Group and Health Specialty Flashcards

1
Q

Types of antiselection

A
  1. External - occurs as the person is first becoming insured. Those with expensive health conditions will seek insurance.
  2. Internal - occurs while the person is insured
  3. Durational - occurs as people make decisions about whether to end coverage. Higher cost insureds tend to keep their coverage in force longer.
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2
Q

What is the buy-down effect?

A

Buy-down effect = upon receiving a rate increase, some policyholders switch to lower cost plans, so the actual premium increase will be less than expected.

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3
Q

What is premium leakage?

A

Premium leakage = unhealthy individuals are less likely to buy down their benefits. So the claim cost reduction is less than the premium reduction and not enough premium is collected.

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4
Q

Mechanisms for controlling external antiselection:

A
  1. Individual underwriting before issue.
  2. Pre-existing condition limitations.
  3. Requiring an enrollment mechanism that doesn’t permit anti selection, such as requiring a minimum participation percentage for associates.
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5
Q

Tools used in underwriting process

A
  1. Individual application- includes medical history, financial information, and a release to obtain information from third parties
  2. Attending physician statement- insurer may choose to request APS from any physician listed in the application
  3. Commercial databases (e.g. MIB)- used to check information provided in the application
  4. Internal data - such as prior applications and claim databases
  5. Telephone interviews - can replace the need for requesting third party information, thereby speeding up underwriting process
  6. Inspection reports - any information obtained through direct contact with the applicant or other related to the applicant
  7. Lab testing - may detect tobacco, illegal drugs, or the presence of some medical conditions
  8. Medical exams - due to high costs, rarely used in underwriting for medical coverages
  9. Tax returns - often the best source of financial information
  10. Pre-existing condition provisions - used to protect against antiselection
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6
Q

Actions available to the underwriter

A
  1. Offer full coverage with no restrictions
  2. Decline coverage
  3. Offer coverage at a higher premium rate, either temporary or permanent
  4. Offer a standard policy with an exclusion rider for a specific body system or condition
  5. Offer a different policy than the one applied for, such as one in a substandard risk pool
  6. Offer a different benefit plan than the one applied for, e.g. longer elimination period or shorter benefit period
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7
Q

Criteria for selecting claims to investigate

A
  1. timing - do not investigate claims beyond the time limit for rescinding a contract
  2. conditions - certain conditions can be ruled out as being a pre-existing condition
  3. size - don’t investigate a claim if the cost of investigation exceeds the cost of the claim
  4. sentinel conditions or procedures - some conditions are related to others that lend themselves to antiselection (e.g. HIV)
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8
Q

Situations when the CAST model doesn’t work well

A
  1. In the first 3-4 durations, when impact of underwriting wear off overwhelms the CAST effects. The solution is to apply additional underwriting selection factors.
  2. In later durations, where only a fraction of the original population remains. The solution is to choose a higher value of k2 and recalibrate the model.
  3. At all durations, when a rate spiral is severe and volatile.
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9
Q

Shock Lapse formula

A

Shock Lapse = [Rate increase - Trend] / [(Rate Increase - Trend) + (1 + Trend) / EF]

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10
Q

Uses of health insurance financial models

A

Hint: Please read my story featuring actuaries

  1. Pricing - financial and sales models are used to determine premium
  2. Reserve calculations and reserve basis evaluation - some reserves such as gross premium reserves are calculated by forecasting models
  3. Monitoring of results - to validate assumptions, to warn of deviations from expected values, and for resource planning
  4. Solvency testing - may indicate a need for gross premium reserves
  5. Financial forecasting - corporations forecast results for various reasons
  6. Actuarial appraisals - these are studies of the value of a block of business, typically used when transferring ownership
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11
Q

Characteristics of a good model

A

Hint: ASSER

  1. Reliable accuracy - must be good at predicting the future. Must also be robust
  2. Suitability for use - model should produce results it was designed for, without adding unnecessary complications
  3. Appropriate precision - this relates to how many decimal places should be kept in the values
  4. Sensibility - the model should reflect a logical construction of what is being modeled
  5. Effectively communicated - this includes communicating everything necessary to understand and use the model’s results
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12
Q

Steps in building a forecast model

A

Hint: Sing in an eloquent voice. Don’t cough.

  1. Choose basic structure. Tools can include spreadsheets, databases, and sequential programs. Model types include asset share models and reserve development models.
  2. Choose information to be carried. the information needed will depend on the purpose of the model.
  3. Choose assumptions and building a prototype projection. Starting values and assumptions must be built into the model. A prototype cell is defined, and then projected to the end of the forecast period.
  4. Extending the prototype - after the prototype cell is built, the model must be extended to other cells which represent the different subsets of the business being modeled.
  5. Validate the model
  6. Document the model - allows model to be evaluated by professionals, and makes it easier to modify
  7. Design output and communicate results - output can be useless unless it is in the context of the question being asked
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13
Q

Model validation methods

A
  1. Starting values are compared to actual values for that year
  2. Year to year changes in the model are compared to actual past historical results
  3. Model results are checked for reasonableness by people familiar with the business
  4. Stress testing - analyze how the modeled results behave when some of the underlying assumptions are changed
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14
Q

Assumptions needed for forecasting

A

HINT: let me call every pretty man

  1. Lapse assumptions
  2. Mortality - some models combine mortality and lapse
  3. Claim costs - best to use actual experience. Trend assumptions are needed to predict future claim costs.
  4. Expense assumptions - expenses are usually expressed on a per unit basis.
  5. Profit - ROI, ROE, or % of premium
  6. Model office assumptions - define he proportion of the block of business represented by each model cell
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15
Q

Bases used as expected amounts for AtoE analysis

A

HINT: only parrots can talk

  1. original pricing assumptions - management expectations are often based on this
  2. profit targets - bottom line that most senior management is interested in
  3. current pricing - useful for inflation sensitive products
  4. tabular - for DI and LTC, companies with large amounts of data may develop their own internal tables for comparisons
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16
Q

Types of reserves in disability income insurance

A

Active life - exists for policies priced on a level-premium basis. Consists of the excess premiums charged in early years to cover the premium shortfall in later years

Disabled life reserve - established to cover each disability claim and its projected length

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17
Q

Factors that stimulate product development for disability income

A
  1. Responding to competition - marketplace is product sensitive, so must react to competitors’ product changes
  2. Consumer demands - as the consumer has become more aware of the need for DI, this product has evolved
  3. Claims experience - must be monitored on an ongoing basis
  4. Governmental influence - regulatory and tax changes can also impact disability income insurance
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18
Q

Areas that participate in the product development process

A
  1. Sales and marketing - closest to consumer, which results in product ideas competitive info
  2. Actuarial - determines pricing and safeguards for new products
  3. Underwriting - determines if new UW approach is necessary
  4. Claims - determine what new risks and factors it will face in administering claims
  5. Data processing and systems - new products may require substantial modification to existing systems
  6. Legal - able alternative approaches to avoid problems with state approval
  7. Investments - investment returns on new products
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19
Q

Types of disability income claim experience studies

A
  1. Actual to expected morbidity - most preferable, but often not enough data
    a. rate of disability - # disabled lives per 1000 exposed
    b. rate of recovery - # of disabled lives that recover, per 1000 disabled lives
  2. Loss ratios - most studies based on this
    a. cash ratio - claims dollars paid out / earned premium
    b. incurred claims ratio (preferred) = (claims + active life reserve + claims reserve)/ earned premium
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20
Q

Parameters to consider in a disability income claims or persistency study

A

Hint: Abis is deep gap. Oo

  1. Occupation class
  2. Occupation
  3. Policy form
  4. Extra benefits
  5. Age
  6. Duration
  7. Elimination period
  8. Benefit period
  9. Indemnity (benefit amount)
  10. Income
  11. Geography
  12. Agent and agency
  13. Sex
  14. Mode of premium payment
  15. Smoking status
  16. Combinations of above parameters
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21
Q

Considerations in establishing morbidity assumptions for LTC

A

Hint: If you drink too much RUM, consume too much DIRT, listen to too much RAP like MM, or get the CLAP, you might end up in long term care. Consider that.

  1. Data sources - insured data is best, but can use population data adjusted for bias and other issues
  2. Integration of coverages
  3. Reinstatements
  4. Transfers
  5. Coordination with other coverage such as Medicare
  6. Pre-existing requirement - not going to save much b/c of heavy UW
  7. Level of care - daily costs vary by type of care
  8. Area - affects utilization and charges
  9. Policy options and benefit triggers - richer plans lead to more adverse selection
  10. Age/ gender - older = more expensive. female = more expensive.
  11. Marital status
  12. Morbidity improvement - debateable that population experience improving over time
  13. UW - strongly impacts experience in early durations
  14. Marketing - broker and agents
  15. Reinsurance - arrangements include coinsurance, modified coinsurance, yearly renewable term
  16. Regulatory considerations - actuary must certify that rates are sustainable under moderately adverse experience
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22
Q

Considerations in pricing LTC

A

Hint: SMILE MPL

  1. Morbidity
  2. Investment earnings
  3. Expenses excluding profit
  4. Voluntary lapses
  5. Mortality - 1994 GAM table is used in NAIC model, but many actuaries feel rates in this table are too high
  6. Surplus strain - reserves have significant impact on pricing due to conservatism required and long duration of policies
  7. Profit - takes 7-10 years to emerge
  8. Loss ratio requirements - most states require 60%
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23
Q

Loss ratio formulas for LTC

A

In order of lowest LR to highest LR:

  1. PV of paid claims / collected premium
  2. PV of discounted incurred claims / earned premium
    a. this is the approach required by most states
  3. PV of undiscounted incurred claims divided by earned premiums
    a. recognizes investment income on claim reserve
  4. PV of discounted incurred claims + PV of change in policy reserve divided by PV earned premium
  5. PV of undiscounted incurred claims + PV of change in policy reserve divided by PV of earned premiums
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24
Q

Medicare supplement pricing assumptions

A

Hint: Mama Pisseo

  1. Morbidity
  2. Mortality - not significant, frequently combined w/ persistency
  3. Persistency
  4. Investment earnings - credited to various types of reserves held
  5. Selection factors/ underwriting
  6. Age and sex distribution
  7. Smoker vs. non-smoker
  8. Area factors
  9. Expenses and taxes
  10. Other considerations - modal factors and policy fees
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25
Q

Steps for developing critical illness incidence rates

A
  1. Start with general population age-specific incidence rates from government sources and research
  2. Adjust these rates to fit the condition definitions in the policy
  3. Apply any applicable trends
  4. Use ratios of insured lives to population mortality to adjust rates from the general population to an insured population
  5. Use ratios of nonsmoker to smoker mortality to segment rates into nonsmoker and smoker rates
  6. Use ratios of select to ultimate insured mortality to create select and ultimate rates
  7. Compare the rates to any available insurance experience and adjust as deemed necessary
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26
Q

Types of critical illness policies

A
  1. Standalone - offers coverage only for critical illness
    a. Basic - cancer, heart attack, strike, and coronary artery bypass graft
    b. Enhanced - 15-20 additional conditions and costs about 30% more
  2. Acceleration - combines coverage for both critical illness and death. Pays the face amount on the earlier to occur of critical illness or death
    a. An alternative is partial acceleration. 25-50% of face amount is paid for critical illness, after which the remaining face amount remains in force as death protection only
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27
Q

Definition of critical illness insurance. It pays when…

A
  1. Insured is diagnosed with a condition covered in the policy. Diagnosis must be made by a doctor and must be supported by objective evidence
  2. The condition meets the definition in the policy and is not excluded by any other policy provision
  3. The insured survives for a specified period (~30 days) after diagnosis
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28
Q

Conditions covered by basic critical illness insurance

A
  1. Life-threatening cancer
  2. Heart attack - may exclude mild heart attacks
  3. Stroke - requires a measurable neurological deficit that persists for 30 consecutive days
  4. Coronary artery bypass graft - similar procedures that do not involve grafts are excluded
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29
Q

Conditions in enhanced critical illness insurance

A
  1. Multiple sclerosis
  2. Kidney failure requiring dialysis
  3. Major organ transplants
  4. Cardiovascular - heart valve replacement and aortic surgery
  5. Degenerative: motor neuron disease, Parkinson disease, Alzheimer disease
  6. Brain: coma and benign brain tumor
  7. Head: blindness, deafness, and loss of speech
  8. Body: loss of limbs, paralysis, major burns, and occupational HIV
  9. Loss of independence (covered by some companies)
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30
Q

Optional product features on critical illness policies

A
  1. Return of premiums on death
  2. Return of premiums on expiry, if policy still in force
  3. Return of (% of) premiums on surrender. % may increase to 100% over time
  4. Face amount increasing to keep up with inflation or decreasing to match declining principal remaining on loan
  5. Partial benefits (10-25% of face amount) payable for some non-life threatening conditions which have been excluded in the policy
  6. Assistance benefit - provides medical consulting advice for the diagnosed critical illness
  7. Guarantee that premiums will not change
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31
Q

Tools used for financial management

A

Informational tools

  1. Financial Analysis - collect historical information on financial results, mortality, investments, and sales
  2. Modeling - ability to project future financial results. Can be combined with historical information to help make business decisions.

