Credibility theory has been applied by actuaries in a wide variety of problems to improve statistical estimates. Matthew Rodermund was quoted as saying: "It is the concept of credibility that has been the casualty actuaries' most important and enduring contribution to actuarial science." Clearly, it is an important aspect of actuarial science. Yet, questions remain on how to best apply credibility theory to group disability insurance. With this in mind, the SOA's Health Section is interested in an examination of issues related to credibility theory and how it can be practically applied for group disability insurance. In other words, what can be learned from the body of credibility theory literature for a group disability insurance setting.

To clarify the scope of the research, the organizers have identified several pertinent practical applications of credibility to group disability insurance on which they would like to focus. Within group disability insurance there are a number of circumstances in which it may be appropriate to blend experience from smaller segments with aggregate block or industry results, and the use of full or partial credibility has been the conventional approach. The organizers are interested in the following situations in which the appropriate credibility method should be evaluated:

• Use of the loss experience of a particular employer group when determining the appropriate new business or renewal rate.
• Use of the loss experience particular to a specific demographic variable, policy provision, or time period when developing or modifying the formula or manual rate. This consideration would include the use of credibility when justifying the selections or methods for statutory rate filings.
• Use of the specific valuation experience of an insurance carrier or claims management facility to modify industry valuation standards and use of valuation experience from a specific and limited period of time to modify long-term valuation expectations.

The SOA's Health Section is seeking researchers to conduct a literature search to frame issues related to the practical application of credibility for group disability insurance. This is intended to be the first phase of a two phase effort with the second phase focused on an empirical study.

Questions and issues that are expected to be documented and framed by the literature search for the situations described in the Background section include the following:

• What general principles for applying credibility are pertinent in a group disability insurance setting?
• What credibility concepts could be practically applied to disability insurance coverages from other insurance coverages such as property and casualty?
• How has credibility been applied to (or has been suggested to be applicable to) company financial management and regulatory considerations for group disability insurance, or for property casualty or other insurance products, that might share similar characteristics with group disability insurance? For example,
   
  
  • Certain states discuss credibility thresholds for using a carrier's own experience to modify manual rating factors. This project could review which states have credibility standards, how these standards are applied, and what sources were cited in the development of these standards.
  • Both the recently approved valuation standards for Group Life waiver of premium reserves, and the current proposed valuation standards for group Long-Term disability reserves discuss the use of credibility for modifying the standard valuation table to reflect an individual carrier's own termination experience. This study could consider the existing literature on credibility with the goal of understanding the applicability of credibility to company-specific statutory valuation guidance.
  • Publicly traded companies need to establish reserves for future payments on outstanding claims according to Generally Accepted Accounting Principles (GAAP). The study could review existing literature to determine if there are any accounting standards on utilizing company specific claim termination experience vs. published industry tables to establish the basis for these reserves.

The expected deliverable from this first phase is essentially an annotated bibliography that clearly lays out the issues and approaches, including a description of relevant sources. Another deliverable from the first phase would be specifications for the eventual empirical study of the second phase.

To facilitate the evaluation of proposals, the following information should be submitted:

1. Resumes of the researchers, including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the authors as well as for the firm or institution on whose behalf the proposal is submitted;
2. A description of the expected report;
3. Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Cost estimates should include (and separately itemize) the costs of other researchers such as researchers involved in population modeling. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
4. A project plan and schedule for completion of the research, identifying key dates or time frames for research completion and report submission.
5. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

The Project Oversight Group (POG) for this project has been appointed and is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals may also be sought, but the POG will make the final decision. The SOA's Research Actuary will provide staff actuarial support.

The SOA desires to foster connections between actuaries and other health-related disciplines. With this in mind, research proposals from non-actuaries and interdisciplinary teams with actuaries are welcome.

Any questions regarding this RFP should be directed by email to Steven Siegel, SOA Research Actuary (email ssiegel@soa.org, ph: 847.706.3578).

If you intend to submit a proposal, please email written notification by March 15, 2012 to:

 
Barbara Scott
Society of Actuaries
475 N. Martingale Road, Suite 600
Schaumburg, IL 60173-2226
bscott@soa.org
ph: 847.706.3592
f: 847.273.3592

Please email a copy of the proposal to:

Barbara Scott at bscott@soa.org

Proposals must be received no later than March 31, 2012. It is anticipated that all respondents who have submitted proposals will be informed of the status of their proposal no later than April 30, 2012.

The SOA reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The SOA also reserves the right to redirect the project as is deemed advisable.

The SOA intends to copyright and publish the results of this research. The research will be considered work-for-hire and all rights thereto belong to the SOA. However, appropriate credit will be given to the researcher(s).