DI Decrement Enhanced (April, 2010)
The DI Decrement switch in the General Assumptions section of the Disability Module has been moved to the Pricing Assumptions section and each of the Reserve Assumptions sections. This allows a different treatment of DI Decrement for pricing and various reserving purposes. A new option was also added to this switch so that clients may hold active life reserves for disabled lives in order to meet statutory requirements. This new feature is available in AXIS starting with version 12.6.02.001.
Enhanced DI Decrement Switch
Previously in the DI module, the DI Decrement switch in the General Assumptions Section was used to control if the insured who are disabled would be further exposed to risks of disabilities, lapse and other benefits decrements. That switch had three options:
0 – No decrement for disabled lives, where in force volumes would not be decremented when an insured is disabled, thus exposing the disabled to future disability, death, lapse or other benefit decrement.
1 – Decremented while disabled, where disabled lives were removed from exposure to future disability, lapse, and other benefit decrement. When this option is selected, no ALR reserve will be held for disabled lives.
2 – Pricing disabled decrement, no decrement for reserving, where disabled lives were removed from future risk exposure during pricing projections but not during reserve valuations. When this option is selected, ALR reserve will be held for disabled lives.
The recent improvement to the switch further allows the following:
- Modeling different treatment of the DI decrement for different types of reserves;
- Allowing clients to hold an ALR on disabled lives where consistent with regulations and their assumptions.
Regarding the second point mentioned above, many clients use incidence assumptions based on the number of active lives instead of total lives in their pricing and reserving, and thus disabled lives need to be decremented from the in force volume. However, previously they would not have had the option of holding an ALR for the disabled lives under such circumstances. The other issue is that the previous ALR factors were calculated by dividing the future net cash flows of actives by the number of active lives. Net cash flows generated by future recoveries from the current disabled lives are also included in arriving at this ALR factor. Such a factor may be deemed too high by some clients if it was to be applied to disabled lives to obtain the ALR held for disabled lives.
To achieve the first point mentioned above, the DI Decrement switch was moved from the General Assumptions section to Pricing Assumptions and each of the Reserves sections. This allows different treatment of this switch for various reserves. And the old option 2 is no longer needed.
To address the second point mentioned above, we introduced a new option in the DI Decrement switch in each of the Reserves sections: “Decremented while disabled, and hold ALR for disabled lives”. This new option is different from option 1 in two ways:
- It allows for holding an ALR for disabled lives by adding the disabled lives back to the lives multiplier when calculating total ALR reserves.
- The ALR factor is calculated by dividing the future net cash flows of actives by the number of total lives (active and disabled) and thus is lower than the ALR factor in option 1. Another way to look at the rationale behind this approach is that part of the cash flows are generated by the current disabled lives (i.e. cash flow of the future recoveries of the disabled) and thus it makes sense to recognize the disabled lives in the denominator when calculating the factor. This is an approximation clients have deemed reasonable.
With these two major improvements, AXIS provides clients a solution to model reserves where lives are decremented while disabled and an ALR is held on disabled lives.