All GH Specialty Flashcards
Types of care management methods
- Pre-Authorization - requires a provider to obtain approval before performing a service
- Concurrent review - monitoring a member’s care while the member is still receiving care in a hospital or nursing home
- Case Management - typically involves a health care professional who coordinates the care of a patient with a serious disease or illness (such as stroke, AIDS, or cancer)
- Demand management - refers to certain passive forms of informational intervention, often provided over the telephone. Includes nurse advice lines and shared decision making
- Disease management - focuses on chronic conditions with certain characteristics that make them suitable for clinical intervention
- Specialty case management - a care manager who has expertise in a particular area coordinates care for patients in that area
- Population health management - the entire membership of a health plan is evaluated, using statistical tools to identify potential high-cost patients who can benefit from some type of voluntary intervention program
- Patient-centered medical home - this model returns to the physician the responsibility for coordinating all of the patient’s care
- Accountable Care Organization (ACO) - a network of doctors and hospitals share responsibility for providing patient care. The PCP is accountable for providing quality care and reducing utilization
- Non-traditional provider interventions and care settings - pharmacists and different types of clinics can be used to provide various interventions
- Gaps in care and quality improvement programs - improving clinical quality and addressing gaps in care is a major focus of ACOs and the Electronic Health Record meaningful use initiative
- Telehealth, telemedicine, and automated monitoring systems
> Telehealth encompasses a broad spectrum of technology-enabled health care services
> Telemedicine is the electronic transmission of medical information to remote specialists who help diagnose and treat the patient
> Automated (or patient) monitoring systems provide patient data to providers. The data can trigger alerts so that the provider can make appropriate interventions - Bundled payment initiatives - these initiatives bundle payments for multiple services across a single episode of care. The goal is to improve coordination and quality of care and lower costs by aligning the financial incentives of multiple providers
Duncan Ch. 3
Characteristics of chronic conditions that make them suitable for disease management programs
- Once contracted, the disease remains with the patient for the rest of the patient’s [L]ife
- The disease is often [M]anageable with a combination of pharmaceutical therapy and lifestyle change
- Patients can take [R]esponsibility for their own conditions
- The average [A]nnual cost is sufficiently high to warrant spending resources to manage the condition
- The expected cost of the non-[A]dherent patient is high
LAMAR
Duncan Ch. 3
Principles for establishing a patient-centered medical home
- Personal physician - each patient has a personal physician trained to provide comprehensive care
- Physician-directed medical practice - consists of a team of individuals taking responsibility for the patient’s ongoing care
- Whole-person orientation - appropriately arranging care with other qualified professionals
- Care coordinated and integrated across all elements of the health care system and the patient’s community
- Quality and safety - includes patient-centered outcomes, evidence-based medicine, and continuous quality improvement
- Enhanced access through open scheduling, expanded hours, and e-visits
- Reimbursement structure to support and encourage this model of care
RAW PIPS
Duncan Ch. 3
Ways in which provider group-based ACOs are expected to generate savings
- Implementing care coordination to manage the care of the patients who need additional services
- Reducing the need for tests via access to integrated medical records and consistent management by the physician
- Developing a network of efficient providers for referrals and limiting the use of less efficient and more expensive providers
- Focusing on quality, which will result in fewer unnecessary services, and emphasizing preventative services will lead to savings as population health improves
- Reducing duplication of services
- Preventing medical errors
Duncan Ch. 3
Types of interventions conducted by pharmacists
- Drug utilization review - these programs manage price by substituting lower-cost alternatives for higher-cost drugs, and they manage utilization by requiring prior authorization for certain drugs
- Medication Therapy Management (MTM) - Part D plans are required to have MTM programs, which aim to improve medication use and reduce adverse events for beneficiaries that have multiple chronic conditions, are taking multiple Part D drugs, and are likely to incur annual costs of at least $4,000 for all covered Part D drugs.
- Pharmacist-delivered care management programs - pharmacists can collaborate with PCPs on medication optimization and medication safety. These programs often focus on drug adherence, which is measured in one of two ways:
> Medication possession ratio = number of days supply in the patient’s possession / number of days during the measurement period during which the patient could have had the drug
> Proportion of days covered = number of days of coverage / total number of days in the measurement period
CUM
Duncan Ch. 3
Components of an MTM program for Part D
- Performing or obtaining necessary [A]ssessments of the patient’s health status
- Formulating a medication treatment [P]lan
- Selecting, initiating, modifying, or administering medication {T}herapy
- Monitoring and evaluating the patient’s [R]esponse to therapy
- Performing a comprehensive medication [R]eview to identify, resolve, and prevent medication-related problems
- [D]ocumenting the care delivered and communicating essential information to the patient’s other primary care providers
- Providing verbal [E]ducation and training designed to enhance patient understanding and appropriate use of medications
- Providing information, support services, and resources to enhance patient [A]dherence to drug regimens
- [C]oordinating and integrating MTM services with other health care management services
TRADE CARP
Duncan Ch. 3
Types of clinics that can be used to provide basic health care
- Retail convenient care clinics - many pharmacies, hospitals, and grocery chains have opened retail clinics staffed by nurse practitioners. These clinics offer care on a walk-in basis for common, non-urgent illnesses and are generally open during evenings and on weekends.
