Chapter 13 Assumptions (2) Financial assumptions Flashcards

-expenses -inflation -investment return -taxes -solvency margin

1
Q

What are the main financial assumptions an insurer needs for pricing (and other exercises)? (9)

A
  • Benefit amount,
  • Benefit inflation,
  • Expenses,
  • Expense inflation,
  • Commission,
  • Commission clawback,
  • Investment income,
  • Taxes.
  • We also consider volumes of business/mix Of Business
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2
Q

Benefit amount: intro

When considering how to set benefit amount assumptions used to price health care insurance contracts, it is often useful to consider two different groups/types into which healthcare contracts may fall; what are these groups? (2)

What general guidelines prevail for the benefit amount assumptions based on the two groups mentioned above? (3)

A
  • It is useful to consider how benefit amount might differ between
  • long term contracts (LTCI, CI), and
  • short term contracts (PMI)

The following guidelines usually prevail for benefit amount assumptions

  • Long-term contracts (LTCI, CI) usually have pre-determined benefits.
    • however claims may vary with benefit size therefore some adjustment may be made for large cases.
  • For short term contracts (PMI), claims are often not pre-determined, and so average claim amounts have to be assessed
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3
Q

Benefit amount: LTC/CI, long-term contracts

Briefly describe considerations for the benefit amount assumption with respect to these policies (4)

A
  • Benefits are usually pre-determine
  • Only with very large benefit size would insurer to change assumptions (like expenses)
  • Underlying experience may vary significantly by benefit size depending on:
    • policyholder tending to be from higher socio-economic groups
    • there being a stricter level of underwriting imposed for larger sums insured
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4
Q

Benefit amount: PMI, short-term contracts, intro

In what way do benefits for short term contracts differ to benefits for long term contracts? (4)

A

Key aspect of benefits for short term contracts compared to long term

  • Short term contracts are indemnity based
  • To assess premium payable, benefit assumption will need to project
    • the number of claims, and amount of each claim…
    • …and come up with an average claim amount
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5
Q

Benefit amount: PMI, short-term contracts, own data

Briefly discuss the approaches which could be taken to set the average claim amount assumption for PMI contracts in terms of

  • appropriate own data being available (2)
  • what influences the average benefit amount assumption (7)
A

If sufficient own data is available

  • average claim amount should be based on own data, ideally
  • assuming sufficient data exists for this

Potential factors to be considered which might influence the PMI average assumption benefit/claim assumption might be

  • medical inflation,
  • treatment costs,
  • demand for expensive treatment,
  • treatment protocols,
  • charging structure of providers,
  • age profile and other risk aspects
    • premium rates usually vary by age

market data may also be used, but should be adjusted for

  • differences in policy conditions
  • differences in negotiated hospital contracts
  • future trends in provider capacity and charges
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6
Q

Benefit amount: PMI, short-term contracts, own data

Briefly discuss the approaches which could be taken to set the average claim amount assumption for PMI contracts in terms of

  • what can be done in the absence of sufficient ‘own data’ (4)
  • adjustments that need to be made in respect of the above (4)
A

If sufficient own data is not available may make use of external data to obtain average claim size, eg

  • market data which has average claim size for existing insurer
  • reinsurer data under a reinsurance treaty
  • price lists availale in the market

When using external data, it is important to adjust for

  • differences in policy conditions
  • differences in negotiated hospital contracts
  • future treatments and trends in provider capacity and charges
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7
Q

Benefit amount: PMI, short-term contracts, impact of providers’ charging structures, intro

One of the key aspects which influences the average benefit/claim assumption for PMI contracts is the method used to reimburse the provider of care.

List the various ways in which providers of care can be reimbursed (6)

A
  • Indemnity/Fee-for-Service
  • Modified Fee-for-Service
  • Per-Diem
  • Per-Case
  • Capitation
  • Salary
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8
Q

Benefit amount: PMI, short-term contracts, impact of providers’ charging structures, detail

One of the key aspects which influences the average benefit/claim assumption for PMI contracts is the method used to reimburse the provider of care.

