Learning Objectives 1 & 2 - General, Products, & ASOPs

Question 1

CDHPs combine

Answer 1

a high-deductible health plan (HDHP) with some form of individual pretax saving account (HSA or HRA)

Question 2

The ACA specifically reference 4 types of organization to help in attempt to ben the cost curve to bring national health care spending to appropriate levels

Answer 2

1. Accountable Care Organizations (ACOs)
2. Patient-centered medical homes (PCMHs)
3. Bundled payment programs
4. CO-OPs

Question 3

Types of health insurers and MCOs

Answer 3

1. Indemnity - indemnifies the beneficiary from the financial cost of health care. There are few controls for managing costs.
2. Service plans - similar to indemnity, but adds contracting with providers as a way to manage costs
3. Managed Indemnity - overlays some managed care features onto indemnity plans
4. PPOs - contract with a network of participating providers who agree to accept the PPO’s payment structure and levels. Members who see PPO providers have higher levels of coverage (lower cost sharing.)
5. Exclusive Provider Organizations (EPOs) - similar to PPOs, but care received OON is not covered (except for urgent or emergency care.)
6. POS plans - combine an HMO with indemnity-type coverage for care received outside the HMO. Members decide at the point of service whether to use the HMO or go OON
7. HMOs - provide basic and supplemental health services in the manner prescribed by the HMO Act
8. CDHPs - combine a high-deductible health plan with some form of individual pretax savings account (HRA or HSA)
9. 3rd Party Administrators - administer benefits for self-funded employer groups, but do not assume risk
10. Consumer operated and oriented plans (CO-OPs) - member-run health insurers created to offer coverage to small groups and individuals through the ACA exchanges

Question 4

Common types of managed care overlays

Answer 4

1. General Utilization Management (UM) - offering a menu of UM activities that can be selected by employers or insurers
2. Large case management - includes identifying catastrophic cases, notifying reinsurers, monitoring the treatment, and negotiating payments for high-cost cases
3. Specialty UM - focuses on utilization review for specialty services, such as behavioral health care
4. Disease Management (DM) - focuses on common chronic diseases, such as diabetes
5. Rental Networks - networks of contracted providers within individual markets
6. Workers’ compensation UM - addresses standard UM and some unique aspects involved with workers’ compensation benefits

Question 5

Features that differentiate HMOs from health insurers

Answer 5

1. Licensed under different laws
2. HMOs must provide adequate access to providers within their service area.
3. Most require “no balance billing” clauses in all provider contracts that are stronger than those found in non-HMOs
4. Must allow direct access to primary care physicians (PCPs) and ob/gyn physicians
5. Must have written policies and procedures for physician credentialing, utilization management, & quality management
6. Must maintain defined minimum levels of capital reserves.
7. Usually share some financial risk with physicians
8. Most require members to see a PCP for routine services and to access specialty care
9. Most are accredited by an accrediting organization.

Question 6

Types of HMOs

Answer 6

1. Open-panel - the HMO contracts with private physicians who agree to its terms and conditions and who meet its credentialing criteria.
   a. Independent practice association (IPA) model - the HMO contracts with an IPA. Physicians are not emmployees of the HMO or the IPA, and they continue to see their non-HMO patients.
   b. Direct contract model - the HMO contracts directly with independent physicians or medical groups.
2. Closed Panel - most of the care is provided through either a single medical group associated with the HMO or through physicians employed by the HMO. Closed to private physicians.
   a. Group model - the HMO contracts with a multi-specialty medical group practice to provide all physician services to the HMO’s members. The physicians are employed by the group practice.
   b. Staff Model - physicians are employed by the HMO and are paid by salary plus bonus or incentives
3. True Network Model - the HMO contracts with more than one large medical group or physician organization
4. Mixed model HMOs - most commonly occurs when a close-panel HMO adds open panel components.
5. Open-access HMOs - the member selects a PCP and gets the most benefits using the HMO system. Can bypass the PCP to get in-network specialty care directly, but with less coverage. Only services provided in network are covered.

