Chapter 20 - Pricing (2) - Group business

Question 1

Special characteristics of group risks

Answer 1

RICIN FF

• REDUCTION in group size - might indicate a down-sizing of work force, which might prompt more lives to claim for healthcare insurance while they are still covered
• INCREASE in group size - an increase is usually a good feature of a scheme, newcomers are often younger and fitter
• CONTROL of intermediary - The broker will exert influence over the information available
• Limited insured INFORMATION - details of individual lives insured is often not known
• NEWCOMERS/leavers - Change in the composition of the group lives
• FREE cover - free of underwriting up to a certain level
• FLEXIBLE benefits

Question 2

Calculation of group insurance premium rates

Answer 2

• Starts off with the calculation of the insurer’s standard risk premium (or ‘book rate’)
• The cost will be derived by splitting a relevant body of experience into appropriate risk cells
• For each risk cell, a historic cost or rate will be derived
• The overall premium that will be charged will be the sum of the risk premium, expenses and loading for profit

Question 3

What is experience rating when pricing group experience

Answer 3

• Experience rating is the phrase given to the practice whereby the premium for a group contract depends wholly or partially on the past experience of that group

Question 4

What is the burning cost

Answer 4

It is the accumulation of claims in one or more recent years.

It is 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 the cover
and medical inflation.

Question 5

What factors can alter the applicability of past experience to the future

Answer 5

Significant changes:
- Of personnel
- Of location
- Of work practices and
- In the cover required

Question 6

Why group insurance business book rates may be lower than individual business premium rates

Answer 6

1. Claim experience for group business tends to be better due to lower levels of anti-selection (especially where the cover is compulsory for members)
2. Expenses for group business tends to be lower due to:
   * Lower levels of underwriting (as result of lower levels of anti-selection)
   * Economies of scale

Question 7

What is community rating

Answer 7

It is the practice of charging all policyholders (or a significant subset of the persons insured) the same premium rate irrespective of rating factors such as age, gender and medical history

Question 8

What is the formula for the group risk premium

Answer 8

RP = Z x A + (1-Z) x E

Z = credibility factor of the group scheme
A = Is the equivalent risk premium based on the past experience of the group
E = the insurer’s standard risk premium for PMI benefits for the group

Question 9

there will be two different types of rating factors for group policies

Answer 9

• INDIVIDUAL-LEVEL RATING FACTORS – these are rating factors that apply to the individual members covered by the scheme and are therefore very similar to the rating factors that would be used for individual business, for example, the individual-level rating factors for a CI policy might be age, gender, smoker status, and occupation
• GROUP-LEVEL RATING FACTORS – these are rating factors that apply to the group itself, for example, industry and location, size of group, employer’s attitude to his/ her employees’ health etc.

Question 10

What is the credibility factor

Answer 10

• The term credibility relates to the factor, between 0 and 1 inclusive, which represents the proportion of the final risk premium that is derived from past experience, the balance coming from book rates