Learning Objective 2 - Manual Rates

Question 1

Skwire Chapter 3
Product Development

58. Steps of the product life cycle

Answer 1

1. Innovate - consists of:
   a) Understanding the company’s strategic perspective
   b) Idea generation (see separate list of common drivers of product ideas)
   c) Idea screening - check for consistency with corporate goals and feasibility with the corporation’s abilities
   d) Market assessment - to determine if a market exists for the product (see separate list of questions answered by a market assessment)
2. Design the product - this phase consists of determining the product structure, plan design options, contribution requirements, and regulatory compliance
3. Build the product (see separate list of steps for building the product)
4. Sell the product - the product is often test marketed, after which revisions are done before it is mass marketed
5. Assess the product - monitor financial results and consumer market feedback
6. Revise the product - changes may be indicated by the product assessment, regulatory requirements, or consumer demand

Question 2

Skwire Chapter 3
Product Development

59. Common drivers of product ideas

Answer 2

1. Innovator or follower - some companies are successful at innovating, while others are successful at following and learning from competitors
2. Changing laws and regulations - new rules can lead to new products developed specifically to operate within the new set of rules
3. Consumer demand - companies must constantly seek consumer feedback and market intelligence
4. Marketing and sales - these teams can spot holes in the product spectrum where consumer demand is not being fully met
5. Leveraging insurer capabilities - product development teams must know what the insurer does well and find ways to grow in those areas
6. Social need - for example, Medicare Part D served the social need of helping seniors who are being overwhelmed by the cost of expensive medications
7. Changing demographics - leads to a shift in the types of products that will be marketable and saleable
8. Changing economy and financial markets - leads to changes in purchasers’ views of their need for insurance
9. Competitive advantage - product development ideas should utilize the company’s competitive advantages

Question 3

Skwire Chapter 3
Product Development

60. Questions answered by a market assessment

Answer 3

1. What exists in the market today?
2. What is the product objective for the consumer?
3. What is the regulatory environment for this product?
4. What are the financial value and other benefits for the consumer?
5. What are the price targets? (the assessment may indicate a range of acceptable prices)
6. What is the likely reaction from competitors?
7. How will the sales team react?

Question 4

Skwire Chapter 3
Product Development

61. Steps for building a new product

Answer 4

1. Project enrollment - this is critical to helping senior management decide whether the product is worth pursuing
2. Price the product - includes an assessment of the market price sensitivity. After initial pricing, the projected enrollment should be reviewed again.
3. Perform financial assessments - to determine whether the new product can meet the company’s required return on investment or return on equity
4. Implement the infrastructure needed to administer the product (process claims, bill and collect premiums, and service member inquiries)
5. Get senior management approval

Question 5

Skwire Chapter 3
Product Development

62. Key players in the product development cycle

Answer 5

1. Product development team - is responsible for generating new product ideas and studying the market
2. Senior management - sets the company goals and is responsible for marketing the decision to pursue a proposed idea
3. Marketing - is focused on advertising, name recognition, and branding
4. Sales - often has insights into price sensitivity and the types of products consumers want
5. Underwriters - can help quantify the risk associated with certain plan features
6. Information technology (IT) - can help in understanding the feasibility of the infrastructure needed to administer the product
7. Operations - work with IT teams to administer the product
8. Compliance - ensures the product is compliant with laws and regulations
9. Actuarial - prices the product and works on the projections and feasibility studies
10. Finance - reviews the projected enrollment and pricing to determine whether projections meet corporate profit targets

Question 6

Skwire Chapter 20
Pricing of Group Insurance

63. Components of gross premium

Answer 6

1. Claim costs
2. Administrative expenses - includes the costs of designing, developing, underwriting includes the costs of designing, developing, underwriting, and administering the product, as well as an allocation of overhead costs. Frequently much higher in the first year than in renewal years.
3. Commissions and other sales expenses - includes special bonuses, incentives, and advertising. Generally expressed as a percentage of premium.
4. Premium taxes
5. Other taxes and assessments - includes federal and state income taxes and new assessments due to the ACA
6. Risk and profit charges - depends on the degree of risk involved, the amount of capital allocated to support the product, and the expected return on the capital
7. Investment earnings - typically credited based on assets held

Question 7

Skwire Chapter 20
Pricing of Group Insurance

64. Considerations in developing administrative expense assumptions

Answer 7

1. How expenses are allocated to the product - allocation methods include:
   a) Activity based allocation - distributes expenses according to some measure of use (e.g. actual postage expense can be charged to the function that generated the mail)
   b) Functional expense allocation - determines how expenses are split by line of business for new and renewal business (done by surveying employees to determine how time is spent)
   c) Multiple allocation methods - a combination of the other two methods
2. How administrative expenses should be allocated to groups - should differentiate between first year and renewal expenses. Various allocation bases exist (see separate list).
3. What the competition includes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace

Question 8

Skwire Chapter 20
Pricing of Group Insurance

65. Types of bases used for allocating expenses

Answer 8

1. Percent of premiums
2. Percent of claims
3. Per policy
4. Per employee (certificate)
5. Per member (each person covered)
6. Per claim administered
7. Per case (some expenses are charged directly to the case for very demanding groups)

