Long term Guarantees:

Value at Risk VS Value for Money

Some recent research developments and their impact on
risk assessment and products

Vincent LEPEZ SCOR Global Life

Global Chief Pricing Actuary

SCOR Global Life

Nov 2015

AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

Ageing in developed countries, the example of France

In 2005, 1 in 5 was over 60
In 2015, 1 in 4 is over 60
In 2050, 1 in 3 will be over 60
The number of people over 60 will double
And
The number of people over 75 will triple
The number of people over 85 will quadruple
SCOR Global Life

Ageing will sooner or later be a regional concern for Asia too

SCOR Global Life

The challenges of an ageing (and living longer) population

Retirement
increase in annuity charges
Relatively less contribution capacity from workforce
Aging diseases
More people getting to an age with high incidence for dementia(s)
Increasing incidences of Critical Illnesses (cancer, strokes, Parkinson, )
Uncertainty around the health condition in which well spend our life expectancy gains
Social and Societal trends
Decrease of government / social security support
Reduction of informal care
As a consequence, private Long Term Care Insurance and CI covers increasing needs, but in an
environment where the risk is constantly evolving and not perfectly observed

SCOR Global Life

AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

 Long Term Care and Longevity

Yang LU, SCOR Global Life & CREST (submitted preprint paper)

SCOR Global Life

Main ideas
LTC and mortality are dependent events, therefore the observation of cohort mortality data
brings information as regards LTC risk, whether due to CI or dementia
We propose a joint LTC/mortality model, that can be estimated using lifetime and mortality
data only, under reasonable assumptions on their joint evolution
The model is proved to be identifiable provided that enough data are fed into it
It allows us to predict the future evolution of the LTC risk, in terms of trends of the underlying
risk drivers

SCOR Global Life

Development of the Mortality/LTC model with longevity drift (1/3)

Assume a three state continuous model (Healthy / Dependent / Deceased) and the
corresponding transition probabilities intensities
The transition intensities are assumed to depend on age x and cohort c

Dependant

Healthy
life

Dead

The model relies on an implicit definition of entry into dependency: age at which we may
observe a jump on mortality rates
SCOR Global Life

Development of the Mortality/LTC model with longevity drift (2/3)

The transition probabilities provide information on the aggregated mortality rates, based on
total population, regardless of the LTC status.
For many countries, HMD database provides evolution of mortality rates over long periods of
time, which help to estimate the transition probabilities from the mortality data
Moreover we usually observe the mortality data for different cohorts and then build the a
model within which transition probabilities evolve across different generations

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Development of the Mortality/LTC model with longevity drift (3/3)

SCOR Global Life

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The Mortality/LTC model with longevity drift: key results (1/2)

The below graph displays the estimated probability of entry into a LTC state during whole
lifetime (Males, France, HMD data), according to the implicit LTC definition, and the related
90% confidence interval
It is strictly increasing but compresses since the mid XXth century, showing the time dynamics
of the underlying risk drivers

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The Mortality/LTC model with longevity drift: key results (2/2)

Red: residual life expectancy at age 50 for males
un France, for different cohorts (with 90%
confidence itv.)
Black: residual life expectancy at age 50 for males
in France without LTC ie. healthy life years (with
90% conf. itv.)
Over the XXth Century, time spent in
dependency gone from 1y to 2y, whereas the
gain in life expectancy was 8y!

However, confidence intervals are large, but

show a drift exists !
Btw These numbers tend to show that the
implicit entry in LTC state definition correspond
to very severe dependency
SCOR Global Life

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AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

14

Continuous time semi-Markov inference of LTCI biometric laws

Guillaume BIESSY, SCOR Global Life & LAMME (submitted preprint paper)

SCOR Global Life

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The 3 state continuous time model, with transition intensities

Dependant

Autonomous

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General
population

Deceased

Deceased

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Parametric expressions of transition intensities

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Some estimation results based on a huge French portfolio*:

rather thin confidence intervals, good data fit but

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* Single insurer homogeneous portfolio, Severe dependency annuity,

10y of observations, 160 000+ lives, 17 000+ claims, 1 300 000+ exposure years

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when we get to Pricing Formulas

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and we account for drifts in the model, Pricing results may get wild !

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AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

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Lessons learnt from research:

What we know and what we dont know
The 2 research articles research lead to aligned and complementary results
1st Paper:
Trends in underlying risk drivers for LTCI and CI do exist
They are material but still uncertain
2nd paper:
Assuming no change in trends, we now have very good modeling capabilities for deriving
Best Estimated of drivers
But when introducing drifts/trends, change in risk drivers induce wide uncertainty that
may cause wide uncertainty on pricing and reserving basis
For such very long term risks such as CI and LTCI, we have good command on level and
volatility risks but still limited understanding of trend risk
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Consequences on Pricing & Valuation in a moving regulatory context? (1/3)

These uncertainties are partially manageable, from a Risk Management perspective, through:
Reinforced socio-medical research efforts (longitudinal studies, public an industry data
pooling and sharing, )
More accurate actuarial modeling, better reflecting risks and uncertainties (Multi-state,
semi-Markov, competing risks, )
Stringent and stable Underwriting and Claims management

But, for Actuaries nowadays, this proves to be challenging with regards current significant
changes in regulatory frameworks:
Solvency II in Europe and European owned insurance companies
C-Ross in China
Solvency II like in Mexico

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Consequences on Pricing & Valuation in a moving regulatory context? (2/3)

Under Solvency II, at least as far as the standard formula is concerned, LTC or CI are not
represented as risk blocks
As a consequence, a company not equipped with an internal model has to use Morbidity or
Health shocks, which are not adapted to these risks.

