LTD Market

1. LTD Market Rich Clement GUAA – Amelia Island November 14, 2007

2. Outline • My Perspective on the LTD market • LTD manual rate comparisons • Underwriting in a slumping economy • Keys to success • Questions and discussion

3. Why is LTD Difficult? • Loss Experience is Volatile • Many time-dependent external influences • Hard to distinguish random from systematic • Loss Takes a Long Time to Develop • -Reserving Issues may cloud risk dynamics • High Product Complexity - Many Plan Options - Contract differences across carriers

4. Why is LTD Difficult? (Cont) • High level of Underwriter Discretion • May provide subjective underwriter intelligence, but leads to loss of control and poor tracking. • Irrational Marketplace: Some Companies … - are buying market share - are subject to underwriting cycles - have poor underwriting control - lead with other products (dental, life, etc) - have old and/or invalid rates

5. Smith Group LTD Manual Rate System • Database of 12 Top LTD Carriers • Manual Rates calculated as publicly filed • Batch Rates on over 20,000 actual LTD Cases

6. LTD Manual Rate Observations Several Main Characteristics determine how your rates function in the marketplace • Rate Level • Rate Volatility (variance of your rates to those charged by other carriers) • Rate Structure (are you high or low in the right spots?) • Discount Authority

7. SG LTD Manual Rate Distributions The average of the three highest rates is more than 60% higher than the average of the three lowest rates on 85% of cases

8. Raw Manual Rates: No Discounting A B C D E F Average In the Hunt 9% 9% 5% 13% 16% 30% 15% Tough Sell 16% 19% 16% 21% 20% 29% 20% Embarrassed to Quote 76% 72% 79% 65% 64% 41% 65% Raw Manual Rates: With Discounting A B C D E F Average In the Hunt 8% 19% 22% 26% 13% 16% 16% Tough Sell 14% 23% 26% 24% 19% 27% 21% Embarrassed to Quote 78% 58% 52% 50% 67% 57% 64% Rate Level Distributions Actual Manual Rates Percent of Cases “In the Hunt”: Within 10% of the average of the lowest three Carriers “Tough Sell”: Between 10% and 30% above the lowest three “Embarrassed to Quote”: More than 30% above the lowest three

9. At the Extremes Raw Manual Rates: No Discounting A B C D E F Average Lowest Rate 5% 4% 2% 7% 8% 16% 8% Rate > 60% above Min 43% 44% 45% 36% 35% 16% 36% Raw Manual Rates: With Discounting A B C D E F Average Lowest Rate 4% 9% 11% 15% 7% 7% 8% Rate > 60% above Min 47% 32% 21% 25% 38% 25% 35% Rate Level Distributions Volatile Rates Produce “Best Ball Effect”: (average sold rate much lower than average manual rate) Sales/Underwriting Loses faith in the Manual

10. Sample LTD Industry Factors

11. Causesof Manual Rate Volatility • Product complexity with a large number of rating variables • Random variations baked into rating factors • Product growth strategy executed through rate adjustments • Significant risk and process impacts not captured in the rating • a) External trends • b) Changes in underwriting and sales practices • c) Changes in claims processing

12. Best Practices for Today and Tomorrow What Do Underwriters Really Do? • Study Data – If they have it. • Renewals should be complete picture. • Assess Risk • Attempt to Predict the Future • Interpret Assumptions • Assign a Cost • Negotiate with Sales Reps and Account Mgmt. • Partner with Actuaries • Collaborate with Claims

13. What if the Economy Turned? Planning and Preparation: • Can the past help us understand the future? • What has happened in the past? • Provides empirical boundaries • Within the last 20 years we have had two economic slow downs: • ’91-’92 impacted white-collar employees • Exacerbated by liberal plan designs • Many new claim diagnosis – CFS, Carpal Tunnel • ’01-’02 impacted financial sector and telecommunications • Smaller employers • Many changes have occurred, i.e. claims practices, contract rewrite

14. Diversity of Book • Pursue Industries that may not follow the traditional economic cycle • Municipalities • Health-care • Education • Other industries • Plan design • Conscious of replacement ratios • Avoid liberal salary definitions that depend on large bonuses • Real Estate • 24 month M&N/Substance Abuse Limitation • Subjective condition limit – understand value from claims

15. Impact on Smaller Employers • Smaller groups can be more of a concern • Less likely to have surplus – rainy day fund • Harder to borrow needed cash – limited collateral • Less RTW opportunities and capabilities • Trickle down effect • Small consulting firms, housing market

16. Financial Underwriting • Pay greater attention to financial underwriting • Look for signs of weak financials • Avoid the mistake • Underwriters should keep up to date on economic outlook • Industry experts to communicate positive and negative outlooks • Evaluate business segments for known concentrations

17. Why is Financial Underwriting Important? • Helps to determine a client’s ability to pay their insurance premium. • An employer’s financial condition can have a major impact on claim incidence rates, the worse the financial condition, the expectation the higher the claim incidence level. • You may find that a company’s positive or improving financial condition could point to an improved claims trend going forward, may be a situation where you can discount your quote rate (track decisions).

