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Question

Risk Adjustment

Answer 1

Normalizes populations according to specific risk factors Is applied to historical data

Answer 2

Demographic: - Age - Gender - Race and ethnicity Clinical: - Acute clinical stability - Principal diagnosis - Severity of principal diagnosis - Co-morbidities - Extent & severity of co-morbidities - Physical functional status - Cognitive status - Mental health - Chronic disease prevalence - Treatment protocol - Hospital admissions Health related behaviours and activities: - Tobacco use - Alcohol use - Use of illicit drugs - Sexual practices (safe sex) - Diet & nutrition - Obesity & overweight

Answer 3

Socio-economic factors: - Familial factors & household composition - Educational attainment, health literacy - Economic resources - Employment & occupation - Housing & neighbourhood characteristics - Health insurance coverage - Cultural beliefs & behaviours - Urban/ rural split - Proportion of the population insured Attitude & perception: - Overall health status & behaviours - Religious beliefs & behaviours - References & expectations for health care services Supply side factors - Specialist facilities eg diagnostic equipment such as MRIs - Number of high care (HC) and ICU beds - Number of clinics - Specialists facilities

Answer 4

D - Discontinuance can be explicitly included I - Investigates sensitivity of profits R - Reserves and solvency requirements can be explicitly allowed for E - Expected return on capital can be measured (In ST can assume that capital needed can be borrowed at the discount rate used) C - Complex model structures e.g. UL & OG possible A - Assumptions that vary over time easier to incorporate, also stochastic assumptions R - Risk discount rate can take into account the term structure of interest rate T - Timing of events eg claims can be more properly included

Answer 5

V - Variation of assumptions over time A - Accumulation of reserves T - Timing of events I - Independent inspection of claim or premium cashflows C - Capital needs N - Net negative cashflows

Answer 6

- Purpose of the Model - Data points or model points - Assumptions (deterministic/stochastic - Parameters —> dynamic interaction - Simulation and projection of cashflows - Discounting: valuation interest rate, risk discount rate reflects the level of risk of the cashflows - Sensitivity tests - Or other considerations such as premium & charges meeting the profit target and marketability —> adjustments of profit targets - Scale up MPs for expected business mix - Profit: on individual policy level or aggregate - Profit matrix: NPV, profit margin = NPV profits/ disc(Premiums), IRR, or DPP; profits results compared to these - Premium level & expense loadings adjusted until target profit level achieved

Answer 7

S - Sensitivity analysis or assessment of variance A - Assessing return on capital A- Assessing a suitable investment strategy A - Assessing the profitability of existing business P - Pricing V - Valuing liabilities P - projecting future supervisory solvency position (Dynamic Solvency Testing)

Answer 8

- Makes use of all known data on o/s claims - Considers qualitative factors that may affect amount - May be more reliable than statistical methods in certain cases

Answer 9

- Cannot be used to produce estimates for claims that have not been reported (incurred or not) - Relies on skill and judgement of claims manager - Managers may be naturally conservative/ optimistic - May not use consistent rates of inflation - May be biased to the lower end of used for negotiations with the claimant - Difficult to check - Expensive and inefficient if there are many o/s claims - May be produced by outsiders who don’t have access to all data on claims

Answer 10

Choose a base period over which to collect claims and exposure — Volume — Detail — Trends — Relevance — Unknowns Collect and check the data — Mention data source and relevance & credibility — Information collected Split data into homogenous groups — Using risk factors Calculate the burning cost premium for each group - BCP = average claim amount x claim incidence rate Analyse the data — To identify trends Adjust the base values: base experience may be different from expected experience — Unusually light/ heavy experience — Large or exceptional claims — Trends in claim experience — Change in risk — Changes in cost of reinsurance — Seasonal variation in claims — Incomplete claims — Changes in agreements with suppliers Project the base values — Adjustments — Claims inflation — Future Trends — Changes in benefit — Medical innovation and technological — Changes in professional fees, cost of medical treatment and pharmaceuticals — Changes in behaviour of healthcare professionals (e.g. trends towards prescribing more expensive treatment) —Introduction of provider network and manages care arrangements — Changes in disease profile and impact on HIV/ AIDS — Impact of regulatory changes eg. Prescribed minimum benefits — Impact of demographic profiles eg age profile and family composition

