decline in Death Rate
65-74 469 12% 129 5% 3.18%75-84 1491 17% 461 8% 2.89%85+ 3681 19% 1589 10% 2.08%
Source: NCHS (2003, Table 37).
Table 9: Unisex Death Rates (per 100,000) for Cerebrovascular Diseases, United States
1960 2000
AgeDeath
Rate
Percent of All
DeathsDeath
Rate
Percent of All
Deaths
Annual Rate of Decline in Death Rate
65-74 2924 76% 1611 67% 1.48%75-84 6708 77% 3577 63% 1.56%85+ 14,448 73% 9335 60% 1.09%
Source: NCHS (2003, Tables 36-38).
Table 10: Unisex Death Rates (per 100,000) for Heart, Cancer, and Cerebrovascular Diseases, United States
1960 2000
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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AgeDeath
Rate
Percent of All
DeathsDeath
Rate
Percent of All
Deaths
Annual Rate of Decline in Death Rate
65-74 899 24% 789 33% 0.33%75-84 2037 23% 2089 37% -0.06%85+ 5409 27% 6190 40% -0.34%
Source: NCHS (2003, Tables 33-38).
Table 11: Unisex Death Rates (per 100,000) for Residual Causes of Death, United States
1960 2000
Mortality Changes 1960-2000
• Increases in life expectancy at age 65 due to decreases in death rates from heart and cerebrovascular diseases
• Cancer death rates increased, but not enough to offset heart and cerebrovascular decreases
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Mortality Changes 1960-2000
• Cancer death rates peaked for males during 1990s (female peak expected 10-20 years after)
• Residual causes at age 85+ increased from 27% to 40% of deaths as progress against top 3 causes left “void”
Gender 1965 2000
Annual Rate of Decline
Male 51.9 26.4 1.91%Female 32.0 21.6 1.12%
Male 28.5 10.2 2.89%Female 9.6 9.3 0.09%
Source: NCHS (2003, Table 59).
Table 12: Current Cigarette Smoking (%) at Ages 45-64 and 65 Years and Older, United States
Age 45-64
Age 65+
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Gender 1960-1962 1999-2000
Annual Rate of Decline
Male 60.3 50.7 0.45%Female 66.4 57.9 0.36%
Male 68.8 68.3 0.02%Female 81.5 73.4 0.27%
Source: NCHS (2003, Table 66).
Table 13: Prevalence of Hypertension (%; SBP >= 140, DBP >= 90, or Medicated) at Ages 55-64 and 65-
74 Years, United States
Age 55-64
Age 65-74
Gender 1960-1962 1999-2000
Annual Rate of Decline
Male 233 210 0.27%Female 262 223 0.42%
Male 230 210 0.24%Female 266 229 0.39%
Source: NCHS (2003, Table 67).
Table 14: Mean Serum Cholesterol Levels (mg/dL) at Ages 55-64 and 65-74 Years, United States
Age 55-64
Age 65-74
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Gender 1960-1962 1999-2000
Annual Rate of Decline
Male 41.6 16.5 2.37%Female 70.1 26.2 2.52%
Male 38.0 19.2 1.76%Female 68.5 37.4 1.56%
Source: NCHS (2003, Table 67).
Table 15: Prevalence of High Serum Cholesterol (%; SC >= 240 mg/dL) at Ages 55-64 and 65-74 Years,
United States
Age 55-64
Age 65-74
Gender 1960-1962 1999-2000
Annual Rate of Decline
Male 9.2 32.9 -3.37%Female 24.4 43.1 -1.49%
Male 10.4 33.4 -3.08%Female 23.2 38.8 -1.34%
Source: NCHS (2003, Table 68).
Table 16: Prevalence of Obesity (%; BMI >= 30 kg/m2) at Ages 55-64 and 65-74 Years, United States
Age 55-64
Age 65-74
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Chronic Disease Risk Factor Changes 1960-2000
• Substantial declines in – cigarette smoking
– hypertension
– serum cholesterol
• Substantial increases in obesity, but not enough to offset favorable declines in other risk factors
Data for Short-Term Trends1984, 1989, 1994, and 1999 National Long Term Care Survey (NLTCS)– Nationally representative sample of elderly
Medicare enrollees aged 65+– Combines cross-sectional and longitudinal
design with stable instrumentation (Stallard, 2000; Stallard and Yee, 2000)
– “One of the best designed surveys for analyzing national disability trends” (Freedman et al., 2002)
– See http://nltcs.cds.duke.edu/index.htm
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Age 1984 1989 1994 1999Annual Rate of Decline; 15 yr.
