1
Q
Types of individual health insurance
A
- Major medical
- Limited benefit medical
- Group conversions
- Medicare Supplement and Medicare Select
- Medicare Advantage
- Disability income
- Business protection coverage
- LTC
- Dental
2
Q
Types of limited benefit medical insurance
A
- Hospital indemnity
- Other scheduled benefits
- Dread disease
- Critical illness
3
Q
Methods used by disability income policies to adjust for the cost of living
A
- Guaranteed insurability - automatically offers increased coverage to active insureds at specified intervals
- Automatic increases
- Increase benefit payments over time for those on disability
4
Q
Major types of business protection coverage
A
- Keyperson coverage
- Disability buyout coverage
- Business overhead expense
5
Q
Benefits that may be covered by LTC policies
A
- Nursing home care
- Assisted living facility care
- Home and community-based care
- Hospice care
- Respite care
- Home modifications and equipment (aka independence support services)
- Care management services
- Bed reservation benefit
- Caregiver training
- Death benefit
- Cash alternative benefit
6
Q
Methods of providing inflation protection on LTC policies
A
- Automatic inflation protection
- Simple inflation protection
- Periodic increase offers
7
Q
Components of gross premiums
A
- Claim costs
- Administrative expenses
- Commissions and other sales expenses
- Premium tax
- Other taxes and assessments
- Risk and profit charges
- Investment earnings
8
Q
Considerations in developing administrative expense assumptions
A
- How expenses are allocated to the product - allocation methods include:
a. Activity based allocation
b. Functional expense allocation
c. Multiple allocation methods - How admin expenses should be allocated to groups - should differentiate between first year and renewal expenses
- What the competition includes as expenses in its pricing
9
Q
Types of bases used for allocating expenses
A
- Percent of premium
- Percent of claims
- Per policy
- Per employee (certificate)
- Per claim administered
- Per case (some expenses are charged directly to the case for very demanding groups)
10
Q
Common rating characteristics included in manual rates for group health insurance
A
- Age
- Gender
- Health status
- Rating tiers
- Geographic factors
- Industry codes
- Group size
- Length of the premium period
11
Q
Common rating tiers for group health insurance
A
- One tier: composite
- Two tier: employee only, family
- Three tier: employee only, employee and one dependent, family
- Four tier: employee only, employee with one dependent, employee with children, family
- Five tier: employee only, couple, employee with child, employee with children, family
12
Q
Considerations in developing a manual claim table for life insurance
A
- Two approaches can be used:
a. Manual premium tables - calc manual premium rate and adj for group size.
b. Manual claim tables - calc manual claim rate, then add appropriate margin, profit, and expense - Data sources - SOA studies, industry mortality tables, population statistics, or own company experience
- Changes in mortality - to reflect future improvements
- Reinsurance - net cost should be factored into claim table or expenses
- Conversions to individual life policies - associated antiselection should be reflected in manual rates
- Manual adjustments are made for group-specific traits
- Rates for the group are based on age/gender mix but groups typically charge composite rate to all employees
13
Q
Use of general population data for pricing life insurance
A
- Estimating annual improvements in mortality
- Determining ratios of mortality by age bracket
- Comparing male and female mortality
- Developing rates for the non-working population
14
Q
Manual claim table adjustments for group life
A
- Disability factors
- Effective date adjustment
- Industry factors
- Regional factors
- Lifestyle factors
- Marketing considerations
- Contribution schedules
- Case size factors and volume adjustments
- Plan options
15
Q
Types of living benefits for life insurance
A
This benefit pays a portion of the face amount prior to death, with the remaining benefit paid at death
- LTC benefits
- Critical illness benefits
- Terminal illness benefit
16
Q
Steps in developing claim costs for use in a manual rate
A
- Collect data (at least 12 months)
- Normalize the data for important rating variables
- Project experience period costs to the rating period
17
Q
Important rating variables when normalizing data for use in the rate manual
A
- Age and gender
- Geographic area
- Benefit plan
- Group characteristics
- Utilization management programs
- Provider reimbursement arrangements
- Other risk adjusters
18
Q
Methods of adjusting manual rates for specific benefit plans
A
- Claim probability distributions - used to estimate impact of deductibles, coinsurance, OOP maximums and annual benefit maximums.
