Chapter 19.1 Pricing (3) Group business Flashcards
-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.
Group risks: special characteristics
Briefly list the special characteristics specific to group risks which differentiate it from individual business (6)
- group risks generally have lower premiums than individual risks
- free cover limits
- limited insured information
- changes in workforce (new comers/leavers)
- control of intermediary
- flexible benefits
Special characteristics: lower premiums
Why might risks insured within group business generally have lower premiums than for otherwise equivalent risks for individual business?
- reduced anti-selection (harder to anti-select, than for individual business)
- less underwriting costs
- greater economies of scale
Special characteristics: free cover
What do we mean by ‘free cover limit’? (3)
- free cover limit refers to the level of insurance/benefit offered with no underwriting needed
- below this free cover limit, members will not be individually underwritten
- it does not in any way related to cover being provided ‘free of charge’
Special characteristics: limited insured information
What do we mean by limited insured information? (4)
What mechanisms are put in practice in light of the above data limitations (from the insurer’s POV)? (3)
Limited information
- full details of the individual members may not be known by the insurer at the time when the period of insurance begins,
- in terms of age gender, etc
- in addition, there are likely to be changes in staff over the period cover
- such information becomes available later during insurance term
In light of above data issues, in practice
- initial/deposit premium approach is taken, whereby insurer makes estimate of premium required (which is paid upfront by insured) and serves as deposit
- retrospective adjustment premium can then be paid at the end of the period of cover
Special characteristics: changes in workforce
In what way is “changes in the workforce” a factor when pricing group risks specifically? (7)
Significant changes to the workforce can alter riskiness of a group scheme, hence, the price which ought to be charged for the risk
- leavers may be relatively healthy or unhealthy
- if leavers are mostly healthy => unhealthy worker effect
- if leavers mostly unhealthy/ill-health retirees => healthy worker effect
- joiners/newcomers often viewed positively as likely to be young and healthy
- a down-sizing of the workforce might prompt members to make claims while they are still covered
- takeovers/mergers need investigation, to determine their past experience
- an increase in the size of the workforce might improve claims experience as newcomers are often younger and fitter.
- care should be taken if M/A.
Special characteristics: control of intermediary
In what way is the intermediary’s role of special importance in the context of health insurance contracts for group risks? (4)
- an intermediary may influence the data available, so the insurer must ensure
- the information is accurate, and
- it is receiving the same level of information as its competitors
- the insurer would like to exert some influence over group policyholders in order to reduce work related health risks encourage claimants back to work, however this may be impeded by the intermediary.
Special characteristics: flexible benefits
What do we mean by ‘flexible benefits’ in the context of health insurance contracts for group risks? (4)
Give examples of flexible benefits which might be found in practice within flexible benefit schemes (2)
What implications arise for pricing (of group risks) due to flexible benefits being offered? (3)
Flexible benefits arise where the insured (or employee) can select from a range of benefits
- through flexible benefit schemes, individuals are permitted to have a choice in cover chosesn and amount of cover chosen
- usually offered in a group risk context, and meant to embrace many aspects of the employee package, not just insurances
Examples of flexible benefits
- buying more leave days out of salary
- additional pension contributions
Implications of flexible benefits
- increased anti-selection => insurer be highly vigilant about this
- insurer may impose limits and other restrictions on choice of such benefits.
Experience rating: pricing group schemes, using past experience
What do we meant by experience rating? (2)
Why is experience rating used? (5)
Experience rating
- the phrase given to the practice whereby the premium for a group contract depends wholly or partially on the past experience of that group.
