20. Pricing (2) - Group Business

Question 1

Special characteristics of group business

Answer 1

• free cover (not relevant for PMI)
• control of intermediary
• limited insured information
• changes in workforce
• flexible benefits

Question 2

Control of intermediary

Answer 2

• intermediary may channel scheme information to insurer
• insurer will not have direct influence on group to reduce work-related health risks and encourage claimants back to work
• broker may be wary of threatening relationship with client by imposing unpopular measures - such as requests for detailed information / carrying out regular risk assessment

Question 3

Limited insured information

Answer 3

• full details of individual members may not be known
• likely to be changes in staff over period
• estimate of premium to serve as deposit made (deposit premium)
• retrospective adjustment made at end of period of cover
  (adjustment to initial premium based on past experience)

Question 4

Change in workforce

Answer 4

• significant changes in workforce can alter riskiness of a group scheme
• leavers may be healthy/ unhealthy depending on their reason for leaving: healthy (young people changing job) –> remaining workforce unhealthy (unhealthy worker effect)
• downsizing may prompt members to make claims while still covered

Flexible benefits - greater flexibility –> greater scope for anti-selection

Question 5

Calculation of book rate

Answer 5

group premium begins with calculation of the insurer standard risk premium
- group insurance book rates tend to be lower than individual premium
- claim experience for groups tends to be better (lower levels of anti-selection)
- expenses for group business tends to be lower:
- lower levels of underwriting
- economies of scale

Question 6

Procedure - book rate calculation

Answer 6

• judge data for relevance to future experience
• subdivide data into homogeneous risk cells for analysis
• for each risk cell, a historic cost/ rate will be derived
• make adjustments to make appropriate for future experience (in terms of claim incidence and size) - e.g. due to inflation

Question 7

Experience rating

Answer 7

• process whereby the premium for a group contract depends wholly or partially on past experience of that group
• can be applied prospectively or retrospectively
• for the retrospective approach, an adjustment is made to the initial (deposit) premium - can be based on number of claims/ claim amounts
• for the prospective approach - the premium is based on prior experience and applied to the future rate
• the credibility approach uses a Z factor
• Z represents the weighting applied to own experience vs book rates
• Z depends on the volume of claims and group size

Question 8

Overall premium for group

Answer 8

RP = ZA + (1-Z)E + L

Z = credibility factor, Z between 0,1
E = insurer book premium for group
A = equivalent risk premium based on group past experience
L = expense/ profit loading

Question 9

Burning cost premium

Answer 9

• accumulation of claims in one or more recent years, which might be taken as a first measure of premium adequacy
• burning cost needs to be compared against (risk) premiums paid for the relevant period