Risk transfer options

  1. Reinsurance - can be used for transferring risk and for shifting earnings, capital, revenue, benefits, expenses, assets, and liabilities
  2. Acquisitions of businesses
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32
Q

Regulatory action levels for Health RBC ratios

A
  1. Company Action Level (150-200%) - requires company to submit a corrective action plan
  2. Regulatory Action Level (100-150%) - allows the commissioner to examine the company and issue an order specifying corrective actions
  3. Authorized Control Level (70-100%) - allows commissioner to place the company under regulatory control if deemed to be in the best interests of policyholders and creditors
  4. Mandatory Control Level (<70%) - requires commissioner to take regulatory control of the company
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33
Q

Parts of RBCAC formla

A

H0 = Asset risk for affiliates, the risk that stock on affiliate may lose value

H1 = Asset risk for other assets, the risk that investments may default or decrease in value

H2 = Underwriting risk, the risk of having inadequate premiums

H3 = Credit risk, the risk of not recovering amounts owed to the insurer

H4 = Business Risk, includes several miscellaneous types of risk, such as administrative expense risk and excessive growth risk

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34
Q

Authorized control level (ACL) capital =

A

RBCAC / 2

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35
Q

Health RBC ratio =

A

total adjusted capital / ACL capital

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36
Q

H2 Underwriting risk =

A

claim experience fluctuation risk + other underwriting risk

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37
Q

H2 claim experience fluctuation risk =

A

Sum of risk charges for

  1. comprehensive
  2. Medicare Supplement
  3. Dental and vision
  4. Medicare Part D
  5. Other

Risk charge = premium * ratio of incurred claims to premium * risk factor * managed care risk adjustment factor

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38
Q

H2 other underwriting risk includes:

A

Coverages not included in claim experience fluctuation risk such as disability income, LTC, stop loss, and AD&D

Adjustments for rate guarantees and premium stabilization reserves

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39
Q

Features of ERM that distinguish it from traditional risk

A

Hint: ELF HORN

  1. ERM creates organization [resilience] in achieving corporate goals
  2. ERM views the organization [holistically], rather than in silos
  3. ERM is [embedded] within management framework, rather than being the responsibility of a single risk manager
  4. ERM provides a common [language] to discuss risks and opportunities
  5. ERM provides a [framework] for identification and evaluation of potentially harmful conditions and events
  6. ERM ensures the organization assumes [no more] risk than necessary to achieve goals
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40
Q

Process of typical risk management

A
  1. Identify risk - circumstances and events that may cause harm to the organization. This is where most programs fail, because they only focus on known risks.
  2. Evaluating risk - determine likelihood and severity
  3. Mitigating risks - applying methods that reduce likelihood or severity of risk events
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41
Q

Reasons why organizations fail to detect emerging risks

A

Hint: I Fuji

  1. Uncertain [future]
  2. Poor [information] about current conditions in organization and environment
  3. Poor [understanding] of organizational complexity makes it difficult to understand the meaning of the information available
  4. Poor [judgement] in deciding how to respond to organizational challenges
  5. Financial [incentives] given to management do not align with other stakeholders
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42
Q

ERM process for managing enterprise-wide risks

A
  1. ERM expands the risk profile by searching for unknown risks. Consists of:
    a. Developing a detailed description of the business system
    b. Constructing the risk hypothesis, which is a structured understanding of the organization’s risk profile and its ability to achieve corporate goals under both normal and stressed conditions
  2. Traditional risk management used to evaluate and mitigate known risks, with ERM ensuring that an integrated response is used
    a. Risk evaluation includes developing ranges of the likelihood and severity of potential harmful events
    b. Risk mitigation involves deciding what to do about the various potentially harmful conditions
  3. An appropriate risk capital is determined - regulators mandate minimum capital requirements, but insurers should hold additional surplus to reduce the likelihood of regulatory intervention
  4. ERM follows up with monitoring and oversight by the board of directors and senior management
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43
Q

Possible indicators of emerging risks

A
  1. High employee turnover
  2. Frequent reassignment or replacement of project managers for major initiatives
  3. Frequent downtime of computer systems
  4. Frequent manual overrides or intervention required
  5. Numerous manual processes
  6. Frequent complaints from internal or external customers
  7. Significant variance of key indicators from normal or best practice
  8. Reactive, rather than proactive, approach to problem solving
  9. Frequency of suprises
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44
Q

Typical information contained in a risk register

A

Hint: PROM IS A DRAG

  1. [Description] of risk scenario
  2. Details of how and when the scenario was [identified]
  3. Which corporate [goals] the scenario affects
  4. Description of the [method] used to quantify risk exposure and the time horizon for modeling
  5. The range of [outcomes] considered
  6. The outcome of a [reverse stress test], which identifies the conditions that would cause risk capital to be exceeded
  7. Assessment of likelihood and impact [prior] to mitigation under normal and stressed environments
  8. Description of mitigation [strategies] and assessment of their effectiveness and cost
  9. Assessment of likelihood and impact [after] mitigation
  10. Assignment of [responsibility] for monitoring the risk scenario
  11. Details regarding [action] plans
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45
Q

Risk mitigation strategies

A

Hint: ATC

  1. Risk avoidance - e.g. not expanding into new areas. Most business risks are unavoidable
  2. Risk transfer - usually through insurance, such as reinsurer
  3. Risk control - done through performance improvement. E.g. internal policies and best practice methodologies
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46
Q

Characteristics to enter into the risk dashboard for each identified risk

A
  1. Brief description of the risk
  2. LOBs affected
  3. Gross likelihood
  4. Gross severity
  5. Gross risk rating - combination of likelihood and severity
  6. Control effectiveness - ability of mitigation strategies to reduce likelihood or severity
  7. Net likelihood after mitigation
  8. Net impact or severity after mitigation
  9. Net risk rating - includes effect on capital
  10. Tolerance - willingness to accept the risk remaining after mitigation
  11. Net risk rating vs. tolerance
  12. Action plan status - implementation status of mitigation strategies
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47
Q

Senior management responsibilities for implementing ERM

A
  1. Communicating support of the ERM process to the rest of the company
  2. Maintaining a culture of performance improvement and learning from successes and failures
  3. Allowing for open discussion of risk
  4. Providing direction to the risk management committee and CRO
  5. Determining risk appetites and limits
  6. Establishing limits of authority for risk assumption
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48
Q

Responsibilities of the CRO

A
  1. Being chief champion of ERM process
  2. Leading the risk management committee
  3. Directing the ERM process by guiding business units as they prioritize, evaluate, and mitigate risk
  4. Guiding information collection and performance monitoring
  5. Testing the perceived risk profile
  6. Modifying the risk profile and risk models using emerging experience and knowledge
  7. Ensuring the organization continues to learn from emerging experience and that the risk profile is continuously updated
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49
Q

Benefits of ERM

A
  1. Credit agencies may be willing to lower borrowing costs
  2. Regulators and the board of directors may allow management more flexibility in managing the company
  3. Management will better understand the business system
  4. The organization will know how much corporate risk capital should be held
  5. There will be fewer unknown risks
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50
Q

Common features of ERM

A

Hint: Mic Mac D

  1. An assessment of the [context] in which the framework is operating. Includes understanding the internal and external environments and the interests of stakeholders
  2. Consistent risk [classification]
  3. Risks to which the organization is exposed must be [identified]
  4. The risks must be [assessed] and compared to target levels of risk
  5. A [decision] must be taken on how to deal with risks that exceed targets
  6. [Measures] to manage risk are implemented
  7. The process needs to be [monitored], documented, and communicated
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51
Q

Models of risk management

A

Hint: 3 odd pp(l)

  1. Three lines of defense:
    a. Day-to-day management by first-line business units
    b. Ongoing monitoring by the central risk function (CRF)
    c. Occasional audits of first-line business units and the CRF
  2. Offense and Defense - says first line business units should take as much risk as they can to maximize returns while CRF should reduce risk as much as possible to minimize losses. Should be avoided b/c 1st two lines are in opposition.
  3. Policy and policing - says CRF should set risk management policies and then monitor compliance with those policies. But often results in the CRF being too “hands-off”
  4. Partnership - says the first-line business units and the CRF should work together closely to maximize returns subject to an acceptable level of risk. This may leave the CRF too involved to give an independent assessment of first-line units.
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52
Q

Categories of risks

A

Hint: SMILED FOR CN

  1. Market risk - e.g. fluctuations in value of assets held
  2. Economic risk - e.g. price and salary inflation
  3. Interest rate risk - risk arising from unanticipated changes in the overall level of interest rates or in the shape of the yield curve
  4. Foreign exchange risk - the risk when cash flows received are in a currency different from the cash flows due
  5. Credit risk - default risk
  6. Liquidity risk - the risk that a firm cannot easily trade its assets or that it cannot raise additional financing when required
  7. Systemic risk - risk of failure of financial system
  8. Demographic risk - mortality risk and longevity risk
  9. Non-life insurance risk - related to incidence of claims and their intensity
  10. Operational risks - risks that impact the way in which a firm carries on business
  11. Residual risks - risks that remain once an action has been taken to treat a risk
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53
Q

Types of systemic risk

A

Hint: clef

  1. Financial infrastructure - e.g. bank not being able to pay back loans from other banks
  2. Liquidity risk - if run on banks occurs
  3. Common market positions - feedback risk is the risk that change in investment’s price will result in further changes in the same direction
  4. Exposure to a common counter party - the risk that a relatively small failure will cascade through several layers of investors
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54
Q

Types of demographic (mortality or longevity) and non-life insurance risk

A
  1. Level risk (life insurance) or underwriting risk (non-life insurance) - the risk that the average level of claims of a particular population will differ from what was assumed
  2. Volatility risk - the risk of claims differing from assumed due to volatility in a small population
  3. Catastrophe risk - the risk of large losses due to some significant event (natural disaster)
  4. Trend risk - risk that claims rates will change unexpectedly from current levels
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55
Q

Types of operational risks

A

Hint: Bringing rufies to dance clubs might result poorly. Should probably bring lighter pills.

  1. Business continuity risk
  2. Regulatory risk
  3. Technology risk - risk of failure, loss of data
  4. Crime risk
  5. People risk
  6. Bias - type of systemic risk. Deliberate if key risks are intentionally downplayed or omitted. Unintentional if due to overconfidence in one’s ability to complete a difficult task.
  7. Legal risk
  8. Process risk - uw and claims handling
  9. Model risk
  10. Data risk
  11. Reputational risk
  12. Project risk
  13. Strategic risk
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56
Q

Types of people risk

A
  1. Employment-related risks - wrong people are hired or promoted
  2. Adverse selection
  3. Moral hazard - people who are insured are less likely to avoid risk
  4. Agency risk - agents may act on their own behalf
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57
Q

Broad areas in risk identification process

A
  1. Risk identification tools
  2. Risk identification techniques
  3. Assessment of nature of the risks. Quantifiable risks can be modeled. Unquantifiable risks can often be analyzed by groups that identify them.
  4. Recording risks in a risk register - should be constantly updated to reflect the changing nature of risks and evolving environment
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58
Q

Risk identification tools

A

Hint: S CC PP TT

  1. SWOT analysis- strengths, weaknesses, opportunities, threats
  2. Risk checklists - used as reference for identifying risks in a particular organization or situation
  3. Risk prompt lists - similar to checklists, but simply identify risk categories
  4. Risk taxonomy - more detailed than prompt list, contains description and categorization of all risks that may be faced
  5. Risk trigger questions - lists of situations or areas in an organization that can lead to risk
  6. Case studies - can suggest specific risks to consider, particularly if there are similarities to the organization in the case study
  7. Risk-focused process analysis - involved constructing flow charts for every process used by the organization and analyzing the points at which risks can occur
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59
Q

Risk identification techniques

A
  1. Brainstorming - unrestrained or unstructured group discussion
  2. Independent group analysis - without collaboration, all participants write down ideas on risks that might arise. Then discuss ideas. Anonymously rank risks.
  3. Surveys - participants are given a list of questions about different aspects of the organization to try to draw out the risks faced
  4. Gap analysis - consists of a survey that asks two types of questions: desired level of risk exposure and actual level of exposure
  5. Delphi technique - begins with initial survey of experts who comment on risks anonymously and independently. Followed by subsequent surveys that are based on earlier responses.
  6. Interviews - individuals are interviewed independently to identify the organization’s risks
  7. Working groups - comprised of a small number of individuals who have familiarity with the risks identified. They investigate more fully the risks which have been identified already.
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60
Q

Information to include in the risk register

A

Hint: At the register, I saw a guy buying PILLS, Q tips, a CD, a gift card to Golden CORRAL, and something for STDS.

