Shared Flashcard Set


SOA Health Core Exam - Objective 2
SOA Health Core Exam - Objective 2

Additional Insurance Flashcards




Components of gross premiums (501)
1. Claim costs
2. Administrative expenses - includes the costs of designing, developing, underwriting, and administering the product, as well as an allocation of overhead costs. Frequently much higher in the first year than in renewal years.
3. Commissions and other sales expenses - includes special bonuses, incentives, and advertising
4. Premium tax
5. Other taxes and assessments - includes federal and state income taxes and new assessments due to PPACA
6. Risk and profit charges - depends on the degree of risk involved, the amount of capital allocated to support the product, and the expected return on the capital
7. Investment earnings - typically credited based on assets held
Considerations in developing administrative expense assumptions (503)
1. How expenses are allocated to the product - allocation methods include:
a) Activity based allocation - distributes expenses according to some measure of use (eg, actual postage expenses can be charged to the function that generated the mail)
b) Functional expense allocation - determines how expenses are split by line of business for new and renewal business (done by surveying employees to determine how time is spent)
c) Multiple allocation methods - a combination of the other two methods

2. How administrative expenses should be allocated to groups - should differentiate between first year and renewal expenses. Various allocation bases exist (see separate list).
3. What the competition includes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace
Types of bases used for allocating expenses (503)
1. Percent of premium
2. Percent of claims
3. Per policy
4. Per employee (certificate)
5. Per claim administered
6. Per case (some expenses are charged directly to the case for very demanding groups)
Common rating characteristics included in manual rates for group health insurance (509)
1. Age
2. Gender
3. Health status
4. Rating tiers (see separate list)
5. Geographic factors
6. Industry codes
7. Group size
8. Length of the premium period
Common rating tiers for group health insurance (509)
1. One tier: composite
2. Two tier: employee only, family
3. Three tier, employee only, employee and one dependent, family
4. Four tier: employee only, employee with one dependent, employee with children, family
5. Five tier: employee only, couple, employee with child, employee with children, family
Considerations in developing a manual claim table for life insurance (514)
Two approaches can be used:
a) Manual premium tables - calculate the manual premium rate, then adjust for group size. This adjustment will reflect the margin, profit, and expenses appropriate for the group size, relative to the averages built into the table.
b) Manual claim tables - calculate the manual claim rate, then add the appropriate margin, profit, and expenses