Question 9

Skwire Chapter 20
Pricing of Group Insurance

66. Common rating characteristics included in manual rates for group health insurance

Answer 9

1. Age
2. Gender
3. Health status
4. Rating tiers (see separate list)
5. Geographic factors
6. Industry codes
7. Group size
8. Length of premium period

Question 10

Skwire Chapter 20
Pricing of Group Insurance

67. Common rating tiers for group insurance

Answer 10

1. One tier: composite
2. Two tier: employee only, family
3. Three tier: employee only, employee and one dependent, family
4. Four tier: employee only, employee with one dependent, employee with children, family
5. Five tier: employee only, couple, employee with child, employee with children, family

Question 11

Skwire Chapter 22
Estimating Medical Claim Costs

68. Sources of internal data

Answer 11

1. Medical claim systems data - includes billed claims, eligible claims, allowed amounts, and paid amounts
2. Pharmacy benefit manager (PBM) data - organizations that use third-party PBMs to administer prescription drug claims will need to collect this data from them
3. Premium billing and eligibility data - includes exposure information that is needed to convert claims data into per member pr employee basis
4. Provider contract system data - includes files of contractual reimbursement rates

Question 12

Skwire Chapter 22
Estimating Medical Claim Costs

69. Steps in developing claim costs for use in a rate manual

Answer 12

1. Collect data - data should be collected for an incurral period of at least 12 months (to avoid seasonality issues). The best source of data is a company’s own experience (see separate list).
2. Normalize the data for important rating variables (see separate list)
3. Project experience period costs to the rating period - the trend rate should reflect changes in utilization of services, changes in the average cost per service, and other factors, such as regulatory impacts and cost shifting among players

Question 13

Skwire Chapter 22
Estimating Medical Claim Costs

70. Important rating variables when normalizing data for use in the rate manual

Answer 13

Many of these variables can only be used in large groups, due to the ACA

1. Age and gender - it may be appropriate to have separate age and gender factors for different major service categories or different plan types (such as high deductible plans)
2. Geographic area - the data should be adjusted to reflect one specific geographic area
3. Benefit plan - adjust the data to reflect a common benefit plan (commonly the richest plan)
4. Group characteristics - the manual rate should represent the average group with respect to group characteristics, such as industry and group size
5. Utilization management programs - adjust for any changes in these programs
6. Provider reimbursement arrangements - adjust the experience to reflect a common reimbursement level
7. Other risk adjusters (based primarily on claim, diagnosis, encounter, and pharmacy data) - these may eventually become the preliminary method of risk adjustment

Question 14

Skwire Chapter 22
Estimating Medical Claim Costs

71. Methods of adjusting manual rates for specific benefit plans

Answer 14

1. Claim probability distributions - these are typically used to estimate the impact on claim costs of deductibles, coinsurance, and out-of-pocket maximums
2. Actuarial cost models - these models build estimated total claim costs by developing a net claim cost (after member cost sharing) for each detailed type of service and summing to get the total

Question 15

Skwire Chapter 22
Estimating Dental Claim Costs

72. Data sources for developing dental claim costs

Answer 15

1. Own company data (best source)
2. Outside databases - Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA “Survey of Dental Fees”
3. Consulting firms (have manuals containing utilization data)
4. Rate filings of other carriers
5. Third party administrators
6. Reinsurers

Question 16

Skwire Chapter 22
Estimating Dental Claim Costs

73. Plan characteristics that impact dental claim costs

Answer 16

1. Covered benefits - plans often have a missing tooth provision and limit the replacement of dentures to once every 5-7 years
2. Cost sharing provisions - these provisions are important because receiving proper dental care is very elective from the insured’s point of view. Provisions include deductibles, coinsurance and copays, and maximum limits.
3. Waiting period - used to discourage individuals from enrolling for one year to treat significant dental problems and then dropping coverage
4. Period of coverage - will need to project past experience into the future. Dental trend should not be assumed to be the same as medical trend.

Question 17

Skwire Chapter 22
Estimating Dental Claim Costs

74. Network and care management practices that impact dental claim costs

Answer 17

1. Provider reimbursement levels
   a) FFS reimbursement may be based on usual, customary, and reasonable levels (UCR)
   b) PPO networks contract for reduced fees for a limited number of dentists. The dentist may not bill above those levels.
   c) Capitation is common with dental HMO plans
2. Care management practices - these will depend on the reimbursement method used. Practices include preauthorization and self-management (for capitated providers).

Question 18

Skwire Chapter 22
Estimating Dental Claim Costs

75. Insured characteristics that impact dental claim costs (378)

Answer 18

1. Age and gender - adults have higher costs than children. females have higher costs than males
2. Geographic area - can be a significant factor
3. Group size - smaller groups have higher costs (due to adverse selection)
4. Prior coverage and pre-announcement - groups without prior coverage will have high costs in the first year due to utilization by those who had put off having dental work done. If the plan is announced many months prior to becoming effective, this problem becomes even worse.
5. Employee turnover - high turnover increases costs since some new employees didn’t have prior coverage
6. Occupation or income - entertainers, professionals, and groups who are more aware of their benefits have higher costs
7. Contribution and participation - groups with less than 100% participation will have higher costs due to antiselection. The level of participation is inversely related to the required contribution level.

