1
Q
What are the 5 reasons to justify government participation in insurance?
A
27 - CAS: Government Insurer Study Note
- Filling insurance needs unmet by private insurers (e.g. Crop Insurance)
- Compulsory purchase of insurance (e.g. WC)
- Convenience (e.g. Florida Hurricane Catastrophe Fund)
- Greater Efficiency
- Social Purposes
2
Q
List and describe the 5 reasons used to justify government participation in insurance?
A
27 - CAS: Government Insurer Study Note
- Filling insurance needs unmet by private insurers
• Can offer insurance where otherwis eunavailable or unaffordable (residual market philosophy)
• Requirements differ from private insurers: Can subsidize with taxes (e.g. TRIA) or charge less than actuarial rates (e.g. crop insurance) - Compulsory purchase of insurance
• Certain types of insurance need to be available to meet social responsibilities (e.g. WC)
• Government can operate as a “take all comers” in competition with private insurers (e.g. subsidizing high risk drivers) - Convenience
• Easier for government to set up a program and may already have services in place
o Flood insurance requires mapping, land control, and disaster relief - Greater Efficiency
• belief that the government can operate at a lower cost than private market
o State auto programs
• some costs exist for both government and private insurers (administration) yet government may include this as a cost saving if done by an existing department - Social Purposes
• Main reason, some goals can only be acieved through government participation
o Workers Comp – Rehabilitation and vocational training of injured workers
o Social Security – Protecting the elderly and disabled
3
Q
What are the 3 levels of government involvement as insurers?
A
27 - CAS: Government Insurer Study Note
(1) Exclusive Insurer (e.g. Social Security)
(2) Partner with Private Insurers (e.g. Flood, TRIA, Crop Insurance, Residual Markets, FAIR)
• government offers reinsurance coverage on specific loss exposures
(3) Competitor to Private Insurers (e.g. Workers Compensation)
4
Q
What 3 questions should be asked to justify government participation in insurance?
A
27 - CAS: Government Insurer Study Note
• Is government insurance necessary for the given market?
• Is it insurance or social welfare program?
o Social welfare provides benefits based on demonstrable need, funded by tax resources
o Insurance is paid to all who suffer loss, funded by the contributions of insureds
• Is the program efficient? Is it accepted by the public?
5
Q
Definition of insolvency risk
A
30 - Dibra and Leadbetter
Assets become insufficient for company to meet contractual and other financial obligations
6
Q
Definition of liquidity risk
A
30 - Dibra and Leadbetter
Sufficient assets to cover obligation, but high level of risk that those assets could disappear
7
Q
Define Insolvency
A
30 - Dibra and Leadbetter
Involuntary exit from the market precipitated by a winding-up order issued by the appropriate supervisory authority
8
Q
What are two types of risk that can lead to winding-up and involuntary exists
A
30 - Dibra and Leadbetter
- Insolvency risk
- Liquidity Risk
9
Q
Historically, what have been the four leading causes of insolvencies in Canada?
A
30 - Dibra and Leadbetter
1 & 2. Inadequate pricing or deficient loss reserves
• Related: Deficient reserves, lead to inadequate prices, lead to deficient reserves, etc…
3. Foreign parent
4. Rapid growth
10
Q
Identify and briefly describe four company characteristics that have been identified in most insolvencies
A
30 - Dibra and Leadbetter
- Governance and Internal controls
• Solvency risk increases when they break down or are purposefully circumvented - New Entrants
• Likelihood of survival increases with the age of the firm - Growth
• Rapid growth in the last few years of business is a contributing factor to insolvencies - Firm Size
• Insolvent insurers are usually small insurers, writing less than 1% of total industry premium
11
Q
4 External Factors that Influence Solvency
A
30 - Dibra and Leadbetter
- Underwriting Cycle & Profitability
• Soft underwriting cycle linked to the three waves of insolvencies - Catastrophe Losses
- Economic & Financial Market Factors
• Key risk is the volatility of financial variables, not their level
• Risk of insolvency heightened when volatility coincides wiht a softening UW cycle - International Exposure
• Mixed conclusions regarding the relationship of foreign ownership and survival
• Increased competition but greater diversification and access to international sources of capital
12
Q
What are the requirement for a risk to be transferred to a risk sharing pool?