2. Data sources - could use SOA studies, industry mortality tables, population statistics, or own company experience (which is the best source, if credible)
3. Changes in mortality - expected future mortality improvement should be reflected
4. Reinsurance - the net cost of reinsurance should be factored into the claim table or expenses
5. Conversions to individual life policies - these create severe antiselection, which should be reflected in the manual rates
6. Manual adjustments are made for group-specific traits (see separate list)
7. Rates for the group are based on age and gender mix, but groups typically end up charging a composite rate to all employees
Uses of general population data for pricing life insurance (519)
1. Estimating annual improvements in mortality
2. Determining ratios of mortality by age bracket
3. Comparing male and female mortality
4. Developing rates for the non-working population (the very young and the very old)
Manual claim table adjustments for group life (522)
(could also be referred to as group rating characteristics for life insurance)
1. Disability factors - an adjustment is needed if a group has a different waiver of premium approach than is assumed in the manual rates
2. Effective date adjustment - an adjustment is needed if the central date of coverage is not July 1
3. Industry factors - usually based on SIC codes
4. Regional factors
5. Lifestyle factors - e.g., adjustments based on the percentage of employees that smoke
6. Marketing considerations - e.g., added charges for rate guarantees
7. Contribution schedules - e.g., a 5% discount if the employer pays the entire premium (since that reduces antiselection)
8. Case size factors and volume adjustments - larger groups may have lower mortality or expenses
9. Plan options - optional benefits and allowing lots of employee choices will create antiselection
Types of group life insurance (526)
1. Group term life insurance
2. Dependent life - a typical benefit might provide $10,000 on the spouse and $2,000 on each child
3. Survivor income benefit - provides a monthly benefit payment to an eligible survivor of an employee who dies while insured
4. AD&D - may be offered in conjunction with a group term life plan or on a stand-alone basis
5. Group universal life - may be sold as a side fund attached to an employee's term insurance, or as an individual universal life policy
6. Living benefits (aka, accelerated death benefits) - pays a portion of the face amount prior to death, with the remaining benefit paid at death (see separate list)
Types of living benefits for life insurance (528)
1. LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home
2. Critical illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer
3. Terminal illness benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with a terminal illness with less than 6 (or 12) months to live
Steps in developing claim costs for use in a rate manual (531)
1. Collect data - data should be collected for a period of at least 12 months (to avoid seasonality issues). The best source of data is a company's own experience.
2. Normalize the data for important rating variables (see separate list)
3. Project experience period costs to the rating period - claim costs need to be trended from the experience period to the rating period
Important rating variables when normalizing data for use in the rate manual (533)
1. Age and gender - it may be appropriate to have separate age and gender factors for different major service categories or different plan types (such as high deductible plans)
2. Geographic area - the data should be adjusted to reflect one specific geographic area
3. Benefit plan - adjust the data to reflect a common benefit plan (commonly the richest plan)
4. Group characteristics - the manual rate should represent the "average group" with respect to group characteristics, such as industry and group size
5. Utilization management programs - adjust for any changes in these programs
6. Provider reimbursement arrangements - adjust for any changes in provider arrangements
7. Other risk adjusters (based primarily on claim, diagnosis, encounter, and pharmacy data) - these may eventually become the primary method of risk adjustment
Methods of adjusting manual rates for specific benefit plans (539)
1. Claim probability distributions - these are typically used to estimate the impact on claim costs of deductibles, coinsurance, out-of-pocket maximums, and annual benefit maximums
2. Actuarial cost models - these models build estimated total claim costs by developing a net claim cost (after member cost sharing) for each detailed type of service and summing to get the total
Data sources for estimating disability claim costs (545)
1. A company's own data is the best source if the data is reliable and credible
2. Intercompany experience studies
3. Rate filings of competitors
4. Research of governmental and business publications
5. Data from consulting firms and reinsurers
Types of disability income experience studies (546)
1. Calendar year loss ratio study
a) Compute the ratio of incurred claims to earned premium for a given calendar year
b) Incurred claims are calculated as paid claims plus the increase in claim reserves
c) May not provide a clear picture of historical trends because results are affected by reserve changes
2. Incurral year loss ratio study
a) Compute the ratio of incurred claims to earned premium for a given incurral year
b) Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve
c) Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred
3. Study of actual-to-expected incidence or termination rates - ratios of a company's actual claim incidence
or termination rates compared to expected rates from published industry tables or company data
Formula for disability income net monthly premium (548)
1. Net monthly premium = IncidenceRate * ^(Benefit, * Continuance, * InterestDiscount,)
2. The summation runs for the entire length of the benefit period (offsets will also need to be reflected, which is discussed in a list from GHC-101-13)
Group characteristics that impact disability income claim costs (555)
1. Age and gender
2. Occupation - may need to adjust claim costs for:

a) Hourly vs. salaried
b) Blue collar vs. grey collar vs. white collar
c) Union vs. non-union
d) Commissioned sales personnel
3. Industry - for group insurance, it is more appropriate to rate based on industry than on occupations
4. Average earnings per employee - claim costs decrease as average earnings increases
5. Area - claim costs vary due to the legal environment and the general attitude and culture of the area
6. Size of group - claim costs follow a "U" shaped curve, with higher costs for the largest and smallest employers
Data sources for developing dental claim costs (562)
1. Own company data (best source)
2. Outside databases - Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA "Survey of Dental Fees"
3. Consulting firms (have manuals containing utilization data)
4. Rate filings of other carriers
5. Third party administrators
6. Reinsurers
Plan characteristics that impact dental claim costs (563)
1. Covered benefits - plans often have a missing tooth provision and limit the replacement of dentures to once every 5-7 years
2. Cost sharing provisions - these provisions are important because receiving proper dental care is very elective from the insured's point of view. Provisions include deductibles, coinsurance and copays, and maximum limits.
3. Waiting period - used to discourage individuals from enrolling for one year to treat significant dental problems and then dropping coverage
4. Period of coverage - will need to project past experience into the future. Dental trend should not be assumed to be the same as medical trend.
Network and care management practices that impact dental claim costs (567)
1. Provider reimbursement levels
a) FFS reimbursement may be based on usual, customary, and reasonable levels (UCR)
b) PPO networks contract for reduced fees from a limited number of dentists. The dentist may not bill above those levels.
c) Capitation is common with dental HMO plans
2. Care management practices - these will depend on the reimbursement method used. Practices include
preauthorization and self-management (for capitated providers).
Insured characteristics that impact dental claim costs (572)
1. Age and gender - adults have higher costs than children, females have higher costs than males
2. Geographic area - can be a significant factor
3. Group size - smaller groups have higher costs (due to adverse selection)
4. Prior coverage and pre-announcement - groups without prior coverage will have high costs in the first year due to utilization by those who had put off having dental work done. If the plan is announced many months prior to becoming effective, this problem becomes even worse.
5. Employee turnover - high turnover increases costs since some new employees didn't have prior coverage
6. Occupation or income - entertainers, professionals, and groups who are more aware of their benefits have higher costs
7. Contribution and participation - groups with less than 100% participation will have higher costs due to antiselection. The level of participation is inversely related to the required contribution level.
Major effects of the year 2000 changes in the NAIC LTC Model Act (583)
1. Requires disclosure of rating practices at the time of application - e.g., including a statement that the policy may be subject to future rate increases
2. Requires an actuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience.
3. Eliminates minimum loss ratio requirements in the initial rate filing
4. Places limits on expense allowances in the event of a rate increase - if a rate increase is requested, the lifetime loss ratio must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase
5. Requires reimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates
6. For policies in a rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting
7. Authorizes the commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums
Major effects of HIPAA on LTC (585)
1. Defined qualified plans
2. Clarified taxation of premium and benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes
3. Standardized benefit triggers (see separate list of benefit triggers from Bluhm (group) chapter 10)
4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans
Major stakeholders in the group LTC policy design process (587)
1. Employer group
a) LTC is appealing because it complements other products (such as disability and life coverages) and relative to medical is a low-cost benefit with stable pricing
b) May not be able to offer guaranteed issue to all active employees, since this could make the premiums more expensive than similar individual policies
2. Insurance company
a) Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee
b) Costs vary significantly by participation level, making this a key assumption
3. Employees
a) May not yet be aware of the risk covered by LTC insurance
b) Concerned with the significant cost, which may even exceed the cost of individual policies
4. Insurance brokers - have found that group LTC insurance provides the opportunity to open the door to
competitive life and disability markets
Assumptions needed for a LTC pricing model (592)
1. Voluntary lapses - lapse rates are much lower than for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection.
2. Mortality - most companies use the 1994 Group Annuitant Mortality ('94 GAM) table. Selection factors may be needed if underwriting is good.
3. Morbidity - the major variables that impact claim costs are:

a) Marital status - costs are lower for married individuals because of the presence of a potential caregiver at home
b) Gender - females have significantly higher ultimate costs than males
c) Benefit trigger
d) Area - utilization patterns of LTC services vary by geographic area
e) Case management - companies using a case manager usually experience lower claims