- the book rate calcualted is adjusted by that group’s history
Experience rating is used because
- the pure book rate/risk premium the insurer calculates won’t allow for things such as
- nuances/peculiarities specific to the scheme/workplace
- the working processes
- employers attitude towards safety and healthcare
- and so, these particular risk features are possibly best demonstrated by that group’s past claims history, suitably adjusted for expected experience in coming policy term
Comparison with pricing individual business: pricing group schemes, using past experience
How does pricing of group contracts compare with that of individual contracts in terms of use of historical/past claims information? Consider the group setting (2) and then the individual setting (3)
- Some form of experience rating is usually incorporated in PMI group pricing
- ie using insureds’ past claims history to calculate premiums
- Whereas, individual business is normally priced on a community basis,
- the premium is assessed with all other lives in the same risk cell without reference to indiviual claims experience
- premiums is calculated irrespective of the partiular insured’s claim history, and other individual rating factors eg age, are likely to be used
Credibility factor: pricing group schemes, using past experience
What do we mean by credibility factor? (2)
Write down a formula which expresses how the credibiliy factor features in the calculation of the risk premium (4)
Credibility factor
- relates to the factor/value between 0 and 1 representing the porportion of the final risk premium derived from past experience, the balance coming from the book rate
Formula for risk premium, allowing for credibility factor:
- Risk premium=Z*A+ (1-Z)*E. Where:
- Z= credibility factor/prop of risk premium derived from past claims experience
- A = experience rated premium ie risk premium for a given group
- E= book rate premium ie insurer’s standard risk premium (eg PMI benefits) for a given group
Credibility factor: pricing group schemes, using past experience
What does the value of the credibility factor depend on? (5)
Value of crediblity factor depends on:
- the volume of the group experience data/size of scheme
- should be large to justify value closer to 1
- premiums calculated for which Z>0 are experience rated
- may also be competitive reasons to use a higher credibility factor
- commercial practices and market practices in many territories have given full credibility to many group PMI schemes, where less than 100 man-years of information is available
Burning cost, definition: pricing group schemes, using past experience
What do we mean by ‘burning cost’? (8)
Burning cost
- accumulation of claims in 1 or more recent years, which may be taken as first measure of premium adequacy
- typically, it’s the estimated cost of claims in the forthcoming insurance period, calculated from previous years’ experience adjusted for changes in
- the numbers insured,
- the nature of cover
- and medical inflation.
- must allow for estimates of relevant year’s IBNR/RBNS reserves, but must exclude/subtract values from prior years, to prevent double counting
- note that the term can refer to the adjusted claims cost, or to describe the historic claims cost only
Burning cost, uses: pricing group schemes, using past experience
What can the burning cost premiums be used for? (5)
Uses of burning cost
- comparison to risk premium
- yearly burning cost calculations can be used to compare emerging claim costs over the year against the risk premiums paid
- the comparisons would also need to include estimates of all claims reported by not yet settled and claims incurred but not reported in burning cost
- these provide the earliest possible feedback on premium adequacy
- in checking premium adequacy, burning cost needs to be compared against the risk premiums paid in the relevant period
Relevance of previous experience: pricing group schemes, using past experience
To what extent, and how, is previous experience relevant when pricing group contracts? (3)
What kind of significant changes can alter the applicability of past experience to future? (5)
Past experience is important because
- the pricing actuary will look at the past claims history available to judge the extent to which it might be considered a good proxy to the future risk experience.
- the actuary will have to make suitable adjustments to the data before using it as a base for pricing.
Significant changes…
- of personnel
- of location
- of work practice
- in the cover required
- ..are among the factors that can alter the applicability of the past experience to the future.
PMI group pricing context: experience rating
In the context of PMI group contracts specifically, briefly discuss experience rating according to:
- how is experience rating carried out (3)
- the level of credibility factor which can be affored, and why (3)
- scenario of a new scheme (to insurer) with limited claims history (2)
How experience rating is carried out
- Some form of experience rating is usually incorporated in group PMI pricing at a level below that which strict statistical approach would demand.
- May be due to commercial pressures/market practice
Credibility level
- The the frequency of claim that applies with group PMI permits a wider use of experience rating where full or partial credibility will be afforded to past history.
- Depends on number of member years available at time of pricing
New scheme with little claims history
- For a new scheme to an exsiting insurer there may be very little past claims history available => places the existing insurer at an advantage.
