Renewal maths

I was talking to a rep in another company about the Manulife renewals and they looked at the blog post. He commented that I had used very very simplified math to determine the renewal. This is true, I didn't feel like getting into the nitty gritty at the time of the post. We went back and forth on how their company actuaries price renewals and how I as the advocate of the client price renewals. We have some differences but here is the email exchange to clarify how we each do it.

I originally responded with a more detailed explanation of my process, and he then responded with his comments in red.

Company rep is in RED, I am in BLUE

More detail on the math I use for renewals

Incurred Loss Ratio = incurred claims / paid premium

Incurred Loss Ratio – TLR = over-under for the year.  

this one should actually be ILR / TLR = over/under for the year.  Again, it'll show us making more on the good years, losing more on the bad years. 

Manulife case I used in the blog

Incurred claims = 6583

Paid premium = 10411

ILR = 63.23%

ILR – TLR = over-under

63.23%-75% = -11.77%

So Manulife made profit of 11.77% this past year. The client overpaid, so they should get that back next year.  

Based solely on the 63.23% number, there's actually 15.7% "extra" in last year's premium if you go by ILR / TLR.  If last year's claims were 6583 with a 75% TLR, overall premium should have been $8,777 to hit the TLR, instead of 10,411.  (10,411 - 8,777) / 10,411 = 15.7% excess premium instead of 11.77%.   

Adding in trend factor  of 8%

Past claims were 6583 x 1.08 = 7109

Next years claims should be 8% higher at $7109 if they follow trend. 

The main challenge with using past claims is it doesn't reflect any of the demographic changes through the year and isn't very accurate.  Don't get me wrong, EVERY group advisor uses this method ... but the only time it's correct is when you haven't had ANY demographic changes to a group over the year.  Let's use an example of a 10-life group that ran right at break-even last year.  So, last year they paid 10K in premiums and received $7,500 back in claims, to run right at 75%.   If we had only those 10 people on the plan throughout the year with no changes and we have only those 10 on at renewal, this method works.  But, let's use an extreme example of this group adding 5 new people the day before the renewal is run.  Well, our claims would still be $7,500 last year, but we now have 50% more people on the plan who will use it next year.  If we just said this group needs 7,500 x 1.08 for trend, we'd be 50% underfunded because of employee changes.  Because of constant employee changes, it's hard to say that claims were $7,500 last year, they'll just be 8% higher next year.  What we can say is the group ran right at break-even last year, so what %age change to rates next year is required?  This is an extreme example for sure, but illustrates the point.

If the TLR is 75% that means they need 25% admin on top of $7109  

If TLR is 75%, that actually means 33% admin is required on top of $7,109.  The 75% represents how much of each dollar of premium you collect you want to pay out in claim.  So, for every dollar collected, the insurer wants to pay out 75 cents.  What that means is top pay out a dollar of claim, 1.33 (1 / .75) needs to be collected. 

7109 / 75% = $9478 in annual premium for next year.  

This is correct, but again $9,478 is actually 1.33 of $7,109. 

Drop the 11.77% the client overpaid from last year

9478 x(0.8823) = 8362

Correct, assuming NOemployee changes at all throughout the year or for next year. 

So the next years premium should be $8362 (assuming I did all my math right... it’s been a long day and im kinda sleepy)

Odds are the claims will be higher than TLR but that is just the ebb and flow of the over-under funding that is going on, rates will go up the following year and vice versa, in the long run it will even out. Manulife made a profit this year, so next year it is only fair for the client to be in a winning position.  That being said I know Manulife will never provide a discount that I am asking for as they know it means they will take a loss in the next year, but if I go in low they will usually give me their best rate, with their biggest discount. I don’t always get what I am asking for but as long as I get every cent they have to offer I am content with that. When I crunch all the numbers I usually end up with a lower rate than the quick/easy way, but that said even the quick way shows the client should be getting a discount, and they were asking for a double digit increase.  

Again, I think your philosophy of getting what you can for the client is very solid.  And, speaking purely from my perspective, when an advisor asks me to review a renewal, I'm always a lot more amenable to revise rates if the advisor actually has some form of reasoning for asking!  Some still show up saying "drop your rates or I'll move the case" which usually garners a pretty quick "Have a nice day" from me, but having someone put some thought into it and saying "your rates are too high because..." usually gets a lot more love.  I'm assuming it's the same with other group reps as well, so I think the way you approach it is the best way, regardless of whether the math would pass the actuary exam or not!