4. Selection factors - to reflect underwriting wear-off. Depends on the level of underwriting performed.
5. Expenses - start-up expenses are high relative to other types of business
6. Interest - the investment rate on assets is a key assumption because of the large amount of reserves
7. Reserve basis - important considerations include the level of margins and how these margins are achieved
8. Other assumptions - including the average daily benefit and the premium mode
9. Profit - typically based on lifetime goals for pre-tax profits, post-tax profits, return on investments, or return on equity
Reasons for experience rating (600)
1. Groups want it - at least those with good experience want the premium to reflect it
2. The insurer wants to quote and charge premiums that are as competitive as possible
3. The insurer wants to avoid antiselection (good groups going to competitors and bad groups staying)
Theoretical considerations in determining credibility levels (601)
1. Coverages with low claim frequency are more volatile and will require a larger exposure base to be credible
2. Coverages with widely varying claim sizes will tend to be more volatile
3. The statistical confidence interval chosen by the insurer
4. Historically, statistical fluctuation was considered to vary inversely with the square root of the number of claims or lives. So it will take 4 times the exposure to double the credibility.
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure and therefore credibility
Practical considerations in determining credibility levels (602)
1. Competitive pressures
2. Ability of administrative and management areas to cope with experience rating
3. The trade off between the cost of experience rating and gains in the quantity and quality of new business
4. The effect on existing business of a change in the credibility level
5. Management philosophy regarding experience rating
6. The need for consistency among classes of business
Steps in prospective experience rating (603)
1. Develop past claim experience - should be incurred claims for an experience year (restated)
2. Use pooling methods (see separate list) to dampen random statistical fluctuation
3. Calculate net premium (expected claim cost)

a) Calculate a historical claim cost per unit of exposure
b) Trend the historical experience to account for changes in claim costs - may be due to changes in morbidity, mortality, demographics, benefits, or antiselection

4. Calculate gross rates from net rates - apply loadings (retention) to the net premium (see separate list)
5. A final adjustment may be required when dealing with a politically-sensitive policyholder. Be sure to know the financial impact of any changes.
6. Plan choice considerations - when employees can choose between an HMO, PPO, and/or indemnity, there is often antiselection against the indemnity plan.
7. Small group considerations - need to recognize experience to some degree. May use one of the following:

a) Formula-based methods (for groups with at least 10 lives) - a group is initially assigned to a rate class then reassigned at renewal if experience differs by a specified amount.
b) Re-underwriting method - look at outlier cases to see causes of bad experience to determine prospective rates
Pooling methods (604)
(regardless of the method chosen, a pooling charge must be applied to all groups being pooled to offset the average cost of claim modifications made during the pooling process)
1. Catastrophic claim pooling - forgive large claims
2. Loss ratio or rate increase limits - put a cap on one of the following: the loss ratio used in pricing, the rate increase proposed, or the aggregate claim dollars a group will be charged
3. Credibility weighting - weight with the expected incurred claims for the entire pool
4. Multi-year averaging - combine several years of experience (may give more weight to recent years)
5. Combination methods - for example, use both catastrophic claim pooling and a rate increase cap
Loadings on the net premium (retention) (612)
1. Expense loadings - usually the largest part of retention
2. Deficit recovery charge (may make rates uncompetitive) - charged to a specific policyholder to recover that policyholder's past losses
3. Termination risk charge - charged to everyone to finance (in advance) the risk of groups leaving while in a deficit position
4. Pooling charges - usually covered in net premium
5. Profit charge or contribution to free reserves - may be built into other assumptions
6. Investment income - may be credited (net of investment management costs and taxes)
7. Explicit margin - reduces insurer's risk
8. Charge to cover risk of rate guarantees. This risk arises due to misestimation risk and trend risk.
Typical retrospective refund formula (616)
Policyholder account balance = prior year's balance + premium + investment earnings - charged claims -expenses - risk charge - increase in stabilization reserve - profit
1. Prior year's balance - ending balance is carried forward if not eliminated at prior year end
2. Premiums - amount may be adjusted for interest based on the timing of payments
3. Investment earnings - very important for coverages with significant reserves
4. Charged claims = claims paid + increase in claim reserves - pooled claims + pooling charges + conversion charges + claim margins (may adjust claims for credibility)
5. Expense charges typically vary by duration to allow for the recovery of acquisition costs
6. Risk charge covers the risk that the policyholder will terminate coverage while in a loss position
7. Addition to premium stabilization reserve - to reduce the risk of a deficit on termination. The insurer may require certain level of reserve before surplus can be paid as an experience refund.
8. Profit - usually built into other assumptions since the insurer is reluctant to show explicit profit in the formula
Considerations in deciding whether to use retrospective experience rating (622)
1. Group size - the group must be large enough to have credible data and to warrant the cost and time of experience rating
2. Contract provisions regarding the funding arrangement - some funding arrangements (like retrospective premium arrangements) will replace the experience rating formula
3. Company policies and practices - is an overriding factor
4. Company financial situation - crucial for insurers with small surplus (e.g., the Blue plans)
Special funding arrangements for group insurance (622)
1. Reserveless plans (aka deferred premium or premium drag plans) - the insurer foregoes premiums equal to part or all of the claim reserves. In return, the insurer receives a terminal premium when the group terminates (risk of not receiving terminal payment). The policyholder chooses how to invest money.
2. Fully insured plans - the standard arrangement. Policyholder pays insurer, who pays claims.
3. Self-insured plans - a trust receives employer money and pays the claims (so there is latitude in the choice of investments). Stop loss is usually purchased from an insurer. Governed by ERJSA (no premium taxes or state mandates).
4. Minimum premium contracts - fully insured plan that includes a minimum premium rider (provides for the employer to fund a trust which the insurer uses to pay claims). Avoids premium tax on the portion of premium used to pay claims.
5. Stop loss contracts (specific and/or aggregate) - trends are leveraged, so give them special attention
