19. Pricing (1) - Individual Business

Question 1

Deriving the risk premium

Answer 1

The risk premium is the element of the premium required to cover only expected claim amount.

Process of deriving the risk premium
- choose base period to collect claims and exposure data
- collect data, checking accuracy and appropriateness
- split data into homogeneous groups
- calculate a historical burning cost premium for each group
- analyse the data (to identify trends)
- adjust and project forward (to obtain future risk premiums) - expected claim amount over the future period

Risk premiums will be calculated separately for each product and benefit option for each policyholder risk class

Question 2

Factors to consider when selecting base period

Answer 2

• volume of data
• detail
• trends
• relevance
• unknowns

Question 3

Internal data sources likely to be helpful in pricing PMI products (what information would you find/ referenced in a pricing spec)

Answer 3

• policyholder profile and dependants
• recent claims experience
• policy benefit terms and conditions
• underwriting process
• reinsurance arrangements, managed care arrangements, fees to doctors, claims management processes
• marketing strategy, distribution channels used business projections
• administration and other expenses
• financial position of the insurer, profitability of portfolio of business
• underwriting process

Question 4

Base value may be adjusted for

Answer 4

• unusually light/ heavy experience
• large and exceptional claims
• trends in claim experience
• changes in risk
• changes in cover
• changes in cost of reinsurance
• seasonal variation in claims
• incomplete claims (e.g. provision for outstanding claims)
• change in agreement with supplier

Question 5

Factors to consider when analysing changes in utilisation of healthcare services for particular benefit option - PMI

Answer 5

• change in benefits
• medical innovations and technological advances
• changes in professional fees, cost of medical treatment and pharmaceuticals
• changes in behaviour of medical professionals (e.g. trends towards prescribing more expensive treatment)
• introduction of preferred provider networks and managed care arrangements
• change in burden of disease
• impact of regulatory changes
• change in demographic profile

Question 6

Premium loadings

Answer 6

• profit margin
• contingency margin
• commission, marketing loading
• solvency capital requirements
• other fees (legal, consulting)
• reinsurance loading
• investment fees
• administration expense

Question 7

Factors to consider when setting level for contingency margin

Answer 7

• benefit design
• number of policyholders, number of policyholders per benefit option
• policyholder risk class distribution and changes in policyholder risk profile
• credibility of claims experience
• overall risk exposure - e.g. exposure to effects of HIV/ AIDS
• changes in managed care arrangements and other contractual arrangements
• likely variation in expenses
• impact of current and future changes in legislation

Question 8

Cash plans

Answer 8

• expected number of days of treatment adjusted to account for inertia (people propensity to not claim, even when entitled to)

Benefits under typical cash plan
- daily cash payment while in hospital
- daily nursing care while recuperating
- refund of osteotherapy, physiotherapy fees
- refund of acupuncture, homeopathy, herbal medicine fees
- dental cover
- optical cover (eye tests, spectacles)
- health screening
- specialist consultation fees and diagnostics tests

Accidental death and TPD similar to PMI and cash plans

Question 9

Health and care insurance modelling complexities - PMI

Answer 9

Distribution of claim frequency
- claim frequency parameters depending on duration in-force, age, gender, time of year, occupation etc. {the variables that the claim incidence experience data will be subdivided by, enables accurate modelling of future incidence rates}
- may be issues in defining a discrete claim

Distribution of claim amount
- dependent on hospital capacity, medical science progress, insurer/ provider deals
- indemnity without ceiling
- sales volumes difficult to model and may be affected by sales tax

Claim incidence rate
- difficulty lies in deciding on distinction between, say, one claim consisting of a number of separate payments, or a number of claims consisting of one payment
- definition of claim therefore important (applied consistently)

Other influences on claim distributions
- macro-economy
- government style
- market level competition

Modelling further complicated by
- existence of NCD states
- incorporation of reclaim of initial costs over several renewals in pricing model
- need to model chain of occurrence through GP referral via specialist to hospital, plus delay to settlement

Data limitations
- absence of insurance statistics
- problems with family cover where details of individuals on risk may not be known
- problems with group arrangements, where details of individuals can only be estimated

Question 10

Health and care insurance modelling complexities - CI

Answer 10

Distribution of claim frequency
- necessary to estimate theoretically up to 40 different distributions, including future trends (for each covered condition)

Other influences on claim distribution
- advancement on medical science, which will impact cures
- earlier diagnosis
- simpler and more readily available operations

Data limitations
- lack of relevant data for all illnesses (except maybe cancer and heart attacks)

Question 11

Health and care insurance modelling complexities - LTCI

Answer 11

Estimation of
- distribution of claim frequency (little experience)
- distribution of claim amount (where funding for care) - dependent on economy, inflation and capacity

Modelling further complicated by
- role of genetics
- trends in anti-selection
- quality of underwriting