- Employer worksite clinics - these are most common at very large employers. They may cover various types of care, such as preventative services, acute care, primary care, pharmacy, disease management, and wellness
- Urgent care clinics - freestanding centers that are staffed by a full range of clinicians, who are directed by physicians. They are generally open longer than physician practices and they offer a full range of ambulatory services, including many that are offered at hospital emergency departments
- Federally qualified health centers (FQHCs) - these are designated by the federal government to provide health care to the underserved and uninsured. An example is a community health center.
CURE
Duncan Ch. 3
Benefits of being designated an FQHC
- [R]eimbursement for services provided under Medicare and Medicaid
- Medical [M]alpractice coverage
- Eligibility to purchase medications for [O]utpatients at reduced cost
- Access to [N]ational Health Service Corps
- [A]ccess to the Vaccine for Children Program
- Eligibility for various other federal grants and [P]rograms
PRO MAN
Duncan Ch. 3
Possible reasons why DM studies show improved clinical outcomes but not cost savings
- The [M]easurement of financial outcomes is not stable enough, or measurement techniques are not sensitive enough, to detect positive financial outcomes
- Programs are either not [F]ocused on financial outcomes, or not structured to optimize financial outcomes
- Program sponsors do not understand the [E]conomics of DM programs and therefore do not optimize the programs for financial returns
- Improvements in quality of care do not always lead to [S]avings. Some improvements may actually increase costs, but still be worth the investment
FEMS
Duncan Ch. 8
Financial measures for disease management programs
- Return on investment - this is the most common metric. DM programs typically use Gross ROI
> Net ROI = (gross savings - cost)/cost
> Gross ROI = gross savings/cost
> Program costs generally include direct costs, indirect costs, management costs, overhead costs, and set-up costs
> Gross savings come from decreased utilization as a result of the DM program or intervention - Total savings - this metric may be more useful, since it represents the dollar savings for the plan
> Average savings = Total Savings net of Program Cost / Total Population
> Marginal savings per chronic member equals the increase in savings (net of costs) due to intervention on the marginal population, divided by the number of members in the marginal population
Duncan Ch. 8
Key metrics in the design of disease management programs
- The number and [R]isk-intensity of members to be targeted - the number must be large enough to produce savings that offset implementation costs, but not so large that marginal costs exceed marginal savings
- Types of [I]nterventions to be used in the program - such as mail or automated outbound dialing
- The number of nurses and other [S]taff needed for the program, and program costs
- The methodology for contacting and [E]nrolling members
- The [R]ules for integrating the program with the rest of the care management system
- The [T]iming and number of contacts, enrollments, and interventions
- The [P]redicted behavior of the target population if there were no intervention, and the predicted effectiveness of the intervention at modifying that behavior
STRIPER
Duncan Ch. 8
Components of the Risk Management Economic Model
- [P]revalence of different chronic diseases
- the [C]ost of the chronic disease
- [P]ayer risk - the most savings for the plan will come when the plan is at financial risk for all of the patient’s costs
- [T]argeting and risk - members should be prioritized based on the probability of experiencing the targeted event. Those with the highest risk ranks will be selected for the program
- [E]stimated cost of the target event
- [C]ontact rate - the rate at which the company is able to make contact with targeted members
- [E]ngagement or enrollment rate
- Member [R]e-stratification rates - the initial risk of the member will be re-stratified after the nurse interacts with the member and assesses the member’s risk. Factors that affect whether the member should be re-stratified include the accuracy of the diagnosis, risk factors present, the ability of the DM program to intervene for the condition, the patient’s readiness to change, and the patient’s self-management skills
CREPT PEC
Duncan Ch. 8
Common chronic diseases addressed by disease management programs
- Ischemic heart disease
- Heart failure
- Chronic obstructive pulmonary disease
- Asthma
- Diabetes
I CHAD
Duncan Ch. 8
Description of opportunity analysis for care management programs
- Definition: a data-driven analytical process that extends traditional predictive modeling by matching opportunities within a population to care management programs and services
- To perform the analysis, the following components are required:
> Knowledge of member benefit design
> Information on any evidence-based care management programs currently in place or that could reasonably be introduced
> Eligibility and claims data for the past 2-3 years - Is retrospective, it looks at past data to identify pockets of opportunity
- Is applied prospectively, once a profile of an opportunity population is identified, all current members meeting that profile can be included in the program
Duncan Ch. 9
Models typically used to stratify members in a care management program
- Stratify members according to the predictive risk [S}core - but at the top of that list are many members who represent a low opportunity for cost savings
- [C]ondition-specific model - focus on members with a specific condition, such as diabetes. But any program targeted at a specific condition may miss the greater opportunity of addressing the co-morbid conditions of that population
- [R]ules-based approach - clinicians use a set of rules to identify patients for care management. But the literature suggests that clinicians are not particularly good at identifying patients for management
Opportunity analysis is designed to address the shortcomings of these models.
SRC
Duncan Ch. 9
Components for designing a care management program using opportunity analysis
- [A]nalytics - members are segmented by medical conditions into subpopulations that are amenable to different types of interventions. Utilization data is compared to a benchmark to highlight areas with the most potential for utilization management savings.
