Chapter 16 - financial assumptions

Question 1

Why do larger policies tend to have better claim experience?

Answer 1

• the policyholders will tend to be from higher socio-economic groups
• there is a stricter level of underwriting imposed for larger sums insured

Question 2

How can healthcare providers be reimbursed for their services?

Answer 2

• fee-for-service
• negotiated fee-for-service
• per-diem
• per-case
• capitation
• salary

Question 3

Fee-for-service

Answer 3

• Industry-level standard fees for specified treatments or services are fixed by healthcare provider representative bodies
• process involves negotiation between organisations representing health insurers, the healthcare providers and possibly the State
• benefits paid on the basis of these standard fees
• may be a gap

Question 4

Negotiated fee-for-service

Answer 4

• health insurers or Health Management Organisations may negotiate a maximum fee per service
• insured may be limited to seeking treatment from a network of preferred providers
• healthcare provider reimbursed at this negotiated fee

Question 5

Per diem

Answer 5

• hospitals are paid a fixed amount per day the policyholder is hospitalised (regardless of reason)
• daily rates may vary according to the ward to which the policyholder is admitted
• average charge per day is equal to total charges by hospital ward divided by the total number of days of hospitalisation by ward

Question 6

Per-case

Answer 6

• providers are paid a fixed amount per-case or hospital admission
• per-case amounts may be differentiated by medical speciality
• fees paid will be based on average cost per case for particular speciality, adjusting for future trends
• per-case reimbursement may be combined with per-diem where per-diems are used for common treatments and per-case amounts for unusual cases

Question 7

Capitation

Answer 7

• Healthcare providers receive a pre-payment (usually per member per month_ regardless of whether the member uses the services or the cost of services
• amount is determined with reference to total costs of delivering service divided by number of members
• more suitable for GPs

Question 8

Salary

Answer 8

• healthcare professional can be employed by the insurer or HMO
• receive a salary regardless of type and frequency of services

Question 9

What risks are transferred to the hospital under per-case arrangement?

Answer 9

• severity risk in terms of length of stay, type of ward and time in surgery
• intensity risk in terms of medication and other treatment required
• risk associated with acquiring infection or complications
• demographic risk if fee is not risk adjusted
• co-morbidity risk associated with the presence of other conditions
• re-admission risk if re-admission for the same diagnosis within a defined period is included in the case

Question 10

Benefit for LTCI and CI

Answer 10

• has some rationale in terms of medical need or need for long-term care
• premiums expressed as a rate per unit of sum insured
• sum needs to be inflated periodically
• increasing benefit and premium annually at same rate in line with some index is not entirely appropriate - risk increases with age so some initial funding must be performed
• absence of simple index to describe medical costs

Question 11

What is the trend in PMI benefit costs a function of?

Answer 11

• medical inflation
• any likely change in medical treatment protocols
• costs of treatment (generally increase due to medical tech innovation)
• demand for more expensive medical treatments
• the future age profile and other risk aspects of the portfolio

Question 12

What expenses should expense assumptions reflect

Answer 12

• initial acquisition
• initial medical underwriting
• initial admin
• renewal admin
• renewal reward to sales channel
• investment
• withdrawal expenses
• claim administration
• termination

Question 13

An area of risk relates to how to incorporate into the charging structure the expenses that do not vary by size of contract. How can this problem be handled?

Answer 13

• individual calculation of premium rates or charges
• policy fee addition to the premium - or deduction from income benefits (the policy fee would represent per-policy expense and premium rate would cover proportionate expenses)
• sum insured differential (different premium rates are charged according to the band into which the requested benefit falls)

Question 14

Comparison with life insurance

Answer 14

• extra underwriting effort required
• non-medical limits often lower
• more information required
• more time is taken to assess morbidity
• initial expenses higher
• products have to be sold
• claims expenses more onerous since more time and medical info will be required to determine validity of claim
• more claims
• costs involved in maintenance of claims

Question 15

Factors to consider when setting expense inflation

Answer 15

• current rates of inflation (price and earnings)
• expected future rates of inflation
• differential between return on government fixed interest securities and government index-linked securities
• recent experience of company/industry

Question 16

What will the value assigned to the investment return parameter be affected by?

Answer 16

• the significance of the assumption on the profitability on the contract (depends on reserves and duration)
• the intended investment mix, return on investments, likely future return
• the extent of any reinvestment risk and the extent to which this can be reduced by suitable choice of assets

Question 17

Factors that lead to sensitivity of the investment assumption

Answer 17

1. the larger the reserves, the greater the proportion of total cashflow that arises from investment income
2. the longer the duration, the longer the reserves will earn investment return
3. the more onerous the guarantee, the more cautious the insurance company should be in selection of assets.

Question 18

Process for determining likely future return

Answer 18

• consider likely mix of assets that will back the contract in the future
• investigate the returns that they are yielding now (and 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

Question 19

Adjustments for taxes on profits

Answer 19

None of the elements in the basis need to be altered, but the return afforded by premiums over claims and expenses may need to be adjusted to permit the appropriate net return

Question 20

Taxes on investment income less expenses

Answer 20

• the heavy initial expenses relieved many long-term insurers from paying tax in the foreseeable future - changed to staggered basis

Question 21

Adjustments for taxes on premiums

Answer 21

• insurer remains neutral to this levy
• no direct allowance for taxation is needed in the pricing model. Just need to ensure that the premium the customer is charged includes the premium tax.

Question 22

For short-term indemnity contracts, average claim amounts may need to be adjusted for:

Answer 22

• medical inflation
• likely changes in medical treatment protocols
• cost of treatment
• demand for more expensive medical treatment
• the future charging structure of hospitals and consultants
• the future age profile of the portfolio