Chapter 20 Pricing (2) Group business Flashcards
-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.
Special characteristics of group business
- Free cover
- Control of intermediary
- limited insured information
- changes in workforce
- Flexible benefits
Free cover
A group may have free below which members will not be individually underwritten.
Control of intermediary
- An intermediary may influence the data available, so the insurer must ensure the information is accurate and that 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.
Changes in workforce
Significant changes to the workforce can alter riskiness of a group scheme
- leavers may be relatively healthy or unhealthy
- joiners are likely to be healthy
- a down-sizing of the workforce might prompt members to make claims while they are still covered.
- 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.
Flexible benefits
- increase anti-selection by permitting individuals to have a choice in covers and amounts.
- Insurer may impose limits and other restrictions on the choice of such benefits.
Limited insured information
- Full details of the individual members may not be known by the insurer at the time when the period of insurance begins.
- There are likely to be changes in staff over the period cover.
- A deposit premium will paid upfront followed by retrospective adjustment premium at the end of the period cover.
Book rate calculation
- The usual procedures apply
- judge the data for relevance to future experience
- subdivide data into homogenous risk cells for analysis
- for each risk cell historic risk cost will be derived.
- make adjustments to make appropriate for future experience
Rating factors used in group covers
-rating factors provide means by which an insurer can assess the correct book premium to charge for any risk, or a set of risks.
- for a group policy the risk premium needs to reflect the overall risk characteristics of the group of lives to be covered under the policy. Therefore will be two different types of rating factors:
1. individual rating factors eg age, gender, smoker status, occupations
2. group-level rating factors eg industry, location, size of group
-the larger the scheme the more likely the price will depend on historical aggregate claims experience and less on individual life rating factors
Experience rating
- 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.
- The overall premium for a group is obtained from:
RP = ZA + (1-Z)E + L
- where E is insurer’s book premium for group
- A is the risk premium based on group’s past experience data
- Z is the credibility factor for the group [0,1]
- L is an expense/profit loading
The credibility factor Z will depend on what?
- the volume of the group experience data.
- Premiums calculated for which Z>0 are experience rated.
Burning cost
- 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 cover and medical inflation.
- Yearly burning cost calculations can be used to compare emerging claim costs over the year against the risk premiums paid.
- These provide the earliest possible feedback on premium adequacy.
Exposure measures to use in group policies
- for PMI - number of people covered
- For CI - the total SI
- For LTCI - the total benefit payable (per annum).
Relevance of previous experience
- 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.
- 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.
- The actuary will have to make suitable adjustments to the data before using it as a base for pricing.
PMI Group pricing: Experience rating
- Some form of experience rating is usually incorporated in group PMI pricing at a level below that which strict statistical approach would demand.
- 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.
- for a new scheme to an exsiting insurer there may be very little past claims history available, which put the existing insurer at an advantage.
PMI Group pricing: NCD
-NCD systems are sometimes used for individual & group business in order to make some allowance for individual claims experience in the premium rates.
- rather than requiring no claims a low claims discount approach may be used.
- this is similar to NCD but it is based on total amount of claims rather than claim numbers.
