Chp 12 - Data

Question 1

Describe the most important component of the premium to be charged for any health insurance contract.

Answer 1

1. The most important component of the premium charged to the customer is typically the pure risk premium.
2. This represents the anticipated cost of claims for the future period during which the policy is in force.

Question 2

State the six key attributes that should apply to the data being used for pricing purposes.

Answer 2

1. Accurate estimation of claims outgo requires using the most appropriate statistics.
2. These statistics should be:
   Relevant to the product and context.
   Credible and based on reliable sources.
   Available and accessible.
   Reliable for the intended purpose.
3. Additional considerations include:
   The cost of obtaining and analysing the data.
   The suitability of the data format for modelling and analysis.

Question 3

Outline how an actuary will use data when setting a price for a product.

Answer 3

1. Actuaries use judgment to compile statistics from multiple sources that meet key criteria (relevance, credibility, availability, reliability).
2. They apply skill and judgment to:
   Project the data.
   Estimate future claims experience.
   Determine the premium to be charged to the policyholder.

Question 4

Describe the projections that will need to be made to the historical experience in order to make it appropriate for pricing purposes.

Answer 4

1. The database for premium estimation is primarily historic.
2. The actuary must gather local market information on:
   Trends and
   Developments to project experience forward.
3. Projections should cover:
   The policy term, and
   The duration for which current terms are offered.

Question 5

Suggest how the various time influences on the future experience might be built in to the assumptions for incidence rates, claim termination rates, and the average claim size (for PMI).

Answer 5

1. Incidence rates (i.e., rates at which claims begin) vary by:
   Age, and
   Calendar year.
2. Claim termination rates vary by:
   Duration since claim commencement.
3. Actuaries may assume experience improvement or deterioration over time when estimating expected claim rates.
4. For private medical insurance:
   a. Average claim size depends on:
   Inflation,
   Medical protocols,
   Hospital charging structures, and
   Availability of State healthcare services.

b. Premium rates are typically reviewed annually, so modelling focuses on one year at a time.

Question 6

Describe one important way in which future changes in experience will usually be built into the insurer’s pricing methodology, when that future experience is very uncertain.

Answer 6

1. Where future experience is highly uncertain, it is important that:
   The contract allows for future review of terms.
2. Without such flexibility:
   The required reserves may drive the premium too high.
   This could negatively impact the perceived value for money and product affordability.

Question 7

Set out the advantages of using the company’s own data for determining a pricing basis.

Answer 7

1. In-house experience data often meets most criteria for premium estimation.
2. Relevance is especially important, as external data may not reflect insurer-specific factors such as:
   Underwriting and acceptance practices
   Policy conditions
   Claims management
   Distribution methods and channels
   Target market
3. A company’s own experience is generally the best base for prediction.
4. Cost, reliability, and data format are usually not problematic when using internal data.

Question 8

Describe the main disadvantage of using the company’s own data for pricing, and state how the problem is usually overcome.

Answer 8

1. In many healthcare insurance lines, insurers may lack credible volume of data, especially at the level of specific risk cells.
2. When in-house data is insufficient, actuaries must:
   Use external sources, and
   Make appropriate adjustments to reflect differences in relevance and characteristics.
3. For a new insurer or a new product line, this challenge is more pronounced:
   It may take years before internal data becomes credible for anything beyond high-level analysis.
   In such cases, actuaries are entirely reliant on external data sources.

Question 9

State the general importance of population data for pricing health insurance contracts, and describe four disadvantages of this source of data for pricing.

Answer 9

a. Population data is a key source for healthcare insurance premium assessment.
For some lines and risk cells, it may be the only basis for initial cost estimates.

b. However, population data has drawbacks:
1. Accuracy and reliability may be questionable due to:
Subjective definitions.
Potential for double counting.

2. Data may not be:
   Available electronically, or
   In a usable format.
3. Timeliness is an issue—data may be outdated by the time it’s published.
4. Relevance may be limited:
   National data may not reflect the insured subset.
   This can be improved by segmenting data by socio-economic groups, regions, and age blocks.

Question 10

Describe the issues with applying national population experience to insured lives.

Answer 10

1. There are conflicting factors when comparing national population experience to insured lives:
   Insured lives are expected to be healthier due to underwriting (less healthy individuals are declined or loaded).
   However, if the policy is non-essential, individuals may self-select into purchasing it, expecting to benefit—this introduces anti-selection.
2. As a result, the difference in experience between population and insured lives may be less pronounced.
   This has been observed in the development of critical illness cover, where anti-selection and moral hazard are concerns.
3. Actuaries may apply a small discount to population statistics, but its validity depends on:
   The insurer’s sales, marketing, underwriting, and claims practices.
4. Additionally, the onset and continuation of disability may not align precisely with the definition of a claim under the insurance policy.