- Searching the [E]vidence base for knowledge of what works and does not work
> A literature review is done to find programs that are efficacious, cost-effective, and generalizable to the population to be managed
> A three-step approach is used: search for relevant publications, assess the quality of evidence, and determine generalizability - [W]eighing the economics
> The population is risk ranked using a predictive model, whch also determines the expected cost for each person
> This cost is compared to the person’s cost without the intervention to determine savings
> The savings are compared to the cost of the intervention to determine at what point in the risk ranking it is economically feasible to intervene
AWE
Duncan Ch. 9
Steps for implementing a care management program using opportunity analysis
- Develop a predictive [M]odel to populate the risk distribution
- Establish a production analysis and [R]eporting unit. Develop the necessary reports and a reporting application
- Determine the likely [N]umber of care managers required
- Develop a [B]udget for the program, accounting for all required resources
- Hire and [T]rain care managers to conduct interventions and manage patients
- Develop a plan, including [E]stimates of the numbers of patients identified and engaged
- Roll out the [I]ntervention and enroll patients
- [O]perate the program, track outcomes, and modify as necessary
MINT ROBE
Duncan Ch. 9
Reasons for using opportunity analysis for identifying patients for care management interventions
- [S]tudies have shown that clinicians are not particularly good at identifying high-risk patients
- The [E]conomics of program planning cannot be ignored in a system with limited resources
- This structured approach is important for [U]nderstanding which subpopulations are amenable to intervention and the likely value of that intervention
- The structured financial model provides a [F]ramework against which actual outcomes may be compared, identifying areas where the program needs to be corrected or improved
FUSE
Duncan Ch. 9
Description of propensity score matching
- Propensity score matching is a technique used for making a participant (intervention) group comparable to a non-participant group. It can control for observable variables such as age, gender, and geography, but it does not control for important unobservable influences such as willingness to change behavior
- Each member in the participant group is matched with a member of the non-participant group based on propensity scores
- The propensity score, p, is the probability that the member will be in the participant group
> IT is calculated using logistic regression based on that member’s values for the independent variables (such as age and gender)
> This process reduces a large number of variables to a single score
> Members with similar scores can then be matched, even if they are not matched exactly on the independent variables
> There should still be relatively close matches on those other variables
Duncan Ch. 11
Steps for applying propensity score matching to a study
- Run logistic regression to create a propensity score. Should consider as the independent variables any observable factors that may influence a person’s decision to participate in the program
> The regression equation is ln[p/1-p)] = a + BX + e
> so propensity score, p = exp[a + Bx]/(1 + exp[a + BX]) - Use propensity scores to match each participant to a nonparticipant using one of the following techniques:
> Nearest neighbor matching: the first member of the comparison population with the closest propensity score is selected, either with or without replacement
> Caliper matching: a match is made if the member and match’s propensity scores are within a fixed distance
> Mahalanobis metric matching: this metric is used to measure the dissimilarity between two vectors
> Stratification matching: observations are stratified and then matched by stratum - Test the model for appropriateness and bias: testing for bias is difficult because the propensity score match only adjusts for observable variables. Models should be parsimonious (should only use minimum variables necessary to achieve stability)
RAM
Duncan Ch. 11
Comparison of propensity scoring and risk adjustment
Similarity:
> Both reduce the effect of multiple risk factors (such as age, sex, and diagnoses) to a single score using multiple regressions
Differences:
> The propensity score is usually based on a wider range of independent variables, but the risk score will almost always take into account more detailed diagnosis variables
> Risk adjustment uses the entire population, while propensity matching can result in many members of the population being discarded
Duncan Ch. 11
Description of the actuarially-adjusted historical control method
- Objective criteria are used to determine which members will be included in the baseline and intervention populations
> This is an open group method, since the populations are not identical. A closed group (or cohort) method uses the exact same population in both periods
> But the populations are comparable, and assumed to be equivalent, because the same selection criteria is used in each period - Savings are not directly measured. They are derived as the difference between
> An estimated statistic projected from the baseline period. The key component is the health care trend factor used for this projection.
> The actual statistic from the measurement period - Formulas for calculating savings:
> Savings = [ChrUtilpy * (1 + tr) - ChrUtilact] * ChrMbrs * Cost/Svc
> Trend rate comes form the health plan’s non-chronic population
> Savings PMPM = savings / member months
Duncan Ch. 12
Issues related to determining and controlling exposure for a disease management study
- Managed versus measured populations: the population to be measured does not need to be the same population that is being managed
- Eligible members: eligibility is first determined for health plan membership, then for DM services
- Member months: in any given month, a member is uniquely classified into a single category. Members can move between categories from one month to the next
- Chronic and non-chronic (index) members: the assignment of chronic status is determined monthly
- Excluded members: some members are eligible for health plan membership but are not eligible for inclusion in the DM program
- Measured and non-measured members: tests for inclusion in the measurement population may include the continuous coverage test and a claim-free period
- Enrolled, targeted, and reachable members: to avoid bias in the results, outcomes should be measured for all targeted members (whether enrolled, not enrolled, or unreachable)
Duncan Ch. 12
Reasons a member may be excluded from a disease management program
- The member class is not receptive to disease management
- The member is a candidate for a program administered by another vendor (such as mental health)
- The pattern of claims that the member exhibits is subject to sharp discontinuity, and can thus distort a trend calculation
- The member’s claims are significant, and the experience is likely to dominate the group, or introduce noise to the calculation
Duncan Ch. 12
Conditions that would exclude a member from a disease management program
- End-stage renal disease (ESRD): this condition is excluded because management of the condition may delay cost, but it cannot ultimately reduce or postpone those costs
- Transplants: claims are high up to a period shortly after the transplant, at which point the claims are reduced and stabilized
- HIV, AIDS, mental health: privacy issues make it difficult or impossible for a vendor to receive complete data feeds, or manage the member
- Members who are institutionalized: these members may not be reachable, or may not benefit from disease management interventions
- Members with catastrophic claims: these members are not manageable by the DM program, and are often subject to management by another program
- Members who are eligible for other management programs
Duncan Ch. 12
Challenges when calculating disease management savings
- Applying the proper trend rate: the trend of the non-chronic population is typically used because the chronic trends are impacted by the disease management efforts. This non-chronic trend must be adjusted for the average risk of the population
- Demonstrating equivalence between the baseline and measurement periods: must account for the change in the mix of new, continuing, and terminating members and any changes in conditions and co-morbidities. This can be done by re-weighting the claim costs that are used in the savings calculations.