Answer 11

Total risk premium: The total risk premium for a class (group) of ph can be found by summing the individual risk premiums for each benefit/ procedure Risk premium (age, gender) = sum(ik * ACk) — Profit margin / profit requirement by company — Setting assumptions - with margins — Modelling — Model points creation —> represents expected NB / mix of lives — Cashflow projection for each MP - Benefit/ claim amount - Renewal assumptions - Utilisation assumptions - Expenses [acquisition and renewal, claims] - Commission - Development costs - Net projected cashflows discounted at a rate of interest - Risk discount rate that accounts for: — Required return by company (net of tax) — Level of statistical risk of each cashflow - Reserves - Solvency margin - CoC - Tax - Margins - Sensitivity testing

Answer 12

Proportions - original terms reinsurance (co-insurance) — Deposit back — Quota share - Risk Premium reinsurance - Coinsurance using Level Risk Premium Non- proportional - excess of loss (XoL) — Risk basis - Individual Surplus — Occurrence basis - Aggregate losses — Stop loss - cap loss arising in a period — Catastrophe reinsurance Financial Reinsurance Retention limit: is the maximum amount of risk retained by the cedent on any individual risk

Answer 13

Average benefit level for the product & expected distribution of benefit Risk appetite Level of free assets & importance attached to stability of its free asset ratio Terms on which reinsurance can be obtained Level of familiarity of the insurer in underwriting the product The on insurers regulatory capital requirement of increasing or reducing the retention limit The existence if profit sharing arrangement The insurers retention limit on its other product Nature of future increases in sum assured

Answer 14

Fund protection refers to the underlying unit fund not being used to fund benefits and insurance benefits are payable from the non- unit fund. The greater the level of fund protection the greater the liquidity risk.

Answer 15

D - Demographics: age, gender, geographical area T - Target market: Individuals( includes retired, anti-selection) or group (generally work-force, worksite health services, wellness programs and days to raise awareness) H - Health status: healthy or in poor health C - Class / socio economic status: upper class more knowledge on product, knows when to claim, has access to health care providers

Answer 16

**Optimal Alternative**: Private healthcare insurance can be purchased on an optional basis. Those with private health insurance only utilise private providers. **Optimal Complement**: Some basic service provided by the state; the rest needs to be paid for, and can optionally insure for these. **Compulsory Alternative**: State resources only available to some (I.e the indigent), the rest need to purchase health insurance and access private resources **Compulsory complement**: Certain services provided by the state, all others privately and those who can need to take out insurance for this.

Answer 17

**Cost analysis**: Asses the cost of various healthcare systems providing services **Cost-effective analysis**: Assesses cost of healthcare systems relative to the non-monetary benefits **Cost-utility analysis:** Assesses the relative to changes in quality of life (quality) **Cost-benefit analysis:** Puts monetary value on the cost of the healthcare and its outcome. Allows for direct comparison between cost and outcome. **Willingness to pay:** Used to measure the value an individual places on a health care system. Determined through: 1. Direct method - through questionnaires/ interviews 2. Indirect method - observing behaviour and identify how much individuals may be will to pay for treatment)

Answer 18

- Means testing - Provision of treatment/ services - Lump sum cash payment - Regular income - Amount of benefit - Differenriation

Answer 19

Protect the nation’s health Subsidise/ support the poor Balance the budget Political promises + follow social culture

Answer 20

Promote self-provision - Tax relief on premiums - Subsidise providers - Exclusions from state provision Provide - means tested cover - reduce non-essential benefits via own hospital - lumpsum - different life stages - Illness Use managed care

Answer 21

Demographic challenges - ageing population Technological challenge - very costly Challenges of Sisyphus - increase life expectancy (medical advances), increase in future demand of health care, increased costs Burden of disease - demand of care Medical professions - leaves the count ny Infrastructure Competition -budget competing needs failure Fraud