Question 19

Skwire Chapter 23
Estimating Pharmacy Claim Costs

76. Data fields included in pharmacy data files (388)

Answer 19

These files include one record per prescription, and the following information on each record

1 . Age, gender. and date of birth of the patient

2. Fill date - this is the incurred date for the claim
3. Claim ID
4. Prescribing provider ID
5. Pharmacy provider ID
6. Drug name - use a consistent source so the data does not have two different names for the same drug
7. Tier - the category for the drug, as defined in the plan design
8. National Drug Code (NDC) - an eleven-digit code used to identify a specific form of a drug. A mapping of NDCs to drug names can be obtained from data vendors.
9. Days supply - scripts are generally grouped into 30-day, 60-day, or 90-day categories
10. Units - the number of pills or a measurement of volume for liquid medications
11. Allowed amount - sum of discounted ingredient cost, dispensing fee, vaccine fee, and sales tax
12. Refill indicators- for prescriptions that allow refills, this shows which fill the current claim is for
13. Member and plan cost - these fields show how much of the allowed cost is paid by each party
14. Therapeutic class - categorization based on the conditions that the drugs are intended to treat
15. Other types of drug codes - RxNorm Concept Unique ldentifier (RxCUI) and Generic Product Identifier (GPI)
16. Average wholesale price and wholesale acquisition cost

Question 20

Skwire Chapter 23
Estimating Pharmacy Claim Costs

77. Steps for calculating premiums for pharmacy benefits (392)

Answer 20

1. Develop an allowed cost trend, which includes:
   a) Unit cost change
   b) Utilization change
   c) Mix change-such as a shift between generics and brand name drugs
2. Calculate adjustment factors for important rating variables (see separate list) - factors that are already accounted for in allowed cost trend should not be included as a separate rating factor adjustment, in order to avoid double counting
3. Estimate member cost sharing based on the projected allowed cost - if the plan design uses copays, use the average effective copay, rather than the nominal copay stated in the plan design
4. Calculate net plan liability and premium
   a) Projected allowed amount= base period allowed amount• trend factor • other adjustment factors
   b) Net plan liability = projected allowed amount - member cost sharing - rebates
   c) Premium = net plan liability + expenses + profit margin

Question 21

Skwire Chapter 23
Estimating Pharmacy Claim Costs

78. Important rating factors for pharmacy benefits (393)

Answer 21

1. Demographics - such as age and gender
2. Area
3. Benefit design - changes in benefits may cause changes in drug use. This is referred to as induced utilization.
4. Formulary - costs are impacted by:
   a) The list of covered drugs and tier placement of drugs
   b) Formulary management programs, such as prior authorization, step therapy, and quantity limits
   c) Brand patent expirations
5. Contracting - PBMs negotiate with pharmacies regarding dispensing fees and discounts off the average wholesale price
6. Other factors - these include changes in mail order utilization, changes in the generic dispensing rate, and changes in utilization management or cost management programs

Question 22

Skwire Chapter 24
Estimating Life Claim Costs

79. Considerations in developing a manual table for life insurance (404)

Answer 22

1. Two approaches can be used:
   a) Manual premium tables - calculate the manual premium rate, then adjust for group size. This adjustment will reflect the margin, profit. and expenses appropriate for the group size, relative to the averages built into the table.
   b) Manual claim tables - calculate the manual claim rate, then add the appropriate margin, profit, and expenses
2. Data sources - could use SOA studies. industry mortality tables, population statistics, or own company experience (which is the best source, if credible)
3. Changes in mortality- expected future mortality improvement should be reflected
4. Reinsurance -the net cost of reinsurance should be factored into the claim table or expenses
5. Conversions to individual life policies -these create severe antiselection, which should be reflected in the manual rates
6. Manual adjustments are made for group-specific traits (see separate list)
7. Rates for the group are based on age and gender mix, but groups typically end up charging a composite rate to all employees

Question 23

Skwire Chapter 24
Estimating Life Claim Costs

80. Uses of general population data for pricing life insurance (409)

Answer 23

1. Estimating annual improvements in mortality
2. Determining ratios of mortality by age bracket
3. Comparing male and female mortality
4. Developing rates for the very young and the very old (the non-working population)

Question 24

Skwire Chapter 24
Estimating Life Claim Costs

81. Manual claim table adjustments for group life (412)

Answer 24

Manual claim table adjustments for group life (could also be referred to as group rating characteristics.for life insurance)

1. Disability factors - an adjustment is needed if a group has a different waiver of premium approach than is assumed in the manual rates
2. Effective date adjustment -an adjustment is needed if the central date of coverage is not July 1
3. Industry factors - based on industry codes such as SIC codes
4. Regional factors
5. Lifestyle factors - e.g. adjustments based on the percentage of employees that smoke
6. Marketing considerations - e.g. added charges for rate guarantees
7. Contribution schedules - e.g., a 5% discount if the employer pays the entire premium (since that reduces antiselection)
8. Case size factors and volume adjustments - larger groups may have lower mortality or expenses
9. Plan options - optional benefits and allowing lots of employee choices will create antiselection

