Chapter 29 Other risk management techniques Flashcards
What are some initial risk management methods we’ve covered so far in this course? (3)
So far, we’ve covered the following risk management methods
- asset-liability matching
- reinsurance
- capital management
Other risk management techniques: overview
What are the further risk management methods which health insurers can use to manage risks? (10)
In addition to the above, we further cover the following risk management methods in this chapter
- reviewing actual claims experience against pricing basis
- through service level agreements with outsourcers and healthcare service providers
- competence assessments for key in-house staff
- checks on policy data
- surveys on customer service satisfaction
- health risk management, including wellness promotion and screening
- underwriting as gatekeeper and risk analysis
- claims management- in line with policy conditions and underwriting
- treating customers fairly
- controlling the distribution process
Underwriting: intro
What is underwriting?
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.
Underwriting: levels/types
What different levels of underwriting may be used by a healthcare insurer? (3)
- Full medical underwriting
- Medical history disregarded (MHD)
- Moratorium underwriting
Underwriting: levels, full medical underwriting
What do we mean by full medical underwriting? (4)
Advantages (2)
Disadvantages (2)
Full medical underwriting
- the most onerous and detailed form of underwriting
Advantages
- gives insurer most information
- give greatest opportunity to learn about the state of health of individual/risk being assessed
Disadvantages
- it is relatively costly and time-consuming
Underwriting: levels, medical history disregarded (MHD)
What do we mean by underwriting with “medical history disregarded”? (3)
Advantages (1)
Disadvantages (2)
This is underwriting which is essentially at the ‘other extreme’ compared to ‘full medical underwriting’. With MHD underwriting:
- no regard is paid to the individual’s/insured’s past medical history
- no exclusions are made for pre-exisiting conditions
- usually used for group PMI
Advantages:
- less costly and less time consuming
Disadvantages:
- it create greatest potential for anti-selection and so product would have to be priced accordingly
Underwriting: levels, moratorium underwriting
What do we mean by ‘moratorium underwriting’ (3)
What kind of conditions do we normally find with moratorium underwriting at point of claim (3)?
What type of health insurance contracts is it most usually suited to/prevalent with? (2)
Advantages (4)
Moratorium underwriting essentially relates to
- underwriting at point of claim
- no formal underwriting is done at the point of acceptance, but past medical history is examined at time of claim
- though, given underwriting only done at claim, insured may misunderstand what they are covered for
Limitations/conditions usually included with moratorium underwriting
- exclusions of all pre-existing conditions within defined period before acceptance (often 5 years)
- …essentially exclusions of conditions for which treatment has been received recently
- exclusions waived after a certain period eg 2 - 3 years, if policyholder receives no further treatment for condition
Most suited to/usually found with
- PMI policies because of the short-term nature
- may also be used for group CI insurance
Advantage is mainly due to reduced underwriting which can
- insurer can encourage purchase by offering the prospect of immediate cover (subject to limitations mentioned above)
- encourages sales/encourage marketing, and
- reduces new business sales costs
Underwriting: levels, moratorium underwriting, important periods
Briefly touch on the two defined periods that are relevant to the moratorium approach of underwriting (5)
- 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.
- usually 5 years
- 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.
Full medical underwriting: process
Give an overview of the process through which (full) medical underwriting is conducted (3)
In what ways may this overall process vary? (3)
Process is
- Medical and other evidence is gathered
- Interpretation of the evidence
- Underwriting decision is made, ie specify terms/acceptance
The process will vary
- by market practice,
- by product, and
- possibly by regulatory control.
Full medical underwriting: process, evidence gathered, reasoning
Why would an insurer gather medical evidence as part of underwriting? (3)
- 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.