  1. A unique [identifier]
  2. The [category] within which the risk falls
  3. The [date] of assessment for the risk
  4. A clear [description] of the risk
  5. Whether the risk is [quantifiable]
  6. Information on the [likelihood] of the risk
  7. Information on the [severity] of the risk
  8. The [period of exposure] to the risk
  9. The current [status] of the risk
  10. Details of [scenarios] where the risk is likely to occur
  11. Details of others risks to which this risk is [linked]
  12. The risk [responses] implemented
  13. The [cost] of the responses
  14. Details of [residual risks]
  15. The [timetable] and process for review of the risk
  16. The risk [owner]
  17. The entry [author]
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61
Q

Purposes of an internal economic capital model

A

Hint: HINT E PDF

  1. Determine how much capital a firm should [hold] to protect it against adverse events
  2. To price [new products] and decide how to allocate capital across business lines
  3. To assess the amount of economic capital that should be held over [time]
  4. To assess the [impact of changes] in investment strategy and capital structure
  5. To look at how an organization copes in the face of [extreme events]
  6. To help measure [performance]
  7. To carry out [due diligence] for corporate transactions
  8. To provide information on the [financial state] of the organization to a regulator
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62
Q

Considerations for designing an economic capital model

A
  1. Must agree on what the model will be used for
  2. Must agree on what risks will be modeled
  3. Must decide which approach to use
    a. Factor table - requires a certain amount of capital to be held for each unit of a particular activity
    b. Deterministic approach - stress test that considers the amount a firm would lose under different scenarios
    c. Stochastic approach - use a stochastic, parametric, or empirical model to produce a large number of simulated results
  4. Decide whether the model will be run on an enterprise-wide basis, or if individual models will be used in each business line
  5. Consider what output is required from the model
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63
Q

Economic capital and risk optimization measures

A

Risk-adjusted return on capital (rA) = risk-adjusted return / economic capital

Economic income (EIC) = (rA - rH) * EC

Shareholder value SV = EC * (rA - rG) / (rH - rG)

Shareholder value added = SV - EC

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64
Q

Categories of risk for health insurance companies

A
  1. Environmental risk
  2. Financial risk
  3. Operational risk
  4. Pricing risk
  5. Reputational risk
  6. Strategic risk
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65
Q

Environmental risks for health insurers

A
  1. Buyer environment
  2. Competition
  3. Economy
  4. Fraud (external) - fraud by providers or customers
  5. Legal
  6. Regulatory and legislative
  7. Supplier environment - suppliers strengthen or lessen their market position
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66
Q

Financial risks for health insurers

A

Hint: MRR Advil

  1. Asset default
  2. Data - insufficient data to assess a given risk
  3. Financial [viability]
  4. Interest rate
  5. Liquidity
  6. Model - risk of not reflecting process being analyzed
  7. Reinvestment risk
  8. Reserve adequacy - the level of reserves held is inadequate or excessive
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67
Q

Operational risks for health insurers

A

Hint: For real surgery news, (watch) BCC HD TV

  1. Billing and collections
  2. Claims processing
  3. Contract wording
  4. Data technology and management - IT system failure
  5. Fraud (internal)
  6. Human resources - the firm does not hire the right people to perform needed tasks
  7. Network management - networks providers give poor service
  8. Reinsurance
  9. Sales force being ineffective
  10. Training - the firm’s employees being inadequately trained
  11. Vendor relations - not selecting the right vendor or TPA
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68
Q

Pricing risks for health insurers

A

Hint: DVR TARA M CUM

  1. Anti-selection
  2. Authority - premium rates deviate from pricing policies
  3. Competition
  4. Data - inadequate, incomplete, or inappropriate
  5. Financial viability of capitated provided
  6. Model risk
  7. Mortality
  8. Regulatory and legislative
  9. Reinsurance
    10: Trend: inflation
  10. Trend: intensity and severity
  11. Trend: technology
    13: Trend utilization
  12. Underwriting
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69
Q

Reputational risks for health insurers

A
  1. Disgruntled policyholder
  2. Rating agencies - risk of rating downgrade
  3. Stock analysts - analysts misinterpret information ore are impatient for profits
  4. Claims adjudication - slow claim payments
  5. Corporate governance
  6. Distribution - poor sales tactics destroy reputation
  7. Fraud - control measures do not properly prevent fraud
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70
Q

Strategic risks for health insurers

A

Hint: CGI N RAM

  1. Capital management - company cannot get capital to support its strategy
  2. Growth is mismanaged
  3. Incentives - misaligned with corporate strategy
  4. Management failure
  5. Mergers and acquisitions - acceptable merger and acquisition candidates are unavailable
  6. Network management - company is unable to contract with providers
  7. Reinsurance - coverage is not available at an acceptable cost
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71
Q

Financial uses of reinsurance

A

Hint: Financial challenges sometimes good business reinsurers

  1. Increase financial capacity - enables the insurer to write larger amounts than otherwise
  2. Catastrophe protection - prevents financial
    destabilization from a single catastrophic claim
  3. Stabilize earnings - strategies include:
    a. Control exposure to loss on each individual
    b. Control of aggregate losses
    c. Managing the mix of business
    d. Increasing the spread of risk
  4. New business growth - can help to grow a new product line quickly
  5. Improve balance sheet position - can move some liabilities to reinsurer’s balance sheet
  6. Reinsurance as a guarantor - reinsurer is ultimately responsible for its share of the business
  7. Retrocessional reinsurer - reinsurance companies also use reinsurance for the same reasons just listed
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72
Q

Non-financial uses of reinsurance

A
  1. Increase intellectual capacity - useful for a new line of business or a small existing one
  2. Joint ventures - situations where reinsurance is used to achieve marketing cooperation
    a. Fronting - because the reinsurer is not licensed as a direct insurer, a ceding company sells the product and then cedes nearly 100% to the reinsurer. Not allowed in NY.
    b. Lack of ceding company commitment - a direct writer may be selling the product only as an accommodation product, so it would cede nearly 100% of th erisk to a company with more expertise with that product
    c. Mutual interests - if both companies want to sell the product and be involved, could use coinsurance
  3. Acquisition - the buyer assumes the obligation of the seller through an assumption reinsurance agreement
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73
Q

Limitations of reinsurance

A
  1. Cannot make uninsurable risk insurable
  2. Cannot make an inadquate premium adequate
  3. It can be misused - reinsuring too much risk results in giving away profits
  4. It can be used for improper and illegal purposes
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74
Q

Types of reinsurers

A
  1. Reinsurance companies - offer products and services to other insurance carriers
  2. Insurance carriers - some have reinsurance divisions specializing in various products
  3. Reinsurance facilities or pools - a group of companies that band together to accept risk
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75
Q

Methods of reinsurance risk transfer

A
  1. Facultative reinsurance - each risk is submitted the reinsurer for acceptance or rejection
  2. Automatic or treaty reinsurance - all business meeting certain underwriting rules is accepted by the reinsurer
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76
Q

Types of reinsurance programs

A
  1. Proportional reinsurance - a fixed percentage of the ceding company’s risk is reinsured. Coinsurance or quota share is most common form. The reinsurer receives a fixed percent of the premium less a ceding allowance, or decides the premium to charge to cover its portion of the risk.
  2. Non-proportional reinsurance - the ceding company is reimbursed if a loss exceeds a certain amount. Includes excess of loss and aggregate excess (specific and aggregate stop loss).
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77
Q

Ceding program considerations in designing a reinsurance program (reinsurer qualities)

A

Hint: SUFFE(R)

  1. Financial condition and continuity
  2. Flexibility in terms of arrangement
  3. Experience and ability - the reinsurer’s own portfolio should be profitable
  4. Services provided
  5. Underwriting
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78
Q

Ceding program considerations in designing a reinsurance program (other than reinsurer qualities)

A

Hint: RAD PB

  1. Rates and terms
  2. Administration costs - will be affected by retention amount and minimum ceding amount
  3. Degree of management involvement - should be reduced if the reinsurer is knowledgeable and helpful
  4. Profits lost to the reinsurer
  5. Business relationships - must have good faith on both sides
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79
Q

Reinsurer considerations in underwriting proposed business

A

Hint: PUF BAM MAP

  1. Ceding company [business objectives] like growth and profits and how they affect reinsured business
  2. Ceding company [management] - strong and experienced? What is appetite for risk? Attitudes towards reinsurance?
  3. Reinsurance [program objectives] (stable earnings, access to services, minimize risk of new product)
  4. [Financial condition] of the ceding company - should be well capitalized with good ratings
  5. [Administration] - will premium and claims be promptly reported, are procedures always followed
  6. [Underwriting] - does ceding company have competence to underwrite the business
  7. Claim [adjudication] - what is the claim payment philosophy, does claim processing reflect policy provisions
  8. [Marketing] and sales - is the marketing strategy focused, does reinsurer know the market
  9. Expected reinsurer [profit] - will the reinsurer have an adequate spread of risk and adequate premiums
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80
Q

Keys to reinsurer success

A
  1. Rating - re-rate and renew business periodically
  2. Expertise - must have uw, claims, and pricing expertise to provide services and evaluate the direct company
  3. Client mix - a large number of average-sized ceding companies will produce a better spread of risk than just a few large claims
  4. Credible size - quote only coverages that fit reinsurer’s marketing niche
  5. Consistency - must exercise sound risk management techniques, throughout market ups and downs
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81
Q

Uses of reinsurance for group medical benefits

A
  1. Reinsurance for a ceding company - may be done through either quota share reinsurance (ceding percentage between 20 and 100%)
  2. Reinsurance for the employer’s risk under a self-funded medical plan. Done through stop loss plans. Most reinsurers require both specific and aggregate stop loss.
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82
Q

Types of reinsurance for disability income insurance

A
  1. Automatic excess - direct writer retains first $X of benefit per individual. Preferred by large insurance
    a. variation 1: extended elimination period - ceding company retains all the risk for the first n months, so retention is based on a period of time
    b. variation 2: specified dollar amount - reinsure cumulative individual losses in excess of a specified dollar amount. This is not used much.
  2. Facultative (quota share) - favored by small and medium-sized companies who need the reinsurer’s services and expertise. The reinsurer provides net rates to which the ceding company adds its expense loads.
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83
Q

Long term care characteristics that make it desirable to use reinsurance

A
  1. Low frequency, high severity
  2. Insured claim cost data is scarce
  3. It is a new product - benefit structure is still evolving and liberalizing
  4. The claim cost slope is steep - will delay the emergence of actual experience for decades
  5. The future direction of claim costs is debatable
    a. Some expect costs to increase as medications keep sick people alive longer
    b. Others expect costs to decrease due to cures for diseases such as Alzheimer’s
  6. The product is capital intensive - steep claim curve leads to substantial active life reserves
  7. Reinsurers have an advantage - they have access to numerous direct carriers and thus have the opportunity to help all clients avoid past mistakes
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84
Q

MCCSR is the sum of

A

Hint: MCCSR = AMMFISL

My car can’t start regularly. A mechanic must fix it sometime later.

  1. Asset default risk (C-1)
  2. Mortality, morbidity, and lapse
  3. Changes in interest rate environment (C-3) risk
  4. Segregated funds risk
  5. Foreign exchange risk
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85
Q

Minimum total ratio for life inurers

A

120%, with supervisiory target of 150%

Majority of the capital held should be in tier 1. Minimum Adjsuted net tier 1 ratio is 60% with a supervisory target of 105%

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86
Q

Components of gross tier 1 capital

A

Hint: SPIN, FLIP, LP

  1. Common [shareholders’ equity]
  2. Participating accounts
  3. Qualifying non-cumulative [perpetual preferred shares]
  4. Qualifying non-controlling [interests in subsidiaries] arising on consolidation from tier 1 capital instruments
  5. Qualifying [innovative tier 1 instruments]
  6. Non-participating accounts
  7. Accumulated [foreign currency translation adjustments] reported in Other Comprehensive Income
  8. Accumulated net unrealized [loss on available-for-sale equity securities] reported in OCI
  9. Accumulated changes in [liabilities] reported in OCI under shadow accounting
  10. Accumulated defined benefit [pension plan] remeasurements reported in OCI
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87
Q

Net tier 1 capital = Gross tier 1 capital minus the following

A
  1. Goodwill
  2. Intangible assets in excess of 5% of gross tier 1 capital
  3. Adjusted negative reserves calculated policy by policy and negative reserves ceded to unregistered reinsurers
  4. Cash surrender value deficiencies calculated on a grouped aggregate basis
  5. Back-to-back placements of new tier 1 capital between financial institutions
  6. Each net defined benefit pension plan recognized as an asset on the insurer’s balance sheet net of any associated deferred tax liability
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88
Q

Adjusted net tier 1 capital = net tier 1 capital minus:

A

50% of deductions/ adjustments

Deductions from tier 2 capital in excess of total tier 2 capital

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89
Q

Types of tier 2 capital

A

2A: Hybrid capital instruments (hybrid equity and debt)
2B: limited life instruments
2C: other capital items

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90
Q

Net tier 2 capial is total tier 2 capital minus

A

50% of deductions/ adjustments

Back-to-back placements of new tier 2 capital between financial institutions

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91
Q

Characteristics of the ideal insolvency process

A
  1. Good relationships between the task force and the receiver
  2. Good policy records
  3. Few uncovered obligations
  4. Facts and solutions are clear and agreed on by the receiver and task force
  5. Joint solicitation of proposals and negotiation of an assumption reinsurance agreement with strong reinsurer
  6. No resistance to a court order of liquidation with a finding of insolvency
  7. Prompt regulatory approvals of agreements among the receiver and the affected guaranty associations
  8. Quick closing to move policyholders to a solid insurer
  9. Guaranty associations’ obligations fully satisfied at closing
  10. Task force involvement in asset recovery
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92
Q

Major steps in ERM process

A
  1. Risk identification and classification - classify risks into categories, such as market risk, credit risk, and operational risk
  2. Risk measurement and prioritization - includes identifying unfavorable outcomes and the likelihood they will occur
  3. Risk management and aggregation - involves establishing risk tolerance levels and developing action plans relative to the risks that have been identified
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93
Q

Definition of ERM

A

ERM is the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organization’s short and long term value to its stakeholders.