Question 25

Skwire Chapter 24
Estimating Life Claim Costs

82. Types of living benefits for life insurance ( 418)

Answer 25

This benefit (also called accelerated death benefits) pays a portion of the face amount prior to death, with the remaining benefit paid at death

1. LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home
2. Critical illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer
3. Terminal illness benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with a terminal illness with less than 6 or 12 months to live

Question 26

Skwire Chapter 25
Estimating Disability Claim Costs

83. Data sources for estimating disability claim costs ( 419, 432)

Answer 26

1. A company’s own data is the best source if it is reliable and credible
2. Rate filings of competitors
3. Research of governmental and business publications
4. Data from consulting firms and reinsurers
5. Insurer studies - such as loss ratio studies and actual to expected incidence or termination rates
6. Industry data and tables (typically based on intercompany experience studies)
   a) 1987 Commissioners Group Disability Table - adopted by the NAIC as the statutory minimum reserve basis for LTD. Is still the most recent intercompany incidence rate study.
   b) SOA 2008 GLTD Experience Table -provides considerable detail on claim termination rates
   c) 2012 GLTD Valuation Table- will be replacing the 1987 CGDT for use in developing minimum statutory reserves
   d) TSA reports - contain exposure and actual to tabular ratios by industry classification
   e) 1985 Commissioners Individual Disability Table A (CIDA) - the basis of active life and claim reserves for individual policies
   f) SOA Individual Disability Experience Committee 1990-2006 Study

Question 27

Skwire Chapter 25
Estimating Disability Claim Costs

84. Types of disability income experience studies ( 420)

Answer 27

1. Calendar year loss ratio study
   a) Compute the ratio of incurred claims to earned premium for a given calendar year
   b) Incurred claims are calculated as paid claims plus the increase in claim reserves
   c) May not provide a clear picture of historical trends because results are affected by reserve changes
2. lncurral year loss ratio study
   a) Compute the ratio of incurred claims to earned premium for a given incurral year
   b) Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve
   c) Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred
3. Study of actual-to-expected incidence or termination rates - ratios of a company’s actual claim incidence or termination rates compared to expected rates from published industry tables or company data

Question 28

Skwire Chapter 25
Estimating Disability Claim Costs

85. Formula for disability income net monthly premium ( 422)

Answer 28

1. Net monthly premium = lncidenceRate * SUM(Benefit t *Continuance t * lnterestDiscount t)
2. The summation runs for the entire length of the benefit period (offsets will also need to be reflected, which is discussed in a list from GHC-101-13)

Question 29

Skwire Chapter 25
Estimating Disability Claim Costs

86. Group characteristics that impact disability income claim costs ( 428)

Answer 29

1. Age and gender
2. Occupation - may need to adjust claim costs for:
   a) Hourly vs. salaried
   b) Blue collar vs. grey collar vs. white collar
   c) Union vs. non-union
   d) Commissioned sales personnel
3. Industry-for group insurance, it is more appropriate to rate based on industry than on occupations
4. Average earnings per employee -claim rates decrease as average earnings increases
5. Area -claim costs vary due to the legal environment and the general attitude and culture of the area
6. Size of group - claim costs follow a “U” shaped curve, with higher costs for the largest and smallest employers

Question 30

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

87. Major effects of the year 2000 changes in the NAlC LTC Insurance Model Act (437)

Answer 30

1. Requires disclosure of rating practices at the time of application - e.g., including a statement that the policy may be subject to future rate increases
2. Requires an actuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience
3. Eliminates minimum loss ratio requirements in the initial rate filing
4. Places limits on expense allowances in the event of a rate increase - if a rate increase is requested, the lifetime loss ratio must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase
5. Requires reimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates
6. For policies in a rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting
7. Authorizes the commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums

Question 31

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

88. Major effects of HIPAA on LTC (441)

Answer 31

1. Defined qualified plans
2. Clarified taxation of premium and benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes
3. Standardized benefit triggers (see separate list of benefit triggers from Leida chapter 2)
4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans

Question 32

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

89. Major stakeholders in the group LTC policy design process (443)

Answer 32

1. Employer group
   a) LTC is appealing because it complements other products (such as disability and life coverages) and relative to medical is a low-cost benefit with stable pricing
   b) May not be able to offer guaranteed issue to all active employees, since this could make the premiums more expensive than similar individual policies
2. Insurance company
   a) Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee
   b) Costs vary significantly by participation level, making this a key assumption
3. Employees
   a) May not yet be aware of the risk covered by L TC insurance
   b) Concerned with the significant cost, which may even exceed the cost of individual policies
4. Insurance brokers- have found that group LTC insurance provides the opportunity to open the door to competitive life and disability markets

