Chapter 16 Assumptions (3) Financial assumptions

Question 1

Financial assumption: Benefit amount

Answer 1

• Long-term contracts usually have pre-determined benefits—>no assump needed
• EVEN SO, NEED average benefit size since prem is typically per Mille of benefit when modelling—> prem cal’d per unit of average benefit size
• however claims may vary with benefit size therefore some adjustment may be made for large cases.
• PMI is indemnity —>Average claim amounts have to be assessed for PMI.

Question 2

Average claim for PMI should be based on own data & market data but market data should be adjusted for?

Answer 2

• differences in policy conditions
• differences in negotiated hospital contracts (large insurer can negotiate better price or reimbursement structure with provider)
• future trends in provider capacity and charges

Question 3

Services by PMI providers to policyholders can be reimbursed in the following ways:

Answer 3

• indemnity or fee-for-service
• modified fee-for-service - network of preferred providers are paid a fee-for service.
• per-diem(hospitals) - hospitals are paid a fixed amount per day of patient hospitalisation regardless of care provided.
• per case
• capitation
• salary - healthcare professional care can be employed by the insurer.

Question 4

Benefit Amount: LTC/CI

Answer 4

• Pre-determine benefits
• Only with very large benefit size would insurer to change assumptions (like expenses)
• Underlying experience may vary significantly by benefit size depending on:
• policyholder will tend to be from higher socio-economic groups &
• there is a stricter level of underwriting imposed for larger sums insured.

Question 5

Benefit amount: PMI

Answer 5

-Here the actuary needs to project the number of claims & amount of each claim in order to assess premium payable.

Question 6

Benefit inflation: LTC/CI

Answer 6

• For LTC contracts the sum insured may be inflated periodically.
• This is to ensure it keeps up with the costs of long-term care or medical services.
• premium may also be inflated periodically
• this rate should allow for age risk
• rate of inflation may be an index of medical costs, CPI or a fixed rate.

Question 7

Benefit inflation: Short-term contracts

Answer 7

• Average claim amount may need to be adjusted for:
• 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

Question 8

Expenses: LTC/CI

Answer 8

• for LTC contracts charging the same premium for policies of different sizes causes cross-subsidies between policies.
• This 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.

Question 9

Expense assumption: These will vary by ?

Answer 9

• inital
• renewal
• claim
• investment expenses
• withdrawal
• or termination
• and between per policy, per unit of premium
• or per unit of benefit.

Question 10

Define the expense assumption

Answer 10

-Parameter values should reflect the expenses to be incurred in processing and administering the business to be written under the product being priced

Question 11

Expense assumption: Data & grouping data

Answer 11

• 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.

Question 12

Expense assumption: Comparison with life insurance

Answer 12

• More work is required to put a Health & care product on the books than for a life insurance product.
• Main reason for this is: extra underwriting effort required, non-medical limits are often lower
• Product development costs higher due to: effort to derive incidence rates, develop policy literature and train sales staff.
• Unlike life insurance healthcare insurance has be 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 & medical information is needed in validating a claim.

Question 13

What is a non-medical limit?

Answer 13

-The maximum benefit for which one can apply for cover without automatically requiring specified underwriting evidence.

Question 14

Expense inflation

Answer 14

• 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.
• expenses are typically linked to a combination of wage and price inflation.

Question 15

The insurance company might consider the following combination of inflation when setting parameter values for expense inflation:

Answer 15

The recent expense inflation experience of the company should be analysed to determine the basis for the future projection.

• current rates for both prices & earnings
• expected future rates of inflation
• differential between fixed interest government bonds and on index-linked gov bonds
• recent actual experience of the company industry

Question 16

Commission

Answer 16

• Commission is oftern paid at a higher rate on initial premium than on subsequent premiums to reflect additional work involved in selling a policy.
• these assumptions will be determined by amounts the insurer intends to pay the distributor as commission.

Question 17

Clawback definition

Answer 17

• where salesperson is paid higher commission in year one than in subsequent years, if a policy lapses early then there is a chance the insurer will lose out if the policyholder lapses at an early duration and the product has a level annual commission loading in the premium.
• under these circumstances a commission is not deemed to be “earned” in the first few months into duration although it is paid to salesperson
• the salesperson will have to pay back commission not “earned” if policy lapse early ( during earning period)
• insurer takes credit risk.
• the actuary must make assumptions about early lapses and the proportions of unearned commission that will be reclaimed.

Question 18

Commission and clawback: Data & Grouping data

Answer 18

• Commission
  
  • this may be influenced by current levels of sales remuneration in the market place and/or by any legislatively imposed rates of commission.

Clawback

• past experience by distribution channel will be the best guide to the relevant numbers.
• standard approach compares early lapses at each duration against policies exposed.
• analysis would be split by product

Question 19

Adjustments: Commissions & Clawback

Answer 19

• actuary needs to include any special arrangements between salespeople & 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 & adjustments made as appropriate.

Question 20

Loading commission into premiums enables?

Answer 20

• this enables 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 a % of sum insured or occasionally fixed sum.

Question 21

Commission: Comparison with life insurance

Answer 21

• Levels of remmuneration may be higher than on standard life insurance.
• A higher level of initial commission could be justified on a healthcare insurance policy due to extra effort needed on part of salesperson.
• This involves explaining the benefits to a prospective policyholder & collecting extra information required for underwriting purposes.

Question 22

Investment return assumption should be consistent with which assumption?

Answer 22

The investment return assumption should be consistent with:
- inflation assumption

Question 23

The investment return assumption will be affected by (factors to consider)

Answer 23

• 1. The assumps significance for profitability, which will depend on:
     i. size of reserves
     ii. duration of contract
     iii. extent of investment guarantees
• 2. the intended asset mix for the contract. Note: irrelevant factor with risk neutral calibration/approach, use r_f and ignore asset mix unless stoch. approach which will use asset mix for Variance and Correlation parameters
• 3. the extent of any reinvestment risk and extent to which this can be reduced by a suitable choice of assets (term matching). NB: Reinvestment risk arises from uncertainty of future investment income ((future income arises from CFs for interest/investment income on reserves) AND mismatching by term for LT contracts).

-This assumption has little relevance for PMI but a big factor for LTCI.

Question 24

The intended asset mix of the contract

Answer 24

• 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.i

Question 25

The extent of reinvestment risk

Answer 25

• 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.

Question 26

Tax assumptions

Answer 26

• Tax assumptions will be used based on known current rates plus any known future changes for the territory insurance is operated in.
• This should be applied to (different types of tax):
• tax on profits (affects target profit level in calc)
• taxes on investment less expenses (“I-E approach”). (use net of tax amounts in CF calcs)
• taxes on premiums .(no calc impact but affects affordability—>cust attraction)