A
31 - Dutil
- PPA only (Quebec allows motorcycles)
- Not a residual market risk
- Carry at least minimum TPL coverage
- Follow appropriate classification and rating procedures
- Use RSP approved premiums for such risk
13
Q
What is the goal of Facility?
A
31 - Dutil
To ensure that auto insurance is available to every owner and licensed driver who needs it
14
Q
What are the requirements for a risk to be stransfered to FARM?
A
31 - Dutil
- Must have at least the statutory minimum coverage
- Policy must be a “Residual Market Risk”
• Motor vehicle, non-PPA; or
• PPA which an insurer refused to cover or renew
15
Q
List and describe the types of risk sharing mechanisms that Facility uses.
A
31 - Dutil
Residual Market (FARM) • Provides a residual auto insurance market for insureds who may encounter an availability problem • Underwriten according to Facility rates and rules
Risk Sharing Pools
• Allows insuraners to transfer certain auto exposures to an industry wide pool
• Exposures don’t qualify for FARM but represent a higher risk of loss
• Underwriten according to insurers own rates and rules
Uninsured Autmobile Fund (UAF)
• Compensate for damages when unable to have covered because no other insurance is available or its inadequate
16
Q
What is UAF?
A
31 - Dutil
The Uninsured Automobile Funds
• Facility administered funds available in the 4 Atlantic provinces
• Compensate for damages when unable to have covered because no other insurance is available or its inadequate
• The respective provincial Insurance Acts govern payments of these claims
17
Q
Identify the 5 classes of business defined for the purpose of determining participation in Facility Association business
A
31 - Dutil
- Private passenger non-fleet non-pool automobile business
- All automobile business other than [1] or business transferred to a RSP
- Business transfer to a RSP in AB, NB or NS
- Business transferred to an RSP other than [3] and other than ON catastrophe claim fund
- Uninsured or unidentified motorist claims and amounts expended in connection with a pool or catastrophic claim fund in ON covering statutory benefit claims due from an insolvent insurer
18
Q
Why do risk-sharing pools operate at a loss?
A
31 - Dutil
The Facility Association designed the risk sharing pools to promote stability in the marketplace by making it possible for companies to accept risks for which they believe their prices are inadequate
19
Q
How much can an insurer transfer to RSPs?
A
31 - Dutil
- There are limits on the proportion of each risk that can be transfered and the transfer of certain coverages (e.g. higher or lower limits)
- Total allowable transfer from each company is a % of all non-fleet TPL direct written exposures (car years) for province in previous calendar year
- Also, expenses such as acquisitions, operating and LAE will be reimbursed to member company as percentage of premium (does not include premium tax and professional fees)
20
Q
What is the mandate of the PACICC?
A
62 - PACICC
- PACICC manages a compensation plan designed to provide a reasonable level of recovery for unpaid claims of P&C policyholders in the event that an insurer becomes insolvent and cannot meet its financial obligations
- PACICC compensation plan pays 70% of unearned portion up to max payment of $700 (UEP weren’t covered priot to 1996)
21
Q
Describe the two conditions that must be met before PACICC has financial responsibility in connection with an insurer’s insolvency.
A
62 - PACICC
- Formal winding-up order
- Insurer must be a member of PACICC
22
Q
What are the recovery limits for unpaid claims and unearned premium under PACICC?
A
62 - PACICC
- Maximum claim recovery is currently $250,000 in respect to all claims from a single occurrence ($300,000 limit for personal property
- Pays 70% of unearned portion up to max payment of $700 (UEP weren’t covered priot to 1996)
23
Q
Give three exceptions to the PACICC compensation plan.
A
62 - PACICC
- Life Insurance
- Distinctive classes of general insurance: aircraft, credit, crop, employer’s liability, directors and officers, certain errors and omissions (except to malpractice which is included in PACICC), fidelity, financial guarantee, marine, mortgage, surety, and title insurance
- Where other compensation plans apply: Auto in MB & SK, BI in Quebec
24
Q
Who is a member of PACICC?
