Lesson 11

Question 1

11.1.1 Explain the relationship between the rate guarantee period for group benefit plans
and the premium rate.

Answer 1

Rates are normally guaranteed for a contract year.

For Life, AD&D an LTD rates may be guaranteed for 1-2 more years, especially for large groups.

For a longer guarantee period the insurer may include a higher margin to account for fluctuation

Question 2

11.1.2 Identify the objective of the renewal rating process.

Answer 2

The objective of the renewal rating process is to set future premium rates at a level that supports projected claims charges and expenses.

Question 3

11.1.3 Describe the components of projected claims charges used in the experience analysis of dental benefits

Answer 3

Claims plus charges incurred but not reported (IBNR) reserves

• waiver of premiums reserves
• disabled life reserves

Over the period used for analysis

Question 4

11.1.3 Describe the components of projected claims charges used in the experience analysis of life and LTD benefits

Answer 4

• paid claims
• change in IBNR reserves

Over the period used in analysis

A cost trend factor is applied to determine projected claims charges

Question 5

11.1.3 Describe the components of projected claims charges used in the experience analysis of health care benefits

Answer 5

• paid claims
• change in IBNR reserves

Over the period used in analysis

A cost trend factor and a fee guide adjustment factor if the plan is not on a fixed fee guide

Although rare in practice some insurers disregard the trend factor and adjust rates on the effective date of the fee guide change

Question 6

11.1.3 Describe the components of projected claims charges used in the experience analysis of weekly indemnity/short-term disability (WI/STD) benefits

Answer 6

• paid claims
• change in IBNR reserves

Over the period used in analysis

Question 7

11.1.4 Explain how a group’s claims experience can be used in determining its renewal
rate.

Answer 7

Experience is weighted by the credibility factor, which insurers have their own formulae to determine

If the group is projected to end in a deficit that won’t be covered by the CFR or a lump sum. A margin for recovery may be added in to the rate

Question 8

11.1.4.b What is the calculation for the blended rate in renewal rates and when is it used

Answer 8

Blended Rate =
(Credibility Factor x Experience Rate) +
[(1 - Credibility Factor) x Manual Rate]

This is used when groups have a credibility factor of less than 100%

Question 9

11.1.5 List 4 reasons a plan sponsor might cancel its group insurance contact.

Answer 9

1) Renewal rates are uncompetitive
2) Service has not met expected standards
3) Funding method is not appropriate for the plan sponsor/plan
4) Plan sponsor is experiencing financial difficulties

The first two reasons are the most common. Unless a plan sponsor is experiencing financial difficulties it typically purchases a replacement contract from a similar insurer

Question 10

11.1.7 Describe the implications for the plan sponsor should an insurer decide not to renew its contract

Answer 10

the plan
sponsor must find an alternate insurer, usually within 60 days

If the termination
relates to the plan falling below a minimum group size requirement, the insurer may
give the plan sponsor up to an additional two months to find a new insurer.

If the plan sponsor expects the group size to eventually increase, the insurer may wait until the next renewal before cancelling coverage.

Question 11

11.1.6 Identify 4 reasons an insurer might cancel a group insurance contract

Answer 11

1) The plan sponsor’s plan no longer meets the insurer’s minimum group size
2) The insurer is no longer underwriting specific benefit coverage
3) The plans claims experience trend has been poor
4) A risk has been introduced into the plan that the insurer does not want to insure

Question 12

11.2.1 List 11 pieces of information that insurers are expected to provide to plan sponsors on renewal of nonrefund accounting or refund accounting plans

Answer 12

1) Premiums Rec’d
2) Claims paid
3) Changes in reserves
4) Any pooling charges
5) Expense levels or incurred claims loss ratios for nonrefund accounting plans
6) Breakdown of retention expenses for refund accounting plans
7) Current year and previous year annual manual rates for plans that aren’t fully credible
8) Changes in plan member demographics
9) Justification for renewal action including breakeven calculation
10) Current and proposed renewal rates
11) Estimated financial statement showing surplus or deficit for refund accounting plans

Question 13

11.2.2 Outline the factors insurers examine in the renewal rating of a particular group benefits plan. (4)

Answer 13

1) Changes in group demographics
2) Claims experience during the past year
3) Credibility factor of the group’s experience
4) Any external factors that might affect any of the benefits

Question 14

11.2.3 Explain how insurers reflect the demographics of the group in the renewal rating process. Provide examples

Answer 14

Insurers require demographic data from certain plan members (renewal data) to compare to prior year data.

Life & LTD needs age & sex

Question 15

11.2.4 Explain how a change in earnings levels impacts a group renewal rating

Answer 15

Earnings may be take into account if at least one benefit is based on earnings

Where benefits are earnings based, a change in earnings affects the total premium amount to the extent that the volume of insurance is impacted, even if there is no change in premium rates

Question 16

11.2.5 Describe the cash loss ratio or paid claims loss ratio

Answer 16

Ratio of paid claims to billed premiums over a period

Question 17

11.2.6 Describe the incurred claims loss ratio aka target loss ratio

Answer 17

The ratio of incurred claims to billed premiums over a period

Question 18

11.2.7 Assume that a group has a retention charge of 15% and an incurred claims loss
ratio of 89%. Calculate the required experience adjustment.