Hint: FACE M

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94
Q

Processes included in the ERM control cycle

A

Hint: ICE LAMB

  1. Risks are identified
  2. Risks are evaluated
  3. Risk appetites are chosen
  4. Risk limits are set
  5. Risks are accepted or avoided
  6. Risk mitigation activities are performed
  7. Actions are taken when risk limits are breached
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95
Q

Considerations when performing services related to risk evaluation

A
  1. Information about financial [strength], risk profile, and risk environment of the organization
  2. Information about the organization’s risk [management] including
    a. Risk [tolerance]
    b. Risk [appetite]
    c. [Components] of the organization’s ERM control cycle
    d. [Knowledge] and experience of management and the board of directors regarding risk assessment and risk management
    e. Actual [execution] of the organization’s ERM control cycle
  3. The [relationship] between the organization’s financial strength, risk profile, and risk environment and the organization’s risk management profile
  4. The intended [purpose] and uses of the actuarial work product

Hint: smacker pt

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96
Q

Required disclosures for communications subject to ASOP #46

A

Hint: ME CARES

1 .Results of [economic capital model], their intended use, and any known limitations of the model

  1. The results of the [stress and scenario tests], their intended use, and any known limitations of these tests
  2. The [methodologies] and sources of information for identifying and evaluating emerging risks
  3. Any material [changes] that have been to the system, process, or methodology since previously used
  4. Significant [assumptions] and their dependencies and statistical distributions
  5. The [risks] included in the risk evaluation and their relative significance, and risks not included and why they are not included
  6. Whether and how the modeled future [economic conditions] have been reviewed and tested for reasonability
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97
Q

Circumstances that lead to a proper fit between and seller and buyer of a block of business

A
  1. Non-core business for seller, but core for buyer
  2. High administrative expenses for seller
  3. Poor management by the seller
  4. Seller’s reputation prevents effective corrective actions (such as high rate increases)
  5. Conservative reserves - the seller may have extra conservative reserves and unwilling to release them
  6. Regulatory fire sales - buying this type of business could be risky but the buyer may be able to get a very good deal
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98
Q

The role of the actuary in the merger and acquisition process

A

Hint: Darma

  1. Being an active member of the [due diligence] review team
  2. Interviewing [management]
  3. Interfacing with [regulators], reinsurers, and investors
  4. Acting as an [advisor] to management regarding the M&A process
  5. Creating an actuarial appraisal
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99
Q

Code of professional conduct criteria for an actuary to perform appraisal services

A
  1. Actuary’s ability to act fairly is unimpaired
  2. There has been disclosure of any conflict to all principals whose interest would be affected
  3. All such principals have expressly agreed to the performance of the actuarial services by the actuary
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100
Q

Steps for calculating the value of an inforce business

A

Hint: please see a psychiatrist

  1. Develop a [projection model]
    a. Windshield appraisal model - appropriate where time is very limited and data is scarce
    b. Intermediate detail model - these often result from a lack of detailed data
    c. Full-blown appraisal model - the preferred approach when there is appropriate time and data
  2. Determine [starting in force value] - should reflect impact of actions already taken
  3. Create a specific set of [assumptions] that reflects reasonable expectations for the business
  4. Perform the [projection] by applying the starting values and assumptions in the model
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101
Q

Items included in the actuarial appraisal report

A

Hint: stupid little bitch violated my vagina and it’s partially dead

  1. Description of [scope] of assignment
  2. Reliances and [limitations] the actuary has placed on his or her work product
  3. A description of the [business] being valued
  4. Actuarial appraisal [value]
  5. [Methodology] and assumptions used
  6. The [validation techniques] and results
  7. [Adjustments] made when valuing net worth
  8. How federal [income taxes] were considered
  9. The annual [projection results]
  10. Disclosure of any [deviations] from actuarial standards of practice
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102
Q

Challenges in determining the value of an insurance company

A

Hint: Some people in CA are challenged and think NIRD is a word. To this, I say RRR.

  1. Long [duration] of liabilities
  2. Sensitivity to [interest rate fluctuations] and the performance of capital markets
  3. Subjective art of loss [reserving]
  4. [Cyclical] nature of insurance
  5. Impact of [reinsurance recoverables]
  6. Challenges associated with [non-market competitors], such as state funds
  7. Varying state and sometimes federal [regulation]
  8. Impact of statutory [accounting] on operational decisions
  9. Influence of [rating agencies]
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103
Q

Techniques used by investment bankers to determine the value of a company

A
  1. Comparable company analysis - the value of the company is estimated based on the values of a peer group of comparable companies
  2. Comparable transaction analysis - the value is estimated based on results of recent insurance mergers that are similar
  3. Discounted cash flow analysis - the projected cash flows and terminal values are discounted to a net present value using the WACC rate
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104
Q

Distributable cash flow =

A

after-tax earnings - increase in required capital

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105
Q

WACC =

A

rD * %D + rE * %E

where % based on market value

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106
Q

Components of an actuarial appraisal value

A
  1. Adjusted book value - this is the net worth of the insurance company on a statutory basis, adjusted for the value of miscellaneous items not captured elsewhere
  2. Value of inforce business - equals the present value of future profits arising from business that is on the books as of the valuation date. An adjustment is included to reflect the cost of capital.
  3. The value of future business capacity - this equals the present value of future profits arising from business that is expected to be written following the valuation date. An adjustment is included to reflect the cost of capital.
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107
Q

Uses of an actuarial appraisal

A

Hint: B Vamp

  1. Help [value] the company - potential buyers will make adjustments based on their internal views
  2. Form the basis for [alternative accounting methods] for cross-border transactions
  3. Can be adjusted to calculate [pro forma earnings] and to establish the opening purchase of GAAP [balance sheet]
  4. [Measure ongoing performance] after the acquisition
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108
Q

Assumptions needed for actuarial appraisals

A

Hint: MOMP DIRT

  1. Mortality - typically based on company experience compared to industry standard
  2. Morbidity - also based on company experience
  3. Persistency - lapse assumptions and any shock lapses should be considered
  4. Investment returns and spreads - consider expected investment returns, reinvestment rates, and interest rates credited on insurance policies
  5. Operating expenses - this assumption should be based on various approaches (most commonly based on target unit expenses plus an unallocated expense)
  6. Discount rate - seller typically gives a range of reasonable rates instead of a specific rate (the CAPM model may be used to determine this rate)
  7. Cost of required capital - the company will have an opportunity cost associated with setting aside capital to comply with required capital regulations
  8. Taxes - the actuarial appraisal should reflect a deduction for federal income taxes
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109
Q

Components of the adjusted book value of an insurance company

A

Hint: CAN SLAM ID

  1. Capital and surplus - includes statutory capital stock, contributed surplus, and retained earnings
  2. Asset valuation reserves (AVR) - this liability is part of surplus and is allocated to the lines of business
  3. Interest maintenance reserve (IMR) - this liability represents past interest-related capital gains not yet amortized into income
  4. Deferred tax asset - the admitted portion of the statutory deferred tax asset is deducted from adjusted book value
  5. Non-admitted assets - the realizable value of assets that were non-admitted for statutory purposes, if they will contribute to earnings over time
  6. Surplus notes and other debt - a reduction is appropriate for any debts owed to another party
  7. Mark-to-market on assets allocated to adjusted book value - this component reflects some riskier assets that are allocated to adjusted book value
  8. Adjustment in the value of certain [admitted assets] that the user values differently than the reported statutory value
  9. Adjustment in the value of certain [liabilities] that the user values differently than the reported statutory value
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110
Q

Approaches for using reinsurance to sell a block of business

A

Hint: AIM

  1. Assumption reinsurance - contracts are transferred from the seller’s books to the buyer’s books. Policyholders must be notified, and some states required policyholder consent to transfer the policy
  2. Indemnity coinsurance - the financial interest is transferred to the buyer, but the policy stays with the seller. Seller remains in the middle of future transactions and policyholder doesn’t need to be notified.
  3. Modified coinsurance - similar to indemnity coinsurance, except that the assets backing the liabilities remain with the selling company
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111
Q

Techniques for estimating property and casualty loss reserves

A
  1. Loss development method - same as development method for health insurance
  2. Expected loss method
    a. Expected loss = forecasted exposure * expected ultimate loss rate
    b. Expected loss = earned premium * expected loss ratio
  3. Bornheutter-Ferguson method:
    For each accident year, Reserve = [1 - (1 / paid loss dev factor)] * expected loss from the expected loss method
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112
Q

Diagnostic tools for evaluating claim reserve

A
  1. Assessing the convergence of the various loss reserving techniques - when estimates from various techniques diverge, it may be a sign that there has been a change in claim development
  2. Analyzing various reserving statistics - such as development triangles of settlement rates, and development patterns of average size claim
  3. Testing the runoff of prior reserve estimates
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113
Q

Formulas for market value of equity

A
  1. Market value of equity = market value of assets - market value of liabilities
  2. MV(E) = franchise value + MV(tangible assets) - PV(liabilities) + Put option value
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114
Q

For a block of business, embedded value =

A

EV = PV(after-tax profits) + cost of capital

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115
Q

For a block of business, cost of capital =

A

COC = PV future tied capital releases minus increase + PV after-tax investment income earned on tied capital - tied capital

PV future tied capital release minus increase = -PV increase in locked-in capital

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116
Q

For company as a whole, embedded value =

A

EV = PV after-tax profits + cost of capital + tied capital + free capital

Hint: ACTF

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117
Q

Uses of EV for block of business

A
  1. To set a value on a block of business for sale or purchase
  2. As part of the calculation of the value of a company. The company’s value would also include the value of the future new business
  3. To ensure that new business is sold is generating an increase in value
  4. To determine compensation for sales staff
  5. To measure the impact of specific management actions on the long-term value of the company
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118
Q

Definition of embedded value

A
  1. A calculation of the value of a block of business, based on the present value of surplus distributable to shareholders
  2. Is based on current in-force business only (not on new business)
  3. Equals the value of in force business plus the value of free capital. Free capital is the capital in excess of regulatory capital requirements (locked-in capital)
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119
Q

Profits to shareholders method EV =

A

EV = free capital + PV(profits to shareholders)

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120
Q

Profits to shareholders method Profits to shareholders =

A

Profits to shareholders = after-tax profits + after-tax investment income on capital - increase in locked-in capital

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121
Q

Profits to shareholders method After-tax profit =

A

A-t profit = premiums + investment income - benefits - expenses - increase in statutory reserve - tax on income

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122
Q

Cost of capital method EV =

A

EV = free capital + locked in capital + PV(after-tax profits) - PV(cost of capital)

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123
Q

Cost of capital method COC =

A

COC = h * locked-in capital - after-tax investment income on capital

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124
Q

EV(t+1) =

A

EV(t) + normal increase in embedded value + value added by new sales - dividends paid + unexpected change in embedded value

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125
Q

Normal increase in embedded value =

A

(EV(t) - free capital) * (1+h) + free capital * (1 + i)

i = after-tax investment income rate

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126
Q

Value added by new sales =

A

PV(future after-tax profit on new sales) - PV(future cost of capital to support new sales)

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127
Q

Risk factors that indicate whether a person may have high claims

A

Hint: MILE F

  1. Inherent risk factors, such as age, sex, and race
  2. Medical condition-related factors, such as diaetes or cancer
  3. Family history for inheritable conditions
  4. Lifestyle risk factors, such as smoking, lack of exercise, and poor nutrition
  5. External risk factors, such as industry, location, and education
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128
Q

Types of medical management interventions

A
  1. Care coordination - focuses on system. Includes case management, discharge planning, and in-hospital care coordination
  2. Condition management - focuses on patient. Includes disease management and risk factor management.
  3. Provider management - Includes provider profiling, pay-for-performance, and accountable care organizations
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129
Q

Areas where condition-based models are used in healthcare financial applications

A
  1. Program management - identifying high-risk individuals, financial modeling and resource allocation, and program evaluation
  2. Provider or health plan reimbursement - normalizing populations to pay providers or plans for the risks they accept and to evaluate provider effectiveness. Profiling providers to assess quality and efficiency
  3. Actuarial and underwriting functions - pricing health plans, underwriting groups, and projecting future claims costs
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130
Q

Types of predictive models that are not based on medical conditions

A
  1. Age/ sex - rates based on average age/ sex factor of the members in the group
  2. Prior cost - prior year’s claims are used to project future costs. Reasonably accurate for large groups, but not small groups
  3. Combinations of age/ sex and prior cost - often used for rating smaller groups
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131
Q

Sources of data for developing risk factors

A

Hint: CSE

  1. Claims data - for medical condition-related risk factors such as diabetes or cancer
  2. Self-reported data - for lifestyle-related risk factors such as smoking, stress, lack of exercise, poor nutrition, etc.
  3. External data - for lifestyle-related risk factors such as industry, geography, education and income level
132
Q

Risk factors identified by health risk assessment

A

Hint: PIGS IN SWAMP TP. FF

  1. Personal disease history
  2. Family disease history
  3. Health screenings and immunizations
  4. Alcohol consumption
  5. Injury prevention behavior
  6. Nutrition
  7. Physical activity
  8. Skin protection
  9. Stress and well-being
  10. Tobacco use
  11. Weight management
  12. Women’s health (e.g. pregnancy status)
  13. General health assessment
  14. Functional health status
  15. Mental health status
133
Q

Types of data sources for predictive modeling

A

Hint: Phil has lemonade every happy hour. Callie might have pineapple martinis. Hicks likes honey lager. Sara likes Miller Lite.

  1. Physician referral chart (high reliability, low practicality) - provides most information, but has drawbacks
  2. Enrollment (high reliability, high practicality) - can be used to convert claims data into PMPM amounts
  3. Claims (medium reliability, high practicality) - usually available to healht plans and continually refreshed as events occur. Data quality varies greatly. Lots of information is provided in claim forms for hospital (UB04) and professional (CMS 1500) claims.
  4. Pharmacy (medium reliability, high practicality) - high quality data that completes quickly. No diagnosis on the claims, and prescriptions that aren’t filled won’t generate claims.
  5. Laboratory values (high reliability, low practicality) - can be difficult to obtain, and vendors do not use a standard format
  6. Self-reported (low/ medium reliability, low practicality) - members can report information that isn’t available elsewhere, but there are drawbacks
134
Q

Drawbacks of using data from medical charts

A

Hint: OCTUU

  1. Do not cover OON services or drugs prescribed by OON providers
  2. They do not record the patient’s compliance with physician orders
  3. Transcribing the data and transferring it to a uniform format is time consuming and requires highly-trained staff
  4. There is not uniformity in how physicians code conditions and their severity
  5. Charts are typically unavailable to the health plan or the actuary
135
Q

Advantages of using diagnosis codes for identifying member conditions

A

Hint: a puppy urinated inside

  1. Codes are almost always present on medical claims
  2. A uniform format exists
  3. Usefulness for identifying conditions
136
Q

Disadvantages of using diagnosis codes for identifying member conditions

A

Hint: Don’t pretend every minute disappeared

  1. Usually only the primary and secondary codes are populated in the claims data
  2. Coding errors may occur
  3. Codes may sometimes be selected to drive maximum reimbursement
  4. Different physicians may follow different coding practices
137
Q

Drawbacks of using survey data

A

Hint: CUBU = can you breed unicorns?