Where are CI
and LTC ?...

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Impact of Regulatory Capital Calculations (3/3)

Fully guaranteed LTC annuity product, comparison of US RBC, SI and SII.
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 MM

- ALM model need, economic balance sheet

approach

4.6% of premiums over $50 MM

16% of premiums over $10 MM

Adjusted LTC Claims = (LRt-1 + LRt) / 2 * premiumt

Adjusted LTC Claims = (sum Paid Claimst-2,t-1,t

+ sum Change IBNRt-2,t-1,t) / 3

- Reinsurance taken into account

38.5% of adj. claims up to $35 MM

26% of adj. claims up to $7 MM

- Central scenario (BE assumptions) + chocs

given by regulators

12.3% of adj. claims over $35 MM

23% of adj. claims over $7 MM

- Diversification effects

RBC = premium component + claims

component average of last 2 years
Difficulty to implement

- Cash flows of future premiums - future claims future expenses

S1 = premium component + claims

component average of last 3 years

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

very low

very low

very high

Risk monitoring

no incentive

no incentive

strong incentive

Required capital

100%

104% to 350% if large player

Comments

- 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

1040% to 3500% at least !!

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

Hence Need to fine tune rate guarantees, reinsurance schemes, and overall risk structures
both in the product design and risk modeling (Pricing and Valuation).
Plus maybe investing in an internal model
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Example of use of an Internal model for modelling LTCI

Fully guaranteed LTC annuity product, Company X Internal Model, reflecting the uncertainty in
capital charges.
Required capital for a fully guaranteed level premium VS a non guaranteed premium:
Around x 7.5 for an age at entry of 50
Around x 6.0 for an age at entry of 60
Around x 5.0 for an age at entry of 70
Underwriting and Claims management may have up to a x 10 factor compared to best in class
operational risk capital contribution, depending the effectiveness and stability of their track
record.

A fully guaranteed product may end up having a Cost of Capital higher than the Risk
Premium itself!

In the end, the policyholder may pay Uncertainty more than Risk

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AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

27

As a consequence
Any refined Risk Based Capital approach, whether imposed by regulation or used for internal
Risk Management purposes will lead to significantly higher capital charges
for unstable operational risk management (UW & Claims)
for larger uncertainties
and finally and mainly for longer rate guarantees

Which definitely makes sense and reflects

underlying risks for the insurer!

In a context of regulatory and market pressure,

How to build a comprehensive and affordable product for the client, hence a good Value
Proposition and Value for Money?
How to build a less risky product for the risk carrier and, in the end, for the policyholder?
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So How to build products in this context?

Length and type of guarantees are key

and there are lots of ways to mitigate risk
Limiting the absolute underwriting risk (italic and brackets: risks addressed)

Lump Sum? (Longevity, Utilization)

Cap on the daily benefit? (Utilization)
Cap on the length or total amount of the annuity? (Longevity, Utilization)
Elimination and Waiting periods? (Anti-selection, administratively costly claims)
Risk premium vs Level premium? (Lapse, Longevity, Market)

Capping reviewability (Long term uncertainties)

Required capital for capped guaranteed premium vs fully reviewable:
Cap on annual review of 10% per year: around +20% capital charge
Cap on annual review of 5% per year: around +40% capital charge

SCOR Global Life

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AGENDA
1

Some context

1st Research paper: Longevity and LTCI, predicting incidences, longevity and their trends

2nd Research paper: LTCI claims costs and related pure premiums in presence of trends

Lessons learnt from Research and Capital charges impact

What about products design and structuring in that context?

Conclusion Risk-Taking or De-Risking?...

SCOR Global Life

30

As a conclusion
Guarantees always seem to be a great Value Proposition

But in the context of long term Guaranteed Life Insurance Products, they
can sometimes lead to really bad value for money:
Getting a fake long term guarantee in case of very adverse deviations
Paying for uncertainty and not for a real risk coverage
However market or regulatory constraints may lead to be forced to play in the LTG space from
a business perspective. If so Be mindful of
Your risk appetite and economic balance sheet structure
The corresponding regulatory Capital constraints
How to de-risk and offload capital for the components youre potentially adverse to
In that regard traditional and non-traditional Reinsurance might definitely help!
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Thank you for your attention!

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