Duncan Ch. 13
Leading indicators of savings for Employee Health Management (EHM) programs
- [I]dentification, stratification, and targeting (outreach)
- Program [E]nrollment and use of tools
- Continuing engagement or program [C]ompletion
- [B]ehavior change
- [B]ehavior maintenance
- [P]rocesses of care
- Medication [A]dherence
- Achieving clinical [T]argets
- Patient [A]ctivation
- [S]atisfaction with EHM
- [W]ell-being
TWAS BIB CAPE
GHS-125-19
Lagging indicators of savings for EHM programs
- Functional [S]tatus
- Quality of life and [W]ell-being
- [A]bsenteeism and presenteeism
- [M]orbidity
- [H]ealthcare claims costs
WHAMS
GHS-125-19
Recommended financial metrics for EHM programs
- Directly-monetized claim savings - one of the following metrics should be selected
> Cost trend compared with industry peers: compares trend to peers without EHM
> Adjusted-expected compared to actual cost trend: compares observed and expected trends. The adjusted-expected trend is the product of:
– trend components that are impactible by EHM (util and risk net of demographics) these are forecasted before the year
– Trend components that are non-impactible by EHM (demographics, price per unit, and plan design)
> Chronic vs. non-chronic trend comparison: used for disease management. Compares expected trend (from the non-chronic population) to observed trend (from the chronic population)
> Cost or trend comparison of program participants vs non-participants: compares cost trajectories of the two groups, after neutralizing the impact of non-EHM differences
> Comparison with matched controls in a non-exposed population: compares cost trajectories of members who meet criteria for EHM program targeting in the employer’s population with members who meet criteria in a comparison population that does not have an EHM program - The monetized impact on utilization that is potentially preventable by EHM: monetizes a downward trend in ER and hospital visits and procedures that can be prevented by EHM
- Financial impact based on a model that links to what occurred during the program and characteristics of program participants
- Reduction or prevention of lifestyle-related health risk factors: relates reduction in or prevention of lifestyle-related health risk factors to published evidence on the economics of preventing and reducing such risk factors
GHS-125-19
Definitions of modeled and measured savings for EHM calculations
- Modeled savings are estimated by multiplying factors from published studies by the utilization reductions or other results of the EHM program
> The use of a savings model is strongly recommended for organizations who do not have the population size and funds required for a valid claims savings measurement study - Measured savings are estimated by comparing actual claims to what claims would have been without EHM
GHS-125-19
Considerations in choosing whether to use modeled or measured savings for EHM calculations
- Measured savings are not accurate for small populations, so models should be used for them. A common cutoff point is 25,000 members
- Measured savings calculations require full-adjudicated claims data. But savings models require only data typically generated through the program, such as demographics, participation, risk factors, disease, or gaps in care
- Measured savings are generally calculated annually, while modeled savings can be run with any desired frequency
- Measured savings inherently incorporate the organization’s specific data. Modeled savings calculations must incorporate this data to be as accurate
- Measured savings are validated (or audited) by a third party. Modeled savings are developed based on published evidence or studies
GHS-125-19
Questions to ask when selecting financial metrics for an EHM program
- Do we have enough baseline claims data and is it of high enough quality
- Do we have fully-adjudicated claims? If not, a dollar-based analysis is not possible?
- Is our membership size more than approximately 25,000?
- Do we have the analytic resources available to use a sophisticated methodology?
- Which EHM components are we implementing?
- Is the structure of our EHM program reasonably close to those in published savings literature?
- Does our consultant have a large benchmarking database that includes employers in our industry?
- Do our leading indicators indicate the program has achieved enough initial success to make it plausible ot detect a sizable enough savings to demonstrate ROI?