65-69 3.32 3.15 3.04 2.38 2.19%70-74 5.15 4.64 4.11 4.12 1.48%75-79 8.83 8.42 7.90 6.32 2.21%80-84 15.95 15.87 13.30 12.61 1.55%85-89 27.86 27.97 25.89 22.50 1.42%90-94 46.89 42.52 45.30 39.04 1.21%95-99 66.43 61.90 60.15 52.11 1.61%Age standardized rate 9.59 9.19 8.49 7.48 1.64%
Source: Author's calculations based on NLTCS.
Table 17: Unisex Prevalence (%) of Disability Satisfying HIPAA ADL Trigger, United States 1984 to 1999, Select Years
Year
Age 1984 1989 1994 1999Annual Rate of Decline; 15 yr.
65-69 1.07 1.01 0.85 0.52 4.67%70-74 2.16 2.09 1.84 1.64 1.84%75-79 4.48 4.37 4.25 2.76 3.18%80-84 9.85 9.43 8.45 6.35 2.88%85-89 19.31 18.95 18.41 12.49 2.86%90-94 34.13 31.38 32.91 27.81 1.36%95-99 50.14 44.60 49.84 37.24 1.96%Age standardized rate 5.47 5.25 5.01 3.71 2.56%
Source: Author's calculations based on NLTCS.
Table 18: Unisex Prevalence (%) of LTC Institutionalization, United States 1984 to 1999, Select Years
Year
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Why is Disability Declining?Contributing Factors --• Improvements in physical health• Improvements in cognitive health• Improvements in diagnosis and
treatment of chronic and disabling illnesses
• Innovations in preventive medicine• Pharmaceutical innovation
Why is Disability Declining?Contributing Factors --• Improvements in diagnosis and
treatment of mental health disorders
• Improvements in health-related behaviors
• Decreases in hazardous exposures• Improved technology of assistive
devices
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Why is Disability Declining?Contributing Factors --• Expanded use of assistive devices
and environmental supports• Changes in reimbursement for home
health care• Expanded elder care and social
support• Improved levels of education• Improved socioeconomic status
Quantitative Estimates 1984-1993There were minimal impacts of population composition, device use, survey design, role expectations and living environments on functional limitations 1984-1993– Trend may be due to change in “underlying
physiological capability” (Freedman and Martin, 1998)
– Or to improved educational attainment (Freedman and Martin, 1999)
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Quantitative Estimates 1989-1996• Disability declined 1989-1994
– not due to decreases in disease incidence (via Medicare reports; which actually increased),
– but to reduced debilitating effects of disease (McClellan and Yan-Li, 2000)
• These results were replicated for self-reported conditions 1992-1996 (Yan-Li and McClellan, 2001)
Expected Lifetime Disability-Time Beyond Age x in Year y (Sullivan, 1971)
, , ,0
, , ,
,
where
and disability prevalence at age
Dx y t x y x t y
t x y x t y x y
x t y
e p dt
p l l
x t
π
π
∞
+
+
+
=
=
= +
∫
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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At Age 65 1984 1999Annual Rate
of Change
Life Expectancy 16.64 17.40 0.30%
HIPAA ADL Expectancy 1.86 1.57 1.13%
LTC Institutional Expectancy 1.11 0.83 1.94%
Table 19: Unisex Life Expectancy, HIPAA ADL Expectancy, and LTC Institutional Expectancy (in Years at Age 65), United
States 1984 and 1999
Year
Source: Author's calculations based on NLTCS and life tables from Bell and Miller (2002).
