Chapter 16 - Assumptins (3) - Financial assumptions Flashcards
What are the ways in which an insurer can negotiate a price with healthcare providers
- Fee-for-service (Indemnity) - Benefits are paid to the standard fees negotiated between the insurer and healthcare providers. There may be a gap between the actual fees charged and the negotiated fees, leaving the insured to pay for the rest out of pocket
- Negotiated fee-for-service - Insurers may negotiate a max fee per service. This may involve the policyholder being limited to seeking treatment from a network of preferred providers
- Per-diem - Hospitals are paid a fixed amount per day the policyholder is hospitalised, regardless of the reason for care. These are usually for common cases.
- Per-case - Healthcare providers are paid a fixed amount per-case or hospital admission. These are usually for uncommon cases.
- Capitation - The healthcare provider receives a pre-payment regardless of whether that member uses the service or the cost of the service
- Salary - Healthcare professionals can be employed by the insurer to provide services to the policyholder base. The healthcare professional will receive a salary regardless of the type and frequency of services provided.
The trend in PMI benefit amounts is a function of?
MAD CT
- Medical inflation
- Any changes in medical treatment protocols
- Demand for more expensive medical treatment
- Cost of treatment
- The future age profile and other risk aspects ( chronic conditions) of the portfolio
Types of expenses
- Direct vs indirect
- Fixed vs variable
The expense assumptions should reflect the incidence of the direct expenses from which activities
- Initial acquisition
- initial medical underwriting
- Initial admin
- Renewal admin
- Renewal reward to sales channel
- Investment
- Withdrawal expenses
- Claim administration
- Termination
How expenses may be loaded into premium rates
- Expenses that vary with policy size
- Per-policy expenses
What should be considered when setting the expense inflation
- Current rates of inflation, both for prices and earnings
- Expected future rates of inflation
- The differential between the return on government fixed interest securities and on government index-linked securities, where such exist
- Recent actual experience of the company / industry
What should be considered when setting the Investment return assumption
- The significance of the assumption for the profitability of the contract, which will depend on the level of reserves built up and the duration of the policy
- The intended investment mix for the contract, as affected by reinvestment, the current return on the investments within that mix and, where appropriate, the likely future return
- The extent of any reinvestment risk and the extent to which this can be reduced by a suitable choice of assets - the less important the reinvestment risk, the less account needs to be taken of future investment yields.
What are the main factors that lead to the sensitivity of the investment assumption
- The size of the reserves built up
- The duration of the policy
- The investment guarantees given
Main components that make up the inflation of the costs of the benefits for PMI cover
ICE S
- Increases in the cost of medical facilities and equipment
- Cost of medical inflation (including the development of new drugs)
- Exchange rates where medical technology is imported
- Salary inflation for medical professionals and administration staff
How to incorporate into the charging structure the expenses that do not vary by contract size
- Individual calculation of premium rates or charges
- Policy fee addition to the premium, or deducted from the income benefits
- Sum insured differential ( Different premium rates are charged according to the band into which the requested benefit falls)
What is the difference between a renewable and a reviewable contract
A reviewable contract guarantees cover for more than one year ( the actual period being specified), but is subject to reviews of the premiums that apply
- A renewable, like PMI, then the period of cover is only one year, after which premiums can be increased to reflect increases in expenses etc
What are the main factors that lead to sensitivity of the investment assumption
The size of the reserves built up, the duration of the policy and the investment guarantees given:
* The larger the reserves (relative to cashflows), the greater the proportion of total cashflow (and profit) that arises from investment income, and hence the greater will be the sensitivity to changes in the investment return
* The longer the duration of the policy, the longer the reserves will earn investment returns and so the more significant they will be
* The more onerous the guarantee, the more cautious the insurance company should be in its asset selection. This caution should then be reflected in the investment return assumption
How does the intended investment mix for the contract determine what the likely future return would be
- Consider the likely mix of assets that will back the contract in future
- Investigate the returns that such assets are yielding now (and have in the past)
- 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
What are the types of taxes that needs to be allowed for
- Taxes on profit - The company is taxed on profits arising from the contracts being written (and those already in force)
- Taxes on investment income - the insurer is taxed on the excess of investment income over the expenses incurred
- Taxes on premiums
Why would larger policies have better claims experience
- The policyholder will tend to be from higher socio-economic groups
- There is stricter level of underwriting imposed for larger sums insured