Question 11

Describe three advantages of population data for pricing.

Answer 11

1. Population cohort studies have been conducted for decades in many countries.
2. These studies offer detailed health experience data across key variables.
3. They are often:
   Readily available, especially in many territories.
   Free of charge.
   Credible, due to the large sample sizes involved.

Question 12

Describe the role of reinsurance data in the pricing of health insurance products and explain the adjustments that might be made when using this data in order to make it appropriate for the purpose of premium calculation.

Answer 12

1. Reinsurers often provide relevant statistics to assist with pricing and reserving.
   They aim for accuracy, as their profitability depends on the premiums calculated under the treaty.
2. Data assistance may come with:
   An explicit charge, or
   Be provided in exchange for a share of profits from the business written.
3. The actuary must assess how reinsurer data diverges from the company’s expected future claims experience.
   Adjustments are needed even if a large share of risk is ceded to the reinsurer.
4. Specific adjustments should reflect:
   The company’s underwriting and claims management practices.
   These may not be fully known to the reinsurer, though they are of interest if the reinsurer is taking on risk.
5. Reinsurers, through their market-wide involvement, are well-positioned to:
   Support companies launching new product lines.

Question 13

Describe the insured lives data that may be available from the market, state the advantages and disadvantages of such data for pricing purposes and explain the adjustments that might be made when using this data in order to make it appropriate for the purpose of premium calculation.

Answer 13

1. In well-established insurance markets, companies may pool claims and policy statistics to create industry-wide data.
   Example: Continuous Mortality Investigation (CMI) in the UK for income protection and critical illness insurance.
2. Advantages of pooled data:
   Reflects insured experience.
   Has statistical credibility due to large volume.
   Represents local market practices.
   Compiled by experts, resolving inconsistencies across companies.
3. Drawbacks:
   Delayed publication reduces timeliness and applicability.
   Represents a market average, not tailored to any one company.
4. Actuaries must:
   Assess differences between market data and their own company’s experience.
   Make adjustments for underwriting and claims management practices.
   Be cautious when applying mortality-based ratios to morbidity risks (e.g., CI or IP).
5. Policy condition differences may allow for straightforward adjustments using risk ratios.
6. Market data availability:
   More robust for long-term healthcare products (e.g., CI, IP).
   Limited for short-term products (e.g., PMI), often only available at a high level.

Question 14

Discuss the possibilities of using insurance company supervisory returns for providing input into the pricing process.

Answer 14

1. Regulatory returns can be a source of statistics for actuaries.
   These are typically accurate, but:
   Offer limited detail for estimating future risk at the level of individual cells.
   Their primary purpose is solvency assessment, not aiding competitors with pricing.
2. Despite limitations, they can serve as a high-level check on premium estimates from other sources.
3. This can be especially useful when launching a new healthcare insurance product, by:
   Comparing competitor rates in the context of their solvency, profitability, and market positioning.

Question 15

Discuss briefly the likely relevance of market data for pricing health insurance contracts.

Answer 15

1. Market data is generally nationally relevant to the insurer.
2. However, caution is needed when:
   Policy conditions differ from the market average.
   The insurer’s underwriting and claims management practices are materially different from those reflected in the market data.
3. Actuaries must assess and adjust for these differences to ensure accurate premium and reserve estimation.

Question 16

List five other different sources of data, and for each one briefly describe how they might be useful in pricing

Answer 16

Additional Data Sources for Premium Estimation

a. Broad-Based Population Ratios:
1. May be used to assess local claims experience relative to available databases.

2. Requires caution due to differences in:
   Culture
   State healthcare provisions
   Market practices
   Legislation
   Policy conditions
3. Even insured data from overseas must be carefully adjusted.

b. Consultants:
1. Have access to national and international data.

2. May assist with:
   Premium compilation
   Data provision
   Software tools
3. Typically do not share risk, but are compensated directly.

c. Market Comparison Software:
1. Available in some territories for individual business.

2. Compares premium rates across similar products.
3. Useful for:
   Initial data gathering
   Checking competitiveness and reasonableness of premiums.

d. Trade Magazines:
1. Provide market-level statistics and reasonability checks.

2. Lack detailed breakdowns, but useful for high-level insights.

e. Peer-Reviewed Medical Journals:
1. May offer additional insights into health trends and risks.

2. Available in some territories and useful for supporting assumptions.