Exam Insights

Question 1

Describe 3 ways to cope with uncertainty in financial forecasts:

Answer 1

1. Sensitivity analysis - vary key assumptions
2. Scenario analysis - vary sets of assumptions
3. Stochastic analysis - simulations using distributions applied to key assumptions

Question 2

Elements of a cahsflow pricing model: (8)

Answer 2

1. Premiums
2. Expenses
3. Commission
4. Claims
5. Contribution to statutory reserves
6. Contribution to solvency capital requirements
7. Interest on cashflow and reserves
8. Tax

Question 3

Explain what is meant by risk disount rate

Answer 3

Rate used to discount future cashflows to give their present values

Represents the risk free rate of return required by the provider of the capital plus margin in respect of variability of the future cashflows valued

It is used in profit testing and embedded value work

Question 4

Define cost benefit analysis:

Answer 4

It puts a monetary value on the cost of the HC system and a monetary value on its outcomes and therefore allows for a direct comparison of cost and outcome

CBA = cost in monetary units/benefits in monetary units

For a project to be recommended CBA < 1

Question 5

Explain why a generalised linear model may be preferable to a one way analysis when estimating the impact certain explanatory variables have on the response variable

Answer 5

1way analysis ignores correlations and interaction effects between variables for exapmle age and disease, age and smoker status

As a result, model may underestimate or double count the effects of variables

A GLM produces estimates of the true value of relativities, by taking account of correlations and allowing investigations of any interactions between variables present in the model

Question 6

3 assumptions of the classic linear model

Answer 6

1. Error terms are independent and come from a normal distribution
2. Mean is linear combinatiom of the explanatory variables
3. Error terms have constant variance (homoscedasticity)

Question 7

Advantages of GLM over classic linear model (3)

Answer 7

1. More general. GLM can take on any distribution in exponential family where classicinear model can only take normal distribution
2. Using a link function, can take account of multiplicative nature of explanatory variables and their effects and transform them to linearity, as opposed to the classic model which assumes the effects of the explanatory variables are additive
3. Variance of response variables is a function of its mean and can often increase with the value of its mean e.g. the Poisson distribution and as it is usually the case when modelling claim amounts

Question 8

Advantages of no claims discount (5)

Answer 8

1. Discourages small claims, which insured will pay for themselves, reducing claim levels and anti selective behaviour
2. Decreases claim aministration costs
3. May increase persistency/decrease lapse rates if NCD is not transferable to other insurers
4. If not offered by other insurers, can be innovative feature, attracting more business
5. May result in positive selection

Question 9

Disadvantages of no claims discount (4)

Answer 9

1. May discourage PH from seeking care, leading to health complications and higher claims costs down the line which could have beem prevented
2. Increases administrative complexity as insurer would need to track NCD level
3. Cost of system development, staff and broker training
4. To fund cost of NCD, higher premiums be required initially, pote tially diacouraging new applicants

Question 10

Risks to discuss when a company is entering a new marketvib different country:

Answer 10

1. Exchange rate risk
2. Investment risk
3. Data risk
4. Assumption risk
5. Expenses risk
6. Claims incidence risks
7. Claims cost risk
8. New business risk
9. Conpetition
10. Operational risk
11. Political risk

Question 11

Operational risk subsets:

Answer 11

1. Dominance of single individual
2. Reputational risks (prm increasing too much
3. Risks relating to data (errors, breaches etc)
4. Risks relating to systems (underwriting accounting etc)
5. Fraud (staff/PH)
6. Regulatory risk (due to non complicance or breach)
7. Business interruption duebto physical risk fire/flood
8. Theft

Question 12

Measures that can be used to test the appropriateness of a GLM: (3)

Answer 12

1. Deviance residuals. Measure the distance between the actual observations and the fitted values
2. Standardised pearson residual - the difference between the observation response and the predicted value, adjusted for the standard deviation of the predicted value and the leverage of the observed response
3. Residual plots - plots of residuals against fitted values. Whichbshould ideally be symmetrical avout the x-axis and fairly constant across the width of fitted values

Question 13

List tue main objectives of managed care interventions (5)

Answer 13

1. Reducing cost of medical events
2. Improving quality of care provided
3. Ensuring medical services are delivered in an appropriate setting
4. Ensuring that high risk members are managed and receive appropriate care
5. Reducing the number of unnecessary medical services

Question 14

Definition of indemnity cover

Answer 14

Indemnity cover is where the insured life’s full costs of your loss (or where the cover restores you to the same financial position as in prior to the health event/loss) due to poor health or a health event, in line with the benefit rules, is covered by the product

Question 15

What is free cover limit?

Answer 15

It refers to the sum assured level in a group risk arrangement below which a member is not subject to individual underwriting.

It is usually a function of the number of members in the scheme or the aggregate level of benefits provided

Question 16

Define anti-selection

Answer 16

People will be more lilely to take out insurance contracts if they believe their risk to be greater than allowed for in the insurer’s premium i.e the benefits are worth more than the premiums payable

Question 17

What is elective surgery?