Change in Expected Lifetime Disability-Time Beyond Age x
( )
( )
( )
0 0 0
0 0
0
, , , , , ,0
, , ,0
, , ,0
Survival Increment
Morbidity Decrement
Dx y Dx y t x y x t y t x y x t y
t x y t x y x t y
t x y x t y x t y
e e p p dt
p p dt
p dt
π π
π
π π
∞
+ +
∞
+
∞
+ +
− = −
= −
− −
∫
∫
∫
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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At Age 65 1984 1999 ChangeSurvival
IncrementMorbidity
Decrement
Life Expectancy 16.64 17.40 0.76 0.76 -
HIPAA ADL Expectancy 1.86 1.57 -0.29 0.13 0.42
LTC Institutional Expectancy 1.11 0.83 -0.28 0.09 0.37
Year
Source: Author's calculations based on NLTCS and life tables from Bell and Miller (2002).
Table 20: Components of Change in Unisex Life Expectancy, HIPAA ADL Expectancy, and LTC Institutional Expectancy (in Years at Age 65), United
States 1984 and 1999
Implications for LTC InsuranceIs there a Dynamic Equilibrium in
Population Health?
• Morbidity, mortality, and disability reflect different aspects of a common, underlying health process; future changes in these three components will be linked.
• Modeling this linkage could yield more accurate projections of the joint impacts of survival increments and morbidity decrements on lifetime disability-time.
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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HIPAA ADL Disability Projections, United States 1995-2040, Unisex Age 65 Years and Older
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Year
Num
bers
in T
hous
ands
Constant prevalence rates0.6% per year prevalence decline1.2% per year prevalence decline
Open Questions
• Can the rate of disability decline in the U.S. continue to be significantly larger than the rate of mortality decline?
• How will biomedical research and health care expenditures affect disability and mortality rates?
• How will trends in these rates impact on LTCI pricing and valuation?
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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ReferencesBell FC, Miller ML. Life Tables for the United States Social
Security Area 1900–2100. Actuarial Study No. 116, Social Security Administration, 2002.
Costa DL. Understanding the twentieth-century decline in chronic conditions among older men. Demography37(1):53–72, 2000.
Costa DL. Changing chronic disease rates and long-term declines in functional limitations among older men. Demography 39(1):119–137, 2002.
Fogel RW, Costa DL. A theory of technophysio evolution, with some implications for forecasting population, health care costs, and pension costs. Demography 34(1): 49-66, 1997.
ReferencesFreedman VA, Martin LG. The role of education in
explaining and forecasting trends in functional limitations among older Americans. Demography 36(4):461–473, 1999.
Freedman VA, Martin LG. Understanding trends in functional limitations among older Americans. American Journal of Public Health 88(10): 1457–1462, 1998.
Freedman VA, Martin LG, Schoeni RF. Recent trends in disability and functioning among older adults in the United States: A systematic review. Journal of the American Medical Association 288(24):3137–3146, 2002.
Kochanek KD, Smith BL. Deaths: Preliminary Data for 2002. National Vital Statistics Reports Vol. 52 No. 13, National Center for Health Statistics, 2004.
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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ReferencesMcClellan M, Yan-Li LL. Understanding disability trends in
the U.S. elderly population: The role of disease management and disease prevention. Paper presented at the Annual Meeting of the Population Association of America, Los Angeles, March 23-25, 2000.
National Center for Health Statistics (NCHS). Health, United States, 2003. NCHS, 2003.
Stallard, E. Retirement and health: Estimates and projections of acute and long-term care needs and expenditures of the U.S. elderly population. Chapter 15 in Retirement Needs Framework, SOA Monograph M-RS00-1, Society of Actuaries, Schaumburg, IL, 2000.
Stallard E, Yee RK. Non-Insured Home and Community-Based Long-Term Care Incidence and Continuance Tables. Actuarial Report Issued by the Long-Term Care Experience Committee, Society of Actuaries, Schaumburg, IL, 2000.
ReferencesSullivan D. A single index of mortality and morbidity. Health
Services and Mental Health Administration (HSMHA) Health Reports 86(4):347–354, NCHS, 1971.
Yan-Li LL, McClellan M. Disease management or disease prevention? Evidence regarding the causes of recent disability decline among American elderly from the Medicare Current Beneficiary Survey. Paper presented at the Annual Meeting of the Population Association of America, Washington, DC, March 31, 2001.
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Morbidity Improvement and Its Impact on LTC Insurance Pricing and ValuationSOA Spring Meeting – Session 107 PD
Scott A. Weltz, FSA, MAAAMay 21, 2004
Do You Believe?I believe in morbidity improvementBUT.........