A
62 - PACICC
All insurance companies licensed in a participating jurisdiction to sell any of the classes of insurance for which PACICC provides protection are members of PACICC
25
What are the funding mechanisms for PACICC?
1. Assessments of participating insurers
2. Compensation Fund
3. Liquidated assets of the insolvent insurer
4. Recoveries from third parties
#62 - PACICC
26
How is PACICC Funded?
• Participating insurers (those that remain solvent) are assessed in the jurisdiction they were licensed where the insolvent insurer wrote business
• Assessment formula:
o A = B X C/D
o A is assessment to be borne by particular insurer
o B is total amount being assessed to all participating insurers
o C is total direct WPs for particular insurer for that jurisdiction
o D is total direct WPs for ALL participating insurers for that jurisdiction
• Max annual levy that an insurer may have to pay is 1.5% of direct WP in that jurisdiction
• Admin expenses are also levied against insurers
• PACICC may borrow from its Compensation Fund and members are assessed to repay borrowed amount with interest
#62 - PACICC
27
How does the claim process work for recovery by PACICC of amounts paid?
* Before a payment is made to policyholder, they must certify that they have exhausted any available claim against any solvent insurer with whom policy covers same loss
* PACICC is entitled to first priority in money received by insured from 3rd parties with respect to loss that they provided payment for
* The policyholder is required to assign to PACICC all of their rights against the insolvent insurer that arise under the particular policy
#62 - PACICC
28
List and describe the six conditions that must be in place to make a peril insurable
1. Mutuality
• A large number of people must combine to form a risk community
2. Need
• There must be a need for insurance cover when the anticipated even occurs
3. Assessability
• Peril must be assessable in terms of possible losses
4. Randomness
• Independent of the will of insured, timing must not be predictable
5. Economic Viability
• Risk community must be able to cover flood-loss financial needs
6. Similarity of Threat
• Community exposed to the same threat and same need for funds
#64 - Swiss Re
29
Discuss the Canada Water Conservation Act
Canada Water Conservation Act (1953-1970)
• Historical reliance on structural flood measures (dams, dykes, levees, etc)
• First federal legislation directly concerned with water management
• Funding provided only for structural adjustments
• Provided cost sharing between federal and provincial government for flood control measures
#64 - Swiss Re
30
Discuss the Canada Water Act
Canada Water Act (1970 to present)
• Replaced the Canada Water Conservation Act
• Allowed for funding of non-structural measures
o E.g. Government disaster relief, emergency preparedness, flood plain mapping, etc…
#64 - Swiss Re
31
What was the purpose of the Flood Damage Reduction Program?
1. (Primary) Reduce flood damage and prevent loss of life by discouraging development in flood-prone areas
• Identifying those areas through extensive mapping
• Using these maps to guide land development
2. Increase coordination of federal and provincial flood strategies
3. Promote long term flood damage reduction
4. Increase stakeholder awareness
• Held public meetings
5. Increase knowledge of high risk areas
• Maps and technical reports were made available to the public
#64 - Swiss Re
32
What were the drivers of the Flood Damage Reduction Program?