Question 7

Advantages and disadvantages of open-panel HMOs

Answer 7

Advantages;

1. More easily marketed and sold due to the large panel of private physicians
2. Easier for members to find a participating physician that is conveniently located
3. in IPA models, routine medical management functions may be delegated to the IPA
4. Easier and less costly to set up and maintain

Disadvantages:

1. Because the HMO is not providing medical care itself, it has little ability to manage care
2. Premiums are often higher than those of closed panels

Question 8

Advantages & Disadvantages of closed-panel HMOs

Answer 8

Advantages:

1. Ability to more closely manage care
2. Delegation of many routine medical management functions to the group, which reduces administration costs
3. Convenience for members of having lots of services available in one location

Disadvantages:

1. Not as easily marketed to new members who would have to change doctors
2. Locations of medical offices may not be convenient for all members
3. Only feasible in medium and large cities
4. More complex and costly to set up and maintain

Question 9

Types of integrated health care delivery systems (IDSs)

Answer 9

In IDS, providers unite to manage health care and contract with health plans.

1. IPAs
2. Physician practice management companies - these companies purchased physician practices. Most failed because once physicians sold their practice there was no longer sufficient incentive for them to be productive.
3. Group practice without walls - formed as a vehicle for physicians to organize without being dependent on a hospital for services or support
4. Physician-hospital organizations - an entity through which a hospital and its physicians negotiate with payers
5. Management services organizations - provides a vehicle for negotiating with payers and also provider services (such as billing and admin support) to support physicians’ practices
6. Foundation Model - a hospital creates a not-for-profit foundation which purchases physicians’ practices. Usually done when there is a legal barrier to a hospital employing physicians directly.
7. Provider-sponsored organizations - groups of providers who contract directly with Medicare on an at-risk basis for all medical services. They failed because they not not properly spread risk, they attracted too many bad risks, and they did not typically conduct UM & DM
8. Hospitals with employed physicians - the hospital employs PCPs and specialists. This substantially increases the hospital’s negotiating leverage.

Question 10

Structural requirement of accountable care organizations (ACOs)

Answer 10

The ACA created ACOs for use in the Medicare program. They help achieve more integrated and efficient care by fostering local organizational accountability for quality and costs.

1. Those eligible to form an ACO include group practices, networks of individual practices, hospitals, rural health clinics, and federally-qualified health centers.
2. Must be a legal entity that is authorized to conduct business in each state in which it operates.
3. Must be formed for the purpose of:
   a. Receiving and distribution shared savings
   b. Repaying shared losses or other monies owed to CMS
   c. Establishing, reporting, and ensuring provider compliance with health care quality criteria.
4. At least 75% of the ACO’s board seats must be held by ACO participants
5. Management structure must e similar to what is found in a nonprofit health plan.
6. Participants must have a sufficient investment such that ACO losses would be a significant motivator.

Question 11

Key characteristics of Patient-Centered Medical Homes (PCMHs)

Answer 11

1. Patients have an ongoing relationship with a personal physician
2. Patients receive care from a team of individuals led by the personal physician
3. Person physicians take responsibility of providing or arranging all of the care of the patient
4. The patient’s care is coordinated or integrated across all elements of the health care continuum
5. Quality and safety are key parts, enhanced by evidence-based medicine
6. Patients have enhanced access to care through open scheduling and expanded hours
7. Payment should appropriately recognize the added value provided to patients.

Question 12

EHB categories

Answer 12

1. Ambulatory patient services
2. emergency services
3. hospitalization
4. Maternity & newborn care
5. Mental Health & Substance Abuse disorders
6. Prescription Drugs
7. Rehabilitative and habilitative services & devices
8. lab services
9. preventive & wellness services and chronic DM
10. Pediatric services, including oral and vision care.

Question 13

Part A of Medicare covers:

Answer 13

payment for hospital and SNF stays, subject to certain deductibles, copays, and maximums on the # of days covered

Question 14

Medicare Part B covers:

Answer 14

reimbursement for outpatient and physician expenses, subject to a deductible and coinsurance (typically 20%)

Question 15

the 2 most common Medicare Supplement (Medigap) plans

Answer 15

C & F - selected by 65% of insureds.

Question 16

Types of individual health insurance

Answer 16

1. Major Medical
2. Limited benefit medical - don’t over enough services to meet the definition of major medical
3. Group conversions - policies offered (on a guaranteed issue basis) to individual leaving group coverage. State laws typically require this coverage to be offered.
4. Medicare Supplement and Medicare Select - supplement Medicare coverage by filling in the gaps in that coverage.
5. Medicare Advantage & Part D - private managed care plans that provide benefits to Medicare beneficiaries
6. Disability Income - covers income lost due to an illness or injury
7. Business protection coverage - disability coverage the protects a business against the impact of an employee becoming disabled
8. LTC - covers service for individual who need assistance performing basic ADLs
9. Dental - not usually sold in the individual market due to antiselection concerns

