Lesson 5 Flashcards
5.1.1 Identify factors impacting plan funding methods available to a plan sponsor
A group benefits plan sponsor has different options for managing its associated risk.
Methods available to a plan sponsor depend on the size of the plan, volume of premium/deposits, type of benefits, volume of claims, current regulatory requirements, tax considerations, the degree of financial risk the plan sponsor can assume and the insurer’s willingness to underwrite the risk associated with the plan
5.1.2 Distinguish between funding methods and underwriting methods
A funding arrangement of a group benefits plan relates to who bears the underlying risk of paying claims and expenses, insure or self insure.
When the funding arrangement includes sharing risk with an insurer underwriting is the process the insurer undertakes to evaluate the risk.
5.1.3 Distinguish between factors considered by a plan sponsor to evaluate funding methods and factors considered by an insurer
A plan sponsor considers:
1) Assumption of financial liability (sponsor or insurer)
2) Financial accountability for experience results (when premiums are in excess of claims or insufficient
An insurer considers the above factors as well as the basis rate determination on plan renewal. Whether or not experience is reflected is up to the insurer ultimately
5.1.4 Describe how the level of financial risk changes as the plan moves to fully insured from self insured
The most risk to the plan sponsor is in self insurance, the least with a fully insured plan
5.1.5 Distinguish between a fully insured and self insured plan
In a self insured plan all claims are paid by the plan sponsor
In a fully insured plan all claims are paid by the insurer and the plan sponsor/members pay premiums.
5.1.6 Explain financial accountability for experience results in the context of insured plan funding and how experience results are determined
Financial accountability refers to the treatment of an insured plan’s surplus or deficit.
A financial report is prepared as at the end of the plan year an the balance is calculated for plan revenues vs claims charges retention expenses (admin), interest charges and taxes.
What financial information is reported to the plan sponsor upon plan renewal depends upon the specific type of insured funding agreement
5.2.1 Describe the key characteristics of the insured nonrefunded arrangement
Under insured nonrefund if claims cost exceed premiums the insurer takes the risk for a set contract period. The sponsor’s risk and liability are limited to premiums. Conversely if claims experience is lower the insurer keeps the profit.
5.2.2 Discuss when it is appropriate to use a fully pooled rating methodology and provide examples of benefits that use it
Fully pooled is appropriate for types of benefits that have low incidence and high dollar amounts when claims occur.
It can also be appropriate when the past experience isn’t indicative of future experience.
Examples are AD&D, Critical Illness which are usually fully pooled.
Life Insurance and LTD are usuallt only fully pooled when a group is large enough to have experience be considered in renewal rating.
WI/STD, Health & Dental benefits are usually fully pooled only for very small groups.
5.2.4 Explain the basis for premium rate renewal for an insured plan underwritten on a prospectively rated basis
Premium rates for a prospectively rated plan are determined in part or in whole on the plan’s own experience. The term prospectively rated means that past claims are used to predict future claims.
Where plans have good experience their rates may be lower and the insurer can raise rates for a plan with unfavorable experience.
5.2.5 Explain why insurers normally have minimum requirements for group size and premiums when determining the rating methodology used to set premium rates on contract renewal
The mimum group size is because of volatility. The more unpredictable the event the larger the group size or premium requirement.
For example life insurance and LTD have a higher minimum number of lives than that required by health and dental benefits
5.2.6.a Outline the advantages of an insured nonrefund arrangement (2)
The main advantage is the plan sponsor’s liability and risk is limited to premiums.
An additional advantage is that the industry drug pooling through the Canadian Drug Insurance Corporation protects against high cost drug claims.
For prospectively rated plans this helps mitigate adverse premium cost impact of high individual drug claims at annual renewal
5.2.6.b Outline the disadvantages of the insured nonrefund funding arrangement (2)
For plans with positive experience the plan sponsor doesn’t participate in the positive results.
If the plan is fully pooled adverse pool experience can impact renewal rates even if the individual sponsor’s plan is preforming well
5.3.1 Describe an insured refund arrangement
the plan sponsor shares in the financial results of the plan and can receive a refund of premiums if a surplus results at the end of the contract year.
5.3.2 Describe the financial accounting method completed by insurers for plans funded using the refund accounting method
The financial accounting report details paid premiums, claims charges, expenses, taxes, and interest credits or charges.
The reporting period corresponds to the most recent contract year.
5.3.3.a what does CFR stand for
Claims Fluctuation Reserve
5.3.3.b Describe the CFR in a refund accounting plan
The CFR is a fund established by the insurer from plans surpluses with the purpose of offsetting a future deficit.
All or part of the surplus generated by a plan in a favourable year is allocated to the CFR.
While the CFR belongs to the sponsor the insurer has first call on the funds in the event of a deficit.
This protects the insurer against shortfalls and mitigates the possibility of the plan terminating in a deficit position.
5.3.4 Describe how refund accounting plan deficits greater than the CFR are addressed by the insurer
A deficit recovery arrangement is implimented through a lump sum payment, payments amortized over a period or through a margin in the premium rates for partial or total recovery.
The plan sponsor has no legal or contractual liability for the deficit and can terminate the plan, leaving the insurer with the deficit.
In practice insurers have different variations of refund arrangements including terminal deficit hold harmless agreements that specify the plan is responsible to repay deficits on termination.
5.3.5 Explain the basis of premium renewal for refund accounting plans.
Plan sponsors with refund arrangements are also prospectively rated for renewal purposes.
However a margin for deficit may be added to recognize the plan sponsor’s agreement to address plan deficits as part of sharing in the experience results.
