16. Assumptions (3) - Financial Assumptions

Question 1

Financial assumptions

Answer 1

• benefit amount
• benefit inflation
• expenses
• expense inflation
• commission and clawback
• investment return
• taxes

Question 2

Benefit amount

Answer 2

• for nearly all health and care products, premiums are expressed as a rate per unit of sum assured

large policies tend to have better claim experience
- policyholder tend to be from higher socio-economic groups
- stricter level of underwriting imposed for larger sum assureds

Question 3

PMI reimbursement models

Answer 3

• indemnity (fee-for-service) (out-of-pocket difference may exist: benefits paid to policyholder on basis of standard fees, actual fees charged differ - fixed fees for specified treatments/ services)
• modified (negotiated) fee-for-service
• per-diem (hospitals)
• per case
• capitation
• salary

Question 4

Benefit inflation

Answer 4

Long-term contracts (CI, LTCI)
- increasing benefit and premium annually in line with some index not appropriate, as risk increases with age
- additional increases reflecting increasing age has to be allowed for in early policy years to make up shortfall from higher claim costs during later years
- process further complicated by absence of index of medical costs

Short-term (PMI, MME, HCP)
trend in benefit amounts (average claim amount) is a function of:
- medical inflation
- cost of treatment, which tends to increase due to innovations in medical technology
- demand for more expensive medical treatment
- future charging structure of hospitals and consultants
- future age profile of portfolio

Main components that make up inflation of cost of benefits for PMI
- salary inflation for medical professionals and administration staff
- increase in cost of medical facilities and equipment
- cost of medical inflation
- exchange rates where medical technology is imported

Question 5

Expenses

Answer 5

parameter values should reflect expenses expected to be incurred in processing and administering business to be written under product being priced

Expense assumptions should reflect the incidence of direct expenses from each of the following
- initial acquisition
- initial medical underwriting
- initial administration
- renewal administration
- renewal commission
- investment
- withdrawal, claim, termination expense

{expense assumptions should produce premiums that will make an appropriate contribution to company overheads}

Main items of expenses for claims in payment
cost of
- administering payments
- monitoring claim validity, enforcing changes to benefit entitlement
- effort expended on rehabilitation
- assessing claims to higher levels of benefits (for LTCI)