Briefly describe the following ways in which providers of healthcare services can be reimbursed:

  • Indemnity/Fee-for-Service (3)
  • Modified Fee-for-Service (2)
  • Per-Diem (2)
  • Per-Case (4)
  • Capitation (4)
  • Salary (2)
A

Indemnity/Fee-for-Service:

  • standard fees for specified treatments fixed by healthcare representative bodies.
    • benefits paid to policyholders based on these standard fees
    • may be a gap in cover if benefit paid to insured < standrd fee

Modified Fee-for-Service:

  • health insurers/providers negotiate a maximum fee per service or a discount at standard rates (within approved provider network).
  • policyholder would be limited to seeking treatment from a network of preferred providers and reimburse at this fee

Per-Diem:

  • hospitals are paid a fixed amount per day policyholder is hospitalised, regardless of reason; daily rates may vary by ward.
  • average charge is total charges by ward divided by days

Per-Case:

  • hospitals are paid a fixed amount per case or hospital admission.
  • can differentiate by medical speciality.
  • may be combined with per-diem
  • will be based on case average adjusted for trends

Capitation:

  • healthcare providers receive a pre-payment regardless of usage.
  • payment usually made monthly
  • determined by service costs divided by number of members
  • suitable for general practitioners (due to higher utilisation), not specialists

Salary:

  • healthcare professionals can be employed by insurer or Health Management Organisation.
  • paid regardless of type and frequency of services
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9
Q

Benefit inflation: intro

In what way does benefit inflation impact the benefit assumptions set for various exercises? (2)

What factors should generally be considered when deciding on how to inflate benefit assumptions during a given exercise? (5)

A

Influence of benefit inflation

  • Size of benefit is linked to medical or care need and changes over time.
  • Needs to be inflated periodically to allow for this.

Factors to consider for benefit inflation

  • Increasing benefit and premium with index or fixed rate not appropriate since risk increases with age and some initial funding must take place. Involves modelling.
  • Complicated by absence of a simple/published index that’s linked to medical costs.
    • Consumer price index can be used but doesn’t allow for salary inflation of medical personnel or medical technology advances.
  • For products that reimburse/indemnify the policyholder, also need an assumption for inflation of costs.
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10
Q

Benefit inflation: LTC/CI, long-term contracts

Why/how might we need to consider benefit inflation for long-term healthcare contracts? (2)

What methods can be used to set rates according to which benefits increase for long term contracts, and give key consdirations related to each method? (6)

A

For LTC contracts the sum insured may be inflated periodically. This is because

  • benefit size linked to medical care need and changes over time.
  • it helps ensure benefit keeps up with the costs of long-term care or medical services.

Premium may also be inflated periodically; rate of inflation may be

  • an index of medical costs,
    • such an index may not actually readily/easily exist
  • CPI
    • easily available, but doesn’t allow for salary inflation of medical personnel or medical technology advances.
  • fixed rate
    • may not be entirely appropriate…
    • …as insured risk increases with age + initial funding must occur
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11
Q

Benefit inflation: PMI, short-term contracts

Why/how might we need to consider benefit inflation for short-term healthcare contracts? (6)

A

Average claim amount may need to be adjusted for inflation over time due to:

  • medical inflation
  • likely changes in medical treatment protocols
  • costs of treatment
  • demand for more expensive treatment
  • future charging structure of hospitals
  • future age profile of portfolio
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12
Q

Expenses: intro

What is the key consideration to be factored into setting expense assumptions? (3)

What other key factor might impact expense assumptions? (2)

A
  • Parameter values should reflect the expenses to be incurred in…
  • …processing and administering the business to be written…
  • …under the product being priced
  • Expense treatement might be affected by tax regime. If “I-E” tax applies, can net expenses down for this (must be in line with investment income expense treatment)
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13
Q

Expenses: different types

What different types of expenses might exist?

A

Direct expenses (can be directly attributable to particular products)

  • inital expenses
  • renewal
  • claim expenses
  • investment expenses
  • withdrawal/termination expenses

Overheads (cannot be directly attributable to any one product)

  • propety costs
  • computer costs
  • salaries/wages
  • determined by
  • and between per policy, per unit of premium -or per unit of benefit.
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14
Q

Expenses: different types, overview to determining

Give broad principles by which we can determine

  • direct expenses (8)
  • overhead expenses (5)
A

Direct expenses (can be directly attributable to particular products)

  • for PMI it is possible to outsource admin at a fixed per policy fee, negotiated annually
    • exchanges uncertain admin costs for certain fixed policy fees
  • for LTC contracts charging the same premium for policies of different sizes causes cross-subsidies between policies.
    • can be removed by using individual calculations, policy fees, or a sum insured differential.
    • per-policy contributions to fixed costs are made by reference to expected volumes
    • care must be taken to ensure competitiveness

Overheads (cannot be directly attributable to any one product)