1. Increasing population in urban areas (flood-prone areas not yet identified)
2. Large federal disaster payouts
3. Pressures to manage flooding on limited budgets
4. Environmental considerations
- -- Desire to preserve green spaces and agricultural land
- -- Environmental impacts of flood control structures
5. Income transfer from general public to those living in flood-prone areas
6. Evidence of structural works encouraged development in floodplains
7. Evidence that government relief encouraged development in floodplains
#64 - Swiss Re
33
Purpose of JEPP
Joint Emergency Preparedness Program (JEPP) [1980 - Present]
• Provides financial assistance to local governments for disaster preparedness projects
o Funds provided to provincial and territorial governments
• Focused on increasing local emergency response capacity
#64 - Swiss Re
34
Purpose of NDMS
National Disaster Mitigation Strategy (NDMS) [2008 – Present]
• Resulted from large disaster payouts in the late 90s
• Purpose was to support mitigation
o Build on current “modest” investments
o Enhance the current piecemeal approach
o Foster shared responsibility for disaster prevention amongst all levels of government
• Published guidelines for mitigation strategy at the national level
#64 - Swiss Re
35
Purpose of DFAA
Disaster Financial Assistance Arrangements (DFAA) [1970 – Present]
• Designed to provide disaster recovery assistance to provinces who have sustained disaster damages exceeding $1 per capita
• As recovery costs increase for a province, the federal gov’t, through DFAA will absorb proportionately larger share of the costs ($0-$1: 0%, 1-3: 50%, 3-5: 75%, $5+: 90%)
• Provinces are responsible for allocating funds to disaster victims
• Applied on a discretionary basis and may not always be applied
#64 - Swiss Re
36
Discuss an Optional vs Bundled coverage system
In an Optional system, people can choose to buy flood insurance for additional premium
In a Bundled system, coverage is made available as part of a "bundle" which includes other perils
#64 - Swiss Re
37
What kind of Flood insurance system does the US have?
Public and Optional
#64 - Swiss Re
38
What are the objectives of the NFIP?
National Flood Insurance Program
1. Identify flood hazard areas
2. Mitigate flood risk through local flood plain development
3. Spread risk through insurance
#64 - Swiss Re
39
What are the issues with the US flood insurance system?
1. Mutuality
• Only those in SFHAs are required to purchase, prone to adverse selection
2. Economic Viability
• Adversely selected, optional for low-risk insureds; subsidized rates for risks in SFHAs prior to flood mappings
3. Assessability
• Need for improved assessment to increase program uptake
#64 - Swiss Re
40
What kind of insurance system does France have for flood insurance?
Public & Bundled
#64 - Swiss Re
41
The Cat. Nat approach is successful in one way, but has many criticisms. List why its successful and list the criticisms.
• The French system has been considered a successful public-private partnership and is not prone to adverse selection
• Criticisms:
o Uniform rates discourage risk prevention measures and low risk insured subsidize others,
o CCR has required reinvestment and may need it again
o CCR has allowed risk selection since insurers that selling in riskiest areas buy reinsurance
#64 - Swiss Re
42
What type of flood insurance system does Germany have?
Private and Optional
#64 - Swiss Re
43
What type of flood insurance system does UK have?
Private and Bundled
#64 - Swiss Re
44
According to the author of Swiss Re "Making Flood Insurable for Canadian Homeowners", which countries system should Canada follow for flood insurance?
UK approach is best example for the basis of Canadian model for following reasons:
1. Bundled approach (reduces adverse selection)
2. Option for exclusion of high risk homeowners
3. Risk based pricing
• Individuals carry a portion of damage through deductibles and premiums
4. Partnership between insurance industry, governments, and private individuals
• Private insurance is supported by government flood risk reduction actions
5. Specific responsibilities of government and industry are defined in an agreement
• Government responsibilities reflect current measures in Canada
#64 - Swiss Re
45
What does the author propose as a solution for flood insurance in Canada?
Partnership Approach, partnership between:
o Private Insurers: Provide bundled coverage with risk based premium and deductible, communicate flood risk and prevention to customers, monitor flood risk
o Governments: Flood hazard identification, work to reduce flood risk for all citizens, increase public awareness about flood, should NOT regulate the insurance flood rates
o Homeowners: Retain some flood famages; take action to mitigate flood damage on own property and receive reduced premiums
• To get this plan going, IBC should on behalf of P&C industry speak with governments
#64 - Swiss Re
46
Identify four reasons why offering flood insurance may be beneficial as part of the typical Canadian homeowner's policy
* Increase confidence and satisfaction of consumers
* Policyholder's expect to be insured for floods (reputation risk)
* Flood insurance coverage would avoid water coverage ambiguity
* Opportunity for growth in the mature insurance market
* Government programs provide little incentive to reduce risky behaviour
* Price would be risk-based
* Encourage risk mitigation
* Bundled coverage would reduce adverse selection
#64 - Swiss Re
47
Even though flood insurance is a combined effort from all parties involved, flood insurance should be offered by private insurers for the following reasons:
* Risk-based insurance coverage is more effective and equitable than government disaster programs
* Government relief provides little incentive to reduce risky behavior – costs are shifted to taxpayers
* Government relief may also be highly politicized and inefficient
* Policyholders expect to be covered for flood (close to 70% in 2004) - anger over lack of coverage
* Adding flood insurance is a business opportunity for insurers and would reduce gaps and ambiguity in policyholders coverage
#64 - Swiss Re
48
The government provides ald age security through a combination of 3 programs. Identify these programs.
