Lesson 10 Flashcards
10.1.1 Outline risks facing insurers if they overprice or underprice their group insurance
products.
Pricing must be both competitive and profitable
Underpricing leads to losses, overpricing leads to lost business
10.1.2 Identify 5 factors considered by insurers in the initial pricing of group insurance.
1) Types of claims
2) Claim frequency
3) Claim costs
4) Expenses incurred servicing the plan sponsor
5) Anticipated profit and applicable taxes
10.2.1 Provide examples of when a claim is incurred.
When an insured person experiences and event they are insured against (becoming disabled, filing a prescription)
10.2.2.a Describe how insurers cover the potential cost of a waiver-of-premium claim
Life insurance may have a waiver of premium if a member becomes disabled.
They need to hold a reserve equal to the PV of costs a “Waiver-of-premium-reserve”
10.2.2 Describe how insurers cover the potential cost of a
conversion charge when pricing a plan
Policies may also allow members whose coverage terminates to get individual coverage without evidence of insurability. Charges levied for conversions offset potential losses from no evidence of insurability.
The group conversion charge is normally a charge per $1,000 of coverage converted and may vary by age and sex
10.2.3 Define mortality rate and the formula used to calculate it.
The rate of death
mortality = #deaths/#insured at period start
10.2.4 Define morbidity rate and the formula used to calculate it.
Incident rate
morbidity rate = #disabilites/#insured individuals at period start
10.2.5 Define utilization rate and the formula used to calculate it.
% of insured individuals who incur a claim
Utilization rate =(# different individuals submitting claims) / (# is insured individuals at beginning of period)
10.2.6 Provide examples of claims where the benefit amount is known when the claim is
incurred.
Death benefits, Accidental death are predetermined, known when the claim is incurred
10.2.7 Provide examples of claims where the benefit amount is unknown at the time the
claim is incurred
- Accidental dismemberment since this depends on the loss
- LTD
- STD
10.3.1 Describe the role of reserves.
Reserves are sums of money set aside to pay future claims
10.3.2 Explain how a waiver-of-premium reserve is usually determined
The prospect of paying a death claim without collecting premium
payments requires insurers to treat the waiver-of-premium reserve like a death claim
in the year the waiver claim is incurred.
The reserve is usually 30% of the life insurance coverage but it may vary according to actuarial factors
10.3.3 Explain how a disabled life reserve is usually determined
PV of expected payments to LTD claimant.
Usually 60 times monthly amount but may vary based on actuarial factors
10.3.4 Define an incurred but not reported (IBNR) reserve and explain how it is usually
calculated.
It’s a reserve for unreported claims.
Incurred in one plan year and reported in the next. Usually calculated on a percentage of claims. The percentage varies by benefit
What does IBNR stand for
Incurred but not Reported
10.4.1 Identify the components affecting a group’s net premium rate
1) frequency of claims
2) amount of claims paid + claims related reserves created
10.4.2 Identify the 5 components of the retention charge that is included in a group’s gross
premium rate.
1) Claims admin and general admin costs
2) Risk charges (possibility of termination in deficit)
3) Profit margins
4) Applicable sales and premium taxes
5) When applicable insurers may add the pool charge to the retention to determine the gross premium rate for healthcare benefit
10.4.3.a Explain how insurers express total administration expenses for refund and non refund groups
Non refund: as a percent of total premium
refund or self insured groups with an ASO expenses are itemized and expressed in terms of an expense or retention formula
10.4.3.b Explain how insurers express general administration expenses for refund and non refund groups
General expenses are usually expressed as a percentage of total premium
10.4.3.c Explain how insurers express Claims administration expenses for refund and non refund groups
May be expressed as a percentage of total premium, claims incurred or incurred claims, or as a flat dollar amount
Flat dollar amounts may be expressed as a fixed cost per plan member or as a fixed fee per transaction in the case of claims, contract amendments and other services.