Answer 22

Benefits limits Exclusions Cost reduction: - Treatment protocols - Formularies - Preferred Provider Networks Co-payments Deductions - is a specific amount you must spend in a year before your insurance policy pays for some or all your claims Negotiate fees & fixed payments Pre-authorisation Case management Preventative measures Attract younger & healthier lives - if prems are not risk rated Utilisation reviews Medical savings account

Answer 23

Matching (NUTC) - Long-term products Distribution: - support brokers to improve sales - expand sales channels - change remuneration strategy to improve client retention - promote cross sell and upsell Retention activities: - improve customer experience - engage more with customers Consider exit some lines of business Premiums: - increase premiums for additional risk for NB - move to reviewable premiums —> balance with future reputational risk - may be difficult to increase NB sales and premiums due to affordability in a bad economic climate - Repricing policies Management expenses: - Ensure that earnings (profit before tax/ NAV) & capital viable medium to long term - perform expense analysis to identify the expenses that need to be managed Invest in automation & digital self- servicing to meet needs to save co More frequent reporting: - focus on key risk metrics - Expertise - Pricing - Model risks Underwriting to prevent anti- selection: - increase vigour - start applying Introduce exclusion clauses on NB (but may have reputational risk) Reinsurance cover; - financial reinsurance - expertise - pricing - model risk Increase claims underwriting to eliminate invalid claims Add extra profit margin Limit maximum sum insured offered Limit number of policies sold, hold back on marketing spend Ensure that you may have a very quick feedback loop on the claims experience Ability to monitor experience by relevant factors Use longer waiting periods to reduce anti-selection Clearly define benefit in policy document and marketing material

Answer 24

Model risk - Risk underlying model is not adequate Parameter risk - Depends on adequacy and appropriateness of data - Parameter used may not reflect future even though model might be appropriate - Possibility of new diseases or advances in medical treatment Random fluctuation risk - unpredictable fluctuation arising from sample error - heterogeneity of data - numbers of exposed to risk in data may not be large enough for law of large numbers to apply Severity risk - risk of average claim exceeding expected value Sources of uncertainty for average claim amount: - changes in cost of medical treatment (medical innovations, advances in tech, currency fluctuations) - changes in lifestyle prevalence of medical conditions -changes in policyholder or medical professional behaviour - poor claims control and fraud - introductions of claims management process - ageing population - greater demand for HC treatment - new diseases or epidemics - hospital capacity changes - pricing agreements are renegotiated Policy data & other data - accuracy Claims: - frequency - amount - anti-selection (especially for indemnity products) Assumptions: - mortality (base & improvement) & morbidity

Answer 25

Investment performance: - risk that investment returns are lower than expected & provided for in the pricing - future investment ( re-investments or investment return assumption not consistent with inflation) Expenses & expense inflation - higher then expected - expense inflation (CPI + medical + salary) - initial expenses not recouped, early withdrawals or non-renewals Withdrawals: - due to affordability etc - risk at early duration when asset share is negative - selective withdrawal —> worsening of the mortality experience of in-force business - may invalidate assumptions esp selective withdrawal on mortality, CI incidence, PMI sickness) New business mix by nature size of contract and source - demographic and expense experience may differ and invalidate these assumptions. New business volumes: - need to cover overheads (if not volumes —> can’t cover overheads) - too much —> not enough capital Guaranteed and options Competition/ competitive pressure Actions of the board of directors or staff Actions of distributors + mis selling risk Operational risk - Failure of appropriate management systems & controls - Dominance of individual - Reliance on third parties - Reputational risks Counterparty risks - reinsurance — - derivatives - corporate bonds — loss of investment returns — deteriorating credit rating - - higher Borrowing costs — increase in capital requirements for investments with worsening credit rating - counterparties in provision of medical services — risk of ultimate claims cost lies in the hands of the third party provider - outsourcing services may be below standard — extra costs for the insurer — e.g administrators or underwriters Legal - legal action & having to pay large compensation to ph - reputational risk Regulatory - how products can be sold, nature of benefits - risk that new regulation may apply to policies already in force and change nature of contract — eg change in supervisory regulations such as prudent prescribed valuation basis could cause large increases in reserves (valuation strain) and the risk of supervisory insolvency Fiscal developments - State decides to offer services for free, for all - Make it compulsory - Risk that tax changes may be introduced that change the probability and coverage of existing contracts Fraud Aggregation and concentration of risk including credit failure - Risks arising for group business or geographical concentration —> removes independence of risks Earlier screening or diagnosis or medical improvements — advances in medical science means that claims incident may increase — CI windfall claims — lead to prolong to life, delaying time of death, leading to more claims paying out - Cost of treatment may increase - Increased encouragement of screen —> increasing claims incident rates & increasing the cost of treatment and PMI