  1. Surveys must be [commissioned], budgeted, and executed to generate data
  2. Data isn’t [updated] as medical events occur, so it can become stale unless survey is updated periodically
  3. Response [bias] can make it dangerous to draw conclusions from survey responses
  4. Respondents may submit [untruthful] responses
138
Q

Questions to answer when building a clinical identification algorithm

A

Hint: Don’t spend countless nights trying (on) pretty dresses

  1. Where are the [diagnoses]?
  2. What is the [source] of the diagnosis (claims, medical charts, etc.)
  3. If the source is [claims], what claims should be considered (IP, OP, lab, etc)
  4. If the claim contains more than one diagnoses, [number] of diagnoses to consider for identification
  5. Over what [time span], and how often, will a diagnosis have to appear in claims for that diagnosis to be incorporated
  6. What [procedures] may be useful for determining severity of a diagnosis
  7. What prescription [drugs] may be used to identify conditions
139
Q

Challenges when constructing a condition-based model

A

Hint: Never say challenges deter egotistical boys.

  1. The large [number] of procedure codes
  2. Deciding the [severity] level at which to recognize the condition
  3. The impact of [co-morbidities] for conditions that are often found together
  4. The [degree of certainty] with which the diagnosis has been identified
  5. The [extent] of the data (claims cover all members, self-reported only covers self)
  6. Type of [benefit design] that underlies data
140
Q

Definitions of sensitivity and specificity

A
  1. Sensitivity - percentage of true positives

2. Specificity - percentage of true negatives

141
Q

External sources of clinical identifications algorithms

A
  1. HEDIS has algorithms for identifying some conditions (asthma, high blood pressure, and diabetes)
  2. Disease Management Association of America has developed algorithms for identifying chronic diseases
  3. Grouper models are commercially available models that identify member conditions and score them for relative risk and cost
  4. Literature - articles will sometimes report the codes that are used for analysis
142
Q

Reasons for using commercially-available group models

A
  1. Building algorithms from scratch requires a considerable amount of work
  2. Models must be maintained to accommodate new codes, which requires even more work
  3. Commercially-available models are accessible to many users. Provider and plans often require that payments be based on a model that is available for review and validation
143
Q

Common features of Medicare prospective payment system

A

Hint: Quarc Co.

  1. A system of [averages] - providers cannot expect to make a profit on each case, but efficient providers can make a reasonable return on average
  2. Increased [complexity] - DRGs are more complicated than a system based on per diem payments
  3. [Relative weights] - associated with each patient group to reflect the average resources used by efficient providers
  4. [Conversion factor] (base price) - the dollar amount for a unit of services. Is multiplied by the relative weight to determine payment
  5. [Outliers] - unusual cases that require above average resources and receive extra payments
  6. [Updates] - the conversion factor and relative weights are adjusted annually to reflect new technologies and changing practice patterns
  7. Access and [quality] - policymakers monitor PPSs and access to high quality care and that providers are compensated adequately
144
Q

Challenges with patient classification systems based on coding systems

A
  1. Need for new DRGs - due to new diseases and new procedures
  2. ICD coding - some codes may not be sufficiently precise as diseases and procedures are refiend
  3. Upcoding - providers may be tempted to exaggerate a patient’s secondary diagnoses to get paid more
  4. New coding systems - adopting the new ICD 10 sstems will be a major challenge for hospitals and CMS
145
Q

Factors for choosing the right predictive model

A

Hint: Correct predictions now can define future choices

  1. [Correlation structure] - more complicated models may be needed for data containing correlated variables
  2. [Purposes] of the analysis
  3. The [nature] of the available data
  4. [Characteristics] of the outcome variable (e.g. quantitative vs. qualitative, unrestricted vs. truncated, binary choice vs. unrestricted choice)
  5. [Distribution] of the outcome variable (normal vs. skewed)
  6. [Functional relationship] (linear vs. nonlinear) - when the equation cannot be transformed into a linear form, iterative processes or a maximum likelihood procedure may be used instead of ordinary regression methods
  7. [Complex decision model] - whether a single equation model is sufficient or a simultaneous equation model is needed (if more than one dependent variable)
146
Q

Steps of the data warehousing process

A

Hint: DIPS

  1. Identify which [patients] to include in the dataset
  2. Identif which [data elements] to merge with the patient list
  3. Identify what the data [says] about the patient (create flags that describe patient’s health and risk status)
  4. Attach the derived variables and flags to the patient [identifiers] to create a picture of the patient history
147
Q

Characteristics for assessing the quality of a model

A

Hint: PIG PC

  1. Parismony - should introduce as few variables as are necessary to produce the desired results
  2. Identifiability - if there are more dependent variables than independent equations, then issues such as bias will result
  3. Goodness of fit - variations in the outcomes variable should be explained to a high degree by the explanatory variables (measured by R2 and other statistics)
  4. Theoretical consistency - results should be consistent with the analyst’s prior knowledge of the relationships between variables
  5. Predictive power - should predict well when applied to data that was not used in building the model
148
Q

Statistics for determining whether a model is good

A
  1. R squared
  2. Regression coefficients - examine signs of the parameter estimates to ensure they make sense and determine whether the value of the parameter estimate is statistically significant
  3. F-test - ratio of variance explained by model divided by unexplained or error variance
  4. Statistics used for logistic models
  5. Multicollinearity - linear relationship between independent variables. May be addressed by removing one of the collinear variables
  6. Heteroscedasticity - occurs when the error terms do not have a constant variance
  7. Autocorrelation - occurs when there is correlation in the error term in the regression function
149
Q

Statistics used for logistic models

A
  1. Hosmer-Lemeshow statistic: used for measuring lack of fit. Statistic is based on chi-suqred values with 8 d.f. Higher value means better fit.
  2. Somers’ D statistic: used in evaluation logistic regression models and determines the strength and direction of relation between pairs of variables range between -1 and 1. Higher value means better fit.
  3. C-statstic: used to evaluate logistic regression models and related to ROC curve. Value of C-statistic = area under curve. Value of 1.0 means perfect predictions.
150
Q

Adjusted R sq =

A

Adjsuted R a = 1 - (1-R^2)*(N-1) / (N - k -1)

N = number of observations
k = number of parameters
151
Q

Resampling methods for validating a model

A

Hint: blowjobs can please

  1. Bootstrap - the sampling distribution of an estimator is estimated by sampling with replacement from original sample
  2. Jackknife - the estimate of a statistic is systematically recomputed, leaving out one observation at a time from the sample set
  3. Cross-validation - subsets of the data are held out for use as validating sets
  4. Permutation test - a reference distribution is obtained by calculating all possible values of the test statistic under rearrangement of the label on the observed data points
152
Q

Factors used in developing risk scores in the CMS-HCC risk model (HCC = hierarchical condition category)

A

Hint: SEE C DDD

  1. Demographics - age and gender. Medicare eligibility
  2. Disabled indicators - separate set of factors used for beneficiaries under age 65 who are eligible for Medicare due to disability
  3. [Separate models] used for beneficiaries who reside in a long-term care institution or suffer from end stage renal disease
  4. New enrollees - since no claim history exists, only age and gender factors are used. Separate factors are developed for new enrollees.
  5. Prospective risk adjustment methodology is used to risk-adjust future payments based on actual historical medical [experience]
  6. Calibration - every two years, CMS recalibrates by updating the model weights to reflect new prescription drugs and changes in medical technologies, practice patterns, and provider coding practices
  7. Health status risk factors are developed from the beneficiary’s disease
153
Q

Central features of Massachusetts health care reform

A
  1. Establishment of an exchange (purchasing pool)
  2. A requirement that all employers establish Section 125 (so employees could pay premiums on a pre-tax basis)
  3. Large subsidies for families living below 300% of FPL
  4. For those above 300% of FPL, available of a more limited plan so insurance would be affordable even outside the subsidy range
  5. A mandate that all individuals must purchase health insurance coverage
  6. Funding through use of federal funds previously paid to safety net hospitals or paid for uncompensated care
154
Q

Steps for developing predictive models for care management system

A

Hint: Dancers rarely perform in every designated theater

  1. Choose a [disease] or condition - programs should focus on diseases that are reasonably prevalent, can lead to costly exacerbations, and have treatments that are relatively low cost that are within control of the member
  2. [Rank] conditions base on intervenability the susceptibility of the condition to external management. prioritize interventions based on an intervenability score rather than the highest risk scores.
  3. Identify the [population] - construct algorithms to identify members who are at risk.
  4. Plan the [intervention] - identify the issue to address and the mechanism by which it will be addressed. Use care management nurses to assess and design a care plan for patients identified by the predictive model.
  5. Perform [economic modeling] of the proposed program - must decide the best population penetration level to achieve the most savings. The Risk Management Economic Model can be used for this.
  6. [Develop] the predictive model
  7. [Test] actual outcomes against predictions, and use this information to modify the model and program
155
Q

Metrics that should be recognized in the RIsk Management Economic Model

A

Hint: BITS ENTICE

  1. The number and risk-intensity of members to be [targeted] - the number must be large enough to produce savings that offset implementation costs, but not so large that marginal costs exceed marginal savings
  2. Types of [interventions] to be used in the program - such as mail or automated outbound dialing
  3. The number of [nurses] and other [staff] needed for the program, and program costs
  4. The methodology for [contacting] and [enrolling] members
  5. The rules for [integrating] the program with the rest of the care management system
  6. The [timing] and numbers of contacts, enrollments, and interventions
  7. The predicted [behavior] of the target population if there were no intervention, and the predicted [effectiveness] of the intervention at modifying the behavior
156
Q

Reinsurance margin =

A

Retained Prem - Retained claims

157
Q

What is reformation

A

Contract is reissued retroactively under terms that apply if insurer knew about a specific condition

158
Q

What is rescission

A

Declaring policy void from the beginning

159
Q

Causes and solutions to durational effects

A

Causes:
Wear off of underwriting
Anti-selection - healthy people leave plan for lower cost plans and leave unhealthy people behind

Solutions:
Prefunding - charge higher premiums initially and set up reserves to cover higher costs in later durations
Durational rating - separate groups based on duration and charge rates based on duration. Some states may not allow this

160
Q

LTC considerations related to Morbidity

A

Data sources - population-based vs. insured data
Integration of coverages - reinstatements and restoration of coverages
Transfers - coordination with other coverages
Coordination with Medicare
Pre-existing requirement
Level of care/ charge levels/ type of care
Area/ Geography/ Location
Policy options and benefit triggers - richer plans have greater potential for adverse selection
Gender/ Sex - female claims are higher than men
Age - costs increase by age
Marital status - morbidity is lower at younger ages for married people. Spouses take care of policyholder
Morbidity improvement
Underwriting
Marketing
Claim administration
Reinsurance
Regulatory considerations

161
Q

LTC considerations related to Expenses

A
Underwriting
Claim Administration
Policy Administration
Compliance
Actuarial
Marketing/ Distribution channel
Premium Tax
Overhead
162
Q

Categories of managed care risk adjustment factor

A

Category 0: FFS/ Usual customary and reasonable. Also payments from capitated providers under stop-loss provisions.

Category 1: Provider fee schedules, case rates, global rates. Protections regarding allowed charges.

Category 2: Withhold or Bonus arrangement with provider.

Category 3: Capitation payments for at least 12 months. Contracts < 12 months are under category 0. Arrangements with provision for retroactive revisions fall under Category 1.

Category 4: Staff Model HMO. Includes non-contingent salaries to persons directly providing care and facility-related medical expenses. This category has the highest discount factor.

163
Q

Managed care risk adjustment factor is applied to all product groupings except

A

Medicare Part D and Other

164
Q

Comparative company analysis judgements, general technique, and output

A

Judgements: peer group is big enough, similar regulatory rules, similar dominant segments

General technique: compare financial statements of companies

Output: Develop implied range of values based on comparative company

165
Q

Comparative transaction analysis judgements, general technique, and output

A

Judgement: similar size, similar sectors

General technique: ascertain actual price paid based on financial data

Output: Develop multiples based on a similar transaction

166
Q

Discounted cash flow judgement, general technique, output

A

Judgement: dividend payout rate, ultimate book value date, appropriate discount rate

General technique: discount future cash flows back to present value dollars

Output: tangible value

167
Q

Tangible value =

A

sum of cash flows + terminal value

168
Q

Terminal value =

A

PE ratio x expected after-tax earnings discounted

169
Q

Examples of H4 risks

A

Admin expenses, guarantee fund risk, execessive growth risk

170
Q

Stock affects which H risk

A

H0 increase

171
Q

Mutual funds sold affects which H risk

A

H1 decrease by amount sold

172
Q

Validation techniques for appraisals

A

Static validation
Dynamic validation
Stress testing

173
Q

What does SV measure?

A

SV measures overall PV of future earnings on economic capital

174
Q

What does SVA measure?

A

SVA measures degree to which SV exceeds value of invested capital.

175
Q

Joint venture effects on RBCAC components

A
H0: depends on excess growth
H1: no impact
H2: decrease if there is more expertise
H3: decrease if good credit rating
H4: no impact
176
Q

Reinsurance effects on RBCAC components

A
H0: Depends on excess growth
H1: No impact
H2: No impact
H3: Increase if good credit rating
H4: No impact
177
Q

Changes to the HRBC formula made by the NAIC

A

Increased credit for capitation to providers from 40% to 60%

Increased credit for capitation to non-regulated intermediaries from 0 to 60%

Increased credit for Staff Model HMOs from 50 to 70%

Changed excessive growth risk change if RBC growth exceeds premium growth by 10%

Changed credits for premium stabilization reserves from 100% case by case to 50% credit applied overall

178
Q

Why two companies can come up with different appraisal values

A

Differences in:

Taxation
RBC
Company size
Marketing distribution channels
Negotiating ability
Geography
Effectiveness in managing health
Experience in mergers
Strategic value of appraised company
179
Q

Characteristics, advantages and disadvantages of assumption coinsurance

A

Characteristics: contracts are transferred from seller’s books to buyer’s books. Policyholder notification is required. Written consent by policyholder is necessary to transfer the policy.

Advantages: cleanest approach, since ceding company is no longer part of the structure.

Disadvantages: It is relatively uncommon due to the legal and regulatory complexity. There are some tax disadvantages.

180
Q

Characteristics, advantages, and disadvantages of Indemnity Coinsurance.