- Actuarial cost models - build estimated total claim costs by developing a net claim cost for each detailed type of service and summing to get the total
19
Q
Data sources for estimating disability claim costs
A
- A company’s own data is the best source if reliable and credible
- Intercompany experience studies
- Rate filings of competitors
- Research of governmental and business publications
- Data from consulting firms and reinsurers
20
Q
Types of disability income experience studies
A
- Calendar year loss ratio study
a. Compute ratio of incurred claims to earned premium for a given calendar year
b. Incurred claims = paid claims + increase in claim reserves
c. May not provide a clear picture of historical trends because results are affected by reserve changes - Incurral year loss ratio study
a. Compute ratio of incurred claims to earned premium for a given incurral year
b. Incurred claims = present value of claim payments made to date + 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 - Study of actual-to-expected incidence or termination rates: ratios of a company’s actual claim incidence or term rates compared to expected rates
21
Q
Formula for disability income net monthly premium
A
Net monthly premium = IncidenceRate * SUM(Benefit(t) * Continuance(t) * InterestDiscount(t))
The summation runs for the entire length of the benefit period
22
Q
Group characteristics that impact disability income claim costs
A
- Age and gender
- Occupation:
a. Hourly vs. salaried
b. Blue collar vs. grey collar vs. white collar
c. Union vs. non-union
d. Commissioned sales personnel - Industry (more appropriate than occupation for group insurance)
- Average earnings per employee
- Area
- Size of group
23
Q
Data sources for developing dental claim costs
A
- Own company data
- Outside databases: Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA “Survey of Dental Fees”
- Consulting firms
- Rate filings of other carriers
- Third party administrators
- Reinsurers
24
Q
Plan characteristics that impact dental claim costs
A
- Covered benefits
- Cost sharing provisions
- Waiting period
- Period of coverage
25
Network and care management practices that impact dental claim costs
1. Provider reimbursement levels:
a. FFS reimbursement may be based on UCR
b. PPO networks contract for reduced fees from limited providers
c. Capitation is common with DHMO
2. Care management practices - including preauthorization and self-management
26
Insured characteristics that impact dental claim costs
1. Age and gender
2. Geographic area
3. Group size
4. Prior coverage and pre-announcement
5. Employee turnover
6. Occupation or income
7. Contribution and participation
27
Major effects of the year 2000 changes in the NAIC LTC Model Act
1. Requires disclosure of rating practices at time of application
2. Requires an actuarial certification at the time of initial rating
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
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
28
Major effects of HIPAA on LTC
1. Defined qualified plans
2. Clarified taxation of premium and benefits
3. Standardized benefit triggers
4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans
29
Major stakeholders in the group LTC policy design process
1. Employer group:
a. LTC is appealing because it complements other products 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 (could be more expensive than individual policies)
2. Insurance company:
a. Concerned with up-front acquisition costs, risk of low enrollment, and need to sell both 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 LTCI
b. Concerned with the significant cost
4. Insurance brokers: found that group LTCI provides an opportunity to open the door to competitive life and disability markets
30
Assumptions needed for a LTC pricing model
1. Voluntary lapses
2. Mortality
3. Morbidity - impacted by:
a. Marital status
b. Gender
c. Benefit trigger
d. Area
e. Case management
4. Selection factors
5. Expenses
6. Interest
7. Reserve basis
8. Other assumptions
9. Profit
31
Reasons for experience rating
1. Groups want it
2. The insurer wants to quote and charge premiums that are as competitive as possible
3. The insurer wants to avoid antiselection
32
Theoretical considerations in determining credibility levels
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 4x the coverage to double the credibility
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure and therefore credibility
33
Practical considerations in determining credibility levels
1. Competitive pressures
2. Ability of administrative and management areas to cope with experience rating
3. Trade off between the cost of experience rating and gains in the quantity and quality of new business
4. Effect on existing business of a change in the credibility level
5. Management philosophy regarding experience rating
6. Need for consistency among classes of business
34
Steps in prospective experience rating
1. Develop past claim experience (incurred claims for an experience year)
2. Use pooling methods 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 due to changes in morbidity, mortality, demographics, benefits or antiselection