GHS-125-19
Regulatory action levels for health RBC ratios
- Company Action Level (ratio between 150% and 200%) - requires that a company submit a corrective action plan
- Regulatory Action Level (ratio between 100% and 150%) - allows the commissioner to examine the company and issue an order specifying corrective actions
- Authorized Control Level (ratio between 70% and 100%) - allows the commissioner to place the company under regulatory control if deemed to be in the best interest of policyholders and creditors
- Mandatory Control Level (ratio less than 70%) - requires the commissioner to take regulatory control of the company
Due to a trend test, insurers who have an RBC ratio between 200% and 300% and a combined ratio greater than 105% could trigger a company action level event
CRAM
Skwire Ch. 39
Formula for health RBC after covariance
- RBCAC = H0 + (H1^2 + H2^2 + H3^2 + H4^2)^.5
> H0 is the Asset Risk for Affiliates: the risk that a stock investment in an affiliate may lose value
> H1 is the Asset Risk for Other Assets: the risk that investments may default or decrease in value
> H2 is the Underwriting Risk: the risk of having inadequate premiums in the future
> H3 is the Credit Risk: the risk of not recovering the amounts owed to the insurer
> H4 is the Business Risk: includes several miscellaneous types of risk, such as administrative expense risk and excessive growth risk - Authorized control level capital + RBCAC/2
- Health RBC ratio = total adjusted capital/authorized control level capital
Skwire Ch. 39
Formulas for the H2 (Underwriting Risk) component of Health RBC
- Underwriting Risk = Claim Experience Fluctuation Risk + Other UW Risk
- Claim Experience Fluctuation Risk is the sum of risk charges for five product groupings (comprehensive, Med Supp, dental and vision, Med PD, and other)
> For each grouping, the risk charge = premium * ratio of incurred claims to premium * risk factor * managed care risk adjustment factor - Other UW Risk includes:
> Coverages not included in claim experience fluctuation risk, such as
– Disability income
– LTC
– Miscellaneous coverage types, such as stop loss, hospital indemnity, and AD&D
> Adjustments for rate guarantees and premium stabilization reserves
Skwire Ch. 39
Calculation of risk factors
Risk factors are part of the formula for Claim Experience Fluctuation Risk charge
1. The factor is based on the type of coverage and the amount of annual underwriting revenue
2. For each coverage type, a weighted average of the following factors is calculated based on the amount of revenue in each tier
Coverage Type $0-3 M $3-25 M $25 M +
Comprehensive 15% 15% 9%
Med Supp 10.50% 6.70% 6.70%
Dental and Vision 12% 7.60% 7.60%
Medicare PD 25.10% 25.10% 15.10%
Other 13% 13% 13%
Skwire Ch. 39
Calculation of risk charge for disability income
The risk charege is the sum of:
1. A factor multiplied by earned premium. The factors vary by coverage
Coverage Type $0-50 M $50 M +
Non-Canc. Ind 35% 15%
Other Ind 25.00% 7.00%
Group LT 15% 3.00%
Group ST 5.00% 3.00%
> In applying factors, both individual products are combined and both group products are combined, but the individual and group products are not combined with one another
> For each of individual and group, the largest factor is applied first
2. 5% of claim reserves
Skwire Ch. 39
Calculation of risk charge for LTC
The risk charge is the sum of:
- For earned premium, 10% of the first $50M, 3% of the excess, and an additional 10% for non-cancelable premiums
- For incurred claims, one factor (usually 25%) for the first $35M, and another factor (usually 8%) for the excess
- 5% of claim reserves
Skwire Ch. 39
Procedures and uses of the simplified RBC estimations
- For health insurance, if H2 is the dominant risk, then RBC can be shown to be equal to H2
> At the limit, as the other risks go to 0, the RBC will be equal to H2 - A result of this is: when H2 is dominant, and the other risks are negligible: RBC Ratio^new ~ RBC Ratio^prior * [H2^prior/H2^new]
> While not precise, one can quickly determine the outer limit of any changes to future RBC ratios with the use of simplified assumptions - Midyear estimates of RBC changes can be easily made
- The estimation can be used to quantify (or reconcile) various changes
> Material emerging information
> Asset mix changes
> Customer portfolio changes
> Income gains and losses
> Unmet assumptions
GHS-128-19
Categories of risk faced by organizations
- [M]arket risk: the risk inherent from exposure to capital markets (e.g. fluctuations in value of assets held)
- [E]conomic risk: e.g. price and salary inflation
- [I]nterest rate risk: the risk arising from unanticipated changes in the overall level of interest rates or in the shape of the yield curve
- [F]oreign exchange risk: risk when cash flows received are in a currency different from the cash flows due
- [C]redit risk: default risk (e.g. a default on loans or a reinsurer failure)
- [L]iquidity risk: risk that a firm cannot easily trade its assets or that it cannot raise additional financing when required
- [S]ystemic risk: risk of a failure of a financial system
- [D]emographic risk:
> Mortality risk: risk that a portfolio will suffer from mortality being greater than expected (neg. for life)
> Longevity risk: risk that a portfolio will suffer from mortality being less than expected (neg. for pension/annuity) - [N]on-life insurance risk: risk related to the incidence of claims and their intensity
- [E]nvironmental risk: the risk that a firm’s activities will have an adverse effect on the environment
- [O]perational risk: risk of loss resulting from inadequate or failed processes, people, and systems, or from external events
- [R]esidual risks: risks that remain once action has been taken to treat a risk, e.g. if an interest rate swap is used to reduce exposure to changes in interest rates, residual risk is that the bank will not be able to make its payments on the swap
- [B]asis risk: e.g. risk of an imperfect hedge in an interest rate swap
D FILM SCENE BRO
Sweeting Ch. 7
Types of systemic risk
- [F]inancial infrastructure: e.g., a bank unable to pay back loans from other banks
- [L]iquidity risk: can become systemic if run on banks occurs
- [C]ommon market positions: feedback risk is the risk that a change in an investment’s price will result in further changes in the same direction. This could impact all investors who have a common investment position
- [E]xposure to a common counter-party: risk that a relatively small failure will cascade through several layers of investors