Question 33

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

90. Assumptions needed for a LTC pricing model (448)

Answer 33

1. Voluntary lapse. - lapse rates are much lower than for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection.
2. Mortality - most companies use the 1994 Group Annuitant Mortality table
3. Morbidity - the major variables that impact claim costs are:
   a) Marital status - costs are lower for married individuals because of the presence of a potential caregiver at home
   b) Gender - females have significantly higher ultimate costs than males
   c) Benefit trigger
   d) Area - utilization patterns of LTC services vary by geographic area
   e) Case management - companies using a case manager usually experience lower claims
4. Selection factors - to reflect underwriting wear-off. Depends on the level of underwriting performed.
5. Expenses - start-up expenses are high relative to other types of business
6. lnterest - the investment rate on assets is a key assumption because of the large amount of reserves
7. Reserve basis - important considerations include the level of margins and how these margins are achieved
8. Other assumptions - including the average daily benefit and the premium mode
9. Profit - typically based on lifetime goals for pre-tax profits, post-tax profits, return on investments, or return on equity

Question 34

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

91. Skwire chapter 34 -Medical Claim Cost Trend Analysis

Answer 34

Common purposes for trend analysis (595)

1. Financial reporting - should meet the following criteria:
   a) Be done on a retrospective basis
   b) Be done at the enterprise level, as well as the division or market level
   c) For statutory reporting, include a provision for adverse deviation. But for GAAP reporting, be on a best-estimate basis.
2. Pricing - for setting premiums or for planning and budgeting. Trend rates may be calculated on the following bases:
   a) Eligible charges (billed charges before provider contracts or discounts are applied)
   b) Covered charges (allowed charges)
   c) Net paid claims - shows the bottom line trend after accounting for changes in provider contracts, member cost sharing, and coordination of benefits
3. Experience analysis - for analyzing changes in a block of business over time

Question 35

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

92. Components of medical trend (599)

Answer 35

The component method for developing pricing trends combines the following to get the pricing trend

1. Core cost trend - the rate of increase in the covered cost per service. before adjustments for specific factors such as aging or one-time changes. Consists of three parts:
   a) Unit cost trend - the change in payments to providers for a fixed basket of services
   b) Severity - the increase in the intensity of treatment
   c) Change in mix of services - such as changes in the distribution of type of service or provider
2. Core utilization trend- includes changes in utilization due to external forces, such as the economy, the number of workdays during the period, and changes in medical practice
3. One-time changes - a response to a specific, identifiable situation. Types include:
   a) A significant change during one period, followed by a return to normal the following period. Examples include a severe flu season and weather events.
   b) A sustained change in claims level. Examples include legislative changes (new mandated benefits) and internal changes.
4. Expected population shifts - includes changes in geographic mix and age-gender mix
5. Structural changes - includes leveraging, benefit changes, changes to clinical programs, and network changes
6. Capitation - can impact trends if there is a material change in the average capitation fee of bonus payments
7. Margin added to best estimate trend to minimize the chances of a loss

Question 36

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

93. Key questions to ask when analyzing trends (606)

Answer 36

1. How accurate were the original projected trend and PMPM estimates?
2. Which assumptions were driving any variation?
3. How can the process be modified to achieve greater accuracy?
4. What other factors, expected or unexpected, drove the trends?

Question 37

Skwire Chapter 26
Pricing Group Long-Term Care Insurance

94. Factors that may influence future trends (610)

Answer 37

1. The impact of exchanges - enrollees will likely change health plans more frequently than in the past, which will require insurers to have a more in-depth understanding of the impact of population shift
2. Cost savings initiatives - including accountable care organizations, clinical interventions, and wellness programs
3. The economy- some economic factors may help in setting better trend estimates

Question 38

Kongstvedt Chapter 22
Underwriting and Rating

95. Desired characteristics of premium rates (473)

Answer 38

1. Adequate - high enough to generate an acceptable return on equity
2. Competitive - low enough to enroll enough members to meet volume and growth targets
3. Equitable - to avoid an unreasonable amount of cross-subsidization among groups (which will improve persistency)

Question 39

Kongstvedt Chapter 22
Underwriting and Rating

96. Information gathered during underwriting for managed health care (474)

Answer 39

1. Health status- determined based on:
   a) For individual and small group: physician exams, prescription drug histories, and medical questionnaires
   b) For large groups: medical cost experience and a listing of employees’ major health conditions
2. Ability to pay the premium - based on income verification and credit history
3. Availability of other coverage - information is needed for coordination of benefits with other insurance and workers’ compensation
4. Historical persistency - groups that frequently change carriers may not persist long enough for the insurer to recoup acquisition costs

Question 40

Kongstvedt Chapter 22
Underwriting and Rating

97. Steps in the rate formula for managed health care

Answer 40

1. Develop the projection period base rate PMPM - base don historical medical costs trended forward, and reflects the average characteristics of the block of business
2. Apply group-specific additive adjustments - such as the added cost of covering mandated services in a given state
3. Apply group-specific multiplicative adjustments - includes factors for the benefit plan, geographical area, age/gender, degree of health care management, and health status
4. Add retention loads - includes administrative expenses, a buildup of contingency reserves, coordination of benefits savings, and profit
5. Convert to a contract rate (per employee or subscriber) - for group coverages, this developing tiered rates (employee only, family, etc.)