18. Why do companies with financial problems exhibit poor disability experience? • Financial pressures often lead to layoffs/downsizing which increases claim incidence levels. • Remaining employees face higher stress levels and may be required to work longer hours leading to an increased number of claims. • Fear of the unknown, is there going to be another round of layoffs? • Employees on claim have less motivation to return to work

19. Why do companies with financial problems exhibit poor disability experience? • Threat of downsizing may affect those employees who continue to work with medical conditions. When faced with potential unemployment, they may file a disability claim citing these latent medical conditions • Employer may not be as willing to accept disabled employees back to work. • Demographics of remaining employees could be worse. Often the younger, less experienced workers are the first to go.

20. Administration/Execution • Limit (try to) Rate guarantees for STD and LTD • Aging population • Monitor premium payment • Variance Reports for both premium and lives • Change in lives kicker • Review census after sale of core/buy-up, voluntary, contributory case • Renewal • Know concentration of risk • Monitor reserving assumptions • Claims support & feedback • Renewal Strategy

21. Best Practices for Today and Tomorrow Invest in the Right Opportunities Who is the competition? What have they done and what will they do? • What do we need to do to write the case (without leaving money on the table?) • Are we comfortable with our decision? • Know when to walk away. • Emotionally invested.

22. Best Practices for Today and Tomorrow Invest in the Right Opportunities Avoid the pitfalls • Don’t back into your formula rate based on competitive positioning. • Do your analysis first • Don’t overvalue the inforce and /or competitor rates • Trust yourself.

23. Best Practices for Today and Tomorrow Invest in the Right Opportunities Avoid the pitfalls • Overly aggressive approach to weighing credibility, shock claims: • Does experience reflect high end exposure? • Pooling works two ways. • Exercise caution when reviewing recent experience periods. • Is data fully revealed? Is standard claim lag appropriate? • Are all claims approved? • What is likely claim termination rate? • We need to honor any rate put on the table. • Be careful of shadow pricing. • No such thing as “illustrative quote.”

24. Best Practices for Today and Tomorrow Invest in the Right Opportunities Avoid the pitfalls • Avoid the disaster! • Look for the warning signs: • Financials: • Mergers, Acquisitions, Management Changes, Filings • Experience and Industry Trends • Data Quality • Carrier Hopping

25. Best Practices for Today and Tomorrow • Invest in the Right Opportunities • “In today’s economy, there are no experts, no ‘best and brightest’ with all the answers. It’s up to each one of us. The only way to screw up is to not try anything. • Tom Peters

26. Best Practices for Today and Tomorrow Making the Call • It’s Your Investment • Common Sense • Not Based On One Reason Alone • Pure Business Decision • Balance; it works both ways • Communicate • Get It Back Into The Process: Document

27. Best Practices for Today and Tomorrow Successful Case Reviews • Sound underwriting risk selection. • Include narrative and financial summaries • Allows the underwriter to walk through the process • Highlights include: • Customer, Producer, Case History, Opportunity • Data quality • Underwriting Adjustments • Sales Strategy, competitors, etc. • Underwriting investment • Financial Summaries

28. Best Practices for Today and Tomorrow Future Lunch and Learn Sessions Topics, Timing and Distribution • Suggested Timing • One hour sessions, (90 minutes if with lunch) • Bi-Weekly • Suggested Distribution of Lunch and Learn • Underwriting Team meetings • Held within 2 weeks of initial lunch and learn information session. • Lunch is optional (non, brown bag, other)

29. Actual Manual Rates Opinion: Keys to Success You need a detailed knowledge of other carriers’ pricing strategy. Sales should gather and track as much quote rate information as possible Key: Good Broker relationships You need to learn to sell something other than price Key: Good Salesmanship Allow subjective risk decisions, but make sure underwriters learn from their decisions Key: underwriter discipline, thorough documentation and tracking Account management needs to understand service model Key: Pro-activity, keep yourself in front of the customer Understand market dynamics: price elasticity on prospects and renewals: How do rate changes impact the sales process? Key: Become a student of the group insurance market

30. Questions Thank you for your time.