1. Old Age Security (OAS)
2. Guaranteed Income Supplement (GIS)
3. Allowance & Survivor’s Allowance
#49 - Morneau Shepell
49
What are the two main objectives of the CPP Investment Board?
1. Manage funds in the best interests of contributors and beneficiaries under the CPP
2. Invest in assets with the best possible return without undue risk of loss, considering the factors that impact the CPP
#49 - Morneau Shepell
50
How are OAS and CPP/QPP financed?
* OAS is financed by general tax revenues
* CPP is funded by contributions from employees and employers (50/50)
#49 - Morneau Shepell
51
Are old age security and CPP/QPP benefits taxable?
OAS and CPP/QPP benefits are taxable income, GIS and Allowances are NOT taxable income
#49 - Morneau Shepell
52
What are the three tiers of Canada's retirement income system
1. Government-administered pension programs (OAS, GIS, CPP, QPP)
2. Employer-sponsored plans
3. Individual retirement savings
#49 - Morneau Shepell
53
Briefly discuss OAS benefits
• Old Age Security provides a flat monthly benefits for Canadian 65+ who meet residency requirements
o Designed to be universal – paid to everyone who qualified irrespective of income
o Subject to a “claw back” tax in 1989 - 15% surtax on OAS if net income > $69K (indexed in line with CPI) which can reduce benefits to 0
• Residency requirements
o 40 years residence in Canada after 18
o Proportionate benefits for those with between 10 and 40 years after 18
o If not residing in Canada at 65, must have been for 20 years to get partial pension
• Benefit may be portable with different countries that Canada has an agreement with
#49 - Morneau Shepell
54
Briefly dicuss GIS benefits
• The Guaranteed Income Supplement provides a flat monthly benefit designed to be needs based
o Available to OAS recipients, subject to income test
• Income Test
o Reduced by $1 for every $2 of other monthly income over and above OAS pension
o Income = Income – OAS – Allowances – Similar payments [Not CPP/QPP]
#49 - Morneau Shepell
55
Briefly discuss Allowance and Survivor's Allowance benefits
• Provides for spouses/partners and widows of OAS pensioners receiving GIS
o Must be between 60 and 64, must meet income test and residency test
• Income Test
o Reduced by $3 for every $4 of couple’s income from other sources until reduction is equal to OAS pension, then reduced by $1 for every $4 of other income
• Allowance benefits ends upon separation; Survivor’s benefits end upon remarry or new common-law partnership
#49 - Morneau Shepell
56
What percentage of income are government pensions designed to replace?