A

Characteristics: Financial interest in the contracts is transferred to the assuming company but the policies remain as policies of the ceding company.

Advantages: No requirement to notify the policyholders. It can be accomplished quickly with no disruption to the policyholders (other than potential service-related disruptions if policy administration is transferred).

Disadvantages: The ceding company remains in the middle of the transaction (which may be an issue if there are concerns about the ceding company’s credit). The assuming company credit is important because the ceding company retains the contractual obligation to the policyholder.

181
Q

Characteristics, advantages, and disadvantages to Modified Coinsurance.

A

Characteristics: similar to indemnity coinsurance, but the assets backing the liabilities remain with the ceding company.

Advantages: Assets are kept in a trust account so that the assuming company can retain control over the portfolio.

Disadvantages: Not commonly used for the sale of a block but may be used in some situations (such as reinsurance of variable products).

182
Q

Keys to success you will want to consider in moving your current fee-for-service providers to capitation contract

A
  • Vision and Mindset
  • Needs to go from filling beds to improving patient care
  • Physician Incentives
  • Want incentives based on quality, not utilization
  • Avoid incentives that encourage physicians to not take on patients with serious health conditions
  • Medical Management
  • Improved Case Management, Utilization Management
  • Improve health status
  • Provide feedback to physicians
  • Accounting and other reporting systems
  • Need to be timely and accurate
  • Administrative Systems
  • Keep records of PCPs and members
  • Subcapitation
  • Providers accepting capitation may pay part of that capitation to another provider for specific services
  • Provider should only keep responsibility for services it can provide
183
Q

Describe the pitfalls a company might face if it does not consider embedded value of profits when making decisions.

A

“Shrink to Glory” – Because statutory accounting penalizes profitability of new business (must take all acquisition costs in year sold) and rewards lapses (can release the very conservative reserves), a company can look profitable while it literally goes out of business.

“Grow out of the Problem” – New business acquired at a cost greater than the hurdle rate means company could be growing and destroying economic capital at same time.

Company could look unfavorably at cost of business that is profitable but not as profitable as rest of block, even though it is adding value to take it on. That is, reject due to lowering overall margin through economic value added.

184
Q

Benefits of economic capital

A

Hint: CUN CLAMS FOOD

  • Used to develop regulatory [capital]
  • Aids in developing risk tolerance [limits]
  • Provides a risk-adjusted value of [new business]
  • Provides a [fresh look] at items that drive value at the line of business level
  • Provides benefits of [diversification]
  • Provides for better risk [measurement and management]
  • Provides a method of [allocating capital]
  • Provides a consistent measure for [comparison across companies]
  • Provides an incentive to [optimize and manage risk/return tradeoffs]
  • Focuses on [one measure] of capital
  • Aligns business unit goals with [share price]
  • Helps [uncover hidden risk] and profit enhancers
185
Q

Challenges of implementing economic capital

A

Hint: CRAM C TURD

  • A clear easy process and appropriate [tools] are required for implementation
  • Results may be difficult to [understand]
  • EC must be balanced with [rating agency and regulatory requirements]
  • May be difficult to map to local [accounting]
  • Specific risks need to be [calculated] which may be difficult
  • [Diversification benefits] are hard to measure
  • May be difficult or [costly] to adapt to
  • Significant [resources] may be required
  • Is it a [management versus measurement] tool?
186
Q

Documents needed in a merger or acquisition process

A

Hint: ODDS R CRAP

Offering memorandum
Actuarial appraisal
"Data room"
Data request
Supplemental info and sensitivity analysis
Purchase agreement
Regulatory requests
Reinsurance and administrative agreements
Closing documents
187
Q

Adjustments made by buyer in an acquisition

A
  • Own version of discount rate and cost of capital
  • Value of goodwill premium
  • Own view of management/expertise regarding due diligence of seller
  • Anticipate structure and any tax benefits with it
  • Anticipated business strategy
  • Level of confidence underlying the projections
188
Q

Capital requirement for volatility risk

A

(Sum of S^2)^.5 + (sum of S^2)^.5 for basic death and AD&D

189
Q

MCCSR calculation S =

A

2.5AB*E/F

190
Q

MCCSR calcuation A =

A

[sum(q(1-q)b^2)]^.5

191
Q

MCCSR calculation B =

A

max(ln(D)/2, 1) for adjustable and participating policies

max(ln(D), 1) for all others

192
Q

MCCSR calculation E =

A

total net amount of risk for policies in set

193
Q

MCCSR calculation F =

A

total net face amount for policies in set

194
Q

MCCSR A approximation if s.d. of death benefits is known

A

(C* sum(b^2) / F)^.5

where C is projected value of upcoming years’ net death claims

195
Q

MCCSR A approximation if s.d. of death benefits is not known

A

(Ac * Nc ^ .5 / Cc) * C^.5 * max(F/n, C/N)^.5

N = number of deaths
n = number of lives
subset c taken from comparison set

196
Q

MCCSR A approximation if all traditional employer group policies, and s.d. is not known

A

A = 1.75 * C^.5 * (max(F/n, C/N))^.5

197
Q

MCCSR approximation if A can’t be calculated and s.d. death is not known

A

S = C^.5 * [(bmin + bmax - (bmin * bmax)) / (F/n) ]^.5

if bmin unknown, simplifies to (C* bmax) ^ .5

198
Q

MCCSR catastropic component formula

A

sum over all products of K

where K = a * C * E/F

a = .05 for adjustable and participating polcies
a = .1 for all other sets
C = projected value of upcoming years total net death claims
199
Q

MCCSR L =

A

L = S^2 / [2 * (sum of S^2) ^ .5] + k
sum over basic death for group basic death policies
sum over AD&D for AD&D policies

L is the amount recoverable from excess loss deposit

200
Q

MCCSR adjustment made for statistical fluctuation =

A

total capital and surplus requirement for morbidity risk if all morbidity risks (M) are < $9 million

total capital and surplus requirement for morbidity risk * .7 / (900 + M)^.5 if M > $9 million

201
Q

Condie: sound underwriting standards

A

Controls on access to care

Identification of at risk members

Management of large claims through reinsurance and care management programs

202
Q

Condie: population risk factors

A

catastrophic events
increase in cost/ frequency of basic services
participation levels

203
Q

What was the Framingham Heart Study

A

Study examined the relationship between risk factors in healthy members that lead to heart conditions based on a study over a period of time.

204
Q

Framingham Heart Study factors

A
Age
Diabetes
Smoking
Treated and untreated systolic blood pressure
HDL cholesterol
BMI
205
Q

Formula for premium leakage

A

new average premium - new average claims

206
Q

formula for buy down effect

A

actual premium - expected premium

207
Q

OBRA =

A

Omnibus Budget Reconciliation Act of 1990

208
Q

CAST =

A

cumulative anti-selection tehory. Models correlation of antiselective lapsation with the size of the lapse rate

209
Q

MNAM model

A

Minnesota Antiselection Model developed to find boundary conditions on the antiselection which might occur in a specific situation

210
Q

What is an asset share type model

A

Typically a two dimensional matrix where each column represents an information element such as exposure

211
Q

Assumptions for development reserve models

A

Number of months’ experience to use

Whether to account for seasonality

Method for recent, non-fully credible, months of experience

Denominator for trending purposes (per policy, per member, per premium dollar, etc.)

Trend rate

212
Q

What is shock lapse

A

A rate increase in one period causes higher lapses in the next period

213
Q

Gross premium formula

A

Gross premium = (1 + e) x Net premium

or Gross premium = Net premium / (1 - e)

where e = loading percentage

214
Q

What are model office assumptions

A

Assumptions that provide the proportion of business in the block being contributed by each model cell

215
Q

What is ARIMA

A

Auto-regressive integrated moving average. Econometric models that create linear combinations of leading indicators to predict claim trends

216
Q

Possible basis for disabled life reserve

A

1985 Commissioner’s Individual Disability Tables or SOA Table 95

217
Q

Most popular source for nursing home and home health population based data sources. What does it include?

A

National Nursing Home Surveys

Snapshot data: study done as of a certain valuation date or over a short period of time

Exposure data: information has been constructed over a period of time, such as a calendar year or other fiscal period

Adjustments must be made to maturity of population, data bias, transfers between facilities, reinstatements, waiting lists for nursing homes

218
Q

Loss ratio standards met as part of filing

A

(Accumulated past + PV future claims) / (Accumulated past + PV future premiums) >= loss ratio standard

PV future claims / PV future premiums >= loss ratio standard

Expected third year loss ratio >= applicable standard

Applicable standard = max(original expected loss ratio, filed, statutory minimum)

219
Q

Items that should be included in filing

A
  1. Description of benefits
  2. Description of marketing, issue age limits
  3. Historical experience by duration
  4. Projected future experience
220
Q

When is reinsurer’s return similar to debt vs equity

A

Equity: if reinsurer’s return is similar to ceding company’s return

Debt: if reinsurer provides small amount of capital

221
Q

Categories of Blanks

A

Orange blank: file NAIC’s health annual statement. Must calculate Health RBC and disclose results in Five Year Historical Exhibit.R

Blue blank: file NAIC’s life/ A&H annual statement

Yellow blank: property and casualty

222
Q

Health RBC standardized approach vs. advanced approach

A

Standardized approach = capital requirement determined by applying fixed factors to information available in insurer’s NAIC filing

Advanced approach = use company-specific internal models

223
Q

What are premium stablization reserves

A

Reserves that consist of accumulated experience rating refunds to reduce insurer’s risk.

224
Q

Some risks not accounting for when developing group insurance

A
  1. Pandemics
  2. Biologic terrorism
  3. Increased compliance costs and regulatory oversight
  4. Financial and reputational risks
  5. Longer-duration products that are newly emerged
  6. Minimum loss ratio
  7. Rate review
  8. PPACA
225
Q

Ways to identify constraints to decision-making process

A
  1. Game theory
  2. Decision analysis training
  3. Root cause analysis
  4. Benchmarking key system variables to best practices
  5. Cultural assessments
226
Q

ORSA =

A

Own Risk and Solvency Assessment. ORSA guidance manual gives qualitative measure when it’s hard to quantify some risks

227
Q

What is Prospective Solvency Assessment

A

Demonstration that insurer has financial resources and adequate capital to support the business plan over 2-5 years under normal and stressed environments

228
Q

Classic and additional categories in Risk Prompt List

A

Classic: political, economic, social, and technological (PEST)

Additional: environmental, legal, and industry (PESTELI)

229
Q

Key areas in risk-focused process analysis

A
  1. Advertising products
  2. Selling products
  3. Collecting premiums
  4. Investing assets
  5. Making payments
  6. Raising capital
  7. Placing contracts
  8. Hiring staff
  9. Paying salaries
230
Q

What is Loss Occurring contract

A

reinsurance coverage based on whether the loss occurred during period of the reinsurance agreement

231
Q

What is risk attaching basis

A

Stop-loss coverage is based on whether the underlying risk insured was sold or renewed during period of the reinsurance agreement

232
Q

What does MCCSR actually stand for?

A

Minimum continuing capital and surplus requirements

233
Q

Three considerations for defining adequate capital of a company

A
  1. Permanence
  2. Being free of mandatory fixed charges against earnings
  3. Subordinated legal position to the rights of policyholders and other creditors of the instutition
234
Q

Characteristics of hybird capital instruments

A
  1. Unsecured, subordinated to policyholder and creditor obligations and fully paid
  2. Not redeemable at the initiative of the holder
  3. May be redeemable by the issuer after an initial term of five years with prior consent of Superintendent of Financial instititutions
  4. Are available to participate in losses without triggering a cessation of ongoing operations or the start of insolvency procedings
  5. Allow service obligations to be deferred where the profitability of the company would not support payment
235
Q

Characteristics of Limited life capital instruments

A
  1. Subordination to policyholders and other senior creditors
  2. Initial minimum term greater than 5 years
  3. May be redeemable by issuer in first 5 years only with prior consent of superintendent of financial institutions
236
Q

What does CALM stand for

A

Canadian Asset Liability Method

237
Q

What does NOLGHA stand for

A

National Organziation of Life and Health Insurance Guaranty Associations

238
Q

Definition of economic capital

A

amount of capital an organization requires to survive or to meet a business objective for a specified period of time and risk metric, given its risk profile

239
Q

Definition of risk evaluation system

A

a combination of practices, tools, and methodologies within a risk management system used to measure the potential impacts of risk events on the performance metrics of an organization

240
Q

Definition of risk management system

A

A combination of practices, tools, and methodologies that an organization uses to identify, assess, measure, mitigate, and manage the risks it faces during the course of conducting its business

241
Q

What is EBITDA

A

Earnings before interest, taxes, depreciation, and amortization

This reflects the value produced using “below the line” financial metrics, which is what shareholders and board members are interested in

242
Q

Max dividend

A

The lesser of 10% of statutory surplus or 100% of prior year’s operating income

243
Q

Advantages of valuing new business for specified number of years

A
  1. Explicitly reflects management’s plan over the planning period
  2. Allows for certain assumptions to change over time, such as absorption of unallocated expense
  3. Procedures projected statutory income statement, which facilitates analysis
244
Q

Advantages of valuing new business for just one year of issue, and then using multipliers

A
  1. Allows user to easily adjust for different growth rates, years of new business, etc.
  2. Provides straightforward basis for comparison of prices paid in transactions
245
Q

Pricing factors for group term insurance

A
  1. Industry
  2. Underwriting
  3. Case size
  4. Plan design
  5. Prior experience
  6. Underwriters’ judgement
  7. Competitive discounting
246
Q

Considerations when making rate increases

A
  1. Company’s history of rate increases
  2. Regulatory approval process (including delays and reductions)
  3. Lapse and antiselection
  4. Bad publicity
  5. Lawsuit potential
247
Q

General approaches in filing with the IRS

A
  1. For assumption reinsurance, entire amount is deductible straight-line over 15 years
  2. For coinsurance, amounts associated with new business or goodwill are deductible straight-line over 15 years
  3. For coinsurance of inforce business subject to DAC proxy tax, excess tax ceding commission associated with inforce business is deductible immediately
  4. For coinsurance of inforce business not subject to DAC proxy tax, amount is deductible over the life of the business (e.g. qualified annuities)
248
Q

Property and casualty lines of business:

A

fire, earthquake, homeowners, farm owners, commercial multiple malpractice, workers’ compensation, general liability, product liability, financial guaranty, private passenger auto, commercial auto liability, aircraft, fidelity and surety, burglary and theft, boiler and machinery, credit

249
Q

Weaknesses of loss development model

A
  1. For immature accident years, LDFs may become very large, especially for long-tailed LOB
  2. For long tailed LOBs, tail factor selection has a leveraged effect on the indicated reserve
  3. Change in a company’s claim reporting patterns and loss payment patterns may produce an indicated change in IBNR reserve that moves in the wrong direction. E.g. if claims are paid quicker, and strengthens claim reserves, indicated LDFs will increase and then be applied to higher claim values, which makes it look like more reserves are needed.
250
Q

Methods used to determine market value margin

A
  1. Stochastic simulation
  2. Loss development modeling
  3. Aggregate probability distribution methods
  4. Market values determined from reinsurance transactions
251
Q

What does embedded value measure

A

Value of insurance comapny’s existing business or specific block of business after tax. Includes free surplus and looks at shareholders’ income rather than profits

252
Q

Expected cost credibility formula

A

Z = (N/2500)^.5

Expected cost = prior cost x trend x Z + BOB cost x (1-Z)

253
Q

What is HERO?

