Chapter 29 Other risk management techniques Flashcards
Underwriting as a risk management tool
- Underwriting can be used to mitigate risk.
- Medical underwriting might be full medical underwriting, moratorium underwriting or medical history disregarded.
What is underwriting?
- The process of consideration of insurance risk.
- This includes assessing whether the risk is acceptable and if so, setting the appropriate premium, together with the terms and conditions of cover.
Different levels of underwriting
- Full medical underwriting
- Medical history disregarded
- Moratorium underwriting
What is full medical underwriting
-Most onerous & detailed form of underwriting.
-costly and time-consuming
-gives insurer greatest opportunity to learn about the state of health of individual.
-
Medical history disregarded
- no regard is paid to the individual’s past medical history.
- no exclusions for pre-exisiting conditions is made.
- less costly & less time consuming
- it create greatest potential for anti-selection and so product would have to be priced accordingly.
- used for group PMI
Moratorium underwriting
- no formal underwriting is carried out at the point of acceptance, but past medical history is examined at time of claim.
- Most suited to PMI policies because of the short-term nature of policy & may also be used for group CI insurance.
- Due to marketing considerations the insurer can encourage purchase by offering the prospect of immediate cover subject only to a total exclusions of all pre-existing conditions.
- this encourages sales and reduces new business sales costs.
There are two defined periods that are relevant to the moratorium approach.
- The applicant can claim for any condition other than those pre-existing in a defined period before acceptance. This is effectively an exclusion of all conditions that have received treatment in a defined period prior to application to the insurer.
- This exclusion is waived after a period of time if the policyholder receives no further treatment for the condition. It is this second defined period that gives rise to the name moratorium, and it is usually set at two or three years.
The process of full medical underwriting
- The process will vary by market practice, by product and possibly by regulatory control.
- Medical and other evidence
- Interpretation of the evidence
- Underwriting decision
Medical and other evidence
- Where the insurer is at risk on sickness under a contract, it will obtain evidence about the health of the applicant so as to assess whether he or she attains the insurer’s required standard of health, and if not what their health state is relative to standard.
- what additional premiums loading is required.
- Medical evidence can be obtained from the following sources:
- questions on the proposal form completed by the applicant.
- reports from medical doctors that the applicant has consulted.
- a medical examination carried out on the applicant at request of the insurer.
- specialist medical tests on the applicant.
Other factors that affect mortality or sickness need to be investigated, namely any risks associated with:
- applicant’s occupation
- leisure pursuits of the applicant
- the applicant’s normal country of residence (and possibly also overseas travel)
Interpretation of the evidence
- The evidence obtained needs to be interpreted in terms of the standard level of health required by the insurer.
- this will be done by specialist underwriters employed by the insurer, who will make use of:
- any doctors specifically employed by the insurer for this purpose.
- underwriting manuals prepared internally or by the major reinsurance companies.
Underwriting decision
- When an application is deemed to represent a higher risk than that assumed in the pricing assumptions, the underwriter still has a number of choices.
- Cases that are considered to bring higher risks than acceptable standard rates:
- can be offered higher premiums or lower benefit
- can be postponed
- can be declined
- can be offered a different type of policy
- can be offered to a reinsurer facultatively with zero retention
- can have certain specific causes and/or conditions excluded.
Medical underwriting can be used to manage risk in the following ways
- it can protect the insurer from anti-selection and in particular from lives whose health is so seriously impaired that it is impossible to assess the risk accurately.
- enables insurers to identify lives with a substandard health risk for whom special terms must be quoted.
- for substandard risks, medical underwriting process will identify the most suitable approach and premium level for the special terms to be offered.
- adequate risk classification within the underwriting process will help ensure that all risks are rated fairly.
- medical underwriting will help in ensuring that actual morbidity experience does not depart too far from that assumed in the pricing of the contracts being sold.
Relationship between underwriting with product development and pricing
- the actuary will rely on the underwriter in processing forms to accept lives in accordance with these principles ie each policyholder should be charged a price consistent with the risk undertaken.
- This will require the underwriter to have detailed knowledge of assumptions used by the actuary in gathering data and calculating prices.
- underwriter will also need to demonstrate expertise in assessing the degree to which any individual proposer, in terms of occupation, previous medical conditions, family history and other potential claims factors, represents a risk within the boundaries of the pricing expectations.
- a close working relationship between pricing actuary and underwriter is very important.
- underwriter needs to understand the policy conditions and intentions of policy and risks which premiums were intended to cover.
- underwriter should be aware of new business procedures and risks in front line contact with the distributor in order to assist in the product development process.
Managing risk in a community-rating environment
- ensure that community rated premiums reflect the expected claims experience of the mix of policyholders insured.
- use moratorium underwriting if full medical underwriting is restricted.
- eg temporary exclusions
claims management control helps to
- ensure claims are paid in line with policy conditions
- check a claim’s validity with the proposal.
- product specific claims control for PMI include using pre-authorisation procedures.
Risk management techniques for PMI
- encourage policyholders to seek the lowest cost medical treatment that is appropriate for their condition through cost-sharing arrangements, use of approved provider networks and preventative medicine and wellness programmes.
- limit the amounts paid to healthcare providers through treatment protocols and negotiated fees and fixed payment methods.
- manage the utilisation of healthcare services through pre-authorisation, case management and utilisation reviews.
Risk management techniques for PMI can be separated into two categories
- Methods aimed at policyholders
- and methods aimed at healthcare providers
- and care & utilisation
Methods aimed at policyholders
- Limitations and exclusions on benefits: Limits by treatment.
- Co-payments, levies, deductibles and medical savings: These make the policyholder liable for part of the cost related to the medical treatment.
- Approved provider networks.
- preventative medicine and wellness programmes.
-One aim of risk management techniques is to encourage policyholders to consider the cost implications when seeking treatment.
Methods aimed healthcare providers
- treatment protocols : Use of prescribed treatment procedures is a way of managing the cost of claims.
- negotiated fees and fixed payment methods: insurers may restrict choice of healthcare providers to approved networks where the insurer entered into an agreement with the healthcare provider.
When determining whether the results of a clinical study should be considered when adjusting treatment protocols the following questions should be asked:
- are the results valid? Did the study use appropriate research methods to value or measure the benefits?
- What are the results? Do results show the test is more accurate or the treatment more effective?
- What is the sensitivity of the results to changes in research subjects, treatment regimens and medicine dosage?
- are the results applicable to the targeted group of policyholders or patients?
Care and utilisation
- Pre-authorisation: PMI is structured such that the insured seeks authorisation from the insurer prior to undergoing treatment.
- Case management: involves monitoring the policyholder while they are receiving treatment by communicating with the healthcare provider.
- Utilisation reviews: restrospective utilisation reviews are helpful in identifying trends in treatments, healthcare with excessive costs, fraud and billing errors.
Policy and claims data checks of concern to health and care insurer.
- accuracy of policy and claims data is a major risk for any insurer.
- it is important to ensure the proposal form and administration systems have the same format.
- by using regular vetting and spot checks
- using controls on data acceptance
- by use of compulsory fields
- training of staff
regular vetting & spot checks
- considering whether data captured are comprehensive.
- this involves systematic comparison between paper records on a periodic basis against facts stored, & deviations noted.
- policy records should be checked end-to-end all the way through data process from input to eventual use.