Claim Rate Projection and Sensitivity Testing        

Claim Rate Projection and Sensitivity Testing        

Executive Summary

To renew the group life contract with GreenCo, MutualOne needs to update the claim rate table to capture the new assumptions and enhanced projections on GreenCo’s estimated annual claim cost. Secondly, MutualOne needs to prepare a projection model, centered on the exposure base total of $148,000,000. In addition, several assumptions should be applied in the projection model based on the industrial mortality trend and GreenCo’s experience. Thirdly, the projection model should be used to calculate the starting point of the projected annual claim cost per $1,000 insured. And lastly, a sensitivity test should be done to determine the materiality of each assumption.

Assumptions and Projections

When an average of $5,900,000 wage is circulated across twelve age groups based on GreenCo’s exposure experience, the exposure base of $148,000,000 becomes equal to 2500 members. Since the GreenCo age group is different from the model age group, it is further broken down into the model age group. Supposing that gender is equally dispersed in each age group, the base claim rate is taken from industrial data due to the unreliability and inadequacy of the historical internal records. The following are the GreenCo’s assumptions based on the GreenCo’s industrial experience data, which computes each age’s manual claim rate (Table 1) once applied to the base claim rate:

1. Mortality trend; Each age group’s tendency factor is computed by deducting one from the average growth mortality enhancement of both genders for each accrual year. This operation is prepared by the age of mortality enhancement from the SOA study.
2. Due to a lack of updated information, the downward adjustment to mortality from underwriting is set to 0.91.
3. Industry factor; is the weighted average of blue-collar and white-collar in opposite affiliation for each age group. Typically, the blue-collar mortality risk exposure is higher than the white-collar, when the age groups have a greater blue-collar.
4. Region factor; supposing MutualOne sets GreenCo in the Northeast of US, the region factor is thereby set to 1.01.
5. Assuming 40% of GreenCo employees are smokers, the Lifestyle factor is set to 1.06.
6. When the insurance contract of GreenCo’s is limited to a year, the Length rate guarantee is thereby set to 1.
7. The credibility of GreenCo’s group data (0.65) is computed by finding the square root of member years (2500) divided by default (5917).
8. The Increase rate of 1-year salary is set to 1.03.

The total claim rate (Table 1) can be computed by crediting 0.65 (credibility factor) to GreenCo’s experience rate and the rest to the manual rate (0.35). Multiplying total exposure ($148,000) by total claim rate of all ages (0.301), while maintaining the salary increase rate (1.03) gives a projection of base claim cost ($550,331).

Sensitivity Testing

Sensitivity testing is performed on the assumptions #b to #h above, to examine the materiality of their assumptions. Supposing that shock reflects the risky cases, A +10% and a -10% shock is applied to all the assumptions, excluding the region factor and length rate guarantee assumptions. 100% is consigned to examine the sensitivity on the region factor assumption, while for length rate guarantee assumption, the testing is performed separately using two and three-year rates. Table 2 illustrates the claim cost results.

Applying shock to the salary increase rate results in a similar impact percentage on the projected claim cost since the salary increase rate is applied directly to the projected claim cost. Therefore the results may not be adequately accurate, despite the salary increase rate having the most substantial impact on the total claim rate and material factor. Consequently, a scenario generation system’s salary increase rate should be tested to project the claim rate more accurately, which is a suitable economic assumption.

In conclusion, additional assumptions materials include the GreenCo’s group credibility data, Midwest regional factor, and the modification to underwriting mortality. Moreover, other testing techniques recommended for better assessment of the assumptions include the Conditional Tail Expectation (CTE) and Value at Risk (VaR).

For improvements to the projection model, an interest or discount rate factor should be included to estimate the time value of money appropriately. Also, a further investigation of the assumption of downward adjustment to mortality from underwriting should be done to ensure adequate preparation.

Table 1. GreenCo – Projected Claim Rate

Table 2. Sensitivity Testing and Results

Table 3. Sensitivity Testing and Results for Regional Factor