Question 17

Types of limited benefit medical insurance

Answer 17

1. Hospital Indemnity - pays a flat amount per day of inpatient hospitalization. Often limited to a certain number of days, and may have an elimination period.
2. Other scheduled benefits - limited coverage for one or more indemnity-type benefits (e.g., $250 per ICU day or $20 per x-ray)
3. Dread disease - provides coverage only for a specified list of medical conditions (such as cancer)
4. Critical Illness - provides a lump sum benefit in the case of a heart attack, stroke, hear surgery, cancer (except skin cancer), or diagnosis of specified conditions

Question 18

Enrollment requirements for MA & PD plans

Answer 18

MA plans are guaranteed issue for any beneficiary who meets the following requirements:

1. is enrolled in Medicare parts A & B
2. does not have ESRD
3. applies during a valid enrollment period, such as:
   a. initial enrollment period - when beneficiaries first become eligible for Medicare
   b. Annual open enrollment period - between 10/15 & 12/7 of each year, beneficiaries can enroll or change their MA or PD coverage
   c. Special enrollment periods - these exist for various reasons, such as a change in residence or loss of current coverage.
4. Resides in the plan’s service area
5. Abides by the terms of the insurance contract

Part D plans have similar guaranteed issue requirements, except that:

1. beneficiaries are eligible as long as they are enrolled in Part A, Part B, or Part C
2. Beneficiaries with ESRD are eligible.

Question 19

Steps in the MA & PD bid submission process

Answer 19

1. Advance notice of payment policies and draft call letter - CMS publishes these early in the year, outline proposed changes for the next year.
2. Announcement of MA capitation rates and the final call letter - CMS publishes this in early spring
3. Submission of initial bid - the plan sponsor submit a bid for each plan by no later than the first Monday in June. This bid projects the expected cost of providing benefits and is certified by a qualified actuary.
4. Desk Review - the bids are reviewed by CMS and 3rd party actuaries contracted by CMS. This review is sually completed by late July.
5. Rebate reallocation process - Part D bids must be adjusted once the final NABA (national average bid amount) and member premiums are known. Plan sponsors do this in early August.
6. Finalize the bid, including a second actuarial certification.
7. Bid or financial audit - after bids are approved, the plan may be selected for this more detailed review.

Question 20

Methods used by disability income policies to adjust for the cost of living

Answer 20

1. Guaranteed insurability - automatically offering increased coverage to active insured, at specified intervals
2. Automatic increases - adjust insured amounts over time, without action by the insured
3. Increase benefit payments over time for those on disability (may apply in addition to one of the previous two methods)

Question 21

Major types of business protection coverage

Answer 21

1. Keyperson coverage - sold to businesses to protect them from the risk of key individuals becoming disabled. Benefits last one or two years, to provide time for the key employee to be replaced.
2. Disability buyout coverage - provides the funds needed (generally lump sum) for a totally disabled partner or owner of a business to be bought out by the remaining partner or owners
3. Business overhead expenses - pays for business overhead expenses in the event of the owner’s disability. Coverage periods are typically fairly short, to provide for short-term needs only

Question 22

Benefit triggers for LTC insurance policies

Answer 22

For tax-qualified plans, the trigger must be:

1. The inability to perform (without substantial assistance) at least 2 activities of daily living (ADLs)
2. A cognitive impairment that requires substantial supervision to protect the health and safety of the insure. Behaviors that indicate cognitive impairment are:
   a. Wandering and getting lost
   b. combativeness
   c. Inability to dress appropriately for the weather
   d. Poor judgement in emergency situations.

Question 23

the ADLs allowed by HIPAA, and typical definitions

Answer 23

1. Bathing - washing oneself by sponge bath or in either a tub or shower, including the task of getting in or out of the tub or shower
2. Continence - the ability to maintain control of bowel and bladder function, or if unable to do so, the ability to perform associated personal hygiene, including caring for a catheter or colostomy bag
3. Dressing - putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs
4. Eating - feeding oneself from a receptacle (plate, cup, etc) or by a feeding tube or intravenously
5. Toileting - getting to and from the toilet, getting on and off the toilet, and performing associate personal hygiene.
6. Transferring - moving into or out of bed, chair, or wheelchair.