  • based on company’s recent experience
  • if not available then parameter values based on a similar line or industry or data from a reinsurer may be used
  • expenses need to be divided by function
  • and whether assumption is expected to be proportional to
    • premium or
    • benefit size or
    • amount per contract
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15
Q

Expenses: per-policy expenses

What risks arise with per policy expenses in a healthcare context? (3)

What methods can be used to mitigate the above risks when setting per-policy expense assumptions (9)

A

Per-Policy Expenses:

  • for healthcare, premium often expressed as rate per unit of sum assured
  • we therefore calculate an average benefit size and use these loadings for all policy sizes.
  • valid if volumes are as expected, but raises a key risk regarding expenses that do not vary by size of contract, esp if volumes not as expected

Risk for expenses that do not vary by contract size. Different ways to handle the problem:

  • Individual calculation of premium rates or charges:
    • calculate prem/charges using actual benefit level, age, term etc for policies; then load explicitly for per-policy expenses.
    • better for large cases, for small can make it uncompetitive.
  • Policy Fee Addition to Premium:
    • modified if premium uncompetitive
    • idea is that policy fee covers per-policy costs and premium rate covers other proportionate expenses
  • Sum Insured Differential:
    • different premium rates charged according to which band benefit falls into
    • need to estimate the number of policies likely in each band
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16
Q

Expenses: fixed expenses

What factors need to be considered when setting fixed expenses?

A

When setting fixed expenses

  • Need to allow for likely volumes of business sold. Uncertain for competitive product lines.
  • Need to recoup fixed expenses in aggregate over all policies sold.
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17
Q

Expenses: comparison with life insurance

Expenses for healthcare contracts differ to expenses for life insurance contracts, and so we’d expect this to be reflected in the expense assumptions.

How do expenses for healthcare insurance contracts compare with expenses for life insurance contracts?

Consider:

  • the work required to sell/develop health insurance contracts (5)
  • the need to sell the contract (vs customers’ desire to buy) (2)
  • claims prorcess (2)
A
  • More work is required to put a health and care product on the books than for a life insurance product….
  • …main reasons for this are:
    • extra underwriting effort required to assess morbidity,
    • non-medical limits are often lower
    • product development costs may also be higher due to:
      • effort to derive incidence rates, develop policy literature and train sales staff.
  • Unlike life insurance healthcare insurance has to be sold to the client involving a lot of time in explaining key features to clients
  • Claims expenses are more onerous than for life insurance
    • time and medical information is needed in validating a claim.
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18
Q

Expenses: non-medical limit

We have seen that one of the reasons that expenses for health insurance products differs compared to life insurance contracts is due to the difference in difficulty developing and selling health insurance contracts, which may also be impacted by the use of non-medical limits.

What is a non-medical limit? (2)

A
  • The maximum benefit for which one can apply for cover without automatically requiring specified underwriting evidence
  • Comparable to free cover limit in group insurance context
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19
Q

Expenses: marginal costing

What do we mean by ‘marginal costing’ of policies? (2)

Briefly describe the rationale behind a marginal costing approach to setting expense assumptions (6)

A

Marginal costing refers to

  • setting expense assumptions such that we cover the variable expenses, incurred only because policy exists
  • using expense loadings that only just cover marginal expenses, to stay competitive

Rationale for marginal costing

  • Expense loadings often used as optional margin to secure competitiveness (which need to be carefully monitored as failure to cover expenses can lead to insolvency and failure to cover claims)
  • What really matters is that TOTAL expense contribution is correct, not necessarily expense contribution per policy because…
  • total profit is total profit contribution summed over all policies;
  • …hence, we want expense loadings that will maximize total profit over all products…
  • …and this may be achieved by having low per-policy margins.
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20
Q

Expense inflation: intro

In what way is expense inflation relevant when setting assumptions for healthcare contracts? (2)

What 2 ‘periods’ for should be considered when setting the expense inflation assumption? (2)

A

Impact of expense inflation

  • Any product that offers level premiums in return for an increasing risk must incorporate an element of expense inflation, even if premiums are annually reviewable
  • it is important to allow for inflation of expenses, especially for long-term products.

