GUAA :: Risk Review

Good Case – Bad Case
I believe when you talk about a “bad” case versus a “good” case there is some component of prospective forecasting, rather than just an observation of the past. You want some way to be able to identify those cases that will not perform well relative to expectations in the future. … a few comments before I proceed with some thoughts on how to make such an identification.

When looking retrospectively, it is tempting to rely on the loss ratio to identify bad cases. What is important to understand is the inherent volatility in our business. If you have a case with 1000 lives, you might reasonably expect 5 claims in the next year. In fact, even if this expectation is correct, you will get 10 or more claims for about 3 out of every 100 such cases. Are these 3 bad cases? No, they are just cases that happened to have bad experience. If there is no underlying reason for the bad experience, we still might reasonably expect 5 claims in the next year. In fact, they might be considered good cases because the market will have a tendency to overprice them.

The rub is that it is difficult to identify the difference between a bad case and a good case with bad experience. There are a couple of approaches. One is to focus on the claim diagnoses. As this information is not provided on prospect business, this approach can be used on your renewal business. There are certain types of claims that tend to be indicative of poor case characteristics (back claims, M&N, subjective diagnosis, unusual amount of older claims, etc.), while other claims types (Cancer, MS, Lupus, etc.) tend to be reflective of poor luck. Alternatively, a case with poor experience should be scrutinized carefully for any indications of high LTD risk… things like poor working conditions, stressful jobs, employees that treat their work as a job versus a career, inflexible employers, poor financials, recent merger/acquisition, threats of lay-offs, etc.

If you can identify that the experience has been poor over the evaluation period and it is expected to be bad in the future, this does not mean that this is a bad case. If you can estimate future cost and place a rate that covers this cost then the case can become good (contributory business excluded). This means that your ability to place a renewal increase, or to place the needed/appropriate rate up-front, is the most important distinction between a good case and a bad case. Thus, an important variable to consider is how likely the employer is to shop the insurance. Some variables correlated to expected persistency may be more useful than the traditional risk variables.

I know this has been a little vague about how to identify the bad cases. Below are a few attempts to identify such risks:

Good Cases:
• A case with bad experience, but little indication that the experience will continue to be bad. That is, good risk indicators, unpredictable claims, or improving risk. A case that experienced a series of lay-offs two to three years ago might be an ideal candidate since the experience rated formula would yield rates that are too high.

• A case committed to a long-term relationship with the insurer. A case that wants to build a partnership, and work together with the insurer to reduce disability costs.

• An account that values service. If the case is being shopped because the prior carrier was not servicing the client, work with your sales partner to identify the issues and sell value. This always gives you an opportunity to gain a new client at an appropriate rate.

Bad Cases:
• A case committed to shopping the disability coverage every year (or every other year). Cases that have been with more than two carriers over a 3 year period has limited carrier loyalty.

• A case with unusually good experience, but poor risk indicators. It is likely that such a case will be under-priced by the market. LTD is catastrophic coverage.

• A case with average experience, but that is headed into a period of financial instability.. layoffs are predicted or a merger seems likely. Financial due diligence helps you avoid the big mistake.

• A case that does not seem to want to work with the insurer. Not interested in employee rehab, or working with the insurer to reduce costs. It is likely that such an employer will not be interested in a long-term relationship and will likely keep their disability costs down by constantly shopping the coverage.