Question 24

Benefits that may be covered by LTC policies

Answer 24

1. Nursing Home Care - care provided in a facility that provides skilled, intermediate, or custodial care, and is either Medicare-approved or state-licensed to provide this care.
2. Assisted living facility (ALF) care - care provided in a facility that is state-licensed as an ALF
3. Home and community based care (HCBS) - LTC services provided in the person’s home or in a community-based facility (like an adult day care center)
4. Hospice care - care provided through a facility or program designed to serve the terminally ill
5. Respite care - formal, paid care provided to relieve an informal care provider
6. Home modifications and equipment - services that allow an individual to remain at home, rather than have to be institutionalized (such as emergency alert systems and wheelchair ramps)
7. Care Management Services - services provided to develop a plan of care, identify providers, and coordinate care.
8. Bed reservation benefit - continues to reimburse the insure for institutional care even if he or she needs to temporarily transfer to an acute care facility due to a medical condition (for up to 21 days per year)
9. Caregiver training - provides training and education to help informal caregivers obtain state licensure as a home health care provider
10. Death Benefit - typically pays a % of all premiums paid minus any benefits paid
11. Cash alternative benefit - some plans give the option of receiving claim payments for home and community based care as a cash benefit, rather than as a reimbursement benefit.

Question 25

Methods of providing inflation protection on LTC policies

Answer 25

1. Automatic inflation protection - benefit limits increase automatically each year by a preset % (required to be at least 5%) on a compound basis.
2. Simple inflation protection - like automatic inflation, but using simple interest instead of compound interest.
3. Periodic increase offers - the insured is periodically *usually every 3 or 5 years) given the opportunity to purchase additional coverage on a guaranteed issue basis.
4. Coinsurance (rarely offered) - the insurer covers a specific % of actual or reasonable charges, and does not include a maximum indemnity limit.

Question 26

Steps of the product development cycle

Answer 26

Product development is the process by which new products are created and existing products evolve.

1. Innovate - consists of:
   a. Understanding the company’s strategic perspective
   b. Idea generation
   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
2. Design the product - this phase consists of determining the product structure, plan design options, contribution requirements, and regulatory compliance
3. Build 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 and market feedback
6. Revise the product - changes may be indicated by the product assessment, regulatory requirements, or consumer demand

Question 27

Common drivers of product ideas

Answer 27

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 & 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 were being overwhelmed by the cost of expensive medications
7. Changing Demographics - leads to a shift in the types of products that will be marketable
8. Changing Economy & 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 28

Questions answered by a market assessment

Answer 28

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 pricing targets?
6. What is the likely reaction from competitors?
7. How will the sales team react?

Question 29

Steps for building a new product

Answer 29

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 30

Key players in the product development cycle

Answer 30

1. Product development team - responsible for generating new product ideas and studying the market
2. Senior Management - sets the company goals and is responsible for making 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 customers want
5. Underwriters - can help quantify the risk associated with certain plan features
6. Information Technology (IT) - can help in understanding the feasibility of infrastructure needed to administer the product
7. Operations - works with IT 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 31

Components of Gross Premiums

Answer 31

1. Claims Costs
2. Administrative expenses - includes the cost of designing, developing, underwriting, and administering the product, as well as an allocation of overhead costs. Frequently much higher in the 1st year than in renewal years.
3. Commissions and other sales expenses - includes special bonuses, incentive, and advertising. Generally expressed as a % 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 changes - 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 32

“Pricing on the Margin”

Answer 32

strategic decision by insurer to ignore overhead expenses for a new product in order to offer a low introductory price

Question 33

expenses are frequently much higher in the first year due to:

Answer 33

the cost of:

1. setting up the group on the computer systems
2. marketing costs
3. possibly higher commissions

Question 34

Products that do not pay premium taxes

Answer 34

1. self-insured products

2. Medicare Advantage

Question 35

Considerations in developing administrative expense assumptions

Answer 35

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 expenses 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 1st year and renewal expenses. Various allocation bases exist.
3. what the competition incudes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace.

Question 36

Types of bases used for allocating expenses

Answer 36

1. % of premium
2. % 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 charge directly to the case for very demanding groups)

Question 37

Common rating characteristics included in manual rates for group health insurance

Answer 37

1. age
2. gender
3. health status
4. rating tiers
5. geographic factors
6. industry codes
7. group size
8. length of premium period

Question 38

Common rating tiers for group health insurance

Answer 38

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

Question 39

definition of medical trend

Answer 39

rate of growth in incurred claim cost PMPM

Question 40

2 main purposes of trend analytics

Answer 40

1. analyses of past trends may reveal insights into an insurer’s current benefit and rate structure
2. these analyses also assist in setting future premium rates and/or budgets