Expenses expressed as flat charges are normally offered only to large groups
10.4.4 Explain how insurers apply risk charges in pricing insurance.
Risk charges (typically 0.1% to 3% of premium) are to cover the possibility of a group terminating in a deficit position. They vary and usually reduce as the CFR increases
10.4.5 Indicate the factors that impact the level of profit margin an insurer might charge.
Profits are earned wither as an explicit charge in the expense formulae (retention) or as a margin built into other expenses.
Can range from 0.25% to 10% of premium but are more typically in the same range as risk premium (0.1%-3%)
10.4.6 What two taxes may be applied to fully insured plans and what provinces charge them?
Premium tax - every province/territory
Sale tax - ON, QC MB (MB not to health or dental premiums)
Is GST/HST charged on insured premiums for fully insured plans?
no
Is GST/HST charged on insured premiums for self insured plans with pooling?
no
Is GST/HST charged on insured premiums for Self insured plans without pooling?
In NS, NB, NL, ON HST is charges on expenses
The federal Gov’t charges GST on expenses in provinces without HST
Is premium tax charged on insured premiums for self insured plans with pooling?
In ON, QC, and NL premium tax is charged on claims and expenses
Is premium tax charged on insured premiums for self insured plans without pooling?
In ON, QC, and NL premium tax is charged on claims and expenses
Is sales tax charged on insured premiums for self insured plans with pooling?
ON and QC charge sales tax on claims costs
Is sales tax charged on insured premiums for self insured plans without pooling?
ON and QC charge sales tax on claims costs
QC also charges on expenses
10.5.1 Explain the impact of plan design on premium rates charged by insurers.
The features that are included in a plan (benefit maximums, annual deductibles, coinsurance, COB provisions) affect premiums to the extent that they increase or decrease the insurer’s exposure to claim risk.
Increased exposure to risk results in higher rates
10.5.2 Outline the group characteristics examined by underwriters to asses the risk that a particular group presents to an insurer
Underwriters compare the characteristics of a group to the other groups in their block of business.
Factors include age, sex, geographic location, occupation, industry, dependent status and group size
10.5.3 Explain how occupation impacts the level of claims and how insurers address its
impact.
Blue collar historically had higher mortality than white collar. Now however there are higher mental health claims in white collar jobs
higher paying occupations have lower expected sickness claims and
disability incidence rates than lower paying occupations; conversely, higher paying
occupations experience higher dental claims
This factor has the most impact on the cost of disability benefits and the least on health care benefits
10.5.4 Identify the group characteristics having the most impact on the cost of life and
disability insurance
Age has the most impact on the cost of life, WI/STD and LTD
Another significant characteristic is sex and in the case of LTD, occupation and industry
10.5.5 Identify 4factors that affect the pricing of group insurance other than
variations in plan design and group characteristics.
1) Definition of eligible dependents (eligible age)
2) Cost trend factors (population aging, inflation, gov’t benefit cutbacks)
3) Prenotification factor
4) Year of birth (rather than exact day)
What is the prenotification factor in terms of a factor with an effect on pricing of group insurance
Prenotification factor Notifying a group in advance that a new benefits plan will
be effective at some future date affects the claims experience of some benefits,
particularly dental since dental has a large preventative component
10.6.1 Define the term manual in the context of group insurance pricing and explain how
that relates to the manual rating process
The term “manual” refers to the book used by the insurer to record typical group
rates for various benefits.
In the manual rating process the insurer examines claims experience for a particular benefit for each age, gender, occupational class and geographic area and determine the average claim experienced by this group in a year.
Divided by 12 this will be the monthly tabular net manual rate
What is the the monthly tabular net manual rate
the insurer examines claims experience for a particular benefit for each age, gender, occupational class and geographic area and determine the average claim experienced by this group in a year.
Divided by 12 this will be the monthly tabular net manual rate
10.6.2 Identify situations when manual rating is typically used
Manual rates are used for small groups where no credible individual loss experience is available.
This may be due to small group size
Manual rating is also frequently used to determine initial premiums for groups. Particularly when the group’s experience is unobtainable or when a group is being underwritten for the first time.
When quoting on a group for the first time why will an insurer disregard the group’s life or LTD experience and quote the manual rate?