6. Retrospective premium arrangements - the policyholder pays some percent of the regular premium (e.g., 90%). At the end of the period, the policyholder is liable for an additional premium up to some amount (there is a risk of nonpayment).
Components of medical trend (632)
1. General macro economic factors (the "force of trend") - the force of trend is the trend in average per capita reimbursement to providers of medical care services from all types of private payers
2. Changes in demographics and health status of the covered population
3. The structure of the carrier's provider contracts, and changes in that structure
4. Managed care initiatives - some initiatives will have a one-time effect on trends, while others (such as implementing capitation) will have longer-term impacts
5. Benefit and cost sharing provisions, and changes in those provisions
6. Random fluctuations - is a major source of variation for small blocks
External sources of trend information (638)
1. Proprietary databases
2. Medicare - history of cost increases for the over age 65 and disabled populations. Distorted by eligibility expansions and legislative changes.
3. National health expenditure portion of GDP - generally not helpful for current monitoring purposes because publication of the index is slow and subject to revision
4. Medical CPI/PPI - M-CPI measures the increase in out-of-pocket costs and the consumer portion of health insurance costs. PPI measures the cost of producing units of health care services.
5. Trend surveys - typically compiled by consultants. Provides a second opinion of internal trends.
Micro-economic variables for modeling health care consumption (640)
These affect the individual consumption of health care, but have less impact on the force of trend
1. Health status of the individual
2. Availability and scope of insurance
3. Access to care
4. Actions of the primary care physicians
Macro-economic variables that affect health care cost trends (640)
1. Wealth - increased wealth is a leading indicator of increased consumption and also investment in research
2. General inflation
3. Physician supply - increased supply should decrease prices and increase quantity and quality of care (but past growth has not decreased prices)
4. More specialists - appears to have led to greater use of technology and more intense therapies
5. Population aging - causes consumption to increase
6. Effect of third party payers - decreases the consumer's sensitivity to costs and increases consumption
7. Managed care - has affected consumption (e.g., shift from inpatient to outpatient care)
Trend analysis techniques (641)
1. Actuarial models - projects utilization and price data by type of service, but the result is still mostly based on historical experience
2. Linear regression model of historical claim costs - basically projects the historical average trend, but does adjust for random fluctuation
3. ARTMA models - do not work for cyclical changes that affect trends, so they are only good for short periods
4. External indicator models - typically statistical in nature and rely on causal modeling techniques. Requires the use of a leading indicators or a coincident indicator that has specified future values (such as the Health Cost Index).
Common challenges in trend analysis (642)
1. Changes in claim processing and payment patterns
2. Seasonality - can smooth out by using 12-month moving averages
3. One-time events (such as a high flu season) - can significantly change claims during one period, followed by a return to normal levels in later periods
4. Margins - in some situations, adding an explicit margin for uncertainty can be appropriate or even required
5. Changes in prior period estimates - the base period claim costs to which the trend is applied may not be complete when claims are projected, so the reserve estimate will impact projected claims
6. Legislative changes - rating laws, mandated benefits, and other changes can cause one-time and ongoing changes in trends
Desired characteristics of premium rates (473)
1. Adequate - high enough to generate an acceptable return on equity
2. Competitive - low enough to enroll enough members to meet volume and growth targets
3. Equitable - to avoid an unreasonable amount of cross-subsidization among groups (which will improve persistency)
Information gathered during underwriting for managed health care (474)
1. Health status - determined based on:
a) For individual and small group: physician exams, prescription drug histories, and medical questionnaires
b) For large groups: medical cost experience and a listing of employees' major health conditions