Question 41

Leida Chapter 5
Setting Premium Rates

98. Rate setting approaches ( 161)

Answer 41

1. Rerating - rating based on direct, existing experience (e.g., the experience of an existing block)
2. Fundamental pricing - rating from other data sources (used as benchmarks), which are adjusted to apply to the current situation
   a) Tabular method - an existing table (or a modification of it) is used as the morbidity basis for pricing (e.g. using the 1985 CIDA table for pricing DI). Typically used for long-term, non-inflation-sensitive products.
   b) Buildup and density functions (see separate list) - a model is built to determine expected claims in the rating period. Generally used for inflation-sensitive products.
   c) Simulation - an existing distribution of expected claims is projected into the rating period, using all known information about the claimants (including prior claim experience)

Question 42

Leida Chapter 5
Setting Premium Rates

99. Major considerations in the rate setting process (161)

Answer 42

1. The market - competitors’ pricing sets expectations for consumers, limiting pricing options
2. Existing products - expectations will be based on the pricing strategies used for current products
3. Distribution system - the compensation system, the structure of the distribution system, and the level of company control are all relevant in pricing
4. Regulatory situation - limitations may exist that impact how rates are set, and whether needed rate increases are allowed
5. Strategic plan and profit goals - pricing practices should reflect the company’s goals

Question 43

Leida Chapter 5
Setting Premium Rates

100. Major rating variables for health insurance (164)

Answer 43

1. Age - claim costs increase significantly by age for almost all health insurance coverages
2. Duration - durational trends are the trends in excess of those generated by insured age alone. They typically come from initial underwriting and from cumulative antiselection.
3. Gender - most coverages vary rates by gender
4. Marital status - this is a big factor for LTC, since having a spouse at home can decrease the need for a nursing home
5. Parental (or family) status - rates must vary based on how many people are insured
6. Occupation - an important rating factor for DI coverages, but not for other coverages
7. Geographic area - rates may vary by area due to different patterns of care, provider contracts, availability of care, and legal requirements
8. Current health status
9. Past claim history
10. Smoking status
11. Weight
12. Presence and nature of other coverage
13. Situation-specific factors - e.g., whether the policyholder converted from another plan

Question 44

Leida Chapter 5
Setting Premium Rates

101. Types of age rating structures ( 164)

Answer 44

1. Attained age rating - a policyholder’s rate is a function of his or her age at renewal. Also referred to as step rating if rates are grouped into age bands.
2. Entry age or issue age rating - the rate reflects the age of the policyholder when the policy was issued
3. Uni-age rating - the rate structure doesn’t recognize age at all, leading to subsidization of older individuals. Most community rate structures are uni-age .

Question 45

Leida Chapter 5
Setting Premium Rates

102. Tabular method formulas for calculating net premiums ( 176)

Answer 45

1. Net Premium = NP = SUM(Pr(Clmz) * ACz * v^z * lz where z = issue yr to final yr)
   a) Pr(Clmz) is the probability of a claim occurring (incidence rate) in year z
   b) ACz is the average claim cost (assuming a claim occurs) in year z
   c) v^z is the present value factor corresponding to year z
   d) lz is the proportion of originally issued lives still in force in year z
2. The average claim cost is calculated as follows: ACz= SUM(Cm$s * Pr(1-Tns) * v^s where s = 1 to FnlCmPyt
   a) s is the claim duration
   b) Cm$s is the claim dollars payable at durations
   c) Pr(1-Tns) is the probability of a claimant at claim duration 0 remaining disabled at durations
   d) FnlCmPyt is the claim duration of the final possible claim payment

Question 46

Leida Chapter 5
Setting Premium Rates

103. Using the buildup and density function approach for pricing ( 180)

Answer 46

1. Buildup approach - each claim type (inpatient, outpatient, etc.) has its own claim cost calculation, as the product of claim frequency times average cost per service. The total claim cost is the sum of the various categories. Works well for benefits with copays.
2. Density functions - calculates a distribution of the expected annual claims for an individual, with no calculation of the different categories of benefits. ls useful when calculating the impact of deductibles and out-of-pocket limits.
3. Combining buildup and density functions -for PPO products. may calculate in-network costs using the buildup approach (due to copays), and out-of-network costs using the density approach (due to deductibles). The two are combined to get a final claim cost.

Question 47

Leida Chapter 5
Setting Premium Rates

104. Steps of the rerating approach for pricing (188)

Answer 47

1. Gather experience on existing business - use incurred claims (preferably on a runout basis) and earned premiums. The reliability of the data should be assessed before using it.
2. Restate experience - past premiums should be restated to the rate levels currently in effect
3. Project past results to the future- adjust for items that cause future experience to differ from past experience (see separate list)
4. Compare the projection against desired results - a rate increase is calculated by determining how much rates need to change to produce the desired loss ratio (which is based on the expected level of expenses and profit)
5. Apply regulatory and management adjustments (see separate fist for reasons for management adjustments)

Question 48

Leida Chapter 5
Setting Premium Rates

105. Adjustments needed for using past claims to project future claims (193)

Answer 48

1. Changes in the covered population
2. Changes in duration - should anticipate durational effects in the claim costs
3. Changes in benefits - changes may be explicit (such as a change in copays) or implicit (such as a change in how a policy provision is interpreted)
4. Changes in claim costs - must project changes in frequencies and changes in average costs
5. Leveraging - as trends change the average claim cost, the impact of deductibles and copays causes claims to increase at a rate greater than trend
6. Other changes - includes antiselection, changes in underwriting, and changes in business practices