Question 41

Common purposes for trend analysis

Answer 41

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 the 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 42

Components of Medical Trend

Answer 42

Combine the following:
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 3 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. Ex: severe flu season, weather events
b. a sustained change in claims level. Ex: legislative changes (new mandated benefits), 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 or bonus payments
7. Margin - added to best estimate trend to minimize the chance of a loss

Question 43

Key questions to ask when analyzing trends

Answer 43

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 44

Factors that may influence future trends

Answer 44

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

Question 45

Desired characteristics of premium rates

Answer 45

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 46

Information gathered during underwriting for managed health care

Answer 46

1. Health Status - determined based on:
   a. for Ind and SG: physician exams, Rx histories, and medical questionnaires
   b. LG: 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 to recoup acquisition costs

Question 47

Steps in the rate formula for managed care

Answer 47

1. Develop the projection period base rate PMPM - based on 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 per subscriber) - for group coverages, this includes developing tiered rates (employee only, family, etc)

Question 48

Revenue elements include:

Answer 48

1. premium
2. investment income
3. explicit subsidies

Question 49

the profit in the asset share model is calculate in one of the following ways

Answer 49

1. % of premium - PV of profits divided by PV of premiums
2. Return on Investment (ROI) - the investments by the company to issue the policy creates a negative profit at the time the policy is issued. At some interest rate (the ROI), the PV of future profits will exactly equal the initial investment.
3. 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 50

Rate setting approaches

Answer 50

1 Rerating - rating based on direct, existing experience

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 1085 CIDA table for pricing DI. Typically used for long-term, non-inflation-sensitive products
   b. Buildup and density functions - a model is built to determine the 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 51

Major considerations in the rate setting process

Answer 51

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 52

Major rating variables for health insurance

Answer 52

1. Age - claims cost 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 antiselections.
3. Gender - most coverages vary rates by gender.
4. Marital status - this 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 - important rating factor for DI coverages, but not for others.
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 53

Types of age rating structures

Answer 53

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 the 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 54

Tabular method formulas for calculating net premiums

Answer 54

1. Net premium = sum (from z= issue year to final year) Pr(Clm(z)) * AC(z) * v^z * I (z)
   a. Pr(Clm(z)) is the probability of a claim occurring (incidence rate) in year z
   b. AC(z) 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. I(z) is the proportion of originally issued lives still in force in year z

The average claim cost is calculated as follows:
AC(z) = sum( from s=1 to final claim payment) CM$(s) * Pr(1-Tn(s)) * v^s
a. s is the claim duration
b. CM$(z) is the claim dollars payable at duration s
c. Pr(1-Tn(s)) is the probability of a claimant at claim duration 0 remaining disabled at duration s
d. Final Claim Payment is the duration of the final possible claim payment

Question 55

Using the buildup approach and density approach for pricing

Answer 55

1. Buildup approach - each claim type (IP, OP, etc) has its own claim cost calculation, as the product of claim 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. Is useful when calculating the impact of deductible and OOP limits
3. Combining buildup and density functions - for PPO products, may calculate in-network costs using the buildup approach (due to copays) and OON costs using the density approach (due to deductibles.) The tow are combined to get a final claim cost.

Question 56

Steps in the rerating approach for pricing

Answer 56

1. Gather experience on existing business - use incurred claims (preferably on a runout basis) and earned premiums. The reliability of the data should accessed 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 expectations to differ from past experience
4. Compare the projection against the 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 expense and profit)
5. Apply regulatory and management adjustments

Question 57

Adjustments needed for using past claims to project future claims

Answer 57

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 claims costs - must project changes in frequencies and changes in average costs
5. Leveraging - as trends change the average claims cost, the impact of deductibles and copays causes claims to increase at a rate greater than trend.
6. Other changes - includes antiselections, changes in underwriting, and changes in business practices.