• Goal is to provide 40% of pre-retirement income when combined with OAS (15% OAS, 25% CPP), up to the national average wage
#49 - Morneau Shepell
57
What are CPP/QPP
Canada Pension Plan/Quebec Pension Plan
• Government sponsored plans designed to partially replace employment income in case of retirement, death, or disability (disability must be severe and prolonged)
#49 - Morneau Shepell
58
Describe an employee's contribution to CPP
• Year’s Maximum Pensionable Earnings (YMPE), the highest amount of earnings used in calculating contributions, is linked to avg CDN wage and adjusted annually
• Year’s Basic Exemption (YBE), the highest amount of earning that are exempted in calculating contributions, is 10% of YMPE rounded down to nearest $100 (to max of $3,500)
• Contributory Earning, those between the YMPE and YBE
• Employee Contribution = [min(Earnings, YMPE) – YBE] X Contribution rate
• Contributory period begins at age 18 - Ends with death or retirement
• Benefits normally begin at age 65
o Early retirement, as early as age 60, reduces pensions by 0.5% each month (0.5% is prior to 2011, increasing to 0.6% in 2016 )
o Deferred retirement, as late as age 70, increases pensions by 0.7% each month (0.5% is prior to 2012, increased to 0.7% in 2013)
o Post-age 65, can draw benefits while still contributing to CPP (Benefits increase benefits by 1/40 of the maximum CPP pension payable)
#49 - Morneau Shepell
59
Describe the process for calculating a CPP Pension
1. Calculate average YMPE for latest 5 years (3 years prior to 1998 amendment)
2. Average Earnings are earnings up to the YMPE of each year from 1966 or age 18, adusted by periods with unemployed, low earnings, sickness and disability
3. Adjusted Average Earnings:
a. Adjust by a ratio of YMPE calculated in (1) to total YMPE in years earnings were paid
b. If earningst > YMPEt , then the adjusted earnings = AVG YPME calculated in (1)
4. CPP Pension = 25% x (Adjusted Average Earnings) x (Decr./Incr. from Early/Deferred Retirement)
#49 - Morneau Shepell
60
Discuss problems with CPP/QPP rate adequacy and how these problems were addressed. What is the current state of the pension plans?
• Problems
o Aging population
o Disability payments are higher than expected
o Economic growth less than expected
#49 - Morneau Shepell
61
How were rate adequacy problems with CPP/QPP addressed
• 1998 Adjustments to CPP/QPP to ensure future sustainability
o A new inreased schedule of contribution rates
o YBE was frozen at $3,500, no longer indexed
o Lowered the maximum death benefit from $3,500 to $,2500 – Froze it there
o Method for calculating combined benefits was changed - lowering combined survivor/disability benefits for many
o CPP Investment Board was established
#49 - Morneau Shepell
62
What is the current state of CPP and QPP?
• 2009 Actuarial report revealed CPP is financially sound up to 2085
• QPP will run out of funds by 2039 and has further increased contribution rates
o Adjustments will be made to keep QPP in steady state
#49 - Morneau Shepell
63
What changes have been made to old age security due to the aging Canadian population?
• Changes to benefits due to aging population
o Eligibility for OAS will gradually increase from 65 to 67 (between 2023 and 2029)
o Allowance/Allowance for Survivorship increasing from 60-64 to 62-66
o Can defer OAS pension up to five years to receive a higher payment
#49 - Morneau Shepell
64
Health care falls under provincial jurisdiction; however, the federal government became concerned about our health care standards. Benefits should not…
Depend on your wealth
#49 - Morneau Shepell
65
Health care falls under provincial jurisdiction; however, the federal government became concerned about our health carestandards. Health care should be…
1) Administered publicly
2) Comprehensive
3) Universal
4) Portable
5) Accessible
#49 - Morneau Shepell
66
How are hospital and medical insurance plans funded?
• Federal and provincial governments once shared costs approximately equally but now federal is less than 50%
• Each province has own method to cover costs not covered by federal:
o Cost sharing between residents (pay premium based on income) and employers
o Levy a payroll tax on employers
o Use general revenue
o Tax group insurance plans
67
Underlying principle of WC systems is
The underlying principle of WC system is no-fault insurance.
#49 - Morneau Shepell
68
How are taxed applied to WC?
* Employers’ contributions are tax deductible but not a taxable benefit to employees.
* Payments to employees are not taxed.
#49 - Morneau Shepell
69
How is WC program funded?