Before entertaining the notion that morbidity might improve in the future, we must understand:
– Current insured morbidity experience– Projected morbidity estimates– Then consider population trends
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Sample Pricing Claim CostsThree carriers – Three assumptions– Uniform plan characteristics and demographics– Similar underwriting criteria– Nationwide rating– Marketed through brokers– Similar claim adjudication procedures
In general, very similar blocks
Sample Pricing Claim CostsPer $10 Daily Benefit
6.2
20.8
100.0
5.0
17.7
89.3
9.6
79.5
30.7
$0
$20
$40
$60
$80
$100
$120
Age 65 Age 75 Age 85
Company ACompany BCompany C
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Sample Pricing Claim CostsHow can this be?
– Dearth of credible & uniform insured data– Dynamic environment
Plan design changesUnderwriting improvementsClaim management improvementsMix of business shifts
Conclusion– Developing LTC morbidity estimates is difficult
Actual Claims ExperienceIndustry claims study
– $2 billion of insured claims– 4.6 million life years– 12 companies
Developed industry benchmarks
Normalized for risk characteristics
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Actual Claims ExperiencePer $10 Daily Benefit
5.8
25.3
107.0
5.4
25.9
101.2
4.7
113.7
26.7
$0
$20
$40
$60
$80
$100
$120
Age 65 Age 75 Age 85
Company ACompany BCompany C
Actual Claims ExperienceWith rigorous experience analysis of fully
credible insured data, it is possible to develop reasonable claim cost assumptions today....
....for the early policy durations
Projecting experience is a different story
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Projecting LTC MorbidityPredominant methods
1. Connect-the-Dots
2. Underwriter’s Dream
3. Freelance
Table I-a: Co nne c t-the -Do ts
0102030405060
65 70 75 80 85 90
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65Actual Issue Age 75Actual Issue Age 85
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Table I-b: Co nne c t-the -Do ts
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65Actual Issue Age 75Actual Issue Age 85Projected Ultimate
Table II-a: Unde rwrite r's Dre am
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65Actual Issue Age 75Actual Issue Age 85Pricing
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Table II-b: Unde rwrite r's Dre am
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
stActual Issue Age 65Actual Issue Age 75Actual Issue Age 85PricingProjected Ultimate
Table II-c : Unde rwrite r's Dre am
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65Actual Issue Age 75Actual Issue Age 85Projected UltimateS i 1
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Table III: Fre e lanc e
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65Actual Issue Age 75Actual Issue Age 85Projected
Table IV-a: Comparis on of ProjectionsIssue Age 65
0102030405060
65 70 75 80 85 90 95
Attained Age
LT
C C
laim
Co
st
Actual Issue Age 65CTD ProjUW Dream ProjFreelance Proj
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Table IV-b: Comparis on of ProjectionsIssue Age 65
0102030405060
65 70 75 80 85 90 95
Attained Age
LTC
Cla
im C
ost
Actual Issue Age 65CTD - 1% Morb ImpUW Dream ProjFreelance Proj
Table IV-c: Comparis on of ProjectionsIssue Age 65
0102030405060
65 70 75 80 85 90 95
Attained Age
LTC
Cla
im C
ost
Actual Issue Age 65CTD ProjUW Dream - 1% Morb ImpFreelance Proj
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Table IV-d: Comparis on of ProjectionsIssue Age 65
0102030405060
65 70 75 80 85 90 95
Attained Age
LTC
Cla
im C
ost
Actual Issue Age 65CTD ProjUW Dream ProjFreelance - 1% Morb Imp
Table V: Generational Morbidity ImprovementFreelance with Morb. Improvement Varying by Issue Age
0102030405060
65 70 75 80 85 90 95
Attained Age
LTC
Cla
im C
ost
IA 65 - 1.5% MI; 15 YearsIA 75 - 1% MI; 5 YearsIA 85 - 0% MI
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Valuation Survey
Survey of LTC companies in late 2003– 17 individual carriers– 6 group carriers– Over $4.6 billion in-force premium
Morbidity improvement assumptions– Reserve calculations (STAT, TAX, GAAP)– Asset adequacy
Valuation Survey
* Note: Some companies do not hold GAAP reserves or do not value their business on a best estimate basis internally.
