Group Chap 20: Pricing of Group Insurance Flashcards
Gross Premium Development
- Gross premium represents cost of the coverage to the customers
- Where self-insured or administrative services only (ASO), the term “gross premiums” is replaced by “contribution rate” or “premium equivalent”
Pricing Assumptions
1. Gross Premiums consist of claim costs, loaded to reflect:
a. Expenses - Administrative expenses, commissions, and sales expenses
b. Premium and other taxes
c. Contributions to surplus (which reflect risk and profit expectation)
2. Less Investment Income
3. Some explicitly add amounts for each cost element
4. Others divide projected claims by target loss ratios to get gross premium
a. Target loss ratio reflects acceptable level of claims as a percentage of premium
5. Administrative Expenses
a. Expenses of designing, developing, selling, underwriting, and administering the product, including allocations of overhead
b. Design and development amortized over a number of years
c. Expenses of provider networks may be recovered with network access charge
- High network access charge worthwhile if equates to lower claims through: discriminating choice of providers, higher discounts, or increased utilization management
- Charge is often set as a percent of claims. To compare admin rates between competitors, need to estimate network access charges
- Some insurers can rent a network - pay charges for network access to let insurer extend into a new grographical area
d. May ignore overhead expenses to offer introductory products at a lower price
- “Pricing on the margin” - only expenses associated directly with product are included
e. Administrative expenses higher first year
f. Marketing expenses also higher in the first year
g. Company may choose to amortize first year expenses over a number of years
h. Amortization expenses and pricing on the margin can result in unrealistically low initial premiums that require rate increases in later years
i. Considerations
- How are expenses allocated to the product?
Activity Based Allocation
i. Allocates according to some estimate of use
ii. Transfer charge for mailing expenses
Functional Expense Allocation
i. Determining how total expenses are split by activity categories, by line of business for new and renewal business
ii. Surverying each employee to determine how time is allocated
Multiple Allocation Methods
i. Both methods describe above may be used within the same financial report
- How should administrative expenses be allocated to groups?
Primary objective to achieve equity among group customers without complicating the process
Expenses expressed on the following bases, differentiating between first year and renewal
i. Percent of premium
ii. Percent of claims
iii. Per Policy
iv. Per employee (certificate)
v. Per member (each person covered)
vi. Per claim administered
Certain expenses may be cahrged separately to customers who use them
Basis that combines a number of factors since expenses vary by members, number of groups, number or amount of claims - What does the competition include as expenses in its pricing?
j. Source of Data
- Internal sources show waht is needed to cover operating costs
- External sources show what the market demands
- Internal
i. A functional cost study measures resources used in each function for various group sizes, coverage, or line of business
ii. Internal generally company’s accounting systems
iii. Types of expenses include salary, bonsuses, benefits, rent, postage, travel, office and computer equipment
- External
i. Includes studies by industry associations, expense data from annual statements, competitive feedback, special surveys
ii. Data may not be accurate
iii. Comparisons with other companeis subject to distortion from differences among companies
- Expenses categorized as direct or overhead
- Either accounting system automatically allocates expenses as they accrue or by doing end of period allocations
6. Commissions and Other Sales Expenses
a. Group insurance marketed by agents or brokers
b. Some are salaried representatives
c. Commissions paid to general agents responsible for a number of agents known as commission overrides
d. Commissions reflect volume and complexity of work, payment practices among other companies’ brokers and what customers are willing to pay
e. Bonuses based on persistency, volume, types of groups sold
f. Other sales expenses include advertising or promotional expenses
g. Commissions expressed as percent of premiums with percent decreasing with group size
h. Some pay commissions as a flat dollar amount per member
i. Commission rates for large groups generally not vary between first and renewal
j. Small group sometimes has higher first-year commissions - Under ACA, insurers can no longer have higher first year commissions
k. Commission structures for Medicare Advantage and Part D have rules to ensure agents cannot “churn” participants from product to product in order to continually earn first year commissions
- Many states have similar insurance laws in palce to prevent churn (actual enforcement of these laws varies among states)
7. Premium Taxes
a. Vary by state
b. Simpler treatment for pricing is to set tax assumption at average premium tax, weighted by business volume distribution
c. Self-insured products do not pay premium taxes
8. Other Taxes
a. Federal and state income taxes
b. May be common across all products or may reflect operating results of each product
c. ACA introduced a federal assessment on health insurance coverage (even self-insured groups)
- Began in 2014 and was to reach $15.5 billion by 2020
