Health Reserves

Question 1

Types of reserve reporting (4)

Answer 1

1. ) Regulatory reporting - concerned with solvency & policyholder, so conservative
2. ) GAAP reporting - “realistic with provision for adverse deviation”
3. ) Experience reporting for employers & providers - typically less sophisticated except for financial settlement & pricing review. For settlements, allow a 3 month run-out period to minimize the sized of the estimate reserve.
4. ) Valuation for acquisitions - reserves are material to profitability, so they are often a focal point of negotiations. There is often a final settlement after several months to revisit the purchase price and assess the impact of claim reserves.

Question 2

Types of claims liabilities & reserves (9)

Answer 2

1. ) Due and unpaid liabilities (reported, adjudicated, and processed, but no paid) - is usually small. Itemize or based on historical averages.
2. ) In course of settlement - system my record receipt and run report. Otherwise, use simple method us as average claims time number of claims.
3. ) IBNR - project by using existing payment data to develop average expected claims or claim payment patterns.
4. ) Loss adjustment expenses - usually a percentage of unpaid claims liability
5. ) PV of amounts not yet due (“unaccrued”) - an estimate of future amounts due on known open claims (commonly for disability or LTC claims)
6. ) Resisted claims - usually reserved seriatim (court-ordered) assuming 100% of claim paid and possibly damages
7. ) Outstanding accounting feed (may overlap w/ due & unpaid liability) - acknowledged but unpaid
8. ) Deferred maternity or other extended benefits - the loss is triggered before the valuation date, but benefits are deferred by contractual provisions.
9. ) Other special reserves - such as waiver of premium due to disability.

Question 3

Methods of estimation for claim reserves (7)

Answer 3

1. ) Case reserves - direct enumeration on a claim-by-claim basis. Typically used only when there are very few claims. Can’t use for IBNR.
2. ) Projection method (formula or factor method) - develop historical claim rate as a function of some measure of exposure. Then apply this rate to projected exposure. The most common approach is: [(proj PMPM clm cost) x (mbr months)] - (claims already paid)
3. ) Loss ratio method (claim cost method) - use where volume is low or to validate other methods: (loss ratio x earned premium) - (claims already paid)
4. ) Tabular method - apply a factor to open claims to calculate reserve. Typically used for LTC or disability. Can’t use for IBNR.
5. ) Development method (lag, completion, or triangulation method) - projects historical claim lag pattern into the future to estimate the reserve based on experience data
6. ) Emerging development method techniques - (separate card)
7. ) Stochastic approaches - methods where a probabilistic statement can be made about the level & adequacy of the reserve amount. Any of the methods discussed previously can be given a stochastic treatment.

Question 4

Case Reserve Methods (2)

Answer 4

1. ) Examiner’s method - estimate ultimate payment and deduct what’s already been paid.
2. ) Average size claim method: the (number of reported claims) x (average claim amount) - (amount already paid)

Question 5

Types of coverage for which the development (lag) method works well (5)

Answer 5

1. ) Ability to record incurral & payment dates for each claim
2. ) Fairly consistent lag patterns
3. ) Short incurral periods relative to the ultimate run out (or monthly is preferred)
4. ) Sufficient volume of business in each cell, in order to obtain reasonably stable results
5. ) Availability of either earned premiums or exposure data (for volume adjustments & smoothing)

Question 6

Steps of the development (lag) method (7)

Answer 6

1. ) Summarize data by incurral vs. paid month to get a claims triangle
2. ) Sum cells of the claims triangle to get cumulative incurred and paid claims
3. ) Develop age-to-age development factors (ratio of month to month cumulative claims)
4. ) Can use various methods to smooth the age-to-age development factors
5. ) Calculate age-to-ultimate development factors (completion factors) from the smoothed age-to-age factors
6. ) Divide each month’s paid claims by its completion factor to get ultimate incurred claims
7. ) Subtract paid claims from the ultimate incurred claims to get unpaid claims liability

Question 7

Smoothing methods to apply to development (lag) factors (6)

