Ch 20: Pricing - Group Business

Question 1

Free cover

Answer 1

Group schemes may have free cover limit, below which members will not be individually underwritten

Question 2

Special characteristics of group business

Answer 2

• Free cover limit
• Control of intermediaries
• Limited insured information
• Changes in the workforce
• Flexible benefits

Question 3

Describe “control of intermediaries” as a special feature of group business

Answer 3

• Group business is usually sold through a broker/intermediary
• Thus all information (scheme information + revenues for premiums and claims) will be influenced and controlled by the broker
• The broker exerts influence over the information available to the insurer
• There are further risk problems with the degree to which the insurer can influence the employer’s attitude towards risk and initial claims management, when all comms is required to go through the broker.
• Actuary would want info to be as accurate and full of detail as possible for pricing but broker would not want to threaten client relationship with “imposing unpopular measures”.
• Not directly a pricing issue but any factor that would increase wither the level or uncertainty around future claims should be incorporated into pricing (as margins)

Question 4

Describe “Limited insured information” as a special feature of group business

Answer 4

• Risk involved in group pricing is that detail of individual lives insured is often not known by insurer at the time when period of insurance begins.
• The insurer in such circumstances will make an estimate of the premium to serve as a deposit, then adjusted up/down at end of period when details are known exactly.
• Even if full details are known, retrospective adjustments may still be made to reflect staff changes over the period

Question 5

Describe “Changes in the workforce” as a special feature of group business

Answer 5

• Actuary will be particularly concerned about changes in numbers and profile of lives that comprise the group from one year to the next.
• Changes that are of particular concern:
  * Change in profile - Possible that fittest lives would want to leave employee group or ill-health retirees, affecting the risk of the lives remaining
  * Reduction in group size - Large reduction in lives covered might signal down-sizing of workforce, which might prompt more lives to claim while they are still covered.
  * Increase in group size - Increase in numbers usually a good thing, newcomers are often younger and fitter. (Care should be taken where the influx is as a result of a takeover or merger of schemes - should investigate claims history of these lives)

Question 6

Danger of Flexible benefits in group business to insurers

Answer 6

• Some group products are designed to offer each employee a range of possible benefits
• From a pricing POV the actuary will need to be careful that the selection effect does not allow anti-selection against the insurer through covers and amounts chosen.
• Limits will generally be placed and statements of good health may be requested

Question 7

Credibility in group business pricing

Answer 7

• Relates to a number between 0 and 1 which represents the proportion of the final risk premium that is derived from past experience with the balance coming from book rates
• Value of factor depends on the size of the scheme and number of years’ of data available