Recent Article Featuring DIS's own Bill Bossi - written by Tim Meyer of Meyer Disability Consulting for the February/March '07 issue of "The Source"

...the STD manual rate basis is still extremely important.
Manual rates are often used to determine the relative pricing difference between benefit options. The relative price difference is then applied to actual experience (subject to underwriting judgment and discretion) to determine a proposed rate applicable for the revised plan of benefits. For example:
•A current inforce policyholder has a STD benefi t plan with
a 26-week benefi t duration, and has asked for a rate for a
plan with a 13-week benefi t duration.
•The STD manual rates show that the 13-week plan is 75
percent of the 26-week plan.
•The underwriter might adjust the actual experience under
the 26-week plan downward by 25 percent in developing
the proposed rates for the 13-week plan.
At the annual SOA meeting in Chicago this fall, Bill Bossi of Disability Insurance Specialists LLC presented the following, which indicates how sensitive STD profitability is to claim duration:
•If pricing anticipates a 65% loss ratio and a 5% profi t, and
average claim duration is 50 days, then a 1 day increase
in duration adds 2% to claim costs (equal to 1.3% of
premium).
•Additional claim cost of 1.3% of premium drops after-tax
margin to 4.15% or 83% of expected.
•A 1-day difference in expected claim duration is worth
17% on the bottom line!
This illustrates the significant impact the STD manual rate can have even for larger cases.
Block Demographic Changes/Shifts
Is the average duration of claim changing? Are incidence rates changing? Are maternity claims changing as a percentage of total claim costs? Note that the answer the above questions should also include an analysis of what was "expected". In other words, is the average duration of a claim changing, and is this expected? Are maternity
of business by plan design, SIC, etc., could result in these changes. As could a shift in demographics – higher/lower female content, changes in average age/age distribution of the block, etc. The best measure of "expected" is the manual rate basis. And if the manual rate basis has an adequate rate slope by age, adequate rates by gender, adequate rates by benefi t duration, etc., then all of the above changes could be occurring and yet the actual-to-manual claims ratio would remain constant, i.e. the changes are occurring but the resulting change in claim costs was expected.
Case Specifi c Demographic Shifts
The manual rate can play an important role in the renewal process by identifying changes in case specifi c demographics. Given no changes in the plan of benefi ts, a change in manual claim costs of a group over time indicates a change in underlying case demographics. When predicting claims for a future experience period, it may be appropriate to make a demographic adjustment to the historical claims experience
to refl ect this gradual change. The manual rate basis can serve as the tool for determining the appropriate adjustment to use.
The above are but a few examples of how the STD manual rate basis impacts the pricing and management of a STD block of business. These examples illustrate that devoting resources/time to ensure an adequate STD manual rate basis is key to a profi table, growing book of business.