Full medical underwriting: process, medical evidence gathered, sources
Briefly list the sources of medical evidence for an insurer performing underwriting (5)
Medical evidence can be obtained from
- questions on the proposal form completed by applicant
- reports from medical doctors applicant has consulted eg a PMAR (primary medical attendant’s report)
- medical examination carried out on applicant at insurer’s request eg exam undertaken by insurer’s doctors/nurses
- specialist medical tests on applicant eg HIV test
Full medical underwriting: process, evidence gathered, proposal forms
What kind of questions are included in proposal forms? (2)
What key requirement is needed for questions asked on proposal forms when gathering evidence for underwriting (2)
Proposal forms
- willl ask for demographic info
- include questions about insured’s medical history
Questions on proposal forms must be
- factual and not require technical knowledge
- eg can ask if and when applicant has been in-patient in hospital, but not whether their condition was serious
Full medical underwriting: process, evidence gathered, costs
Of the sources from which medical evidence can be gathered, which are/can be quite expensive? (3)
What implication does this have? (3)
These sources can be quite expensive for medical evidence:
- reports from medical doctors applicant consulted
- medical exams carried out on applicant at insurer request
- specialist medical tests
Implication is that
- above data options may generate great expenses for insurer
- hence, extent to which they’re used in a particular case depends on extent of loss insurer may make if it misestimates applicant’s health state
Full medical underwriting: process, other evidence gathered
What other factors influence mortality, hence lead to additional evidence which might be gathered during the underwriting process? (5)
Over and above factors influencing morbidity and mortality, what further information may an insurer seek, and why? (2)
Other factors that affect mortality or sickness need to be investigated, leading to additional evidence gathered, namely any risks associated with:
- applicant’s occupation
- lesiure pursuits of the applicant
- the applicant’s normal country of residence (and possibly also overseas travel)
Additional information
- in addition, to counter the risk of over-insurance, financial details of the applicant may be obtained
Full medical underwriting: process, interpreting evidence
In what context does the insurer interpret the evidence gathered during underwriting? (2)
Who does interpretation of the evidence for the insurer, and how? (4)
Evidence obtained needs to be interpreted
- in terms of/in relation to the standard level of health required by the insurer (ie “according to its standard assumptions”)
Interpretation 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.
Full medical underwriting: process, underwriting decision
Once underwriting information has been gathered and intepreted, the insurer must make an “underwriting decision”. Outline the aspects/options of this step in the underwriting process
- consider ‘standard risk’ applicants (1)
- consider ‘higher than standard risk’ applicants (6)
Applicants with health state reaching insurer’s required standard
- can be offered standard rates for a particular contract.
Cases that are considered to bring higher risks than acceptable standard rates can be:
- offered higher prems/lower benefit, comensurate with risk
- have certain specific clauses and/or conditions excluded
- offered to a reinsurer facultatively with zero retention
- offered different (less risk intenstive) type of policy
- postponed (if period of higher risk deemed temporary)
- declined
Underwriting: risk mngmnt, overview
Briefly describe how underwriting can help the insurer manage risk (6)
- it can protect insurer from anti-selection, and in particular from lives so seriously impaired that 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, help identify most suitable approach and premium level for the special terms to be offered
- helps with adequate risk classification, which 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.
- for larger proposals, underwriting helps reduce risk from over-insurance (financial underwriting)
Underwriting: risk mngmnt, accep risks consistent with pricing assumptions
Briefly describe how underwriting helps manage risk through the relationship which exists between (10)
- the underwriter and
- the actuary does in terms of the pricing/product development process
- close working relationship between pricing actuary and underwriter is very important
- actuary will devise premium rates for standard policyholders using data, models, etc
- actuary then relies on underwriter processing forms to accept lives in line with ‘standard policyholders’ principles ie each policyholder should be charged a price consistent with the risk undertaken
- will require the underwriter to have detailed knowledge of assumptions used by the actuary in gathering data and calculating prices
- underwriter also need to display 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.