Projected claimst = Claim cost PMPMs * Number of memberst

• (1 + leveraged claim cost trend)^(t-s)
• Avg durational factort / Avg durational factors
• (1 + Antiselection factor due to lapse(t-s))
• (1 + Adjustment factor for other changes(t-s))

Question 49

Leida Chapter 5
Setting Premium Rates

106. Reasons for management adjustments in pricing (202)

Answer 49

1. Competitiveness of the premiums for new business
2. Profitability in other lines of business
3. Relations with the public or the sales force
4. Social policy
5. Desire to manage the block from a long-term perspective (e.g., phase in a large rate increase)

Question 50

Leida Chapter 5
Setting Premium Rates

107. Methods for calculating gross premiums (204)

Answer 50

1. Block rating (short time horizon) approach - claim costs are calculated for the rating period (typically a one-year period), and premiums are calculated by adding on expenses and profit charges. Gross premium ‘= G = [N * (1 + E^N) +E^F] / (1 - E^G).
   a) N = net premium (claim cost)
   b) E^N = percent of claim expenses
   c) E^F = fixed expenses
   d) E^G = percent of premium expenses + profit as a percent of premium
2. Asset share approach - involves long-term projections of various items, in order to determine the necessary premium

Question 51

Leida Chapter 5
Setting Premium Rates

108. Items included in asset share projections (207)

Answer 51

1. Exposure values - including the number of policies sold or in force, number of claims or claim payments, number of premium collections, and number of units sold or in force
2. Revenue values - including premium, investment income, and explicit subsidies
3. Claim values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves
4. Capital values - must model the cost of the capital used by the line of business
5. Expense targets - expense loadings may be very detailed. The cost of capital is sometimes treated as an expense.
6. Profit targets - profit is calculated in one of the following ways:
   a) Percent of premium - present value of profits divided by present value of premiums
   b) Return on investment (ROI) -this is the interest rate at which the present value of future profits will exactly equal the initial investment
   c) Return on equity (ROE) - this is like the ROI method, except the initial investment is increased by the amount of capital that is set aside to cover the business

Question 52

GHC-101-13, Sections 4 and 7
Group Disability Insurance

109. Steps for manual rating of disability coverage ( 17)

Answer 52

1. Determine the base rates/premium (base premium = base rate * benefit amount)
   a) LTD: Base rate x,g,e,w, = Ix,g,e * RSVx,g,e,0 / 12 (RSV is the reserve at time 0, I is the probability of claim)
   b) STD: Base rate x,g,e,w = Ix,g,e * Dx,g,e /12 (D is the expected length of claim in weeks)
2. Deduct offset credits - to get the net base premium
3. Demographic adjustments-adjust the net base premium to reflect the person’s salary, industry, occupation, and location
4. Plan provision adjustments - adjust for the definition of disability, maximum or minimum monthly benefits, pre-existing clause, and antiselection
5. Non-claim adjustments (retention) - the prior steps give the final claim cost. Add loadings for commissions, expenses, and premium taxes
6. Add profit - can be a percent of premium or a needed ROI/ROE

Question 53

GHC-101-13, Sections 4 and 7
Group Disability Insurance

110. Steps for experience rating of disability coverage (20)

Answer 53

1. Determine the group’s manual rate with profit and expenses removed (this is the final claim cost)
2. Determine the experience-based rate using the last 3-5 years of data
   a) Discount claims and reserves to the midpoint of the experience period or to the actual date of disability
   b) Divide by exposure to get the experience-based claim rate
   c) If large claims are pooled, add a pooling charge
3. Blend the manual rate and the experience-based rate to get the case claim rate
   a) Blended rate = Manual claim rate * (1-Z) + Experience claim rate * (Z)
   b) Credibility (Z) = N / (N + K) where N = number of life years and K = constant (for example, 5,000 for LTD or 250 for STD)
4. Final case premium = blended rate / target loss ratio

Question 54

GHC-101-13, Sections 4 and 7
Group Disability Insurance

111. Steps in the claim process for disability (31)

Answer 54

1. Determine eligibility for coverage - is the claimant insured and actively at work, is there a pre-existing condition?
2. Determine if the definition of disability is met - this is the most difficult step of the process
3. Determine the payment amount (usually straightforward) = pre-disability income * benefit percent - offsets
4. Get ongoing proof of disabilities
   a) STD - often approved for a specified period based on the type of disablement. Reviewed at the end of the period
   b) LTD - reviewed annually, when the condition or treatment changes, or when the definition of disability changes

Question 55

GHC-101-13, Sections 4 and 7
Group Disability Insurance

112. Tools of the claim process for determining and handling disabilities (33)

Answer 55

1. Medical evaluation - begins with an APS and can include independent medical exams
2. Rehabilitation plans providing vocational training or physical rehabilitation
3. Financial evaluation of the claimant verification of pre- and post-disability earnings
4. Settlements -these are risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation)
5. Fraud review - check information for inconsistencies or alterations
6. Managed disability - techniques are used to “manage” disability and encourage a return to work

