22 - Reserving for benefits in healthcare Flashcards
Explain the concept of Gross Premium Prospective Policy Values (GPPPVs) and their use in reserving.
Gross Premium Prospective Policy Values (GPPPVs) are a technique for reserving. In products with a term of 1 year or less, GPPPV is not commonly used for historical reasons and the fact that the calculation would require the use of monthly approximations for mortality and morbidity.
Define the Unearned Premium Reserve (UPR) and explain how it is calculated for a short-term policy with annual premiums.
The Unearned Premium Reserve (UPR) is not an exact claim reserve but is a provision for premiums received in advance of coverage. For a short-term policy with a premium payable annually in advance, if the valuation runs from 1 January to 31 December and the policy book has three policies that all had a renewal date of 1 January, we would not need to reserve for the mismatch between risk premium and premium at 31 December. This is because the policyholders have come to an end and the insurer is no longer on risk. Let’s now allow for varying inception dates but no initial premium risk and all policyholders are charged an annual premium of P. The total UPR is then the sum of the unearned portions of each policy’s premium at the valuation date. For example, if policies started on 1 October, 1 July, and 1 April, the premiums unearned on 31 December would be 9/12 P, 6/12 P, and 3/12 P respectively, totaling 1 1/2 P.
Explain the concept of the Unexpired Risk Reserve (URR) and the formula for the Additional Unexpired Risk Reserve (AURR).
The Additional Unexpired Risk Reserve (AURR) is the top-up amount required on the UPR. The AURR = max(URR - UPR, 0). For a book of business, an AURR would exist where the GPPPV approach or the UPR / URR approach to cater for the policy period is termed the policy value. The reserve held for this purpose can be termed the policy value.
Define the Incurred But Not Reported (IBNR) reserve.
Incurred But Not Reported (IBNR) reserve is held for claims that have happened but have not yet been reported to the insurer. Sometimes this is known as the pure or true IBNR.
Define the Reported But Not Settled (RBNS) reserve and its relationship with the IBNR reserve.
Once the claim event is reported, the insurer starts the process of gathering valid information. For indemnity-products, this involves not only considering whether a valid claim event has occurred but the level of the claim. For a hospitalisation event, this process may only start once the patient is discharged. On top of the reserve covering the period from the claim event to settlement, the insurer may also hold an Incurred But Not Enough Reported (IBNER) reserve. In some territories this is also defined as Incurred But Not Enough Reserved (IBNER). The purpose of the IBNER allows for the fact that even once a claim is reported, once further information becomes available, the RBNS reserve may be adjusted upwards or downwards.
Briefly describe Option Reserves and their purpose in healthcare.
Some policies have options that may or may not be exercised. For example, there may be guaranteed conversion options on CI insurance policies. An option reserve is held to fund these.
What is the purpose of Equalisation Reserves and Catastrophe Reserves in healthcare reserving?
Equalisation reserves are amounts held back generally from profitable years. In the less profitable, or loss making, years, amounts may be drawn from the reserve to boost the results for that year. In a mutual insurer or benefit arrangement, these reserves can also be used to smooth premium and contribution rates. Catastrophe reserves are funds held aside in case a future catastrophe happens.
Differentiate between case estimates and statistical estimates in reserving for health and care products.
The two primary methods used to calculate the reserves for health and care products are case estimates and statistical estimates.
* Case estimates involve an expert claims assessor or manager giving their opinion of the ultimate value for a claim. When coming up with the case estimate, the case manager may use information on procedure type, hospital or healthcare facility, role of principal medical practitioner, policy coverage, age, gender and past claims history, and current levels of medical inflation.
* Statistical techniques can be used where the data is relatively homogenous and the experience is expected to be stable. These methods allow for historic patterns and anticipated future changes. Any errors, omissions, or distortions in the past claims data will be projected into the future.
List some advantages and disadvantages of using case estimates relative to statistical estimation.
