Chapter 29 Other risk management techniques

Question 1

Underwriting as a risk management tool

Answer 1

• Underwriting can be used to mitigate risk.

- Medical underwriting might be full medical underwriting, moratorium underwriting or medical history disregarded.

Question 2

What is underwriting?

Answer 2

• 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.

Question 3

Different levels of underwriting

Answer 3

• Full medical underwriting
• Medical history disregarded
• Moratorium underwriting

Question 4

What is full medical underwriting

Answer 4

-Most onerous & detailed form of underwriting.
-costly and time-consuming
-gives insurer greatest opportunity to learn about the state of health of individual.
-

Question 5

Medical history disregarded

Answer 5

• 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

Question 6

Moratorium underwriting

Answer 6

• 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.

Question 7

There are two defined periods that are relevant to the moratorium approach.

Answer 7

• 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.

Question 8

The process of full medical underwriting

Answer 8

• The process will vary by market practice, by product and possibly by regulatory control.
• Medical and other evidence
• Interpretation of the evidence
• Underwriting decision

Question 9

Medical and other evidence

Answer 9

• 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.

Question 10

Other factors that affect mortality or sickness need to be investigated, namely any risks associated with:

Answer 10

• applicant’s occupation
• leisure pursuits of the applicant
• the applicant’s normal country of residence (and possibly also overseas travel)

Question 11

Interpretation of the evidence

Answer 11

• 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.

Question 12

Underwriting decision

Answer 12

• 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.

Question 13

Medical underwriting can be used to manage risk in the following ways

Answer 13

• 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.

Question 14

Relationship between underwriting with product development and pricing

Answer 14

• 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.

Question 15

Managing risk in a community-rating environment

Answer 15

• 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

Question 16

claims management control helps to

Answer 16

• 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.

Question 17

Risk management techniques for PMI

Answer 17

• 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.

Question 18

Risk management techniques for PMI can be separated into two categories

Answer 18

• Methods aimed at policyholders
• and methods aimed at healthcare providers
• and care & utilisation

Question 19

Methods aimed at policyholders

Answer 19

• 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.

Question 20

Methods aimed healthcare providers

Answer 20

• 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.

Question 21

When determining whether the results of a clinical study should be considered when adjusting treatment protocols the following questions should be asked:

Answer 21

• 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?

Question 22

Care and utilisation

Answer 22

• 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.

Question 23

Policy and claims data checks of concern to health and care insurer.

Answer 23

• 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

Question 24

regular vetting & spot checks

Answer 24

• 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.

Question 25

Controls on data acceptance

Answer 25

• software for accepting data input should have in built checks that prevent erroneous items from being accepted.
• eg gender other than M or F
• certain errors may have exceptions that can only be overwritten by persons of a pre-specified status with organisation.

Question 26

Staff training

Answer 26

• staff will establish culture of the value of accuracy of data.
• to develop ability to spot information that may be wrong.
• feedback from staff responsible for data input should be encouraged.

Question 27

Product design

Answer 27

• risks can be controlled by considering the design of the product, in particular, the form of the benefits, claim definition, the inclusion of guarantees and options and the terms and condition included in the policy wording.
• The appropriateness of the product design for the chosen target market is also important.

Question 28

Managing the distribution process & customer relationship: The distribution process should be controlled by :

Answer 28

• monitoring sales message
• being aware of business churning
• analysing the quality of sale staff
• being aware of overgenerous commission
• monitoring premiums receipts
• investing in sales training

Question 29

Monitor sales message

Answer 29

• promises made over phonecall should be consistent with conditions insurance contract.
• Literature to support the product & sale should be customer friendly.

Question 30

beware business churning

Answer 30

• salespeople should not be encouraging policyholders to lapse with view to taking out other products (with same or different insurer) & undergoing 2nd set of initial charges.
• products should offer value when measured against new business terms.
• there should be an adequate process of commission clawback.
• there should be an appropriate balance between initial & ongoing commission.

Question 31

Analyse the quality of sales staff

Answer 31

• the record of sales agents should be analysed for volumes written and for persistency.
• complaints against each agent should be reviewed.

Question 32

Beware of overgenerous commission

Answer 32

• commission should be commensurate with sales effort
• commission should be commensurate with policy loadings
• commission levels should not introduce product bias.
• commission should not encourage over-selling.
• commission should be matched with clawback controls on early lapse.

Question 33

Invest in sales training

Answer 33

• Salespeople should be trained enough on sales processes including need to obtain robust information on customers’ health and care insurance needs & ability to pay.
• salespeople and sales support staff should be adequately trained on products and acceptance procedures such as medical underwriting procedures.

Question 34

Managing the distribution process and customer relationship can be categorised into 3 broad categories.

Answer 34

• distribution
• treating customers fairly
• surveys on customer service satisfaction

Question 35

Treating customers fairly should help to:

Answer 35

• regulators may impose requirements to ensure TCF
• make all conditions clear, explicit and in line with customers’ expectations.
• monitor sales processes, ensuring sales staff do not oversell products.
• these requirements by regulator may impact sales process, claims process, etc.
• regulator may make certain features in products mandatory.