Projected Claims (t) = Claim cost PMPM (s)

 * # of members (t)
 * (1 + leveraged claim cost trend) ^ (t-s)
 * Avg durational factor (t)  avg durational factor (s)
 * (1 + Antiselection factor due to lapses (t-s))
 * (1 + Adjustment factor for other changes (t-s))

Question 58

Reasons for management adjustments in pricing

Answer 58

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 59

Methods for calculating gross premiums

Answer 59

1. Block Rating (short term horizon) approach - claim costs are calculated for the rating period (typically 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 = % of claim expenses
   c. E^F = fixed expenses
   d. E^G = % of premium expenses + profit as a % of premium

Question 60

Items included in asset share projections

Answer 60

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. Claims 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. % of Premium - PV of profits divided by PV of premiums
   b. ROI - this is the interest rate at which the PV of the future profits will exactly equal the initial investment
   c. 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 61

According to ASOP #23, the actuary is not required to:

Answer 61

1. Determine whether data supplied by others is intentionally misleading
2. Compile additional data solely for the purpose of searching for questionable data
3. audit the data

Question 62

Actuarial standards for the use of data

Answer 62

1. Data that is completely accurate, appropriate, and comprehensive is frequently not available, so the actuary should use available data that allows the actuary to perform the analysis
2. Considerations in selecting the data
3. Review of the data - the actuary should review the data for reasonableness, unless such a review is not necessary or practical
4. The actuary should use appropriate data
5. Reliance on the data and other information supplied by others - the accuracy of this information is the responsibility of those who supply it. The actuary may rely on this information, but should disclose this reliance.
6. Confidentiality - the actuary should handle data containing confidential information consistent with Precept 9 of the Code of Profession Conduct.
7. 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.

Question 63

Considerations in selecting data to use in an actuarial analysis

Answer 63

1. The scope of the assignment and the intended use of the analysis.
2. the desired data elements and possible alternative date elements
3. Whether the data is appropriate and sufficiently current.
4. whether the data is internally consistent
5. Whether the data is reasonable given relative external information that is readily available
6. the degree to which the data is sufficient for the analysis
7. Any known significant limitations of the data
8. the availability of alternative data, and the benefit and practicality of obtaining this data
9. Sampling methods that were used to collect the data

Question 64

Categories of appropriateness of data used in an actuarial analysis

Answer 64

1. The data of acceptable quality to perform the analysis
2. The data requires enhancement before the analysis can be performed, and it is practical to obtain additional or corrected data
3. Judgmental adjustments or assumptions can be applied to the data, or the analysis results, to allow the actuary to perform the analysis
4. The data is likely to have significant defects
5. The data is so inadequate that it cannot be used to satisfy the purpose of the assignment

Question 65

Required documentation related to data quality

Answer 65

1. The source of the data
2. Any limitations on the use of the actuarial work product due to uncertainty about data quality
3. Whether the actuary reviewed the data, and any limitations due to data that was not reviewed
4. A summary of unresolved concerns the actuary may have about questionable data values
5. A summary of any significant steps the actuary has taken to improve the data
6. A summary of significant judgment adjustments or assumptions the actuary applied to the data or the results
7. The existence of results that are highly uncertain or potentially biased due to the quality of the data
8. The extent of the actuary’s reliance on data and other information supplied by others
9. Disclosures in accordance with ASOP #41 if:
   a. any material assumption or method was prescribed by law
   b. The actuary relies on other sources and thereby disclaims responsibility for any material assumptions or method
   c. the actuary has otherwise deviated materially from the guidance of this ASOP

Question 66

Situations in which ASOP #25 applies

Answer 66

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 67

Recommended practices for using credibility procedures

Answer 67

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 to 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.

Question 68

Disclosures required in an actuarial report

Answer 68

This report states the actuarial findings and identifies the methods, procedures, assumptions, and data used:

1. The intended users of the report
2. The scope and intended purpose of the assignment
3. The acknowledgement of qualification as specified in the Qualification Standards
4. Any cautions about risk and uncertainty
5. Any limitations or constraints on the use or applicability of the findings
6. Any conflict of interest
7. Any information on which the actuary relied that has a material impact on the findings and for which the actuary does not assume responsibility
8. The information date ( date through which data and other information have been considered)
9. Subsequent events (may have material effect on the actuarial findings)
10. If appropriate, the documents compromising the actuarial report

Question 69

Disclosure requirements for assumptions and methods used in an actuarial report

Answer 69

1. The communication should identify the party responsible for each material assumption and method.
2. If the assumption or method is prescribe by law, disclose the applicable law, the assumptions or methods affected, and that the report was prepared in accordance with the law.
3. If material assumption or method is selected by another party, the actuary has 3 choice:
   a. If it does not conflict with the actuary’s professional judgment, no disclosure is needed.
   b. If it significantly conflicts with the actuary’s professional judgment, then disclose this fact.
   c. If the actuary is unable or not qualified to judge its reasonableness, then disclose this fact.
   In the case of either b or c, also disclose the affected assumption or method, the party who set it, and the reason it was set by this party, rather than by the actuary.