Advantages
* Takes into account the skill of the assessor
* Uses more information
* May be reliable when statistical methods are not
* May be easier to pick up claims fraud
Disadvantages
* Subjective, case estimates can be inconsistent between different assessors
* Subject to bias (assessors may be naturally conservative or optimistic in their assessment)
* If the estimate is used for negotiation with claimants, there may be a tendency for the estimate to be biased to the lower end
* Difficult to review
* Inflation and different bases may be difficult to account for
* Highly dependent on available data
* Expenses can be high
* Cannot be used when claims volumes are high
Describe the Average Cost Per Claim (ACPC) method and its underlying assumption.
ACPC methods rely on estimating the claims frequency and severity separately. The claims severity is often expressed as an average cost per claim which gives the method its name. The product of the average cost per claim and estimated ultimate number of claims gives ultimate expected claims outgo. Subtracting developed claims from this gives the reserve. An underlying assumption of this method is that the estimated claim frequencies and average cost per claim are appropriate for the future period that the reserve covers.
What are some advantages and disadvantages of the ACPC method?
Advantages
* As claim frequency and severity are analysed separately
* It requires more data than a simple analysis of the total claim values, however, the separation of claims frequency and severity may provide more useful management information, particularly on very small lines of business, where one expects more volatility
* Easy to understand and communicate
* Less influenced by changes to claims processing timelines than other methods
Disadvantages
* This method would be extremely difficult to apply in a co-insurance arrangement where risk is shared between insurers
* Unless the data is adjusted appropriately, the availability of the data can be problematic
* Sensitive to changes in definition of claims development
* Sensitive to data errors, omissions, and anomalies such as once-off large claims
* As with all foundational statistical methods, small sample sizes may lead to volatile results
Explain the Loss Ratio method for reserving.
In general terms, a loss ratio is the cost of claims per unit of exposure. This exposure measure is commonly the premium per life per month (PLPM) measure. Another example used for group risk cover could be per mille, or per 1 000 currency units of cover. The assumed loss ratio is multiplied by the exposure measure to give an estimate of the ultimate claims. The developed claims can then be subtracted from this to give the reserve.
What are some advantages and disadvantages of the Loss Ratio method?
Advantages
* The ultimate loss ratio can be estimated using expert judgement which removes the effect of data anomalies.
Disadvantages
* Expert judgement can make the loss ratio subjective.
* This subjectivity can lead to inconsistent or biased ultimate loss ratios.
* Future ultimate loss ratios may be difficult to predict.
* Trends and cycles in the loss ratio can invalidate the use of a constant ratio.
* If derived from industry or reinsurer data, policy conditions and underwriting practices may differ, making the ratio inapplicable.
* It ignores any actual claims development pattern.
* It does not easily cater for large and unusual claims.
* For short-term, non-community-rated products, differing premium rate adjustments for new and renewal business can create difficulties in estimating the ultimate loss ratio.
Describe the basic principle of the Chain Ladder method.
Chain ladder methods use past claims data to fit a cumulative distribution function to the claim development. Two chain ladder methods that were explored in Subject A214 were the BCL and IACL. In the BCL, no explicit assumption is made for claims inflation, but if inflation has been constant in the past, then this constant rate will be projected into the future. The IACL caters better for volatile claims inflation by making specific adjustments for inflation. The key assumption is that, for each origin period, the expected value of claims in nominal terms, developed in each development period, is a constant proportion of the total claims, in real terms, from that origin period.
Explain how to calculate a development factor in the Basic Chain Ladder (BCL) method.
A development ratio rj,j+1 is calculated for each development period. The development ratio is the expected ratio of the cumulative claims at the end of development month j+1 to the cumulative claims at the end of development month j. Importantly, development period j would have even origin period relative to development period j+1. When the columns are summed, only the number of rows of data available in development period j + 1 should be summed. The ultimate development factor fj is then typically calculated as the average of the most recent and credible development ratios.