4. Calcualte gross rates from net rates by applying loadings (retention) to the net premium
5. A final adjustment may be required when dealing with a politically-sensitive policyholder.
6. Plan choice considerations to account for antiselection (multi-option scenarios)
7. Small group considerations to recognize experience to some degree:
a. Formula-based methods (for groups with at least 10 lives)
b. Re-underwriting method
35
Pooling methods
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
2. Loss ratio or rate increase limits
3. Credibility weighting
4. Mulit-year averaging
5. Combination methods
36
Loadings on the net premium (retention)
1. Expense loadings
2. Deficit recovery charge
3. Termination risk charge
4. Pooling charges
5. Profit charge or contribution to free reserves
6. Investment income
7. Explicit margin
8. Charge to cover risk of rate guarantees (due to misestimation risk and trend risk)
37
Typical retrospective refund formula
Policyholder account balance = prior year's balance + premium + investment earnings - charged claims - expenses - risk charge - increase in stabilization reserve - profit
Charged claims = claims paid + increase in claim reserves - pooled claims + pooling charges + conversion charges + claim margins
Risk charge covers the risk that the policyholder will terminate coverage while in a loss position
Addition to premium stabilization reserve reduces the risk of a deficit on termination; a certain level of reserve may be required before surplus can be paid as an experience refund
38
Considerations in deciding whether to use retrospective experience rating
1. Group size
2. Contract provisions regarding the funding arrangement
3. Company policies and practices
4. Company financial situation
39
Special funding arrangements for group insurance
1. Reserveless plans (aka deferred premium or premium drag plans)
2. Fully insured plans
3. Self-insured plans
4. Minimum premium contracts
5. Stop loss contracts (specific and/or aggregate)
6. Retrospective premium arrangements
40
Components of medical trend
1. General macro economic factors ("force of trend")
2. Changes in demographics and health status of the covered population
3. Structure of carrier's provider contracts
4. Managed care initiatives
5. Benefit and cost sharing provisions
6. Random flucuations
41
External sources of trend information
1. Proprietary databases
2. Medicare
3. National health expenditure portion of GDP
4. Medical CPI/PPI
5. Trend surveys
42
Micro-economic variables for modeling health care consumption
These impact individual consumption of health care
1. Health status of the individual
2. Availability and scope of insurance
3. Access to care
4. Actions of the PCPs
43
Macro-economic variables that affect health care cost trends
1. Wealth
2. General inflation
3. Physician supply
4. More specialists
5. Population aging
6. Effect of third party payers
7. Managed care
44
Trend analysis techniques
1. Actuarial models
2. linear regression model of historical claim costs
3. ARIMA models
4. External indicator models
45
Common challenges in trend analysis
1. Changes in claim processing and payment patterns
2. Seasonality
3. One-time events
4. Margins
5. Changes in prior period estimates
6. Legislative changes
46
Desired characteristics of premium rates
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
47
Information gathered during underwriting for managed health care
1. Health status 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
3. Availability of other coverage (for COB)
4. Historical persistency
48
Steps in the rate formula for managed health care
1. Develop the projection period base rate PMPM
2. Apply group-specific additive adjustments
3. Apply group-specific multiplicative adjustments
4. Add retention loads
5. Convert to a contract rate per employee or subscriber (including tiered rates for group coverages)
49
Rate setting approaches
1. Rerating - based on direct, existing experience
2. Fundamental pricing - from other data sources, with applicable adjustments:
a. Tabular method - an existing table is used as the morbidity basis; used for long term, non-inflation sensitive products
b. Buildup and density functions - model is built to determine expected claims; used for inflation-sensitive products
c. Simulation - existing distribution of expected claims is projected into the rating period, using all known info about the claimants
50
Major considerations in the rate setting process
1. The market
2. Existing products
3. Distribution system
4. Regulatory situation
5. Strategic plan and profit goals
51
Major rating variables
1. Age
2. Duration
3. Gender
4. Marital status
5. Parental (or family) status
6. Occupation
7. Geographic area
8. Current health status
9. Past claim history
10. Smoking status
11. Weight
12. Presence and nature of other coverage
13. Situation-specific factors
52
Types of age rating structures
1. Attained age rating (aka step rating if age bands are used)
2. Entry age or issue age rating
3. Uni-age rating
53
Tabular method formulas for calculating net premiums
1. Net Premium = NP = SUM(Pr(Clm(z)) * AC(z) * v^t * l(z)) over z = issue yr to final yr
Pr(Clm(z)) is the probability of a claim occurring in year z (incidence rate)
AC(z) is the average claim cost (assuming a claim occurs) in year z
v^t is the present value factor at duration t corresponding to year z
l(z) is the proportion of originally issued lives still in force in year z
2. Average claim cost = AC(z) = SUM(Cm$(s) * Pr(1-Tn(s)) * v^s) over s = 1 to FnlCmPyt
s is the claim duration
Cm$(s) is the claim dollars payable at duration s
Pr(1-Tn(s)) is the probability of a claimant at claim duration 0 remaining disabled at duration s
FnlCmPyt is the claim duration of the final possible claim payment
54
Using the buildup and density function approach for pricing
1. Buildup approach - each claim type has its own claim cost calculation as the product of claim frequency times average cost per service. Total claim cost is the sum of the various categories. Good for benefits with copays.
2. Density functions - calculates a distribution of the expected annual claims for an individual, with no calculation of the different categories of benefits. Useful for calculating the impact of deductibles and OOP limits.
3. Combining buildup and density functions - for PPO products, may calculate in-network costs using the buildup approach (due to copays), and OON costs using the density approach (due to deductibles). The two are combined to get a final claim cost.