Time periods over which to consider expense inflation; consider:

  • inflation between setting assumption, and point from which new policies will be sold
  • inflation during term of policy
21
Q

Expense inflation: key factors influencing

What will primarily affect the inflation assumption, and why? (2)

List 5 factors that will considered when setting the expense inflation assumption for pricing (6)

A

Key impact on inflation will likely

  • expenses are typically linked to a combination of wage and price inflation
  • key impact on expense inflation will likely be earnings inflation, as insurer’s expenses are mostly staff related

Factors affecting expense inflation which should be considered

  • Recent expense inflation experience of the insurance company
  • Recent actual experience of the insurer’s industry
  • Current rates of inflation, both for prices and earnings
  • Expected future rates of inflation
  • Difference between fixed-interest government bond yields and index-linked government bond yields (may be skewed by any risk premium implicit in price of government fixed interest bonds)
  • Investment assumption being used (be consistent), where relevant (mostly for LTCI)
22
Q

Commission

What determines the commission assumption used for a particular exercise, and what often influences commission paid? (4)

A

Commission assmption set is

  • determined by the amounts the insurer intends to pay distribution system as commission.
  • it is influenced by
    • current levels of sales remuneration in the market place
    • legislation/legislatively imposed rates of commission
    • special arrangements
  • Commission is oftern paid at ahigher rate on initial premium than on subsequent premiums toreflect additional work involved in selling a policy. -these assumptions will be determined by amounts the insurer intends to pay the distributor as commission.
23
Q

Commission: clawback, intro + calculation

What do we mean by ‘clawback’? (5)

How is clawback calculated? (1)

A

Clawback arrangements

  • These apply in the context of indemnity commission paid
  • The adviser earns indemnity commission over a defined earnings period normally stated in months.
  • Clawback is a mechanism through which insurer can recoup (‘claw back’), in full, or in part, for indemnity commission paid to a distribution channel, should the policy for which such commission was paid lapse during the earnings period ie before the commission was deemed to have been fully earned.
  • If policy lapses during the earnings period/before the commission is fully earned then insurer may apply claw back from distributor.
  • No clawback applies for lapses which occure after the earnings period

Calculation of clawback

  • clawback is usually calculated by a formula in the commission agreement.
24
Q

Commission: clawback, risks + additional assumptions required

What kind of risk is introduced to the insurer via the use of indemnity commission and clawback structures? (1)

What additional assumptions will be needed in the event that indemnity commission/clawback structures are used? (2)

What sources may be used to obtain the additional data/assumptions above? (7)

A

Risks introduced:

  • insurer takes credit risk if the distributor fails to repay indemnity commission as per clawback agreement

The actuary must make assumptions about

  • early lapses and
  • the proportions of unearned commission that will be reclaimed

Data sources:

  • past experience by distribution channel will be the best guide to the relevant numbers, but may lack volume of data required
  • standard appproach compares early lapses at each duration against polices exposed, split by product type;
  • can also compare in-house figures to
    • market,
    • reinsurers, or
    • consultants
25
Q

Commission: adjustments to assumptions

What kind of adjustments must be made when setting commission assumptions for a particular contract during a given exercise?

(3)

A
  • actuary needs to include any special arrangements between salespeople and insurer
  • expected volumes by distributor are crucial where a single tariff premium is sold under different commission structures by the different distributors
  • assumptions on volumes have to be monitored against actual experience and adjustments made as appropriate
26
Q

Commission: loading commission into premiums, expressing commission assumption

In what way may the commission assumptions be added into the set of assumptions used for pricing contracts (or other exercises)? (1)

How might the commission assumption be expressed in the assumptions basis? (3)

A
  • Commission is usually loaded into the premiums by setting appropriate rates to be loaded into premium formula.
  • Thus overall commission loadings will support commission paid.

Commission can be expressed as a

  • % of premiums or
  • % of sum insured or
  • occassionaly, as a % of fixed sum.
27
Q

Commission: comparison with life insurance

How does commission for health insurance contracts compare to that for life insurance contracts (and thus influence the commission assumption set for health insurance contracts)? (4)

A
  • Levels of remmuneration may be higher than on standard life insurance.
  • Higher level of initial commission could be justified on healthcare insurance policies due to extra effort on part of salesperson from
    • having to explain the benefits to a prospective policyholder
    • collecting extra information required for underwriting purposes
28
Q

Investment return assumption

In what way does the investment return assumption feature when setting assumptions for pricing health insurance contracts? (5)

What is it important for the investment return assumption to be consistent with elsewhere in the set of assumptions used for a particular exercise, such as pricing? (1)

A

How does investment return feature when setting assumptions for various exercises (including pricing)?