200N/A*
1111.50%
2111.25% - 1.49%
5441.00% - 1.24%
711110.00%
GAAP*TaxStatAnnual
Morbidity ImprovementRate
Morbidity Improvement RatesIndividual Companies
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Valuation Survey
11116 - 20 Years
* Note: Some companies do not hold GAAP reserves or do not value their business on a best estimate basis internally.
200N/A*
322Forever
22211 - 15 Years
2116 - 10 Years
711110 - 5 Years
GAAP*TaxStatYears of Improvement
Applied from Policy Issue Date
Duration of Morbidity ImprovementIndividual Companies
Summary
LTC morbidity is ever-changing
1. Evaluate available data2. Develop well thought-out projections3. Consider morbidity improvement
Population dataTranslating to insured environmentDo not attempt this step in a vacuum from Steps #1 & #2
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Session 107 PDMorbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
Use of LTCI Morbidity Improvement -Practical Considerations
Presented byRonald M. Wolf, FSA, MAAA
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Outline
• Is the use of morbidity improvement material?
• Is it supportable (for an insured population)?
• (When) is it properly used?• Guidelines for consideration
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Materiality
• Consider four alternatives:
1 No No
2 Life No
3 Life* Life*
4 10 y** 10 y**
Alternative Morbidity MortalityPremium For
Same ROIROI For Same
PremiumImprovement In
*1.5% improvement per year**Improvement for10 years, then level for life
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Materiality (continued)
It is material for pricing
1 No No $100 15%
2 Life No $ 86 23%
3 Life* Life* $ 91 22%
4 10 y** 10 y** $ 99 17%
Alternative Morbidity MortalityPremium For
Same ROIROI For Same
PremiumImprovement In
*1.5% improvement per year**Improvement for 10 years, then level for life
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Materiality (continued)
It can be material for in-force modeling
1 No No $100
2 Life No $240
3 Life Life $164
4 10 y 10 y $110
Alternative Morbidity MortalityPV Pre Tax
Book Profits*
Improvement In
*Discounted at pre-tax earned rate
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Supportable/Applicable/Appropriate?
• Population improvement implies insured improvement(?)– Seems plausible at face value– True for life insurance mortality
• Supported by insured experience (?)– 1984-1999 SOA study shows improvement in
incidence by issue year and duration– Some carriers have seen improving A/E ratios (some
have seen deterioration)– Difficult to measure due to changes in underwriting
and selection curve– Inherent tendency of insured to anti-select
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Supportable/Applicable/Appropriate? (continued)
• Potential long term societal trends– Fewer family care givers, more single persons– Change in care delivery, contract interpretation– Rate increase policies, limitations– Morbidity/mortality for the very elderly
• Context of other assumptions– Mortality – level and improvement– Voluntary lapse– Current morbidity – good/bad (rate increases); credible– Interest rates (hedging; improving?)
• Nature of task
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Appropriate Assumptions Differ By Task
Task Nature of Assumptions
Pricing Moderately adverseStatutory ALRs No prescribed table; sound valueGAAP ALRs Best estimate plus marginAsset Adequacy Moderately adverseEV Reporting Best estimateDFCA
Internal Best estimateExternal Moderately adverse
Appraisal “Best foot forward”
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Characteristics of Assumptions
• Best estimate– Equally likely to be high or low
• Best estimate plus margin• Moderately adverse• Sensitivity/stress test
– Plausible/possible– Minimal chance of being worse than…
(historical tie-in)• Lack of directly credible data should imply some
conservatism
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If Used, How Much Morbidity Improvement May Be Appropriate
• Stallard data indicates morbidity improvement about 1% per year higher than mortality improvement (recently)
• Material difference in effect of lifetime vs. temporary improvement
• Current industry practice varies considerably
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation
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Guidelines For Consideration
• Morbidity improvement should not be used without mortality improvement
• Consider nature of other key assumptions
• Consider nature of the assignment or application
• Lifetime improvement is not moderately adverse
SOA 2004 Anaheim Spring Meeting - 107 PD, Morbidity Improvement and Its Impact on LTC Insurance Pricing and Valuation