Actuarial Notes

Issues in Applying Credibility to Group Long-Term Disability Insurance

By Paul L. Correia · Society of Actuaries · 2013

Study guide: Exam CP-321

A research report, prepared by Paul L. Correia of Milliman for the Society of Actuaries Health Section in September 2013, on issues in applying credibility in group long-term disability (LTD) insurance. It collects information on the challenges and current methods for applying credibility in LTD, including a survey of 11 LTD insurers, compiles an annotated bibliography, and summarizes actuarial guidelines that pertain to the use of credibility in LTD.

On the syllabus

  • Exam CP-321 — Outcomes 2e; pages 5-15 (Practical Applications of Credibility Concepts in Group LTD; Challenges in Applying Credibility in LTD).

Introduction

  • The project's three components: collecting information on challenges and current methods for applying credibility in LTD, compiling an annotated bibliography, and summarizing actuarial guidelines that pertain to the use of credibility in LTD.
  • Most applications of credibility in LTD are based on classical paradigms, and in particular the limited fluctuation model.

Practical Applications of Credibility Concepts in Group LTD

  • Valuation
    • The 2012 GLTD valuation standard uses a limited fluctuation credibility model for blending company-specific claim termination experience with the valuation table; "selected variance factors" by claim duration adjust for the non-independence of claim terminations.
    • Full credibility is the number of expected terminations that yields an 85% probability that observed terminations are within 5% of expected, taking differences in volatility by duration into account.
  • Experience Rating
    • The most common formula for experience rating LTD products weights an experience rate and a manual rate by a credibility factor.
    • Credibility formulas vary significantly across the industry, in the exposure measure used (life years of exposure or claim volume), the thresholds and the shape of the credibility curve.
  • Manual Ratemaking
    • Actuaries use credibility concepts to decide how finely experience can be divided by gender, age, industry and other variables to calculate base rates and pricing factors; the method ranges from subjective judgment to formal limited fluctuation procedures.

Challenges in Applying Credibility in LTD

  • Non-Independence of Claims
  • Heterogeneous Claims
  • Competitive Pricing Pressures
  • Claim Duration
  • Benefits from Other Sources
  • Outlier Claims
  • Regulatory Requirements
  • Estimating Parameters

Credibility Survey for Actuaries Practicing in LTD

  • Summary of Responses to Survey Questions for Actuaries Practicing in LTD

Credibility Survey for State Regulators

Credibility Survey for Actuaries Practicing in Medical Insurance

Credibility Adjustment Factors for Medical Loss Ratio Refund Calculation

Actuarial Guidelines Pertaining to the Use of Credibility

Annotated Bibliography

Sources