2. Ability to pay the premium - based on income verification and credit history
3. Availability of other coverage - information is needed for coordination of benefits with other insurance and workers' compensation
4. Historical persistency - groups that frequently change carriers may not persist long enough for the insurer to recoup acquisition costs
Steps in the rate formula for managed health care (479)
1. Develop the projection period base rate PMPM - based on historical medical costs trended forward, and reflects the average characteristics of the block of business
2. Apply group-specific additive adjustments - such as the added cost of covering mandated services in a given state
3. Apply group-specific multiplicative adjustments - includes factors for the benefit plan, geographical area, age/gender, degree of health care management, and health status
4. Add retention loads - includes administrative expenses, a buildup of contingency reserves, coordination of benefits savings, and profit
5. Convert to a contract rate (per employee or subscriber) - for group coverages, this includes developing tiered rates (employee only, family, etc.)
Rate setting approaches (113)
1. Rerating - rating based on direct, existing experience (e.g., the experience of an existing block)
2. Fundamental pricing - rating from other data sources (used as benchmarks), which are adjusted to apply to the current situation

a) Tabular method - an existing table (or a modification of it) is used as the morbidity basis for pricing (e.g., using the 85CIDA table for pricing DI). Typically used for long term, non-inflation sensitive products.
b) Buildup and density functions (see separate list) - a model is built to determine expected claims in the rating period. Generally used for inflation-sensitive products.
c) Simulation - an existing distribution of expected claims is projected into the rating period, using all known information about the claimants (including prior claim experience)
Major considerations in the rate setting process (113)
1. The market - competitors' pricing sets expectations for consumers, limiting pricing options
2. Existing products - expectations will exist for the company's product, based on its current products
3. Distribution system - the compensation system, the structure of the distribution system, and the level of company control are all relevant in pricing
4. Regulatory situation - limitations may exist that impact how rates are set, and whether needed rate increases are allowed
5. Strategic plan and profit goals - pricing practices should reflect the company's goals
Major rating variables (115)
1. Age - claim costs increase significantly by age for almost all health insurance coverages
2. Duration - durational trends are the trends in excess of those generated by insured age alone. They typically come from initial underwriting and from cumulative antiselection.
3. Gender - most coverages vary rates by gender, unless prohibited by law
4. Marital status - this is a big factor for LTC, since having a spouse at home can decrease the need for a nursing home
5. Parental (or family) status - rates must vary based on how many people are insured
6. Occupation - an important rating factor for DI coverages, but not for other coverages
7. Geographic area - rates may vary by area due to different patterns of care, provider contracts, availability of care, and legal requirements
8. Current health status
9. Past claim history - renewal rates are sometimes based on claim experience
10. Smoking status
11. Weight
12. Presence and nature of other coverage
13. Situation-specific factors - e.g., whether the policyholder converted from another plan of the same insurer
Types of age rating structures (115)
1. Attained age rating - a policyholder's rate is a function of his age at renewal. Also referred to as step rating if rates are grouped into age bands.
2. Entry age or issue age rating - the rate reflects the age of the policyholder when the policy was issued
3. Uni-age rating - the rate structure doesn't recognize age at all, leading to subsidization of older individuals. Most community rate structures are uni-age.
Tabular method formulas for calculating net premiums (125)
1. Net Premium = NP = lUsue yr * final yr Pr(Clmz) * ACZ * v' * lz
Using the buildup and density function approach for pricing (129)
Using the buildup and density function approach for pricing (129)
Steps of the rerating approach for pricing (136)
1. Gather experience on existing business - use incurred claims (preferably on a runout basis) and earned
premiums. The reliability of the data should be assessed before using it.
2. Restate experience - past premiums should be restated to the rate levels currently in effect
3. Project past results to the future - adjust for items that cause future experience to differ from past experience (see separate list)
4. Compare the projection against desired results - a rate increase is calculated by determining how much rates need to change to produce the desired loss ratio (which is based on the expected level of expenses and profit)
5. Apply regulatory and management adjustments (see separate list for reasons for management adjustments)
Adjustments needed for using past claims to project future claims (140)
1. Changes in the covered population
2. Changes in duration - should anticipate durational effects in the claim costs
3. Changes in benefits - changes may be explicit (such as a change in copays) or implicit (such as a change in how a policy provision is interpreted)
4. Changes in claim costs - must project changes in frequencies and changes in average costs
5. Leveraging - as trends change the average claim cost, the impact of deductibles and copays causes claims to increase at a rate greater than trend
6. Other changes - includes antiselection, changes in underwriting, and changes in business practices
Projected claimst = Claim cost PMPMS * Number of memberst
* ((1 + leveraged claim cost trend)(,"s) -1)
* Avg durational factor, / Avg durational factors
* (1 + Antiselection factor due to lapses,.s)
* (1 + Adjustment factor for other changes,.s) It appears the "-1" in the formula above is an error, but it is not yet listed in the errata for this book
Reasons for management adjustments in pricing (148)
1. Competitiveness of the premiums for new business
2. Profitability in other lines of business
3. Relations with the public or the sales force
4. Social policy
5. Desire to manage the block from a long-term perspective (e.g., phase in a large rate increase)
Methods for calculating gross premiums (150)
1. Block rating (short-term horizon) approach - claim costs are calculated for the rating period (typically a
one-year period), and premiums are calculated by adding on expenses and profit charges. Gross premium
= G = [N * (1 + EN) + EF] / (1 - EG).
a) N = net premium (claim cost)
b) EN = percent of claim expenses
c) EF = fixed expenses
d) EG = percent of premium expenses + profit as a percent of premium
2. Asset share approach - involves long-term projections of various items, in order to determine the
necessary premium
Items included in asset share projections (153)
1. Exposure values - including the number of policies sold or in force, number of claims or claim payments, number of premium collections, and number of units sold or in force
2. Revenue values - including premium, investment income, and explicit subsidies
3. Claim values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves
4. Capital values - must model the cost of the capital used by the line of business
5. Expense targets - expense loadings may be very detailed. The cost of capital is sometimes treated as an expense.
6. Profit targets - profit is calculated in one of the following ways:

