Aging Population Insurance Impact Detailed By Experts

NU Online News Service, May 29, 11:21 a.m. EDT

An aging population is impacting the underwriting and pricing of property-casualty insurance products ranging from personal lines to commercial coverages, experts told a meeting of the Casualty Actuarial Society.

The organization said that word came from a panel that addressed attendees at the Casualty Actuarial Society's Spring Meeting, May 3-6, 2009.

According to the CAS report of their remarks, Martin Wolf, economist with the National Council on Compensation Insurance (NCCI), noted that the average age of workers 45 to 64 is expected to peak in 2011 and discussed implications for workers' compensation insurance.

Mr. Wolf described how the changing demographics affect claim frequency, indemnity severity and medical severity.

He explained that 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.

Explaining the reasons for an increase in older workers, Mr. Wolf mentioned that people want to work longer.

This is due, he explained, to the recent financial crisis, prohibitions against mandatory retirement, the removal of the earnings cap on Social Security benefits, and less strenuous and safer work environments.

Mr. Wolf also said older workers need to work longer because of increased life expectancy, changes in pension plans and increased health care costs.

The industries and occupations that are the top choices of older workers are education and health services, followed by retail trade, Mr. Wolf related.

He mentioned that 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.

Paul Vendetti, consulting actuary for Pinnacle Actuarial Resources Inc., discussed other lines of insurance and, taking a predictive modeling and pricing view, outlined 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," Mr. Vendetti said.

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

He explained that demographic information can help identify potential new markets and new coverages, analyze market penetration, and better manage catastrophes.

Mr. 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.

Changes in demographics, he explained, 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.

Using demographic information, said Mr. Vendetti, 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.

Panel moderator Brian Stoll, senior consultant for Towers Perrin, said that "for personal lines--auto and homeowners--the age of your customers means different exposures. Factors are shifting and they interplay with each other."

Mr. 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.