CLEF
Sweeting Ch. 7
Types of demographic (mortality and longevity) and non-life insurance risk
- Level risk (for life insurance) or underwriting risk (for non-life insurance): risk that the average level of claims of a particular population will differ from what was assumed
- Volatility risk: risk of claims differing from assumed due to volatility in a small population
- Catastrophe risk: risk of large losses due to some significant event (such as natural disaster)
- Trend risk: risk that claims rates will change unexpectedly from current levels
Sweeting Ch. 7
Basel Committee definitions of types of operational risks
- [I]nternal fraud: acts which involve at least one internal party and that are intended to defraud, misappropriate property, or circumvent the law
- [E]xternal fraud: acts by a third party that are intended to defraud misappropriate property, or circumvent the law. Examples include theft and fraudulent insurance claims
- Employment practices and [W]orkplace safety: the risk related to employee relations workplace safety, and diversity and discrimination
- [C]lients, products, and business practices: losses may arise from a failure to meet a professional obligation to specific clients. The firm must ensure that products sold are suitable for the clients to whom they are sold
- [D]amage to physical assets: the risk that an organization will suffer financial losses due to some form of physical damage to its property
- [B]usiness disruption and system failures: the risk that an external event will affect the physical ability of a firm to carry on business at its normal place of work
- [E]xecution, delivery, and process management: the risk of a failure in a process. This might lead at best to embarrassment, and at worst to litigation
WEB DICE
Sweeting Ch. 7
Other definitions of operational risk
- Crime risk: results from the dishonest behavior of individuals (e.g. internal or external fraud)
- Technology risk: risk of a technology failure, including loss or disclosure of confidential information, data corruption, and computer system failure
- Cyber risk: failure of information technology systems, typically where there is online activity (e.g. theft of client lists)
- Regulatory risk: risk that an org. will be negatively impacted by a change in legislation or regulation, or that it will fail to comply with current legislation or regulation
- People risk
- Legal risk: risk arising from poorly-drafted legal documents
- Model risk: risk that financial models used to assess risk or otherwise help make financial decisions are flawed
- Data risk: risk of using poor data
- Reputational risk: failures related to other risks can lead to a loss of confidence in the organization and a subsequent loss of business
- Project risk: various operational risks in the context of a particular project
- Strategic risk: risk that the organization will not make a conscious decision of what its strategy is and how it intends to implement it.
Sweeting Ch. 7
Types of people risk
- [I]ndirect employment-related risks: the risk that the wrong people are employed, retained, or promoted
- [A]dverse selection: the risk that the demand for insurance will be positively correlated with the risk of loss
- [M]oral hazard: the risk that people who are insured will be less likely to avoid risk
- [A]gency risk: the risk that a party that is appointed to act on behalf of another will instead act on its own behalf
- [B]ias: type of systemic risk
> Deliberate bias can arise if key risks are intentionally omitted or downplayed
> Unintentional bias may occur due to overconfidence in one’s ability to complete a difficult task
AB AMI
Sweeting Ch. 7
Broad areas in the risk-identification process
- Risk identification tools
- Risk identification techniques
- Assessment of the nature of the risks
> Quantifiable risks can be modeled
> Unquantifiable risks can often be analyzed by the groups that identify them - Recording risks in a risk register: the register details all of the risks faced by the organization. It should be constantly updated to reflect the changing nature of risks and the evolving environment
Sweeting Ch. 8
Risk identification tools
- SWOT analysis: identifies organization’s:
> Strengths (e.g., market dominance, economies of scale, and effective leadership)
> Weaknesses (e.g., high costs, lack of direction, and financial weaknesses)
> Opportunities (e.g., innovation, additional demand, and cheap funding)
> Threats (e.g., new competitors, price pressure, falling liquidity, and increased regulation) - Risk checklists: lists that are used as a reference for identifying risks in a particular organization or situation
- Risk prompt lists: similar to checklists, but rather than seeking to pre-identify every risk, they simply identify categories of risk that should be considered
- Risk taxonomy: more detailed than a prompt list, containing a description and categorization of all risks that might be faced
- Risk trigger question: lists of situations or areas in an organization that can lead to risk
- Case studies: can suggest specific risks to consider, particularly if there are similarities to the organization in the case study
- Risk-focused process analysis: involves constructing flow charts for every process used by the organization and analyzing the points at which risks can occur
Sweeting Ch. 8
Risk identification techniques
- [B]rainstorming: this is an unrestrained or unstructured group discussion
- [I]ndependent group analysis: without collaboration, all participants write down ideas on risks that might arise. These ideas are aggregated and there is a discussion. Risks are then anonymously ranked
- [S]urveys: participants are given a list of questions about different aspects of the organization to try to draw out the risks faced
- [G]ap analysis: consists of a survey that asks two types of questions: the desired level of risk exposure and the actual level of exposure
- [D]elphi technique: begins with an initial survey of experts who comment on risks anonymously and independently. Is followed by subsequent surveys that are based on earlier responses. Continues until there is a consensus or stalemate.
- [I]nterviews: individuals are interviewed independently to identify the organization’s risks
- [W]orking groups: comprised of a small number of individuals who have familiarity with the risks identified. They investigate more fully the risks which have been identified already.