- Repealed starting in 2021 by federal spending bill - some states have special assessments to subsidize individual market premiums
- Assessments on insurers usually limited to insurance products (not self-insured), while assessments on providers will affect insurers and self-insured groups
9. Risk and Profit Charges
a. Reflect degree of risk, amount of capital allocated to support coverage, return expected on capital
b. Degree of risk varies by group size, benefits provided, funding vehicle, and resources required to administer the account
c. For smallest groups, risk of underestimating claims in the pool or in underwriting a specific group
d. Small group regulations introduce additional risks (Benefit mandates, regulations that restrict underwriting, or may restrict rate increasaes)
e. For larger groups risk of underestimating claims and financial arrangements risk
f. For self-insured accounts, risks that administrative fees are not adequate
- Also risk that employer or regulator may look to insurance company or HMO for help if employer unable to meet its obligation
g. For jumbo accounts, risk that company is unable to reduce expenses rapidly in response to loss of the account
h. If profit margins built into expense charges, investment income credits and pooling charges, explicit risk and profit charges may be reduced
i. Returns may be measured against target returns on RBC requirements
10. Investment Earnigns
a. Earned on assets related to claim reserves, other reserves, and on cash flows
b. Allowing customer to hold their own reserves reduces investment earnings
c. Rate of return credited in premium formular generally based on company’s portfolio rate of return
d. May reflect investment strategy, the type and time of the liabilities
e. Investment earnings reflected as an explicit rate component, an offset to expenses, or an offset provision for risk or profit
f. Some do not explicitly reflect individual earnings, instead adjust target loss ratios
Manual Premium Rates
1. Rates that would be charged in absence of credibility given to past claim experience or health underwriting
2. Rating Characteristics
a. Manual rate structure could include plan characteristics, employee demographics, period for which the rates are set, industry, size and location
b. Rating characteristics include
- Age
- Gender
- Health status
- Rating tiers
- Geography
- Industry
- Group size
- Length of premium period
c. As of Jan 1, 2015, insurers in small group, non-grandfathered market must use the age curve applicable in each state and can only rate on:
- Benefit design
- Network factors
- Geographic factors
- Tobacco use
d. Government restricts gender-based employee contribution rates for groups
- Even though quoted rates depend on gender mix, the rate structure quoted to group does not reflect it
e. Rates can be loaded for specific substandard health conditions. Generally for small groups but not in larger groups
f. Rating tier choices:
- One Tier: Composite
- Two Tier: EE only, family
- Three Tier: EE only, employee and one dependent, family
- Four Tier: EE only, employee with one dependent, employee with children, family
- Five Tier: EE only, couple, employee with children, family
g. On a one-year term basis (typically involves projections 15-18 months beyond period of the data)
- Some coverages established for more than one year involve greater risk cahrges (long-term care insurance and some group life)
- Investment income and persistency assumptions more important in setting multi-year rates
h. Marketing, Competitive, and Regulatory Issues
- Needs to be rational relationship between rates by group size and product category
- Premium rates between products generally reflect differences in expected costs although rates may deviate from strict actuarial equivalence
- Company must match financial plan and strategy with competitive forces
- Laws restrict how rates can vary due to rating characteristics as well as rate increases year to year
- ACA introduced federal rating restrictions (for individual and small group plans less than 50 employees)
Group Specific Adjustments
- Premium rates for a group may be expressed as percentage of the manual rates
- Large groups based on groups’ own experience
- For other groups based on manual rates, adjustments made for new business discounts and credible prior experience
- New business discounts sometimes used to encourage group to change insurers
- ACA prevents new business discounts in individual and small group market, non grandfathered plans
- Should be supported by analysis of claim experience by duration
- Renewal rates will be increased for trend plus the discount
- Recovery of discounts limited by group rating restrictions - Blending process may involve pooling
- Jumbo groups may provide a marketing advantage, may increase company’s negotiating power with providers leading to larger provider discounts
- Economies of scale with jumbo groups in enrollment, billing and administration
- On the other hand, demand a lot of special attention
- Quantity new effect in setting premium rates - For self-insured groups, loadings based on cost of adminsitrative services and stop-loss insurance provided by the carrier
- Underwriters usually responsible for developing customers’ rates
- Have some discretion to adjust rates from what actuarial tools propose
- Actuaries must monitor the use of discretion, reflecting profit and risk margin
Monitoring of Experience
- Actual experience never conforms precisely to assumptions
- Implement systems to monitor actual experience, so that assumptions can be modified