Because the incidence on life & LTD is low but the amount is high the claims experience from individual small groups doesn’t provide a credible basis on which to base premium rates
What is the simples method of setting premium rates
Pooled rating is the simplest.
It uses the demographics of the group and the collective claims experience from benefit plans of a pool of plan sponsors to set rates
10.6.3 Explain experience analysis.
Experience analysis measures projected claims charges and plan expenses against
current premium levels
The rate required to
cover projected costs is known as the “experience rate.
In experience analysis what is included in projected claims? (7)
Projected claims charges consist of all or a combination of:
-paid claims
-change in reserves (IBNR, waiver-of-premium and/or disabled
life reserves);
- general and claims administration charges;
- risk and profit charges;
- premium taxes;
- commissions paid to advisors, if applicable;
- and other special
charges that apply to the period for which rates are being set
10.6.4 Define credibility factor
The degree to which a group’s own experience is used to set the premium rate is
called the “credibility factor
10.6.4.b What is credibility factor based on
This factor is usually tied to “life years,” which is the
number of lives covered in the group multiplied by the number of years of
experience used in the analysis. For example, if five years of experience is used in the
LTD analysis of a 150-life group, the number of life years is 750.
Credibility given to
experience can also be tied to the number of lives, as is the practice of some insurers
for WI/STD, health care and dental benefits.
How many life years is considered full credibility for life insurance and LTD?
To achieve full
credibility, life insurance and LTD benefits typically require about 10,000 life years,
with 7,500 life years at the low end of the range.
Most insurers consider a range from
five to ten years of experience for life insurance and LTD benefits
10.6.4.c What are the requirements for WI/STD, health and dental in terms of life years for credibility
On the low end of the range,
the experience of a 20-life group would be fully credible; on the high end of the
range, a 100-life group would need three years of experience to be fully credible.
10.6.5 Assume the following life insurance data:
Number of Total Number Years of
Plan Members of Claims Experience
Centra Agency :
4,000 members 1 claim 1 yr experience
Dateline Associates 3,000 members 3 claim 3 yrs experience
Inglis Financial 2,500 members 2 claims 2 yrs experience
Dundee Associates 1,000 members 4 claims 5 yrs experience
Identify the company an insurer will give more credibility.
Because Dundee Associates
has 5 years of experience, it is a better indicator of the pattern of claims experience.
It will be given more credibility.
10.6.6 Outline the information usually considered by insurers when analyzing claiming
patterns in a group’s claims experience? (6)
1) Frequency of claims
2) Time of year claims are incurred
3) Repeat Claimants
4) Average claim amount
5) With disability benefits, average duration of claims
6) Nature of claims
10.6.7 What is the incurred claims loss ratio
The incurred loss ratio is the relationship between
a) the total adjusted premiums and;
b) the sum of paid claims, change in the ; change in reserves, (disabled life, waiver pf premium, IBNR) and if used, interest credit on reserves
10.6.7.b What is the target loss ratio
Premiums less retention
10.6.7.c What is the significance of the incurred claims loss ratio and the target loss ratio.
The incurred claims loss ratio is compared to the target loss ratio to determine premium adjustments
For example, a retention charge of 12% levied on a group leaves 88% of the premium to cover the claims charges.
If the analysis results in an incurred claims loss ratio of 88%, the plan is in a break-even position,
10.6.8 Outline the advantages of a delayed premium arrangement for the plan sponsor.
Lets the sponsor defer premiums beyond the usual 30 day period
The plan sponsor may also benefit by investing the delayed premium at perhaps a higher rate of return than would have been credited on the claim reserve;
Why would an insurer offer a delayed premium arrangement
This arrangement may serve as a negotiating tool for plan sponsors that are
considering changing insurers but do not want to fund reserves in the first year under a new arrangement; the effect of a delayed premium arrangement is that the premium normally payable during the 60- to 120-day grace period equals the amount of premium required to fund first-year reserves.
The delayed premium arrangement places a new insurer on equal footing with an incumbent insurer
insofar as the funding of reserves is concerned.