Answer 26

- commit to new conditions - delay premium or claim payments - bring insurer to disrepute - encourage business to lapse and re-enter where there are no clawback arrangements - taking advantage of loopholes in product design, eg. With risk classification where the insurers’ non-smoker/ smoker definitions may allow some variation in interpretation - stop selling your business and you have no alternative routes available through which to make sales - mid-selling products lead to poor persistency and damage to reputation

Answer 27

A prudent basis, rather than best estimate should be used with appropriate margins for adverse deviations. Regulatory requirements need to be taking into account. **Interest rate** - Take account of currency - Regard to yields on existing assets - Regard to yield in sums to be invested in the future - Credit/default risk - Term of the liabilities - A low rate is prudent **Mortality** - Need to consider mortality both pre and post claim *Pre claim* - Take account of sex and age - Underwriting policy - Territory of insurance - A low rate of mortality is prudent. *Post claim* - Factors as above: - Take account of sex and age and extent of impairment - Duration of claim (note this is for active lives) NB: Cause not required as this is for active lives - Source of data eg published statistics - A low rate of mortality is prudent. **Morbidity** Consider both prob of claim and claim recovery rate ( prob very low) *Pre-claim* - As of mortality: - Take account of sex and age - Underwriting policy - Territory of insurance - Occupation class - A high rate of incidence is prudent *Post claim* - As per pre claim - Extent of impairment - Duration of claim (note this is for active lives) NB: Cause not required as this is for active lives - Source of data eg published statistics - A low rate of recovery is prudent **Expenses** - Gross valuation so would look to allow for expenses in line with best estimate plus margin Allow for: - product design features - territory - claim costs - administration costs - commission - need to allow for future inflation. Should be based on analysis of recent experience

Answer 28

1. The reserves should cover all liabilities arising from all contracts 2. The reserves should be calculated prudently, allowing for all relevant liabilities 3. Take credit of future premiums if these are contractually due 4. Valuation should be prudent, not best estimate, so basis should contain margins 5. The valuation is the liabilities should be consistent with the asset valuation. 6. Appropriate approximations or generalisations may be allowed 7. Interest rate used for calculating reserve should be chosen prudently, taking into account currencies, yields & reinvestment yields on the assets 8. The demographic, persistence, and expense assumptions used should all be prudent, but the expenses can be on an ongoing basis. 9. The valuation method itself defines the amount of expenses assumed (e.g. premium method) then the amount implied must be no less than a prudent estimate of the relevant expenses. 10. Evolution calculations conducted overtime should not suffer discontinuities arising from arbitrary changes to the basis 11. The evolution method used should recognise the emergence of profits appropriately over the policies lifetime 12. Valuation basis and method should be disclosed

Answer 29

1. Price risk 2. Severity risk 3. Intensity risk 4. Frequency risk 5. Actuarial and marketing risk

Answer 30

Administration Marketability Profitability Level and form of benefits Early leaver benefits ``` ``` Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Terms and conditions of contract ``` ``` Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (cross)

Answer 31

- Reducing the **cost** of medical event - Improving the **quality** of care provided - Ensuring that the medical services are delivered in an **appropriate setting** - Ensuring that **high risk members** are managed and receive appropriate care - Reducing the number of **unnecessary medical services**

Answer 32

T - Types of assets that can be invested in E - Extent of mismatching allowed C - Currency match between assets and liabilities —> Reduce currency risk H - Hold certain proportion of total assets in particular class eg gov bonds S - Single counterparty exposure maximum C - Custodianship of assets A - Amount of any asset allowed to demonstrate solvency M - Mismatch reserve