CH 20 (WM) Flashcards
-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.
List the special characteristics of group business. [1.25]
- Free cover
- Control of intermediary
- Limited insured information
- Changes in workforce
- Flexible benefits
Describe the role of the intermediary in Group Business. [5]
- Group business is usually sold through insurance intermediaries (brokers).✓✓
- Quite often, the broker or intermediary will exert influence over the information available.✓✓ The scheme information may be channelled through the broker as might the revenues for premiums and claims.✓✓
- The actuary will want to be sure that the information is as accurate as possible✓✓ and that he/she is getting the same level of detail as other companies who may also be pricing and quoting✓✓.
- There are further risk problems with the degree to which the insurer can influence the employer’s attitude to risk and initial claims management✓✓, when all communication is required to be passed through the broker✓. This, however, is not directly a pricing issue.✓
- The broker may be wary of threatening his/her relationship with the client by “imposing unpopular measures”✓✓, such as requests for detailed information or carrying out regular risk assessments✓✓.
- Though not directly a pricing issue✓, the actuary should reflect any
factor that increases either the level✓ of, or the uncertainty around, future claims✓ (the latter being important for the size of margins to include in the basis)✓.
Additional marks = 0.5
Describe how the changes in workforce can alter the riskiness of a group scheme. [3]
Significant changes to the workforce can alter riskiness of a group scheme✓:
- Leavers may be relatively healthy or unhealthy✓✓, depending on the reason for leaving✓.
- Joiners are likely to be healthy✓✓.
- A down-sizing of the workforce might prompt members to make claims while they are still covered.✓✓
- An increase in the size of the workforce might improve claims experience✓✓ as newcomers are often younger and fitter✓. Care should be taken if M/A.✓✓
Describe the challenges of limited insured information in pricing of group business. [3.5]
- One of the risks involved in pricing group healthcare insurance products is that the detail of individual lives insured (numbers, ages, gender split, benefits)✓✓ is often not known by the insurer at the time when the period of insurance begins✓✓.
- The insurer, in such circumstances, will make an estimate of the premium to serve as a deposit.✓✓ This will be adjusted up or down at the end of the period, when the details are known exactly.✓✓
- These are often referred to as “deposit and adjustment premiums”.✓✓
- Limited insured information for group schemes is becoming less of a problem more recently, with full membership information usually being supplied at the quotation stage.✓✓
- However, even where full details are known at the start of cover, retrospective adjustments will need to be made to reflect staff changes over the period.✓✓
Describe the calcuation of the book rate of group insurance premiums. [ ]
- The usual procedures apply.
- The cost will be derived by splitting a relevant o
- judge the data for relevance to future experience
- subdivide data into homogenous risk cells for analysis
- for each risk cell historic risk cost will be derived.
- make adjustments to make appropriate for future experience
Rating factors used in group covers
-rating factors provide means by which an insurer can assess the correct book premium to charge for any risk, or a set of risks.
- for a group policy the risk premium needs to reflect the overall risk characteristics of the group of lives to be covered under the policy. Therefore will be two different types of rating factors:
1. individual rating factors eg age, gender, smoker status, occupations
2. group-level rating factors eg industry, location, size of group
-the larger the scheme the more likely the price will depend on historical aggregate claims experience and less on individual life rating factors
Experience rating
- Experience rating is the phrase given to the practice whereby the premium for a group contract depends wholly or partially on the past experience of that group.
- The overall premium for a group is obtained from:
RP = ZA + (1-Z)E + L
- where E is insurer’s book premium for group
- A is the risk premium based on group’s past experience data
- Z is the credibility factor for the group [0,1]. Its value depends on the volume of the group experience data. Schemes for which Z > 0 is experience-rated.
- L is an expense/profit loading
Burning cost
- is the estimated cost of claims in the forthcoming insurance period, calculated from previous years’ experience adjusted for changes in the numbers insured, the nature of cover and medical inflation.
- Yearly burning cost calculations can be used to compare emerging claim costs over the year against the risk premiums paid.
- These provide the earliest possible feedback on premium adequacy.
Exposure measures to use in group policies
- for PMI - number of people covered
- For CI - the total SI
- For LTCI - the total benefit payable (per annum).
Relevance of previous experience
- The pricing actuary will look at the past claims history available to judge the extent to which it might be considered a good proxy to the future risk experience.
- Significant changes:
- of personnel
- of location
- of work practice
- in the cover required
- are among the factors that can alter the applicability of the past experience to the future.
- The actuary will have to make suitable adjustments to the data before using it as a base for pricing.
PMI Group pricing: Experience rating
- Some form of experience rating is usually incorporated in group PMI pricing at a level below that which strict statistical approach would demand.
- The the frequency of claim that applies with group PMI permits a wider use of experience rating where full or partial credibility will be afforded to past history.
- for a new scheme to an exsiting insurer there may be very little past claims history available, which put the existing insurer at an advantage.
PMI Group pricing: NCD
-NCD systems are sometimes used for individual & group business in order to make some allowance for individual claims experience in the premium rates.
- rather than requiring no claims a low claims discount approach may be used.
- this is similar to NCD but it is based on total amount of claims rather than claim numbers.
PMI Group pricing: Different group sizes
- Larger groups (>50 employees) are flat-rated according to benefit class, whereas individual business is almost always age rated in addition to group rating.
- Large groups frequently self-insure up to a point, eg 125% of expected claims cost, and purchase administration and stop loss insurance from the insurer.
Summary of different group sizes:
- Individual business - individually priced. may have an NCD.
- Small groups - Premiums based on group rating and ages of individuals; NCD or LCD systems often applied.
- Medium groups - Flat-rated premiums based on group rating factors, and experience-rating using credibility factors.
- Large groups - Self-insure, usually with stop loss cover and admin from insurer.
Rating factors
Rating factors provide a means by which an insurance company can assess the correct book premium to charge for any risk, or set of risks. These would be the factors, relating to the risk presented by a specific policy, according to which the premium rate charged might be caused to differ from that charged to others.
For group policies, the risk premium needs to reflect the overall risk characteristics of the group of lives to be covered under the policy. Therefore there will be two different types of rating factors:
individual-level rating factors – these are rating factors that apply to the individual members covered by the scheme and are therefore very similar to the rating factors that would be used for individual business, for example, the individual-level rating factors for a CI policy might be age, gender, smoker status, and occupation.
group-level rating factors may therefore also be applied – these are rating factors that apply to the group itself, for example industry and location, size of group, employer’s attitude to his/her employees’ health etc.
Rating factors for group business are typically similar to those of individual business but vary by product according to the relevance and amount of information provided. Generally the larger the scheme, the more likely the price will depend on historical aggregate claims experience and correspondingly less on individual-life rating factors.
So as well as individual-level and group-level rating factors, we might also use the group’s own historical claims experience, ie use experience rating to calculate the premium for a group scheme. We discuss experience rating in the next section