A

health enhancement research organization.

HERO study assigns members to high and low risk categories based on responses to a health risk assessment questionnaire.

254
Q

ICD 10 changes from ICD 9

A
  1. Almost 2x number of categories
  2. Use of alphanumeric categories instead of only numeric
  3. Changes in chapters, categories, titles, and groupings
  4. Expansion of injury codes, ambulatory, and managed care encounters
  5. Addition of 6th character
  6. V = ongoing treatment not related to condition. E= accident, injury, or poison-related diagnosis
255
Q

Key data included in hospital claims form

A
  1. Facility name and tax id, statement date, patient name, type of bill code
  2. Occurence code = indicate whether an admission results from an auto accident, workplace accident, etc.
  3. Revenue codes, description of services, HCPCS, service date
  4. Service units = for blood, oxygen, etc.
  5. Payer (usually insurer), provider number, prior payments, estimated amount due, principal diagnosis code, other diagnosis codes, admitting diagnosis code, principal procedure administered, attending physician
256
Q

Key data included in physician claim forms

A
  1. information about patient, insured, relationship, employer, and if claim is result of an accident
  2. Prior patient illness
  3. Referring physician
  4. Performing physician
  5. Diagnosis or nature of illness
  6. Dates of service
  7. Procedures: HCPCS/ CPT
  8. Charges
  9. Days or units
257
Q

Reasons a drug might not appear in NDC directory

A
  1. Product may not be a prescription drug or insulin product
  2. Manufacturer has notified the FDA that product is no longer being marketed
  3. Manufacturer has not complied fully with listing obligations
  4. FDA standard code contains 10 digits. HIPAA requires 11.
  5. Prescriptions written but not filled will not generate claims.
258
Q

Variables used to assign DRG

A
  1. principal diagnosis
  2. sex
  3. age
  4. Secondary diagnosis
  5. Procedures
  6. Patient disposition
259
Q

What is rules-based modeling

A

Use clinical best-practice guidelines to identify individual members whose care deviates from practice guidelines

260
Q

What is N class vs. M class variables

A

N class: derived variable that indicates the number of therapeutic classes

M class: derived variable indicating number of condition categories found in the member’s medical record. Could represent number of HCC’s or diagnosis categories under an alternative grouper system.

261
Q

What is Akaike information criterion (AIC)

A

Ranks competing models

AIC = 2K + n * log(RSS)

262
Q

Worksheets for completing a bid for Medicare Part C

A

Worksheet 1: captures bid-specific experience for base period and makes projection assumptions

Worksheet 2: calculated projected allowed costs for contract year by PMPM

Worksheet 3: summarizes projected MA cost sharing PMPM values by medical service category for contract year and includes both IN and OON cost sharing

Worksheet 4: uses allowed costs and cost sharing PMPMs from worksheet 2 and 3 to develop net medical costs.

Worksheet 5: calculates A/B benchmark and evaluates whether the plan realizes a savings or needs to charge a basic member premium

Worksheet 6: summarizes results of the calculations of the bid form but also requires some additional User input

Worksheet 7: contains actuarial pricing elements for any optional supplemental benefit packages to be offered during the contract year, up to a maximum of 5.

263
Q

PMPM capitation rate =

A

target x RFHP + Admin

target = statewide Medical only Target for the Commonwealth Care Program

RFHP = average rating factor for health plan = sum(Geo x Plan x Disc x Risk) / total members for each member

Admin = non-medical expenses

264
Q

Typical chronic diseases

A
  1. Diabetes
  2. Heart disease
  3. Heart failure
  4. Asthma
  5. COPD
265
Q

What is MIB

A

Medical Information Bureau - association of more than 500 life insurers. It can provide data that has been gathered from other insurance applications and other sources. Commercial database source.

266
Q

Pre-existing condition provisions

A
  1. Is not used to evaluate risks. Instead, used to protect against anti-selection and replace parts of uw process
  2. Typically says that any condition for which there was a treatment or symptoms for up to 6-12 months prior to the application, will not be covered for 12-24 months after issue
  3. Provision does not usually apply to conditions disclosed on the application This is because the insurer was aware of the conditions and still chose to issue the policy
  4. For some coverages (such as hospital indemnity), these provisions supplement other uw approaches
267
Q

Common predictive models

A
  1. Credibility formula - individual’s expected claims are modified based on past claim dollars, dampened to reflect that some claims are due to random fluctuations
  2. Debt manuals are early versions of predictive models
  3. Commercially-developed risk adjusters
268
Q

Exceptions to the HIPAA provision that all actively-marketed policy forms must be offered to eligible individuals, without any pre-ex condition exclusions

A
  1. If a state implements an acceptable alternative mechanism, the rules of that mechanism apply
  2. If a state does not implement an acceptable alternative mechanism, the issuer may choose to offer eligible individuals only two policies, which must meet certain specified criteria
269
Q

Asset risk factors most commonly held by health insurers

A
  1. Cash and bonds - factors of 0.3 - 30%
  2. Common stock - factor of 0.15%
  3. Property and equipment - factor of 10% on admitted assets
270
Q

Life RBCAC formula

A

RBCAC = C0 + C4a + {(C1o + C3a)^2 + (C1cs + C3c)^2+C2^2 + C3b^2 + C4b^2}^.5

C0 = asset risk- affiliates
C1cs = Asset risk - unaffiliated common stock and affiliated non-insurance stock
C1o = Asset risk - all other
C2 = insurance risk
C3a = interest rate risk
C3b = health credit risk
C3c = market risk
C4a = business risk
C4b = health administrative expense component of business risk
271
Q

What is a risk hypothesis

A

A structured understanding of the risk profile of the organization and its ability to achieve corporate goals under both normal and stressed conditions

272
Q

Meanings of “risk”

A
  1. Uncertainty over the range of possible outcomes
  2. Probability associated with a particular outcome
  3. Likely severity of a loss, given a loss occurs
  4. Exposure to a loss
  5. Problems and opportunities that arise when an outcome is different than expected
273
Q

Types of bias

A
  1. Deliberate bias - key risks are intentionally omitted or downplayed to secure approval of a project
  2. Unintentional bias - due to overconfidence in one’s ability to complete a difficult task
  3. Anchoring - form of behavioral bias where decisions are made relative to an existing position (e.g. reserves aren’t changed enough to keep up with environment)
274
Q

Economic capital model approaches

A
  1. factor table
  2. deterministic approach
  3. stochastic approach
275
Q

Examples of Tier 2C: other capital items

A
  1. 75% of amounts deducted from tier 1 on account of cash surrender value deficiencies
  2. All amounts deducted from tier 1 on account of negative reserves
  3. 50% of terminal dividend reserve associated with out of Canada participating life insurance business
  4. 50% of the amount deducted from gross tier 1 on account of each net defined benefit pension plan recognized as an asset on the insurer’s balance sheet
  5. Adjustment amount ot amortize the impact in the current period on available capital on account of the net defined benefit pension plan liability or asset
276
Q

Registered reinsurers include:

A
  1. Reinsurers incorporated federally or foreign companies that reinsurers risks in Canada. These entities must be authorized by the Superintendent to reinsure the ceding company’s risks.
  2. Provincially or territorially regulated insurers that have been insurers that have been approved by teh Superintendent
  3. Arrangements that meet the following:
    - Canadian insurer or subsidiary
    - All of the policies reinsured are issued outside of Canada
    - Arrangement is subject to solvency supervision in the foreign country
    - Either the reinsurer is subject to meaningful solvency supervision, or the arrangement is fully collateralized by the reinsurer
277
Q

Requirements in order to obtain a reduction in required capital

A
  1. Arrangement must conform to all principals contained in Guideline B-3: Sound Reinsurance Practices and Procedures
  2. The arrangement must also meet all of the effective risk transfer conditions in this section
  3. Ceding company must be able to demonstrate that the change in risk it is exposed to as a result of the arrangement is commensurate with the amount by which it reduces its required capital or margin
278
Q

Items to review to determine if model is fit for the purpose

A
  1. Degree to which the models need to be reproducible and adaptable to new risks
  2. The sophistication of the models in proportion to the materiality of the risks they cover
  3. The practical considerations for the models, including usability, reliability, and cost efficiency
  4. The inherent statistical and theoretical limitations of the models
  5. The quality of the data underlying the models
  6. The appropriateness of the methodologies used for model validation and calibration
  7. The appropriateness of the methodologies used for modeling dependencies among risks
  8. The appropriateness of the cash flow and discounting methodologies used in the models
279
Q

Thea actuary should use professional judgement in considering the following:

A
  1. Historical data available
  2. Prices in the marketplace
  3. Opinions of other expert
  4. The fit of the assumed distribution to available data
  5. The ability of the assumed distribution to reflect possible extreme values
  6. Sensitivity of results to changes in assumptions
  7. Internal consistency of the assumptions
  8. Consistency in the application of assumptions
280
Q

Seven components of ERM program

A
  1. Corporate governance - to ensure that the board of directors and management have established the appropriate organizational processes and corporate controls to measure and manage risk across the company
  2. Line management - to integrate risk management into the revenue generating activities of the company including:
  3. Portfolio management - to aggregate risk exposures, incorporate diversification effects, and monitor risk concentrations against established risk limits
  4. Risk transfer - to mitigate risk exposures that are more cost-effective to transfer out to a third party than to hold in the company’s risk portfolio
  5. Risk analytics - to provide the risk measurement, analysis, and reporting tools to quantify the company’s risk exposures as well as
  6. Data and technology resources - to support analytics and reporting
  7. Stakeholder management - to communicate and report the company’s risk information to its key stakeholders
281
Q

Approaches to improve H0 risk

A
  1. Reduce ownership in affiliated companies

2. Reduce holdings of off-balance sheet items

282
Q

Approaches to improve H1 risk

A
  1. Increase investments in higher rated securities (i.e. US Government bonds, high investment grade bonds)
  2. Diversify holdings of bonds to include more issuers in order to reduce the asset concentration factor (RBC factor is doubled for certain assets held in the 10 largest seurity issuers of the insurer’s investment portfolio which reflect the risk of having high asset concentrations from a single issuer of the security)
  3. Increase investments in unaffiliated stock relative to affiliated stock
283
Q

Approaches to improve H2 risk

A
  1. Increase business in lines that have less variability in claims (i.e. Dental, ASO)
  2. Increase provider reimbursement arragements that result in higher managed care risk adjustment factors (i.e. capitation, bonus and withold arrangements)
  3. Do not issue rate guarantees for multiple periods
  4. Hold higher premium stabilization reserves
  5. Use reinsurance
  6. Lower the loss ratio via more effective underwriting and pricing, use of managed care techniques, and care management programs, alternative pricing designs…
284
Q

Approaches to improve H3 risk

A
  1. Have more arragnements in which capitations are paid directly to providers and have fewer arrangements in which capitations are paid to intermediaries (who then reimburse providers)
  2. Insurer can exclude capitations made to providers from the rbc calculation if: a. insurer receives a letter of credit from teh provider (which will cover the insurer if the provider breaks the contractual agreement or if the provider becomes insolvent or b. witholds made by the insurer on the capitation payments to providers
  3. Reduce receivables that are related to administrative services contract (ASC) and ASO plans (i.e. pharmacy rebates, claim overpayments, loans to providers, provider risk sharing arragements, where the provider owes the carrier money
285
Q

Approaches to improve H4 risk

A
  1. Increase non-underwritten lines of business (i.e. ASO, ASC)
  2. Increase ASO and ASC business which has a risk factor of 2% which is less than the risk factor for administrative expense risk that ranges from 4% to 7% of annual administrative expenses (The 2% factor is applied to account for risk of the insurer incorrectly estimating their fees for these contracts)
  3. Hold higher ASO business relative to ASC business as there is an additional risk factor of 1% that is applied to the benefit payments that are administered. The reason for this factor is to account for the additional risk in an ASC contract that the insurer fronts the money for the benefit payments that are made adn the insurer then receives reimbursement from teh 3rd party. With an ASO arrangement, the benefits are paid from an account funded by the third party- which represents less risk
  4. Reduce excessive growth. Safe harbor level = (current year uw revenue)/ (prior year uw revenue) + 10%
286
Q

Components of the MCCSR formula

A
  1. Qualifying regulatory available capital, which includes Tier 1 (core capital) and Tier 2 (supplementary capital)
  2. Base required capital (asset default risk, mortaility, morbidity, lapse, interest rate risk, segregated funds risk, foreign exchange risk)
287
Q

