Question 1

Give two reasons why, on long-term contracts, policies with larger benefit levels tend to have lighter claim experience than smaller policies.

Accepted Answer

1. The policyholder will tend to be from a higher socio-economic class. 2. Policies with larger sums insured will have had stricter underwriting.

Question 2

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

Accepted Answer

Benefit amount, Benefit inflation, Expenses, Expense inflation, Commission, Commission clawback, Investment income, Taxes. We also consider volumes of business/mix of business

Question 3

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)

Accepted Answer

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

Question 4

Outline how the average claim size assumption may be set for a new contract.

Accepted Answer

The actuary might take the average claim size based on equivalent business from another insurer (if available), and adjust this for differences in policy conditions, differences in negotiated hospital contracts and for future trends in provider capacity and charges. Alternatively, treatment price lists for private hospitals could be used.

Question 5

Benefit amount: LTC/CI, long-term contracts Briefly describe considerations for the benefit amount assumption with respect to these policies (4)

Accepted Answer

Benefits are usually pre-determined 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

Question 6

Discuss whether and how benefits and/or premiums, paid under long-term healthcare insurance policies that do not indemnify the policyholder, should increase over time.

Accepted Answer

For most of these products, the size of the benefit chosen at outset has some rationale in terms of medical need, or practical income where salary is no longer available. In each case, the sum insured needs to be inflated periodically if the policy is to be kept in line with its original purposes. Increasing the benefit and premium annually at the same rate in line with some index or fixed percentage is not ideal, since the risk increases with age and thus some form of initial funding of these increases must be performed. The process is further complicated by the absence of a simple index to describe medical costs. A consumer price index is often used as an alternative, although this ignores medical salary inflation above the rate of price inflation and the additional costs of modern medical technology. Many companies avoid the problem of unknown future indexed benefit increases by escalating premiums and payouts at a fixed annual percentage (often reduced to the rate of increase of consumer inflation, if this turns out to be lower).

Question 7

Benefit amount: PMI, short-term contracts, intro In what way do benefits for short term contracts differ to benefits for long term contracts? (4)

Accepted Answer

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

Question 8

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)

Accepted Answer

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, future age profile of the portfolio 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

Question 9

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)

Accepted Answer

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

Question 10

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 six ways in which providers of care can be reimbursed.

Accepted Answer

Indemnity/Fee-for-Service Modified Fee-for-Service Per-Diem Per-Case Capitation Salary

Question 11

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)

Accepted Answer

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

Question 12

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)

Accepted Answer

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.

Question 13

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)

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

Expenses: intro What is the key consideration to be factored into setting expense assumptions? (3) What other key factor might impact expense assumptions? (2)

Accepted Answer

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)

Question 16

Expenses: different types What different types of expenses might exist?

Accepted Answer

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.

Question 17

Outline how the expense assumptions may be set.

Accepted Answer

The values (for the expense assumptions) will be determined after analysing the company’s recent experience for the type of product concerned. The result of this analysis will be a division of the expenses by function, and possibly by whether the level of expense is expected to be proportional to the level of premium or benefit. Alternatively, the result can be expressed as an amount per contract. If the company has insufficient recent experience to provide meaningful results, or suitable recent experience is not available, the parameter values may be based on a similar line, or on any industry data or data from a reinsurance company.

Question 18

Expenses: different types, overview to determining Give broad principles by which we can determine direct expenses (8) overhead expenses (5)

Accepted Answer

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

Question 19

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)

Accepted Answer

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 since costly Policy Fee Addition to Premium or reduction in benefits: modified if it makes premium uncompetitive, but this would lead to increased risk 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 discontinuities in rates between bands could also cause problems

Chapter 16 Assumptions (3) Financial assumptions Flashcards

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

Brainscape's Knowledge GenomeTM

Chapter 16 Assumptions (3) Financial assumptions Flashcards

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

Brainscape's Knowledge Genome^TM