Demographic Shifts Impacting Underwriting, Pricing

Demographic changes are impacting the underwriting and pricing of many insurance products and the implications of these changes are creating new challenges and opportunities for property/casualty insurers, according to some industry analysts.

Speaking on a panel at the Casualty Actuarial Society’s 2009 Spring Meeting in New Orleans last week, Dr. Martin Wolf, economist with the National Council on Compensation Insurance (NCCI), said the average age of workers 45 to 64 is expected to peak in 2011 and there will be impact on workers’ compensation insurance.

The changing demographics affect claim frequency, indemnity severity, and medical severity, Wolf said. Indemnity severity increases with the age of workers because older, more experienced workers are paid more, while medical severity – the cost per claim – increases with age because older workers take longer to heal from their injuries than younger workers, he added.

The reason there could be more older workers is that people want to work longer, he said. This is due to prohibitions against mandatory retirement, the removal of the earnings cap on Social Security benefits, and less strenuous and safer work environments. Also, they need to work longer because of increased life expectancy, changes in pension plans, increased health care costs, and the recent financial crisis.

The industries and occupations that are the top choices of older workers are education and health services, followed by retail trade, Wolf said. And statistics from the U.S. Bureau of Labor Statistics show that retail trade accounts for the largest share of injury and illness cases for older workers.

New and Changing Markets

Looking at other lines of insurance and taking a predictive modeling and pricing view, Paul Vendetti, consulting actuary for Pinnacle Actuarial Resources Inc., discussed the impact of demographic information, the catalysts for demographic changes, and the potential for new and changing markets.

“Changing demographic information can lead to an increase or decrease in frequency and severity, and there is a correlation between demographic information and expected losses,” Vendetti said.

The catalysts for demographic changes are the aging population, population shifts, economic events, and changes in technology, he outlined. “The key is that use of demographic information may allow rating systems to react before losses,” he said.

Demographic information can help identify potential new markets and new coverages, analyze market penetration, and better manage catastrophes, he said.

Vendetti said some of the demographic information that can be used includes population characteristics, such as population by county from the U.S. Census Bureau, and annual estimates of housing units for counties from the American Housing Survey, which provides information about household characteristics, types of dwellings, age of structures, and vacancy rates.

Vendetti explained that changes in demographics can be gradual and long term, such as the aging population, or sudden and short term, such as the shifting population densities of counties, which can be caused by economic events, reduced driving, and catastrophes.

“Demographic changes mean products and rate plans must recognize trends and adjust prior to recognizing losses,” he said.

Vendetti said using demographic information can help identify segments of a company’s business that have been profitable, analyze market penetration to see if market share goals have been achieved, and monitor the results of a rating plan by setting market share goals and examining the results.

Shift in Demographics

Wrapping up the discussion, panel moderator Brian Stoll, senior consultant for Towers Perrin, described shifting demographics and the characteristics of generations of consumers.

Outlining why these demographic shifts matter, Stoll said “for personal lines – auto and homeowners – the age of your customers means different exposures. Factors are shifting and they interplay with each other.”

Stoll concluded that demographic shifts matter more for insurance now because of the amount of data available in the “information age,” the boom in predictive modeling, shrinking profit margins and financial stresses, as well as more sophisticated insurance buyers and smarter competitors. With the industry responding, inaction means falling behind, he warned.

The Casualty Actuarial Society is an organization dedicated to the advancement of the body of knowledge of actuarial science applied to property, casualty and similar risk exposures.

Source: CAS