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PHI termination

01 August 2007 Grete Kritzinger, RGA Reinsurance

Research conducted by RGA on behalf of the Continuous Statistical Investigations (CSI) Committee of the Actuarial Society of South Africa (ASSA) on group disability income has highlighted a number of interesting market trends.

The study focused on terminations of disability claims (PHI), either through death, retirement or recovery. The seven largest group life insurance companies in South Africa participated in the study, which represent approximately 90% of the market.

Higher income reduces termination rates

Key findings in the research concluded that termination rates reduce as salaries increase. "There are many possible explanations for this, but it could partly be explained by AIDS claims with high terminations being more prevalent in the lower salary bands," comments Grete Kritzinger, Group Risk Analyst at RGA Reinsurance Company of South Africa. "Another possible explanation is that higher income groups have experienced a higher proportion of neurological and psychological claims with low termination rates."

Age factor

Termination rates also reduced as the age at disability increased. "This is largely due to the fact that there is a higher return-to-work rate for people at a younger age," comments Kritzinger. "Our study also showed that female terminations were lower than male terminations across all durations. This is in contrast to Australian experience, where terminations are similar for males and females at early durations, and significantly higher for females at durations exceeding a year."

Waiting periods and escalation

The study confirmed the commonly held belief that, at short durations, terminations were higher for 3-month waiting periods than for 6-month waiting periods. "What is of interest to insurers is the effect of escalation on termination rates that were highlighted by the study," says Kritzinger. "Through the research conducted it was found that termination rates are significantly higher for policies without escalation than for policies with escalation, at all durations. This phenomenon is mainly driven by return-to-work terminations, a trend that is not unique to the SA market, as a similar pattern was recently seen in the US individual disability market."

HIV/AIDS-related claims increase

The conditions with the highest termination rates were found to be cancer and HIV/AIDS claims. The number of claims that are HIV/AIDS related have increased significantly, as a percentage of all claims, over the periods from 1994-98 (0.5%) to 2002-05 (7.8%). Neurological and psychiatric claims currently account for almost a quarter of the total cost of claims, as these claims have the longest durations, as well as high average real benefits.

Socio-economic conditions

Neurological claims in S.A., as a percentage of all claims, were greater during the period between 1998 and 2001 (12.1%) than during preceding and subsequent periods. During 1994 to 1998 they comprised 9.2%, and during 2002 to 2005 only 6.1%. "This suggests a link between claims and socio-economic conditions, as this was a period when interest rates were hiked and there was also a lot of uncertainty in South Africa, following the 1998 emerging market crisis," comments Kritzinger.

Increasing trend

"An increasing trend in termination rates was evident over the period of the study. These improvements can mainly be attributed to an increase in termination rates at the shorter durations, with termination rates at duration three to 12 months more than doubling between 1999 and 2005," comments Kritzinger. "Again, this is in contrast to Australian experience, where termination rates continue to deteriorate during the first year of a claim. However, this is compensated for by higher termination rates at later durations."

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