WIGDIBS
Sweeting Ch. 8
Information to include for each entry in the risk register
- A unique identifier
- The category in which the risk falls
- The date of assessment for the risk
- A clear description of the risk
- Whether the risk is quantifiable
- Information on the likelihood of the risk
- Information on the severity of the risk
- The period of exposure to the risk
- The current status of the risk
- Details of the scenarios where the risk is likely to occur
- Details of other risks to which this risk is linked
- The risk response implemented
- The cost of the responses
- Details of residual risks
- The timetable and process for review of the risk
- The risk owner
- The entry author
Sweeting Ch. 8
Purposes of an internal economic capital model
- To determine how much [C]apital a firm should hold to protect it against adverse events
- To [P]rice new products and decide how to allocate capital across business lines
- To assess the amount of [E]conomic capital that should be held over time
- To assess the impact of changes in [I]nvestment strategy and capital structure
- To look at how an organization copes in the face of [E]xtreme events
- To help measure [P]erformance
- To carry out [D]ue diligence for corporate transactions
- To provide information on the financial state of the organization to a [R]egulator
DICE PREP
Sweeting Ch. 18
Considerations for designing an economic capital model
- Must agree on what the model will be used for
- Must agree on what risks will be modeled
- Must decide which approach to use
> Factor table: requires a certain amount of capital to be held for each unit of a particular activity
> Deterministic approach: stress test that considers the amount a firm would lose under different scenarios
> Stochastic approach: use a stochastic, parametric, or empirical model to produce a large number of simulated results - Decide whether the model will be run on an enterprise-wide basis, or whether individual models will be run for each business line with the results being combined later
- Consider what output is required from the model
UR BOA
Sweeting Ch. 18
Economic capital and risk optimization measures
Definition of economic capital: the additional value of funds needed to cover potential outgoings, falls in asset values, and rises in liabilities at some given risk tolerance over a specified time horizon
- Risk-adjusted return on capital (ra) = risk-adjusted return / economic capital. Is well suited for comparing different lines of business within a firm
- Economic income created (EIC) = (ra - rh) * EC, where rh is the hurdle rate of return and EC is the economic capital. Is the rate of return that each unit of a product sold must earn to cover the additional amount of risk it generates
- Shareholder value (SV) = EC * (ra - rg) /(rh - rg), where rg is the rate of growth of the cash flows. Represents the discounted present value of all future cash flows
- Shareholder value added (SVA) = EC * [(ra - rg) /(rh - rg) - 1] = SV - EC
Sweeting Ch. 18
Options for allocating the benefits of diversification
- Allocating the full stand-alone capital requirement to each line and retaining the diversification benefit centrally
- Giving the full benefit of diversification to the new line of business that triggers the benefits
- Allocate the benefit in proportion to the stand-alone capital requirements by LOB
- Euler capital allocation principle: consider the marginal contribution of each additional unit of business to the overall capital required. For example: if the required economic capital is proportional to the SD of a loss, then allocate risk capital for a given line of business in proportion to the following ratio:
> The cov. between the loss in that line and total loss
> Divided by the SD for the total loss
Sweeting Ch. 18
ORSA includes ongoing processes to support
- Risk identification and [P]rioritization
- Risk [M]easurement
- Articulation of risk [A]ppetite and tolerances
- Implementation of risk [L]imits and controls
- Development of risk mitigation [S]trategies
- Capital [A]dequacy assessment
- [G]overnance and risk reporting
GLAM ASP
Understand ORSA Before Implementing It
Definition, requirements, and goals of an Own Risk and Solvency Assessment (ORSA)
- Definition: a confidential internal self-assessment of the risk associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks
- Requirements for an insurer subject to ORSA:
> Conduct an ORSA at least annually to assess the adequacy of its risk management framework and solvency position
> Internally document the process and results of the assessment
> Provide a confidential high-level ORSA summary report annually to the lead state commissioner if the insurer is a member of an insurance group and, upon request, to the domiciliary state regulator - Primary goals of ORSA:
> Foster an effective level of ERM at all insurers, through which each insurer identifies, assesses, monitors, prioritizes, and reports on its material and relevant risks, using appropriate techniques and in a manner that is adequate to support risk and capital decisions
> Provide a group-level perspective on risk and capital as a supplement to the existing legal entity view
DRG
GHS-116-19
Major sections of an ORSA Summary Report
Section 1: Description of the insurer’s risk management framework
> Describes how the insurer identifies, categorizes, and manages risk
> Describes risk-monitoring processes and methods, provides risk appetite statements, and explains the relationship between risk tolerances and risk capital
> Identifies assessment tools used to monitor and respond to any changes in risk profile
> Describes how the insurer incorporates new risk information in order to monitor and respond to changes in risk profile
Section 2: Insurer’s assessment of risk exposure
> Provides a high-level summary of the quantitative and/or qualitative assessments of risk exposure in both normal and stressed environments for each material risk category in Sect 1
> Includes descriptions of risk-mitigation activities and outcomes of any plausible adverse scenarios assessed
Section 3: Group assessment of risk capital and prospective solvency assessment
> Group assessment of risk capital: the goal is to provide an overall determination of risk capital needs and to compare that to available capital to assess capital adequacy
> Prospective solvency assessment: should demonstrate that the insurer has the financial resources necessary to meet regulatory capital requirements and execute its multi-year business plan in both normal and stressed environments.