a) Percent of premium - present value of profits divided by present value of premiums
b) Return on investment (ROI) - this is the interest rate at which the present value of future profits will exactly equal the initial investment
c) Return on equity (ROE) - this is like the ROI method, except the initial investment is increased by the amount of capital that is set aside to cover the business
Steps for manual rating of disability coverage (17)
1. Determine the base rates/premium (base premium = base rate * benefit amount)
a) LTD: Base RateXig.e.w = Ix,g.ex RSV^eo /12
(RSV is the reserve at time 0,1 is the probability of claim)
b) STD: Base RateXig.e.w = Ix>&e x Dx,g.e / 12
(D is the expected length of claim in weeks)
2. Deduct offset credits - to get the Net Base Premium
3. Demographic adjustments - adjust the Net Base Premium to reflect the person's salary, industry, occupation, and location
4. Plan provision adjustments - adjust for the definition of disability, maximum or minimum monthly benefits, pre-existing clause, and antiselection
5. Non-claim adjustments (retention) - the prior steps give the final claim cost. Add loadings for commissions, expenses, and premium taxes
6. Add profit - can be a percent of premium or a needed ROI/ROE
Steps for experience rating of disability coverage (20)
1. Determine the group's manual rate with profit and expenses removed (this is the final claim cost)
2. Determine the experience-based rate using the last 3-5 years of data

a) Discount claims and reserves to the midpoint of the experience period or to the actual date of disability
b) Divide by exposure to get the experience-based claim rate
c) If large claims are pooled, add a pooling charge
3. Blend the manual rate and the experience-based rate to get the case claim rate
a) Blended rate = Manual claim rate * (1-Z) + Experience claim rate * (Z)
b) Credibility (Z) = N / (N + K) where N = number of life years and K = constant (for example, 5,000 for LTD or 250 for STD)
4. Final case premium = blended rate / target loss ratio
Steps in the claim process for disability (31)
1. Determine eligibility for coverage - is the claimant insured and actively at work, is there a pre-existing condition?
2. Determine if the definition of disability is met - this is the most difficult step of the process
3. Determine the payment amount (usually straightforward) = Pre-disability income * benefit percent - offsets
4. Get ongoing proof of disabilities

a) STD - often approved for a specified period based on the type of disablement. Reviewed at the end of the period
b) LTD - reviewed annually, when the condition or treatment changes, or when the definition of disability changes
Tools of the claim process for determining and handling disabilities (33)
1. Medical evaluation - begins with an APS and can include independent medical exams
2. Rehabilitation plans - providing vocational training or physical rehabilitation
3. Financial evaluation of the claimant - verification of pre- and post-disability earnings
4. Settlements - these are risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation)
5. Fraud review - check information for inconsistencies or alterations
6. Managed disability - techniques are used to "manage" disability and encourage a return to work
Uses of health insurance loss ratios (1)
1. Evaluating of an organization's performance
2. Providing consumers with information on the relative quality of competing health plans
3. Projecting future earnings growth of HMOs
4. Testing products against minimum loss ratio standards
5. Comparing insurers and MCOs (the list of users of loss ratios includes more ways in which loss ratios are used)
Users of loss ratios (3)
1. Legislators use loss ratios to make sure that a reasonable percentage of premium is allocated to the cost of benefits
2. Regulators use loss ratios to monitor insurance companies (evaluating rates and monitoring solvency)
3. Investors, investment analysts, and lenders use loss ratios to track trends in a company's earnings
4. Rating agencies refer to loss ratio trends in their reports.
5. Insurance companies and managed care companies use loss ratios to set target premiums, determine rate increase needs, assess product viability and performance, and to compare results with other companies
6. Consumer advocates use loss ratios to compare the performance of companies, reasoning that high loss ratios are best for consumers
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