Answer 7

1. ) Simple averaging - average development factors for each lag months (3 month average is very current, 12 month average is smoothest but may bury trends)
2. ) Removing bumps - throw out high and low factors and use 6 of the last 8 or 10 data points. Or remove large “shock” claims from the claim triangle and analyze them separately
3. ) Weighted averaging - give more credibility to most recent results (sum of digits, squared sum of digits, constant declining percentage)
4. ) Other types of means - harmonic (use the reciprocal of the “mean of reciprocals”) or geometric (the nth root of the “product of n observations)
5. ) Dollar-weighted methods (prior methods have been ratio weighted) - compute smoothed age-to-age factors directly by averaging the payment amounts for a given lag month and then dividing by the average for the prior lag month
6. ) Per member age-to-age ratios - before calculating age-to-age ratios, divide payments in each lag by the exposure for that lag. Then use one of the above methods.

Question 8

Methods for adjusting development (lag) method reserve estimates for recent months (3)

Answer 8

Replace completion factors that are less than 40% to 70% with estimates based on:

1. ) Projection method
2. ) Loss ratio method
3. ) Credibility-weighted average of development (lag) method results with the projection or LR method results

Question 9

Emerging development method techniques (2)

Answer 9

1. ) Multiple triangles - this technique looks at claim triangles in both the traditional way (claims paid by service date) and in a new way (claims reported by service date)
2. ) Time series and other statistical projections (“regression methods”) - these techniques use advanced statistical & computer tools to help in projecting claims. Uses include:
   a. ) Project payment patterns for partially complete incurral months (use statistical or time series techniques - instead of lag factors - to complete the claims)
   b. ) Project PMPM cost that can be applied in projection method techniques

Question 10

Process for building conservatism in claim reserves (4)

Answer 10

1. ) Development method - can incorporate conservatism in the completion and projection factors. But usually use most likely factors and add an explicit margin to the reserve.
2. ) Tabular reserves - margins are typically included in the assumptions made to calculate the tabular factors.
3. ) Projection methods - add margins to the trend assumptions that are used to project costs per unit.
4. ) Loss ratio methods - margins can be explicit or implicit, depending on the choice of loss ratio

Question 11

Types of outcome-based contractual reserves (2)

Answer 11

1. ) Employer-based contractual liabilities - need to recognize liabilities for contracts where the employer shares the risk of emerging claims experience. The most common is the contractual Claims Stabilization Reserve (CSR).
2. ) Provider liabilities - for example, capitation payments owed, withholds, bonuses & incentives, top loss settlements, and anticipated insolvency of capitated providers.

Question 12

Claims Stabilization Reserve (CSR)

Answer 12

Prior period CSR + Premiums Earned + Interest Credits - Claims Incurred - Risk and Retention Charge

Question 13

Steps for using the authorization method to project claims (5)

Answer 13

1. ) Gather data on the number of authorized services as of the valuation date
2. ) Adjust authorized services - adjust for differences between initial authorizations & actual services rendered. Differences arise due to appeals, poor data, and issues with COB and enforceability of rules.
3. ) Calculate an avg cost per service rendered - this avg cost is frequently a blend of provider contractual amount & actual payments made.
4. ) Estimate incurred claims - multiply the number of services by the cost per service
5. ) Calculate the estimated IBNR - equals the estimated incurred claims minus the amount of paid claims to date

Question 14

Methods for calculating provider liabilities (2)

Answer 14

1. ) Risk-based payments - liabilities are based on projected contractual payout , which is commonly defined as the difference between experienced and targeted costs. Settlement are often done several months after the period ends, so reserves play a minimal role.
2. ) Bonus or incentive contracts - estimates are normally based on utilization studies

Question 15

Variations and complications in policy reserves (5)

Answer 15

1. )Implicit recognition is expenses in Statutory
2. ) Explicit recognition of expenses in GAAP
3. ) Purchase GAAP - DAC is released by selling company and acquiring company created value of acquired business (VOBA)
4. ) Pre-funding tends - adjust policy reserve to account for increases in cost
5. ) Premium rate increases

Question 16

Methods to calculate claim reserves (7)

Answer 16

1. ) Triangulation method (lag or development)
2. ) Claim cost method (LR or pure premium)
3. ) Tabular methods
4. ) Regression methods
5. ) Average size claim method
6. ) Formula method
7. ) Seriatim case reserve