Its a lot of numbers but thats how I do it. Still not taking into account credibility, past experience etc but for a year over year renewal thats the process I use more or less. Again, its been a long day, and I had to fix a few mistakes I made so I might have done something wrong.

So that's my process more or less, if there are changes to the demographics or certain oddities like a sick employee or odd claims I will adjust how I do things accordingly. 

TL;DR the manulife renewal I commented on previously should have ended up with a new annual premium of $8362 which is a 19% decrease, like I say above I don't expect to get that from Manulife or any carrier for that matter but I do expect close to the $9478 number which is a 8.9% decrease, a larger decrease than my original post I might add. Manulife proposed a rate increase of +10.95% which is simply not acceptable.

I do have some good news though, after talking with my Manulife rep, we were able to settle with a final rate change of -5%.

Thanks Manulife.

Look in the mirror and say their name three times: Manulife, Manulife, Manulife

I think they were listening, from Google analytics of the blog. Lets see if they do anything about it. They haven't contacted me yet.

Manulife your group renewals SUCK

I have been contacted by Standard Life in the past for kind words I wrote here on their behalf. Apparently they have internet monkeys scouring the inter-tubes looking for any reference of their company name, so here is hoping Manulife is listening.

I've recived three group insurance renewals in the last few days from Manulife. They have all sucked, hard. The rates they are proposing are a joke. I am used to Manulife and other carriers trying to get away with a little bit of extra fat on a renewal, but these have been a joke. Clients with good claims have been hit with increases when a decrease should have been provided. God help the clients with bad claims, they might as well just pack up and go home. I dont know if Manulife is trying to lose business or what?

For example: I'm working on a renewal right now which takes effect March 1 2010. Carriers usually provide the claims and premiums paid for the past year less a month. So the March renewal should have March 1 2009 to January 31, 2010. Maybe 2 months of lag, so claims too the end of December. Manulife's renewal only has experience to October 31, 2009. What about November or December? I know it takes time to prepare a renewal and the claims aren't always up to date but October? Come on, you can do better.

Same group, dental premiums paid $10,411.20; total claims incurred $6,568.92 or 63% of premium. Manulife says their administration is 25% of premium and trend is 8%.

Sooooo 63% plus 25% plus 8% = 96% of premium paid.

I see this and expect a 4% decrease in rates. What does Manulife ask for? 10.95% INCREASE, are you insane? That's a 15% spread who are you trying to fool?

Same thing for another group, claims are 96% of premium, ok thats bad, claims are high, the target was 75% so they are 21% over, an increase is justified. Trend is 15% for health, admin is again 25%.

96% plus 15% plus 25% = 136% of premium, so a 36% increase is justified.

Manulife wants 48.33% increase. NO just NO. I talk to an underwriter and they inform me they have already reduced the rate internally, the original increase was going to be north of 60%. I'm dumbfounded. Manulife originally calculated that they needed nearly double the rate increase I consider fair.

Manulife, if your reading this, PLEASE look at your underwriting, the rates you are coming up with are totally out to lunch. There is no way I can support rate increases like this, it is hard enough that I have to fight you every renewal to get a fair rate but when you are asking for colossal rate increases when none is justified, the client is just going to go elsewhere. You are a good carrier, one of the best, your admin and website rock, you pay claims quickly and accurately, but your pricing sucks.

Brutal.

Gamble with a guarantee

 

Segregated Funds have maturity guarantees. This means that after 10 years (usually) if you have lost money, the insurance company has to pay you back either 75%, or 100% depending on the contract, of your money. Here is the first such occasion where our office has seen this happen. The image above is an actual RRSP statement we received recently. Personal information has been redacted for privacy reasons. As you can see the original deposit (Net Transaction) was $58,218.41 this was deposited nearly 10 years ago on Feb 25, 2000. The client had invested heavily in the NASDAQ index and we all know how that went. 

  

NASDAQ index from 1999 to 2009 - OH GOD IT BURNS.

So in about three weeks, this client will be receiving a cheque from Industrial Alliance Pacific for 100% of his original investment, $58,218.41 A pretty terrible rate of return for 10 years of time, but far far better than the loss he would have otherwise be stuck with. 

Segregated Funds, it's whats for breakfast.