Experience Rating and Funding Methods Flashcards

1
Q

Experience Rating and Funding Methods

How does group size impact the experience rating approach?

A
  • Small group size = may not have adequate claims data, use manual rating
  • Large group size = only use experience rating
  • Mid-sized groups = use combination of manual and experience rates
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2
Q

Experience Rating and Funding Methods

Theoretical Considerations of Credibility Levels for Experience Rating

A
  • Low frequency coverages (volatile, needs larger exposure base)
  • Widely Varying Claim Sizes (Volatile)
  • Confidence Interval
  • Experience due to Statistical Fluctuation
  • Non-Zero correlation between Experience Period and Projection Period
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3
Q

Experience Rating and Funding Methods

Practical Considerations of Credibility Levels for Experience Rating

A
  • Regulatory restrictions
  • Competitive pressures
  • Admin and managerial units
  • Added cost of experience rating and resulting gains (trade off in volume and quality)
  • Management philosophy
  • Internally self-consistency between classes of business
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4
Q

Experience Rating and Funding Methods

Prospective Rating Steps

A
  1. Incurred Claims Estimate
  2. Adjustments to Claim Experience (Incurred, but unpaid claims)
  3. Final Incurred Claims
  4. Adjustments to Reduce Effects of Random Variation (Pooling)
  5. Trend
  6. Retention
  7. Consider final adjustments
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5
Q

Experience Rating and Funding Methods

Incurred Claims Formula

A

Incurred Claims = Paid Claims + Ending Reserve - Beginning Reserve

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6
Q

Experience Rating and Funding Methods

Pooling Methods

A
  • Catastrophic Claim Pooling
  • Loss Ratio/Rate Increase Limit
  • Credibility Weighted
  • Multi-Year Averaging
  • Combination
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7
Q

Experience Rating and Funding Methods

Factors with Impact on Expected Costs

A
  • Changes in government programs
  • Secular/cyclic trends in rates of disablement or length of disability
  • Mortality trends
  • Utilization or cost trends in medical trend
  • Changes in demographic characteristics
  • Changes in benefits in plan
  • Antiselection opportunities by insureds
  • Changes in insured, economic, or financial environment
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8
Q

Experience Rating and Funding Methods

Common Retention Items

A
  • Expense loadings and ACA fees
  • Deficit recovery charge
  • Termination risk charge
  • Pooling charges
  • Profit charge
  • Investment Income
  • Explicit Margin
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9
Q

Experience Rating and Funding Methods

Retrospective Rating: Current Balance Formula

A

Current Balance = Prior Formula Balance + Premium + Investment Earnings - Claims Charged - Expenses Charged - Risk Charge - Premium Stabilization - Profit

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10
Q

Experience Rating and Funding Methods

Retrospective Rating: Claims Charged Formula

A

Claims Charged = Claims Paid + Increase in Claims Reserves - Pooled Claims + Pooling Charges + Conversion Charges + Claim Margins

  • Incurred basis
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11
Q

Experience Rating and Funding Methods

Premium Stabilization Reserve Addition

A

Reduce risk of being in deficit by accumulating portion of PH surplus

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12
Q

Experience Rating and Funding Methods

Special Funding Arrangements

A
  • Reserveless Plans
  • Minimum Premium Contracts
  • Retrospective Premium Arrangements
  • Self-Insured Plans
  • Level-Funded Contracts
  • Stop-Loss Contracts
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13
Q

Experience Rating and Funding Methods

Reserveless Plans

A

Insurer forgoes portion of premium payments and PH promises to pay needed amount upon termination

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14
Q

Experience Rating and Funding Methods

Minimum Premium Contracts

A

Hybrid of self-insured and insured plans

  • PH deposits funds into account as needed. Claims are paid from fund
  • Insurer is liable for claims above expected amount (like stop-loss)
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15
Q

Experience Rating and Funding Methods

Retrospective Premium Arrangements

A

PH takes on aggregate claim risk in exchange for reduced risk charges and lower upfront premiums

  • If experience is worse than expected, additional premium due
  • If better experience, refund may be payable
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16
Q

Experience Rating and Funding Methods

Level-Funded Contracts

A
  • Admin pays claims, ER pays level amount to admin each month
  • Reconciliation at end of year
    • Worse experience = Stop loss kicks in
    • Better Experience = Surplus converts into credit for next year’s premium
17
Q

Experience Rating and Funding Methods

Types of Rating Methods and Related Arrangements

A
  • Fully Pooled Method
  • Experience Rating
    • Prospective
    • Retrospective
      • Deficit Recovery Arrangement
      • Unilateral Arrangement
      • Bilateral Arrangement
18
Q

Experience Rating and Funding Methods

Deficit Recovery Arrangement

A
  • Deficit (Costs > Premium) = Recovered with premium increase over given number of years
  • Insurer risks being left with deficit if policy terminates
19
Q

Experience Rating and Funding Methods

Unilateral/Bilateral Arrangements

A
  • Unilateral = Insurer assumes Deficit, Client gets surplus
  • Bilateral = Plan sponsor assumes deficit and must reimburse insurer for full amount