Answer 18

An incurred claims loss ratio of 89% and projected
retention charge of 15% results in a required experience adjustment of 10.47%

(0.89/0.85) - 1 = 1.047 = 4.7%.

Question 19

11.2.8 Assume that the current life rate is $0.11, a group’s life experience is 80% credible, the experience adjustment rate is 1.15 and the manual rate is $0.220. Calculate the
blended rate.

Answer 19

The blended premium rate = 0.1452

The required premium rate adjustment is 32%

Question 20

11.2.9 Describe factors other than demographics and factors relating to claims experience that insurers consider in the renewal rating process (3)

Answer 20

1) Regulatory/legislative factors. (Changes in taxation)
2) Economic factors (inflation rates, interest rates and employment rates cost trend factors for health & dental)
3) Other (profitability of the group benefits plan, the relationship with the plan sponsor/advisor, past experience with deficit recovery)

Question 21

11.3.1 Explain the purpose of a financial accounting.

Answer 21

The basic purpose of the financial accounting is to determine the financial position of the plan at the end of the contract period

Refund accounting and self-insured with ASO or TPA

Question 22

11.3.2 Describe the financial accounting process for a group benefits plan underwritten on a refund accounting basis

Answer 22

The insurer prepares an annual financial accounting to determine the experience
results for the last contract year.

Paid Premiums 
- Claims Charges 
- Retention 
\+ Interest =
 Year-End Balance

Question 23

11.3.3 Identify claims charges included in the financial accounting of a refund accounting plan.

Answer 23

1) Cash claims or paid claims
2) Changes in reserves (IBNR, life waiver premium, LTD disabled life)
3) Pool charges for individual high limit pooling or aggregate stop loss pooling (some insurers include this in retention charges)
4) For life insurance only, conversion charges

Question 24

11.3.4 Explain what is included in the interest component in the financial accounting of a
refund accounting plan

Answer 24

Interest may be a charge or a credit and includes

1) Interest on reserves (IBNR, CFRs, premium waver reserves, disabled life reserves)
2) Interest on cash flow (premium - claims-retention)

Question 25

11.3.5 Describe what usually occurs if the financial accounting of a refund accounting plan results in a deficit for a particular accounting period

Answer 25

First it’s offset by the CFR

Then a deficit recovery arrangement must be entered into

Lump sum, amortized payments or a margin added to premiums

Question 26

11.3.6 Explain the advantage of using a delayed or extended-plan-year accounting arrangement.

Answer 26

This includes claims incurred in the plan year but not reported until after the plan year which gives a more accurate picture and reduces the need for IBNR reserves

Question 27

11.3.7 Define CFR and identify who owns it.

Answer 27

The claims fluctuation reserve or premium stabilization reserve/fund or rate stabilization
reserve/fund is held from surpluses against deficits.

The plan sponsor owns the funds but the insurer determines how it is used

Question 28

11.3.8 Explain what is included in the financial accounting of a self-insured plan with an
ASO arrangement

Answer 28

A self-insured plan with an ASO arrangement is similar to a refund accounting plan
in that, depending on the plan sponsor’s administrative arrangement, the insurer or TPA prepares an annual financial statement to reconcile plan sponsor payments to the insurer or TPA against claims payments, administrative expenses, applicable taxes and cash flow interest for the reporting period. For a billed-in-arrears payment
option (i.e., claims and expenses are reimbursed to the insurer or TPA through a cheque payment in the following month), monthly statements are prepared

Question 29

11.4.1 Identify alternatives an insurer may offer to a plan sponsor to help minimize the
impact or eliminate the need for a renewal rate increase

Answer 29

1) Introduce cost sharing through mbr contributions, coinsurance or deductibles
2) Introduce cost management features such as dispensing fee caps on drugs, generic substitution of drugs and fixed dental fee schedules
3) Reduce benefits through lower benefit maximums or shortened benefit durations

Question 30

11.4.2 Describe the key characteristics of a retrospective premium arrangement and
explain why this arrangement is beneficial to the plan sponsor

Answer 30

A retrospective premium arrangement allows the plan sponsor to remit monthly
premiums that are less than the proposed renewal rates; the discount or reduction
typically ranges between 5% and 10% of the renewal premium rate.

However, the
plan sponsor must pay an additional amount at the end of the policy year if the paid
premium proves to be insufficient

This arrangement is beneficial to the plan sponsor despite the additional year-end
payment. The plan sponsor can use the additional funds throughout the year and doesn’t have to seek new insurance despite premium rate disagreement