Group Chpt37 Funding Methods

Question 1

Considerations of credibility levels for experience rating

Answer 1

1. Theoretical considerations
   
   1. 1 low frequency claims more volatile and require larger exposure for credibility
   2. 2 Coverages with widely varying claim size will tend to be more volatile
   3. 3 Typical measure is lives covered but may use longer period rather than more lives
2. Practical considerations
   
   2. 1 Competitive pressures
   3. 2 Administrative ability to cope with experience rating
   4. 3 Trade-off between the added cost and the resulting gains in volume
   5. 4 Management philosophy regarding experience rating

Question 2

Prospective experience rating

Answer 2

1. Change in the premium to be charged for a future period
2. Incurred claims = paid claims + ending reserves - starting reserves
3. Pooling methods
   
   3. 1 pooling charge must be >= claim modifications made
   4. 2 Catastrophic claim pooling
   5. 3 loss ration/rate increase limits
   6. 4 Credibility weighting
      
      3. 4.1 Pooled clms = C * Inc clms + (1-C)*Expected inc clms
      4. 4.2 Loss Ratio (pooled) = C LR before pooling + (1-C)*Pooled LR
   7. 5 Multi-year averaging = (5LR in year Z + 3LR in Z-1 + 1*LR in Z-2)/9
   8. 6 Combination. Many of the methods can be used together
4. Trending midpoint of experience to midpoint projection
5. Calculating gross rates from net rates
   
   5. 1 Expense loadings (also known as retention loadings/items)
   6. 2 Deficit recovery charges; termination risk charge; pooling charges; profit charge; investment income; explicit margin
6. Plan choice consideration

Question 3

Retrospective Experience rating

Answer 3

1. Balance = prior balance + prem + investment - claims charges - expenses - risk charge - rate stabilization reserve addition - profit
2. Claims charged = clms paid + clm reserve increase - pooled clms + pooling charges + conversion charges + clm margins
   
   2. 1 Specific stop-loss claims are removed
   3. 2 Claims > aggregate stop-loss pooling level are removed
   4. 3 Stop loss pooling charge is added back in
   5. 4 add in excess claim cost for conversion privileges
3. Rate stabilization reserve addition: reduce risk of being in deficit by accumulating portion of policyholder surplus
4. Profit: margins often built into other assumptions, rather than shown explicitly

Question 4

Special funding arrangement

Part 1 of 2

Answer 4

1. Reserve less plans: insurer fore goes some prem, and PH promises to pay amount upon termination
2. Fully-insured plans
   
   2. 1 Insurer bears immediate risk of adverse experience
   3. 2 Insureds have security of insurer being the claim guarantor
   4. 3 Premium tax owed on money flowing to the insurer
   5. 4 contracts subject to insurance laws
3. Self-insured plans
   
   3. 1 Employer take on the role as the primary risk taker
   4. 2 Employer may purchase stop loss
   5. 3 Premium tax is avoid
   6. 4 State regs on insurance contracts will not apply

Question 5

Special funding arrangements

Part 2 of 2

Answer 5

1. Minimum premium contracts
   
   1. 1 Hybrid of insured and self-insured plans
   2. 2 Policyholder deposits funds to an account as needed
   3. 3 Clms are paid from fund, insurer liable for clms > expected
   4. 4 state premium tax is avoid
2. Stop loss contracts
   
   2. 1 Used with self-insured plans
   3. 2 Specific stop-loss insures claims of individuals covered
   4. 3 Aggregate stop-loss covered the claims of the plan as a whole
3. Retrospective premium
   
   3. 1 The policyholder takes some claim risk in exchange for reduced risk charges and lower up-front prem

Question 6

Reasons for experience rating

Answer 6

1. Groups prefer premium base on own experience rather than pooled
2. May help insurer quote more competitive rates
3. Competitive pressures despite theoretical justification to pool
4. Policyholder held financially accountable for its past claims experience