- 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
Underwriting: risk mngmnt, heavier risks
We’ve already discribed what actions may be taken for risks which are identified as ‘heavier than standard’ during the underwriting process. From this perspective, what is the key descired outcome from underwriting? (2)
- underwriting attempts to match the risk with the pricing assumptions and ultimately ensure that a suitable premium is charged, whether it be for standard risks, or heavier risks
Underwriting: risk mngmnt, new business acceptance analysed vs expected
Briefly describe how underwriting may help insurer to manage risk in terms of the new business accepted vs that expected (5)
- actuary and underwriter will analyse actual new business level vs expected, by various homogenous risk cells (where data allows)
- comparison to other companies operating in same lines will be very informative
- significant deviations will be investigated to determine whether it’s due to the new business acceptance process
- either need to change procedeurs, or
- change pricing assumptions
Underwriting: risk mngmnt, standard acceptances vs rated cases
Briefly describe how underwriting may help insurer to manage risk in terms of analysing experience from business written on standard terms vs business written on ‘special terms’
after accumulating enough data, actuary will compare experience for claims accepted from
- business written with special terms vs
- business written on standard terms
- …to judge appropriateness of loadings/other adjustments applied
- here, reinsurer’s more volumnous experience can provide valuable/credible input
Underwriting: risk mngmnt, impact on product development
In what way can underwriters contribute to product development and pricing? (3)
What other benefits arise to the underwriter (hence the insurer) of being included in the product design process? (3)
Underwriters can contribute significantly to product development process due to their
- knowledge of new business procedeures,
- awareness of risks presented, and
- position often at the front line of contact with distributor and/or customers
In addition
- involving underwriters in product development ie in determining policy conditions, in aspects of pricing…
- …gives them better understanding of intentions of policy and the risks that the premiums were intended to include
Underwriting: risk mngmnt in community-rating environment
Briefly refresh your memory of what is meant by ‘community rating’ (4)
In what way does underwriting help in a community rated context? (3)
Community rating essentially refers to
- restricting the use of full medical underwriting and rating factors to differentiate premiums ie only being allowed to use restricted invidual-related information to different premiums
- eg in South Africa, PMI premiums can only be differentiated by benefit option, income band and family size ie no
Underwriting can still help in a community rated context as follows
- ensure that community rated premiums reflect the expected claims experience of the mix of policyholders insured
- using moratorium underwriting if full medical underwriting is restricted. -eg temporary exclusions
Claims management: intro
Briefly list ways in which claims management can be implemented to help the insurer to manage risk (7)
Claims management which can be used to help the insurer manage risks:
- validating claims
- ensure claims are paid in line with policy conditions
- check a claim’s validity with the proposal
- product specific claims control measures more important for PMI, where indemnity benefits are offered
- methods aimed at policyholders
- methods aimed at healthcare providers
- care/utilisation management
Claims management: validate claims
How might validation of claims help the insurer to manage claims, hence manage risk
- claims paid in line with policy conditions (2)
- claim conditions vs proposal (3)
In some cases, investigations into claims at claim stage vs proposal stage may yield discrepencies; briefly describe this scenario and the insurer’s course of action (3)
Ensure claims are paid in line with policy conditions
- checking accepted claims are consistent with that assumed in pricing and product design
- claims management team should be involved in pricing/product design
Check a claim’s validity with the proposal
- checking claims conditions compared to admissions/proposal terms
- eg checking medical conditions giving rise to LTCI claim; health impairments should not have been present at initial application
- underwriting and claims should liaise to ensure that info provided at claims is consistent with info provided during underwriting
Medical investigations to substantiate claims can sometimes contradict application info; insurer decision here depends on various factors, including
- materiality of discrepency
- intention by applicant to defraud/withhold info
- other: eg reputational damage from repudiating claim
Claims management: PMI specific, aimed at policyholders, intro
Briefly list claim management methods for PMI which is aimed at policyholders (4)
- Limitations and exclusions on benefits
- Co-payments, levies, deductibles, medical savings account
- Approved provider networks.
- Preventative medicine and wellness programmes
Claims management: PMI specific, aimed at policyholders, indepth
Briefly describe claim management methods for PMI which is aimed at policyholders as follows
- limitations and exclusions on benefits (2)
- co-payments, levies, deductibles, med savings account (3)
- approved provider networks (3)
- preventative medicine and wellness programmes (1)
Limitations and exclusions on benefits
- limit annual monetary amount paid for particular treatment
- can be difficult to set right benefit level, esp where chronic benefit involved
Co-payments, levies, deductibles and medical savings:
- introduces cost sharing: policyholder responsibility for part of medical treatment cost
- can direct utilisation to to more cost-effective options: encourages cost consideration when seeking treatment
- dissentivises unecessary medical treatment; downside => could lead to larger claims in long term
Restrict use to approved provider networks
- where insurer has an agreement with healthcare provider
- set service/treatment guidelines
- level of reimbursement for medical services
Preventative medicine and wellness programmes
- as a strategy to reduce claim costs
Claims management: PMI specific, aimed at healthcare providers, intro
Briefly list claim management methods for PMI which is aimed at healthcare providers (2)
- treatment protocols
- negotiated fees and fixed payment methods
Claims management: PMI specific, aimed at healthcare providers, in depth
Briefly describe claim management methods for PMI which is aimed at healthcare providers as follows:
- treatment protocols
- negotiated fees and fixed payment methods (5)
Treatment protocols
- set of prescribed treatment procedures for specific medical conditions is a way of managing the cost of claims
Negotiated fees and fixed payment method
- insurers may restrict choice of healthcare providers to approved networks where the insurer entered into an agreement with the healthcare provider
- this gives insurer many ways to manage costs through negotiated agreements
- fee discounts
- using incentives to limit costs
- negotiating fixed payment methods
