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