1) Individual Liability - “Pay as you go”
2) Collective Liability - Employers divided into group plans according to industry and inherent risk
#49 - Morneau Shepell
70
Employer EI premiums are reduced if short-term disability plan is eligible. What are the qualifications?
o Have disability benefits at least equal to EI sickness benefits
o Benefits starting on or before 15th day of disability
o Must not be reduced for EI payments
#49 - Morneau Shepell
71
Describe the EI Premium Reduction Program
if the employer operates a short term disability plan and is first payer (where EI is second payer) the cost of the EI fund is reduced (lowered contribution)
#49 - Morneau Shepell
72
What are the objectives of Employment Insurance?
o Provides temporary income replacement as a result of employment interruptions, e.g., work shortages, sickness, off-job accidents, maternity leave, parental leave
o Promotes active re-employment assistance to help unemployed workers find jobs
#49 - Morneau Shepell
73
Discuss the regular benefits provided by EI and the qualifications to receive them
* Benefit is 55% x average insured earnings over prior 26 weeks
* Payable to individuals unemployed due to loss of work, through no fault of their own (no benefits if fired for misconduct, on strike, or voluntarily quit job)
* Must apply for suitable work and take training courses if asked
* Qualifying period is the 52-weeks prior to start of claim and the period from the start of a previous benefit to the start of claim
* Number of work hours to qualify for benefits varies by unemployment rate
* The duration of benefits is based on the number of insurable hours in qualifying period and the unemployment rate at the time
#49 - Morneau Shepell
74
How are taxes applied to EI program? Employer? Employee?
o EI benefits are taxable income
o Premiums paid by employers are tax-deductible
o Premiums paid by employees are tax credit
#49 - Morneau Shepell
75
How is the EI program funded?
Financed by:
1) Employee and employer contributions (subject to annual maximums with employer paying more)
2) General Tax Revenues
#49 - Morneau Shepell
76
Extended Health Care (EHC) major categories are:
1) Prescription drugs – roughly 75% of EHC costs and rising. QUE has mandatory coverage.
2) Hospital accommodation above ward level – semi-private or private services
3) Medical services and supplies – include nursing duty, ambulance, chiropractor/massage, prosthetics, accidental dental, etc.
4) Emergency out-of province – very limited coverage
5) Vision care – typically 100% coinsurance up to fixed $ maximum
#49 - Morneau Shepell
77
EHC costs are rising due to:
1) Aging population
2) Reductions in federal payments
3) Reduced coverage under provincial plans
4) Rising prescription drug costs
5) Obesity
#49 - Morneau Shepell
78
To deal with rising EHC costs:
1. Deductibles and coinsurance
• Coverage for catastrophic events, routine expenses are individuals responsibility
2. Modification to drug program
• Generic substitution, lowest cost alternatives, limits for lifestyle drugs, etc
3. Health care spending accounts (HCSA)
#49 - Morneau Shepell
79
Describe the tax implications of EHC
* If the plan is contributory, the premiums paid by the employee are NOT directly deductible from income tax purposes. However, may be included in the calculation of the medical tax credit.
* Employer contributions can be charged as an operating expense and thus tax deductible
#49 - Morneau Shepell
80
What type of modifications can be made to drug programs to reduce costs?
1. Generic Substitution - Not brand name, usually has the same ingredients but cheaper
2. Lowest Cost Alternatives – Only be reimbursed for the cheapest drug on the market
3. Therapeutic Substitutions – Substitution of a less expensive drug within the same therapeutic classification but with different active ingredients than the prescribed drug
4. Lifestyle drugs – employers may limit certain drugs on the basis that usage is related to lifestyle and not considered medically necessary (contraceptives, fertility, anti-obese, sexual dysfunction, etc.)
5. Managed care formularies – a formulary covers a specific list of eligible drugs that are updated periodically. Replace drugs that are not available anymore with something that is cost effective and high quality.
6. Three-Tier Copayments – first tier may be 100% coinsurance if you choose the generic brand, 80% if you choose the brand name drug with no available generic and third tier may be for brand names where there is a generic drug available.
#49 - Morneau Shepell
81
List the advantages of HCSA.
(1) More choice given to employees without major overhaul to the plan
(2) Utilized the defined contribution concept versus the defined benefit approach
(3) Easier to administer than a complete flexible benefit plan
(4) Better communication of value of benefits as part of the employees’ total compensation package
#49 - Morneau Shepell
82
How is EHC funded
Generally second payer to provincial medical plans. Paid for by employers and employees.
#49 - Morneau Shepell
CAS 6C - Spring 2015
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