Characteristics of Tier 1 (core capital)

A
  1. Component of capital that covers losses that occur during regular operations
  2. Includes the highest quality capital elements
  3. Major types include common shareholders’ equity and policyholders’ equity (for mutual insurers)
  4. Some items are removed from reported earnings for the MCCSR calculation
288
Q

Characteristics of Tier 2 (supplementary capital)

A
  1. Contributes to the financial strength of carrier on a going concern basis
  2. Category applies to capital if there is question on its availability (i.e. its realizable value are uncertain)
289
Q

Condie challenges for disability income policies

A
  1. Ability to adjust pricing assumptions based on social and economic changes
  2. Need to understand the cyclical nature of the business
  3. Do not ease or tighten assumptions when the economy and experience is favorable or unfavorable unless warranted by experience studies
290
Q

Condie considerations related to carrier philosophy when pricing disability income products

A
  1. Quality of experience of underwriters
  2. Level of competition in the market
  3. Claims adjudication approach - strictly based on contract terms?
  4. Product knowledge of sales team
  5. Constant monitoring of experience and comparison with pricing assumptions to ensure target profit margins are met
  6. Higher margins are required the greater risks of the product
291
Q

Considerations when using data sources for establishing morbidity assumptions for LTC

A
  1. Population based data sources are used when: lack of credible experience, assess new benefits, understand morbidity trends
  2. Types of data sources (e.g. national nursing home surveys)
  3. Data can be snapshot or exposure
  4. Necessary adjustments: maturity of populuation, data bias based on specific type of individual or service, transfers between facilities, reinstatements, changes in provider environment (move from killed nursing facility to home health), government program influences on utilization and cost
292
Q

Insured data sources

A
  1. Preferable data source if credible and appropriate

2. SOA LTC Experience Committee Intercompany study is the only available source of insured data

293
Q

Limitations when using SOA LTC Experience Intercompany Study data

A
  1. Carriers may code their data differently than the coding used in this study
  2. Majority of data based on older issues (i.e. nursing home claims)
  3. Study is based on early duration experience as LTC is a relatively new product
  4. Level of underwriting varies by company
  5. Distortions cuased by changes in the underlying mix of business and the companies used in the study
  6. Changes in technology and in the environment for LTC services
294
Q

Pricing methodologies for Medicare Supplement policies

A
  1. Issue age - premium based on age at issue, premium same for all policyholders with the same age, carrier cnnot increase premums as policyholder ages, carrier can increase premiums for a class of policies (e.g. poor claims expeirence), priced to meet lifetime target loss ratio, selection of age bands
  2. Attained age - premium based on current age, premium increases as policyholder ages, selection of age bands
  3. Community rated - same premium is charged to all policyholders in an area regardless of age, premium increase to reach profit objectives
  4. Modified community rated - premiums can be based on factors like age, sex, and duration
295
Q

Differences between standalone CII and acceleration CII policy

A
  1. No 30 day survivial period for Acceleration CII as the benefit is payable on death and critical illness
  2. Higher premium for Acceleration CII as a death benefit is included
  3. Premium is lower for Acceleration CII compared to separate standalone policies, as one benefit is paid under acceleration CI (i.e. either CI or death)
296
Q

Condie considerations in product design process for cirtical illness insurance

A
  1. CII is relatively new product with immature experience data
  2. Limit benefits for conditions that are not life threatening
  3. Avoid anti selection at time of issue
  4. High claims cost for some conditions after age 75 (e.g. Alzheimers)
  5. High claims cost of long term guarantees due to earlier detection of conditions
297
Q

Describe and list advantages of LTCI combination product

A
  1. Combination life with accelerated benefits are life insurance or annuity policies along with a rider that provides accelerated death benefits if the individual requires LTC benefits due to a chornic or terminal illness
  2. The total benefit available is limited to teh amount of the life insurance death benefit
  3. Advantages include lower premium rates compared to standalone coverages, and avoids concern with standalone LTCI policies of the steep claim cost curve (i.e. no claims for many years while premiums are paid)
298
Q

Why is reinsurance for LTCI not widely available

A
  1. Few reinsurers have the product expertise
  2. LTCI represents a small part of the block for large direct carriers
  3. Small direct carriers do not perform adequate underwriting and pricing (and therefore are not attractive risks to the reinsurer)
299
Q

Concepts of risk adjustments and risk prediction

A
  1. Risk adjustment - technique to normalize differences in risk between populations, applied to historical data
  2. Case mix adjustment - special case of risk adjustment, normalizes risk profiles when evaluating differences in utilization/ cost between populations, risk score based on condition of a member is not developed, complexity of the calculation is dependent upon number of variables (i.e. conditions)
  3. Predicvitve modeling (risk prediction) - predicts cost/ utilization based on risk factors obtained from patient profiles, identifies members at risk for high utilization or a high cost event, members with highest risk scores may not be suitable to a care managment program (i.e. ESRD), useful for pricing/ underwriting as risk scores and dollar claims are correlated
300
Q

Projection models used to determine the appraisal value

A
  1. Windshield appraisal model - used when there is time constraints and data is limited, used to determine if a more detailed analysis is reqiured
  2. Intermediate detail model - used when there is insufficient detailed data, systems may not be able to generate detailed data, model can be used to generate adequate estimates
  3. Full-blown appraisal model - used when detailed data is available and there is tiem to develop a refined model, model needs to reflect the business (sophisticated model required for LTC), model cells based on benefit or pricing variations, underwriting differences, ability of model to track inforce business by duration (to accoutn for changes in morbidity by duration)
301
Q

Shortcomings of ERM programs

A
  1. Programs do not include major variables that impact risk
  2. Risk is analyzed via a silo approach
  3. There is not a focus on developing resilience to risk via ERM
  4. Corporate risk capital levels is based on standard guidelines
  5. Risk capital is generally not attributed by line of business
302
Q

Ways to control UW risk

A
  1. Require members to be in good health at the time of application
  2. Exclude claims for pre-ex conditions or apply limits on high cost procedures
  3. Require members to use a network of conservative or efficient physicians
  4. Use reinsurance for large claims
  5. Use care management programs
303
Q

Tools for recording electronic medical records can help the provider by:

A
  1. Providing information on alternative drugs within a class
  2. Linking to the latest research in the area of the patient’s diagnosis
  3. Providing guidance in establishing an appropriate treatment plan
  4. Recommending the appropriate billing codes
304
Q

Covered charges =
Allowed charges =
Net incurred claims =

A

Submitted claims - ineligible charges = covered charges
Covered charges - negotiated discounts = allowed charges
Allowed charges - member responsibility = net incurred claims

305
Q

Advantage of using paid instead of incurred claims

A
  1. Analyst does not have to wait for run-out before claims are deemed complete
  2. Paid claims can successfully identify members for a care management program. Pricing requires incurred claims
306
Q

What do the 3 digits of bill type code stand for

A

First digit = type of facility
Second digit = bill classification information
Third digit = frequency of billing for a claim

307
Q

What is HIPAA

A
  1. Most significant legislation affecting use of health data
  2. It defines what data needs to be protected, gives patients both knowledge and control over how their health data is used, and requires certain minimum standards for the use, disclosure, and protection of the data
308
Q

What is HITECH

A
  1. Health Information Technology for Economic and Clinical Health Act
  2. HITECH made same security and penalty provisions as HIPAA applicable to all business associations of health care organizations
  3. Created initiatives for health professionals and health care providers related to the creation and meaningful use of electronic health records
309
Q

What is GINA

A
  1. Genetic Information Non-Discrimination Act
  2. Act prohibits discrimination in health coverage and employment based on genetic information
  3. Insurers cannot set rates based solely on a genetic predisposition, but they are allowed to charge based on the manifestation of a genetic disease or disorder
310
Q

Name some grouper models

A
  1. Johns Hopkins Adjusted Clinical Group (AGC) system
  2. Diagnosis related groups (DRGs)
  3. Chronic Illness and Disability Payment System - used for adjusting capitated payments
  4. Clinical Risk Groups (CRGs)
  5. Diagnostic Cost Groups/ Hierarchical Condition Category
  6. Sightlines DxCG Risk solutions
  7. Episode Treatment Groups
311
Q

4 levels of DxCG model classification

A
  1. All of an individual’s diagnoses are processed to identify presence of one or more DxGroups which combine ICD9 codes
  2. DxGroups classify diagnoses into higher-level clinical groupings called Condition Categories
  3. CCs clinically related to each other are then collapsed into Related Condition Categories, which are helpful in reporting on specific diseases and conditions
  4. RCCs grouped by body system to create Aggregated Condition Categories (ACC)
312
Q

When MCO’s bid is less than or equal to CMS benchmark,
government payment =
supplemental member premium =
total payment to MCO =

A

government payment = bid * risk adj score + 75% * (benchmark - bid)
Supplemental member premium = MCO member premium, if any, for additional benefits or reduced cost sharing
Total payment to MCO = government payment + supplemental member payment

313
Q
When MCO's bid is greater than the CMS benchmark,
government payment =
basic member premium = 
supplemental member premium = 
total payment to MCO =
A

government payment = benchmark * risk adj score
basic member premium = bid - benchmark
supplemental member premium = MCO member premium, if any, for additional benefits or reduced cost sharing
total payment to MCO = government payment + basic member premium + supplemental member premium

314
Q

Plans made available to Medicare Population

A
  1. Medicare Advantage Plans (part C) - includes HMO, PPO, POS, private FFS, SNP (special needs plans), Medical Savings Account, ESRD, MA-PD (offers drug benefits), and employer plans
  2. Medicare Part D (prescription drug plans)
  3. PACE (programs of all-inclusive care for the elderly)
  4. Numerous demonstration programs administered by CMS to encourage and monitor innovative programs
315
Q

Key acts affecting Medicare plans

A
  1. Tax Equity and Fiscal Responsibility Act of 1982 - permitted all HMOs to offer full risk Medicare contracts in exchange for a defined capitation payment for each member served
  2. Balanced Budget Act of 1997 - established Medicare + Choice plans. Introduced the concept of risk adjusting payments and expanded eligible organizations to include PPOs, private FFS plans, and MSAs
  3. Benefits Improvement and Protection Act of 2000 - expanded the risk adjustment methodology to the current CMS-HCC methodology and enhanced payments to Medicare + Choice plans
  4. Medicare Modernization Act of 2003 - established regional PPOs and SNPs, further enhanced payments to MCOs, and established the Medicare Part D program
316
Q

Key concepts in Risk Managment Economic Model

A
  1. Risk varies within populations, as well as over time
  2. Patients can move between risk categories
  3. A small percentage of the population will account for a disproportionately large percentage of expenses
317
Q

Operating expense assumptions

A
  1. Fully absorbed unit expense - implies that company is at critical mass. Can be used if expense improvements are expected to be passed back to policyholders, typically on groups that re-rate annually. May also be used by large companies that are not expected to improve their efficiencies
  2. Target unit expenses and an unallocated expense - most common approach for setting operating expense assumptions. Combination of company targets for fully allocated expenses, company assumptions used in their internal new business pricing analysis, representative industry levels of target expense, representative unit expense levels by a third party administrator
  3. Target unit expenses without an unallocated expense - expenses are often adjusted by the buyers to what they believe is appropriate based on their plans for acquisition
318
Q

Factors other than risk-free rate that affect discount rate used by companies

A
  1. Internal company targets
  2. Cost of funds for transactions
  3. M&A marketplace discount rates
319
Q

Assumptions that are important for life insurance

A
  1. Mortality improvement
  2. Reinsurance
  3. Reserve issues
  4. Low interest rate environment
  5. Non-guaranteed elements e.g. sales literature, illustrations, or past company practice
320
Q

Considerations for modeling group term coverages

A
  1. Portability - individuals that use portability provisions generally have substantially higher mortality or morbidity than average individual
  2. Group conversions - these also result in higher mortality or morbidity
  3. Beneficiary checking account - asset spreads on a group life beneficiary checking account represent potential source of value
  4. Association, affinity, or other special purpose groups
  5. Other specialty coverages such as accident or travel insurance
321
Q

What does economic value added (EVA) measure?

A

The value as the adjusted statutory book value plus the present value of future earnings less the cost of capital

322
Q

Most significant difference between discounted cash flow and economic value added

A

How they determine terminal value

  1. DCF - terminal value includes remaining capital of the company, and therefore is larger when forecast period is short
  2. EVA - initial capital is immediately recognized, so terminal value is much smaller
323
Q

Adjustments to capital that are needed for P&C valuations

A
  1. Adjustments for adequacy of loss and loss adjustment expense reserves
  2. Goodwill
  3. Bonds should be valued at market value rather than at amortized cost
  4. Adjustments related to Schedule F penalties for reinsurance
  5. Unearned premium reserve adjustments
324
Q

Elements that cause unexpected change in EV

A
  1. Actual experience being different than expected
  2. A change in an embedded value assumption
  3. A capital injection
  4. The buy back of shares by the company
  5. A change in the required capital formula
  6. A change in tax rate
  7. Acquisitions
325
Q

Bonds, notes, and other obligations of the following entities are eligible for a 0% C-1 factor

A
  1. The government of Canada
  2. Sovereigns rated AA- or better and their central banks
  3. Unrated sovereigns with a consensus risk score of 0 or 1, as assigned by Export Credit Agencies
  4. Canadian provincial and territorial governments
  5. Agents of the Canadian Government or a Canadian provincial government whose debts are direct obligations of the Crown
  6. The Bank for International Settlements
  7. The International Monetary Fund
  8. The European Community and the European Central bank
  9. Specifiacally-listed multilateral development banks (e.g. Asian Development Bank, African Development bank, Carribbean Development Bank)
  10. Public sector entities in jurisdictions outside Canada for which the national bank supervisor permits banks under its supervision to use a risk weight of 0% under the Basel Framework
  11. Recognized exchanges and clearing houses that serve as central counterparties to derivatives and securities financing transactions