Describe how ultimate claims are estimated using the BCL method once development factors are calculated.
The reserve can be calculated for each origin period by dividing the claims developed by this period by the proportion developed to that point (using the inverse of the cumulative development factor) to get the ultimate claim amount for that origin period. The reserve is then the difference between the ultimate claim amount and the claims developed to date for that origin period.
What is the primary difference between the Basic Chain Ladder (BCL) and the Inflation Adjusted Chain Ladder (IACL) methods?
The difference between the IACL and the BCL is that in the IACL, an inflation index is applied to past claims data to bring them into line with the latest origin period, and to inflate the projected claims of the other valuation dates.
What are some advantages and disadvantages of the Chain Ladder method?
Advantages
* The method is flexible and can be easily used to estimate the number of claims for the ACPC method.
* It is simple.
* Data distortions can be easily spotted in the incremental triangle.
* The result is easy to tie back to the cumulative distribution function of claims development.
* It forms the basis for blends and extensions, which can address some of its shortcomings.
Disadvantages
* Anomalies may be difficult to remove, for example, adjusting for a period with no claims development.
* If anomalies are not removed, the results are easily distorted.
* The method is inappropriate if current and historic claims development patterns differ.
* Changes to internal processes can create distortions.
* Tail factors may be difficult to estimate if no fully developed cohort is available.
* These anomalies may be difficult to remove.
* The results are easily distorted if anomalies are not removed.
* The method is inappropriate if the current and historic claims development patterns differ.
* Changes to internal processes can create this sort of distortion.
* Tail factors may be difficult to estimate if no fully developed cohort is available.
Explain the Extended Average Cost Per Claim (EACPC) method as a blend of techniques.
The Extended ACPC can be blended with chain ladder methods or the BF method. For example, one can use the BCL or BF method to estimate ultimate claims, the value for which is then divided by expected claims numbers, possibly derived the same way, to obtain an average cost per claim.
Describe the Bornhuetter-Ferguson (BF) method and its core concept.
The BF method combines the estimated loss ratio with a chain ladder method - usually the BCL. Therefore it improves on the crude use of a loss ratio by taking account of the information provided by the latest development data. Likewise, the addition of the loss ratio to a projection method serves to add some stability against distortions in the development pattern. As the final estimate of the ultimate loss is based on observed data and an initial estimate ignoring the observations, this method could be viewed as using a Bayesian approach. The loss ratio represents the eventual claims outgo, from paid claims, but the BF method can use claims reported, claims accepted, or claims paid data.
Outline the steps involved in applying the Basic Bornhuetter-Ferguson (BF) method.
Step BF1: Determine the initial estimate of the total ultimate claims from each treatment month using premiums and initial, prior or a priori, expected loss ratios.
Step BF2: Carry out BCL Steps 1–5 (given in Section 7.4) to estimate the proportion outstanding (1 – 1/fj). This is multiplied by the a priori ultimate paid claims estimates obtained in Step BF1 to give an estimate of the reserve amount for each origin period.
Briefly explain the Cape Cod method.
The Traditional Cape Cod method is also known as the Stanard-Bühlmann method. Under the BF method, an a priori ultimate loss is used in Step BF1. The Cape Cod method uses a specific technique to derive this estimate, which is then used to calculate the reserve in Step BF2. Under the Cape Cod method, the claims reserve is found by taking the claims developed to date and dividing by a unit of exposure to obtain a loss ratio for each origin period.
What is the purpose of Bootstrapping in the context of claims reserving?
Bootstrapping allows this technique to be used without requiring explicit parametric assumptions. Bootstrapping is formally known as repeated resampling with replacement and can be used to turn a handful of data points into a complete distribution. The bootstrapped approach has five steps, involving using BCL or BF on an expected run-off triangle, taking the actual run-off triangle, applying an adjustment to the raw residuals, resampling these residuals, and applying chain ladder techniques to each alternative reality run-off triangle to obtain a distribution of reserves.