FER
GHS-116-19
Key information to include in an ORSA Summary Report
- The basis of accounting and the date or time period that the numerical information represents
- The scope of the ORSA conducted
- A short summary of material changes to the ORSA from the prior year
GHS-116-19
Key principles of an effective ERM framework
- Risk [C]ulture and governance
> A governance structure that clearly defines roles, responsibilities, and accountabilities
> And a risk culture that supports accountability in risk-based decision-making - Risk [I]dentification and prioritization process: the risk management function is responsible for ensuring that the process is appropriate and functioning properly at all organizational levels
- A formal risk [A]ppetite statement and associated risk tolerances and limits: understanding of the risk appetite statement ensures alignment with risk strategy by the board of directors
- Risk [M]anagement and controls: managing risk is an ongoing ERM activity, operating at many levels within the organization
- Risk [R]eporting and communication: provides key constituents with transparency into the risk-management processes. Facilitates active, informal decisions on risk-taking and management
MICRA
GHS-116-19
Considerations in quantifying available capital and risk capital
- How the insurer defines solvency for the purpose of determining risk capital and liquidity requirements
- The accounting or valuation basis for measuring risk capital requirements and available capital
- The subset of business included in the analysis of capital
- The time horizon over which risks were modeled and measured
- The risks modeled in the measurement of risk capital
- The method used to quantify the risk exposure
- The risk capital metric used in determining aggregate risk capital
- The defined security standard used in determining risk capital requirements
- The method of aggregation of risks and any diversification benefits considered
GHS-116-19
Reasons for reinsuring accident and health products
- To [T]ransfer risk (primary)
- To enable an insurer to [O]ffer products in a specific market in which it lacks expertise. This allows the insurer to provide a broad range of products
- To share the financial [L]oad. This is sometimes done for products that require large amounts of capital such as individual LTC
LOT
GHS-117-16
Proportional reinsurance methods
- Coinsurance: the reinsurer accepts the ceding company’s reinsurance premium and pays its share of benefits. The reinsurer pays a ceding allowance to cover a portion of the ceding company’s commission and expenses
> Fixed or excess share: ceding company retains a fixed, level amount of risk
> Quota share: ceding company retains fixed percentage of each risk - Modified coinsurance: works just like coinsurance, except the assets backing the reserves are held by the ceding company
- Funds withheld coinsurance
- Risk premium reinsurance
CoMoRF
GHS-117-16
Nonproportional reinsurance methods
- [E]xtended wait (aka extended elimination period or extended deductible): reinsurance benefits begin only after the claims have reached a specified duration or amount
- [E]xcess reinsurance or stop loss reinsurance: provides coverage for claims in excess of a defined level
> Individual excess or specific stop loss: provides payment if the total benefits on a single individual exceed a specified attachment point or deductible
> Aggregate stop loss: provides a benefit if total retained claims on the entire group or portfolio exceed a specified attachment point. For medical insurance, the attachment point is typically defined as a percentage (e.g. 125%) of expected claims - Specified benefits or [C]arve out, such as premature births, transplants, and trauma. Disability income policies occasionally carve out accidental benefits
- Claim takeover reinsurance and [R]unoff blocks: reinsurer assumes risk on future runoff of a known block of claims
- [C]atastrophe covers: provides coverage in the event of a catastrophe
CERCE
GHS-117-16
Decisions to make when setting retention limits for disability income insurance
- The method of determining the retention: the insurer may retain a max amount per month or it may set a limit on the total benefit paid for the entire benefit period
- The amount of the maximum claim: the insurer might set limits for disability income that would produce present values of benefits approximately the same as the max retention for life insurance
GHS-117-16
Purchasers of medical reinsurance
- [T]raditional insurers offering both first dollar insurance and excess of loss coverage
- [E]mployers providing self-insured benefits to employees
- [H]MOs providing services
- Certain providers that offer prepaid [B]enefit plans
BETH
GHS-117-16
Approaches for defining coverage periods for health reinsurance
- “Losses occurring during”: claims are covered only if they occur during the agreement year, regardless of the effective date of risks accepted by the insurer. It is most commonly used for excess arrangements
- “Risk attaching”: provides that the reinsurance period for each underlying risk from the insurer coincides with the insurer’s policy year. Is commonly used for proportional reinsurance
GHS-117-16
Primary approaches for reinsurance of major medical policies
Coinsurance is rarely used today, stop loss is common
1. Quota share coinsurance
2. Specific stop loss or excess
3. Aggregate stop loss or excess: reinsurance is usually not for 100% of excess claims. The ceding company is required to keep a portion of claims to ensure appropriate claims handling
4. Combined specific and aggregate stop loss or excess
> Ceding companies often purchase specific and aggregate stop loss as a single package
> The cost of each coverage is affected by the other. For example, a lower specific attachment point will result in lower aggregate reinsurance claims
5. Carve out coverages
GHS-117-16
Uses of reinsurance for medical coverages other than major medical
- [F]ixed benfits medical and surgical products: reinsurance is rarely purchased for claims protection, but quota share coinsurance may be purchased to support growth
- [S]pecific or dread disease products: reinsurance is rarely used since most insurers retain all the risk on these policies
- [A]ccident and AD&D coverages: except for very large coverages, reinsurance is rarely used. Some reinsurers offer coverage for accidents on a portfolio basis, similar to catastrophe reinsurance
- [M]edicare Supplement: reinsurance is attractive for an insurer that no longer wants to retain the risk or manage the product. Quota share coinsurance is sometimes used because this product is relatively capital intensive. Fronting is also used
- [C]ritical illness: coinsurance has been used, with the reinsurers providing expertise and product design advice
- [D]ental and vision coverages: many group insurance plans offer these coverages and then use coinsurance to transfer the risk to reinsurers that specialize in these coverages
- [O]ther uses of reinsurance include captive reinsurers for employee benefits, stop loss for providers, securitizations of health insurance, and capital relief provided by a portfolio reinsurance agreement
MOC FADS
GHS-117-16