Question 36

Survey levels of customer service satisfaction ensure

Answer 36

• customers know what has been bought: Otherwise this might lead to loss of customers, insurer may pay claims against their will cause of regulator.
• it meets their needs: best way to satisfy the customer is by ensuring products meet their needs.
• they receive information as expected: eg statement of unit values, results of any products or premium reviews, contract renewal details under short-term insurances.
• claims are paid correctly and promptly: balance between proving entitlement to a claim & clients’ expectation is important.
• customers are happy, so they don’t leave.

Question 37

Techniques for managing counterparty risk include:

Answer 37

• due diligence on the counterparty before selection: ensures the counterparty meets required standards.
• diversification across different counterparties: reduces risk of default or poor performance by any single counterparty.
• single counterparty exposure limits: similar to point above.
• restriction on the use of counterparties below a specified credit rating: quicker criterion than performing a due diligence exercise.
• credit insurance or derivatives: a type of insurance that protects the insurer against risk of default, insolvency or bankruptcy of counterparty.

Question 38

Use of outsourcing

Answer 38

• 3rd party specialists have been developed to assist the insurer in several core areas of business processes.
• 3rd party salesperson is characterised by the insurance intermediary or broker.
• companies have been set up that will perform specialist activities: underwriting, claims management, actuarial functions like reserving & pricing.

Question 39

Service level agreements

Answer 39

• Once the 3rd party is chosen, a service level agreement will be put in place.
• this will be a legal contract.
• the SLA should have details behind the role of each party to the agreement.
• in return for fees certain tasks will be performed to a pre-specified standard and within pre-specified times.
• by passing certain processes to 3rd parties the insurer is reducing its risks.
• insurer should receive regular reports from the 3rd party to ensure that they will not suffer from reputational risks and security issues.

Question 40

Other internal processes

Answer 40

• enterprise risk management
• experience monitoring and control
• data analytics and predictive modelling
• quality of staff

Question 41

What is Enterprise risk management

Answer 41

• this is a risk management process framework that considers the risks of the business as a whole rather than considering individual risks in isolation.
• this allows for concentration risks within an organisation to be appreciated and diversified where possible.
• an insurer needs to be aware of, and assess the overall risk profile to which it is exposed based on aggregation of the underlying risks that it faces allowing for correlation effects.

Question 42

How can risks be controlled via ERM?

Answer 42

• the actuary should have a regular programme of advising the directors of the nature and size of risks faced.
• Risks should be controlled by analysing and explaining their nature, costing them as far as possible, and agreeing on management strategies for them.
• actuary should model a range of long-term scenarios to show the impact of variations to future experience, and management strategies should be designed to protect those risks that the insurer is able to control.
• risk management strategies shold be documented & implemented. Monitored on an ongoing basis.
• another element of ERM is recognition that value can be added to a business through educated risk-taking, with a strong risk management framework.

Question 43

Experience monitoring and control

Answer 43

• periodic review of insurer’s experience can help the insurer to identify the appropriate risk management actions such as:
• expense controls
• policy retention activity
• reviewing new business strategy
• asset-liability management
• capital management

Question 44

Data analytics and predictive modelling

Answer 44

• bancassurers hold a large quantity of information about a customer who also has a bank account with them, including data on that customers spending habits.
• the ability to analyse and use such information to understand better the underlying risks will become increasingly important in insurance, as more sophisticated analytical techniques develop to facilitate this.
• risk classifications are likely to develop as a result , allowing more accurate rating for each individual customer. The insurer also then has greater ability to select the preferred risks.
• monitoring the available data may also allow the insurer to drive better experience, through early identification of changes in individual insured risks or potentially through being able to interview and influence customer behaviours.
• multi-factor predictive modelling techniques are also increasingly being adopted.
• these techniques can combine the internally held customer data with external drivers, allowing for correlations and interactions between them.

Question 45

Quality staff

Answer 45

• successful performance of a business is down in large measure to the quality of staff employed and their exercise of judgement.
• thus there needs to be in place adequate systems of identification of competence levels required at various stages of business administration, of recruitment, of staff training.
• systems need to monitor for fraudulent as well as incompetent behaviour.
• companies may perform an occasional audit of staff competence.

Question 46

Reimbursement methods

Answer 46

• fee-for-service reimburse on a per service basis and has been associated with escalating costs.
• episode care fees bundle costs for a particular episode of care including different service providers.
• capitation is a fixed fee per covered person payable to the healthcare service provider hence transferring the risk of higher utilisation requirements to the healthcare service provider.
• pay for performance involves structuring incentives to improve treatment outcomes.
• pay for co-ordination involved structuring incentives for managing the referral of patients to other service providers and coordinating the treatment process.
• deal with heavier risks appropriately, eg premium loading or exclusion clause
• analyse new business acceptances against expected.