  • Insurer will need to invest in assets that support its liabilities for its various products
    • LTC is long-term, so need to mirror cost increases may require equities
    • Some healthcare contracts are unit-linked, and assumption for returns needed. In this case, usually investments are a managed fund composed of equities and bonds.
  • Investment return assumption will be heavily influenced by assets invested in, that support the product in question; generally fixed bonds or bonds

It is important for the investment return assumption to be consistent with inflation

29
Q

Investment return: key factors, list

List key factors that affect the value assigned to the investment return assumption (or the margin therein) when pricing a health insurance contract (6)

A
  • Significance of assumption for the (pricing) exercise.
  • Intended investment/asset mix for contract, current return and, where appropriate, likely future returns on these assets
  • Extent of any reinvestment risk, and extent to which reinvestment risk can be reduced by suitable asset choice: the less important the reinvestment risk the less account needs to be taken of future investment yields
30
Q

Investment return: key factors, significance of assumption

Describe the following key factors that affect the value assigned to the investment return assumption (or the margin therein) when pricing a health insurance contract:

Significance of assumption (5)

A

Significance of assumption for the (pricing) exercise. Depends on:

  • level of reserves (larger reserves => more important)
  • extent of any guarantees (eg accelerated CI)
  • duration of contract
    • PMI, not very significant, since short-term and annually renewable
    • LTCI/CI, becomes more important as benefit date is further in time (ie long-term)
31
Q

Investment return: key factors, intended asset mix

Describe the following key factors that affect the value assigned to the investment return assumption (or the margin therein) when pricing a health insurance contract:

Intended investment mix/asset mix (5)

A

Intended investment/asset mix for contract, current return and, where appropriate, likely future returns on these assets.

The process for determining the likely future return would be: -

  • consider likely mix of assets that will back the contract in future
  • investigate the returns that such assets yield now
  • attempt to predict the returns that will be obtained from the future asset mix bearing in mind the impact of future changes to the economic environment
32
Q

Investment return: key factors, describe

Describe the following key factors that affect the value assigned to the investment return assumption (or the margin therein) when pricing a health insurance contract:

Extent of reinvestment mix (7)

A

Extent of any reinvestment risk, and extent to which reinvestment risk can be reduced by suitable asset choice: the less important the reinvestment risk the less account needs to be taken of future investment yields

  • reinvestment risk refers to the uncertainty of the return that can be obtained from investment in the future
  • investment available from the future may be different from investment return available now.
  • overall best estimate investment assumptions will reflect expected balance btwn expected future and current investment yields
  • if real cashfow positive in future => requires purchase of future assets. more this happens=>investment ass reflect expected future experience
  • even if negative real future cashflows=> mismatching may mean need to buy/sell assets, so future investment yields still important
33
Q

Investment return:

In what way is tax a factor when setting the investmnet return assumption? (4)

A

Need to allow for appropriate allowance for tax on investment returns (if fund subject to tax)

  • apply appropriate tax rate to different components of tax return
    • eg income gain vs capital gains, or different asset classes’ tax
  • need to allow for assumptions re future tax rates
    • best to use current rates, allowing for imminent known changes
34
Q

Investment return: market consistency

For a contract that is priced using a market-consistent approach, how do we set investment return assumption? (3)

Comment on this process specifically for stochastic modelling (2)

Comment on this process specifically for deterministic modelling (3)

A
  • For market consistent approach
    • expected investment return should be set as the risk-free rate
    • irrespective of the actual underyling assets held
    • this is true for both stochastic and deterministic models
  • If stochastic modelling is used
    • need additional assumptions for investment return volatility and correlation assumptions
    • which are dependent on actual udnerlying assets
  • If deterministic modelling is used
    • use risk-free rate appropriate to term of each cashflow
    • actual assets held are irrelevant
    • eg when pricing an annuity
35
Q

Tax: intro, what tax can be applied to

How might tax influence the assumptions used to price a health insurance contract (or perform other exercises)? (2)

List the various ways in which tax can be applied in the assumption basis for a pricing (or other) exercise on a health insurance contract (3)

A

Including tax:

  • Tax assumptions will need to be allowed for based on known current rates plus any known future changes…
  • …depending on the line of business/territory insurance is operated in.