55
Steps of the rerating approach for pricing
1. Gather experience on existing business
2. Restate experience
3. Project past results to the future
4. Compare the projection against desired results
5. Apply regulatory and management adjustments
56
Adjustments needed for using past claims to project future claims
1. Changes in the covered population
2. Changes in duration
3. Changes in benefits
4. Changes in claim costs
5. Leveraging
6. Other changes, including antiselection, U/W changes, business practice changes
Projected claims(t) = Claim cost PMPM(s) * Number of members(t) * ((1+ leveraged claim cost trend)^(t-s) -1) * Avg durational factor(t) / Avg durational factor(s) * (1 + Antiselection factor due to lapses(t-s)) * (1 + Adjustment factor for other changes(t-s))
57
Reasons for management adjustments in pricing
1. Compeitiveness 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)
58
Methods for calculating gross premiums
1. Block rating (short-term horizon) approach
Gross premium = G = [N * (1+ E^N) + E^F] / (1 - E^G)
N = net premium (claim cost)
E^N = percent of claim expenses
E^F = fixed expenses
E^G = percent of premium expenses + profit as a percent of premium
2. Asset share approach
59
Items included in asset share projections
1. Exposure values - 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 - premium and investment
3. Claim values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves
4. Capital values - modeled cost of capital used by the line of business
5. Expense targets - expense loadings may be very detailed. Cost of capital is sometimes treated as an expense.
6. Profit targets - profit is calculated in one of these ways:
a. Percent of premium: present value of profits / present value of premiums
b. Return on investment (ROI) - interest rate at which the present value of future profits will equal the initial investment
c. Return on equity (ROE) - like ROI but initial investment is increased by amount of capital set aside to cover the business
60
Steps for manual rating of disability coverage
1. Determine the base rates/premium (base premium = base rate * benefit amount)
a. LTD: Base Rate = probability of claim * reserve at time 0 / 12
b. STD: Base Rate = probability of claim * expected length of claim in weeks / 12
2. Deduct offset credits (result is the Net Base Premium)
3. Demographic adjustments
4. Plan provision adjustments
5. Non-claim adjustments (retention)
6. Add profit
61
Steps for experience rating of disability coverage
1. Determine the group's manual rate with profit and expenses removed (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 experienc-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), N = number of life years, K = constant
4. Final case premium = blended rate / target loss ratio
62
Steps in the claim process for disability
1. Determine eligibility for coverage
2. Determine if the definition of disability is met
3. Determine the payment amount = Pre-disability income * benefit percent - offsets
4. Get ongoing proof of disabilities
a. STD: often approved for a specified period based on type of disablement and reviewed at the end of the period
b. LTD: reviewed annually, when condition or treatment changes, or when definition of disability changes
63
Tools of the claim process for determining and handling disabilities
1. Medical evaluation
2. Rehabilitation plans
3. Financial evaluation of the claimant
4. Settlements
5. Fraud review
6. Managed disability
64
Uses of health insurance loss ratios
1. Evaluation 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
65
Users of loss ratios
1. Legislators - make sure reasonable percentage of premium is allocated to the cost of benefits
2. Regulators - monitor solvency of insurance companies and evaluate rates
3. Investors, investment analysts, and lenders - track trends in a company's earnings
4. Rating agencies - refer to loss ratio trends in their reports
5. Insurance companies and MCOs - set target premiums, determine rate increase needs, assess product viability and performance, compare results with other companies
6. Consumer advocates - compare performance of companies, reasoning high loss ratios are best for consumers
66
(Added) Requirements of the NAIC LTC Model Act
1. Covers renewability, policy exclusions, unintentional lapses, minimum benefit standards, standards for disclosure, reporting, advertising & marketing
2. Requires policyholders be offered compound inflation protection and non-forfeiture benefits
3. Group LTC must be issued with a basis for continuation and conversion
67
(Added) Definition of loss ratio and considerations
1. Loss ratio = incurred claims / earned premium for a calendar year
2. Lifetime loss ratio = PV(expected claims) / PV(expected premium)
3. Expense values vary by product
4. Impacted by volume, morbidity, carrier definition of claims, premium components
68
(Added) Changes and difficulties related to pricing for the 2014 Exchanges
1. ACA expansion of private insurance coverage to uninsured/unknown population
2. New benefit designs (metal AVs, essential health benefits)
3. Eliminates health, gender, pricing differences and restricts variation of rates by age
4. Despite risk adjustment, and temporary risk and reinsurance programs, there is still risk due to mispricing:
a. If price too high, result in market destabilization due to antiselection
b. If price too low, leads to antiselection which is likely not fully offset by risk mitigation
69
(Added) Impact of benefit rush on self-insured and insured business
1. Benefit rush is the increase in trend the year before implementation of a plan change. Followed by lower trend the year the change is made (benefit hush) and return to normal the following year (trend crush).
2. Self-insured business will be impacted by trend guarantees put in place without knowledge of the benefit change.
3. Insured business may be unable to raise rates to adequately cover the year 2 "trend crush" due to 15% experience increase limits; may need to reduce year 1 discounts.
Group & Health Core
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