Question 56

GHC-105-14
Pricing Considerations for Drugs Covered under Pharmacy Benefit Programs

113. Payment mechanisms for prescription drugs ( 1)

Answer 56

1. Average manufacturer price (AMP) - the price manufacturers use for selling to wholesalers. In Canada, this is called the manufacturer’s list price (MLP) and is regulated to ensure the prices charged are reasonable and in line with the prices of alternative treatments.
2. Wholesale acquisition cost (WAC) - the manufacturer’s suggested list price, which may also be used as a sale price to the wholesaler
3. Average wholesale price (AWP)- is based on data obtained from manufacturers and distributors, but it’s not an average nor is it based on any actual prices paid by anyone
   a) WAC and AWP are the most widely accepted mechanisms. WAC must equal 80% of AWP in the US, due to legislation.
4. Actual acquisition cost (AAC) - the price retailers pay to wholesalers, negotiated between the two parties. ln some cases, pharmacies buy drugs directly from manufacturers, in which case AAC = AMP.
5. Usual & customary (U&C) retail price- the price consumers pay to retailers. It includes the retailer’s AAC plus a markup.
6. Maximum allowable cost (MAC) - is typically used for generic drugs and can be viewed as a fee schedule

Question 57

GHC-105-14
Pricing Considerations for Drugs Covered under Pharmacy Benefit Programs

114. Layers (participants) within the prescription drug distribution channel

Answer 57

1. Manufacturers produce drugs and typically sell them to wholelsalers based on AMP or WAC.
2. Wholesalers act as middlemen baecause retailers generally prefer to purchase drugs from one source rather than negotiating with hundreds of individual manufacturers. They sell to retailers based on WAC plus a marketup or a discount off AWP.
3. Retailers (pharmacies) dispense prescription drugs to consumers, charging a U&C retail price. But if insurance is involved, the retailer will negotiate pricing with the insurer or its contracted pharmacy benefit manager (PBM).
4. Consumers purchase drugs at the U&C prie if there is no insurance. If insurance is involved, consumers typically pay a copayment or coinsurance and the insurer pays the rest of the negotiated price.
5. PBMs and insurers are not involved in distributing drugs except for PBMs who own mail service or specialty pharmacy facilities

Question 58

ASOP #23
Data Quality

115. Actuarial standards for the use of data

Answer 58

1. Selection of data (see separate list)
2. Reliance on data and other information supplied by others - the actuary may rely on such information, but should disclose this reliance
3. Review of data - the actuary should review the data for reasonableness and consistency, unless such a review is not practical
4. Limitation of the actuary’s responsibility - the actuary is not required to audit the data or determine whether data supplied by others is intentionally misleading
5. Use of data - the actuary must decide whether the data is of sufficient quality, if adjustments need to be made, or if data defects prevent the analysis from being done
6. Documentation regarding data quality (see separate list)

Question 59

ASOP #23
Data Quality

116. Considerations in selecting data for an actuarial analysis (3)

Answer 59

1. Appropriateness for the intended purpose
2. Reasonableness, comprehensiveness, and consistency of the necessary data elements
3. Any known material limitations of the data
4. The cost and feasibility of obtaining alternative data in a reasonable time frame
5. The cost and benefit associated with using an alternative data set or data source
6. Sampling methods that were used to collect the data

Question 60

ASOP #23
Data Quality

117. Required documentation related to data quality (6)

Answer 60

1. The process the actuary followed to evaluate the data, and any limitations due to data that was not reviewed
2. A description of any material defects the actuary believes are in the data
3. A description of any adjustments or modifications made to the data
4. The source of the data
5. Any limitations on the use of the actuarial work product due to data quality issues
6. Any unresolved material concerns the actuary may have about the data
7. Any results that may be biased due to data quality issues, including the magnitude of the bias
8. Disclosures in accordance with ASOP #41 in the following situations:
   a) If any material assumption or method was prescribed by law
   b) If the actuary relies on other sources and thereby disclaims responsibility for any material assumption or method
   c) If the actuary has otherwise deviated materially from ASOP guidance

Question 61

ASOP #25
Credibility Procedures

118. Situations in which ASOP #25 applies

Answer 61

1. When the actuary is required by applicable law to evaluate credibility
2. When the actuary chooses to evaluate the credibility of subject experience
3. When the actuary is blending subject experience with other experience
4. When the actuary represents the data being used as statistically or mathematically credible

Question 62

ASOP #25
Credibility Procedures

119. Recommended practices for using credibility procedures (3)

Answer 62

1. The actuary should use an appropriate credibility procedure when determining if the subject experience has full credibility or when blending the subject experience with the relevant experience. In selecting a procedure, consider:
   a) Whether the procedure is expected lo produce reasonable results
   b) Whether the procedure is appropriate for the intended use and purpose
   c) Whether the procedure is practical to implement when considering its cost and benefit
2. The actuary should exercise professional judgment in selecting relevant experience to blend with the subject experience. This relevant experience should have characteristics similar to the subject experience.
3. The actuary should use professional judgment when selecting, developing, or using a credibility procedure
4. The actuary should consider the homogeneity of both the subject experience and the relevant experience