Tax can be applied on

  • profits
  • investment income
  • premum
36
Q

Tax: different methods of tax

What are the different ways in which tax can be applied in the assumption basis when performing a pricing (or other) exercise for health care contracts:

  • tax on profits (3)
  • tax on investment income
  • tax on premiums (2)
A

Tax on profits

  • can be taxed on profit arising from contracts written and in force.
  • return on premiums over claims needs to be adjusted.
  • usually authorities allow adjustment for reserves

Tax on investment income

  • insurer taxed on investment income excess over expenses incurred.
  • need to include relevant net of tax investment return in basis
    • requires assumptions about asset mix, relative contributions of income and capital gains
    • must be consistent with expenses
    • state may set limits due to some companies using high initial expenses to limit tax paid

Tax on premiums

  • insurer merely collects taxes for state, but healthcare premiums go up which reduces consumer attraction
  • need to account for volume differences
37
Q

Volumes of business

Briefly describe how this assumption will feature when doing a pricing (or other) exercise for health insurance contracts (3)

A
  • New business volume should be considered/assessed
  • Especially important for
    • expense allocations, to choose per-policy contribution to cover fixed expenses,
    • reserves required…to judge adequacy of capital to support new sales ie. launch a new product.
38
Q

Mix of business

What kind of risks arise due to estimating mix of business for a pricing (or other) exercise on health insurance contracts?

A
  • Any cross-subsidies in pricing basis will create a risk that business mix is not as expected.
    • by choosing an average assumption over a group of policies an insurer lays itself open to anti-selection if more higher risk policies are in force
    • this will be made worse if a competitor uses more detail/subdividision in its assumptions and takes all the lighter risks, leaving other insurers with heavy risks
    • it is important to monitor and reappraise assumptions as necessary
39
Q

Mix of business: various factors

According to what factors may the mix of business assumed for a pricing (or other) exercise vary for a health insurance contract?

A
  • average policy size
  • product type
  • distribution channel
  • territory
  • gender
  • age
  • socio-economic status, income or occupation
  • health status
  • new and renewal business
40
Q

Business mix: average policy size

In what way does avarage policy size affect business mix assumptions? (2)

How might we estimate this assumption and what considerations should be borne in mind when estimating this assumption? (3)

A

Influence of average policy size assumptions in business mix

  • used for allocation of expenses eg sum insured
  • average policy size may be linked to socio-economic profile of target market

How we might estimate + what to bear in mind

  • use past experience and market data
  • consider inflation and consumer demand
  • for PMI depends on level of benefits offered and cover option selected
41
Q

Business mix: split by product

Why is thisa assumption important? (3)

A
  • enables indirect expenses to be allocated correctly by contract.
  • allocation of SCR within pricing calculations
  • important to determine investment income from free reserves for each business line
42
Q

Business mix: split by distribution channel

Why is this assumption important? (2)

What else is needed in order to derive this assumption? (1)

A

This is important

  • where commission levels paid are actually different to those assumed in pricing basis, else can just be loaded into premiums
  • hence, need to monitor actual commission paid compared to expected commission assumed in pricing basis

What else is needed to derive this assumption

  • where healthcare insurance products are priced uniformly but sold through different channels, projections by each channels are needed
43
Q

Business mix: split by territory

Why is this assumption important? (3)

A
  • healthcare can vary substantially by territory
  • the actuary may use territory as a rating factor
  • if not used as a rating factor, need to allow for differences through average product costing
44
Q

Business mix: split by gender

Why is this assumption important? (1)

What restrictions may exist with respect to using this split of business within the basis for a given exercise? (2)

A

Why is this assumption important?

  • morbidity risk will almost certainly vary by gender

Restrictions

  • for some product lines, the market practice may prohibit the use of this factor in pricing healthcare
  • for such product lines, the actuary will need estimates of relative numbers and sizes so that the correct unisex price is charged
45
Q

Business mix: split by age

What restrictions may exist with respect to using this split of business within the basis for a given exercise? (2)

A
  • market practice may dictate insurers may not discriminate by age in pricing some health product lines.
  • in such cases, the insurer will need to estimate the distribution of business such that uniform assumptions can be applied across all ages
46
Q

Business mix: split by socia economic status, income or occupation

What makes this assumption important for a pricing (or other) exercise being performed for a health insurance contract? (2)

A
  • this might increase propensity to claim
  • therefore insurer must monitor this mix to ensure adequate premium can be charged over whole portfolio.
47
Q

Business mix: split by health status

What restrictions may exist with respect to using this split of business within the basis for a given exercise? (2)

A
  • in some countries insurers are prohibited from discriminating by health status. i.e. use it in underwriting
48
Q

Business mix: split by new and renewal business

In what way does split of business factor into the assumptions used for a pricing (or other) exercise on health insurance contracts? (4)

A
  • this assumption is important where policies are renewed annually
  • there is no differentiated pricing for new and renewal business due to marketing pressures.
    • if an insurer charged higher premiums for new business then new business volumes might be lower.
    • therefore they should monitor this split to ensure premiums are adequate across whole portfolio.