Answer 17

Surgery that is not deemed necessary or even advisable, but that the patient chooses to undergo, is deemed elective, and seldom covered by PMI. For example cosmetic surgery

Question 18

5 main aims of financial services regulation:

Answer 18

1. Protect consumersnof financial services
2. Prevent financial crimes
3. Address informatiom asymmetries
4. Ensure confidence in the finacial system
5. Correct perceived market inefficiencies and to promote efficient and orderly markets

Question 19

Outline the differences between principles of mutuality and solidarity

Answer 19

Mutuality - each risk/individual is evaluated on its own risk characteristics and charged a premium proportionately with the level of risk posed

Solidarity - individual risks aren’t evaluated for premium purposes - premiums depend on other favtors such as ability to pay, and cover is granted based on need. The group’s risks as a while are evaluated to establish the overall premium required

Question 20

Direct and indirect cost of regulation on health products

Answer 20

Direct:
- developing regulation
- administering regulation
- compliance for regulated firms
- these costs are likely o be borne by final consumer/PH

Indirect:
- alteration of consumer behaviour
- intermediaries behaviour may be influenced, can have detrimental effect on the system
- reduced competition
- reduced innovation
- incentives for insurers to find other ways of to control costs/risk profile eg cherry picking

Question 21

Product specific risks associated with LTC products (7)

Answer 21

1. Risk in transfer probabilities between claim states (for pre funded includes risk of claim inception)
2. Investment risk
3. Longevity risk for claims in payment
4. Expense risk
5. Selective withrawals (pre funded)
6. Risk of guarantees not being met
7. Marketing/reputation risk from PH expectations not being met

Question 22

Data required to compare costs between various network providers: (11)

Answer 22

1. Admission data from hospital
2. Diagnosis and seconsary diagnoses for the admission
3. Consultation info from primary care providers
4. Exposure info (# of lives serviced by each hospital)
5. Demographic info (age, chronic condition, prevalence …)
6. Facility info (size, specialty facility, procedures)
7. Network footprint (# of facilities across country)
8. Treatment/procedures offered by various providers
9. Average cost per treatment/procedure per provider
10. Rate of complications
11. Staff salaries/wages for different providers

Question 23

Ways to measure quality of treatments provided by different networks/providers: (9)

Answer 23

1. Patient/family questionnaire
2. # of secondary infections contracted in hospital
3. # of icu deaths vs. Discharges
4. Average length of hospital stay per diagnosis
5. Number of relapses within x days per diagnosis
6. Staffing - level of seniority, skills, number of vacancies
7. Length of waiting lists
8. Up to-date-ness of technology and/or procedures
9. General upkeep of facilities, equipment

Question 24

Reasons why Health insurer would monitor their experience: (5)

Answer 24

1. Update assumptions for future experience
2. Monitor actual compared to expected experience and take corrective action as needed
3. Monitor any trends in experience
4. Provide management info to aid business decisions
5. Make more informed decisions about pricing and about adequacy of reserves

Question 25

Data sources that can be used to determine assumptions in the case of merger/acquisition:

Answer 25

1. Model points will be provided by seller
2. Previous valuation
3. Industry tables for incidence rates
4. Population tables (if industry tables are unavailable)
5. Reinsurer may also assist
6. Previous published accounts could be used to derive estimates of lapes and renewal rates

Question 26

Challenges state may face with respect to providing healthcare to its citizens: (8)

Answer 26

1. Demographic challenge (ageing population)
2. Technological challenge (new tech is costly)
3. Challenge of sisyphus. (pushimg a rock up the hill, watching it rolling down, repeating process) (new treaent, longer life expectancy, .ore treatments)
4. Burden of disease (eg rise of non-communicable diseases)
5. Medical professionals (long and costly to train, risk they leave)
6. Infrastructure (limited scope for maintaining, upgrading)
7. Competition (state budget has competing needs for very worthy causes)
8. Regulation (significant regulation necessary to protect industry, comes at significant direct cost and indirect cost due to efficiency lost)

Question 27

Advantages of cashflow approach over formula approach: (7)

Answer 27

1. Allows fornassumed experience to vary over time
   2 allows for stochastic model to be built for deriving a distribution of reserve level and for valuation of options
2. Allows for withdrawal experience explicitly (leading to more accurate reserves)
3. Allows more easily for complex benefit structures (eg where charges and benefits depend on future assumptions such as unit linked business)
4. Risk discount rate can take account of the term structure of interest rates
5. Tax can be allowed for more appropriately
6. Can more easily allow explicitely for future bonuses

Question 28

Advantages of formula approach over CF approach: (3)

Answer 28

1. Formula method is much easier and quicker to calculate
2. Formula does not require establishing/purchasing complex and expensive models
3. Formula requires fewer assumptions