Medicare Supplement and Disability

Question 1

Rating approaches for Medicare Supplement (10)

Answer 1

1. Attained age – rates are based on the individual’s current age
2. Issue age – rates are based on the individual’s age when the policy was issued
3. Community rates – all participants pay the same rate. Some modified community rating approaches differentiate based on age, sex, duration, or other parameters

Question 2

Medicare supplement pricing assumptions (12)

Answer 2

1. Morbidity – past claim costs need to be trended forward to the rating period
2. Mortality – not a significant assumption, and is frequently combined with persistency
3. Persistency – should be based on the company’s experience for similar products
4. Investment earnings – will be credited to the various types of reserves that are held
5. Selection factors/underwriting – for underwritten policies, selection factors may be used for the first one to three yeas
6. Age/sex distribution – most policies are sold to individuals turning 65
7. Smoker/non-smoker – if rates vary by smoker status, then the distribution of smoker status must be estimated
8. Area factors – claim costs by area may come from rating manuals or government statistics
9. Expenses and taxes
10. Other considerations – model factors and policy fees are sometimes used

Question 3

Types of reserves in DI insurance (18)

Answer 3

1. Active life reserve – exists for policies priced on a level premium basis. Consists of the excess premiums charged in early years to cover the premium shortfall in later years
2. Disabled life reserve – established to cover each disability claim and its projected length

Question 4

Factors that stimulate product development for DI (19)

Answer 4

1. Responding to the competition – b/c the marketplace is so product sensitive, the DI insurer must be quick to react to its competitors product changes
2. Consumer demands – as the consumer has become more aware of the need for LTD protection, the DI product has evolved. The product development process must be responsive to whatever changes emerge in the future
3. Claims experience – this must be monitored on an ongoing basis. When pricing assumptions prove to be inaccurate, changes in product language, rate structure, or UW may be needed for future sales
4. Govt influences – for example the expansion of the social security disability program in the 1970s affected DI insurers. Regulatory and tax changes can also impact DI insurance

Question 5

Areas that participate in the product development process (21)

Answer 5

1. Sales and marketing – closest to the consumer and competition, so good source of product ideas and competitive info
2. Other home office disciplines
   a. Actuarial – must determine how it’s to be priced and what safeguards may be necessary to develop competitive rates
   b. UW – must determine whether new UW approaches are necessary
   c. Claims – must determine what new risks and factors it will face in administering claims
3. Data processing and systems – must be involved early since new products may require substantial modification to existing systems. Timely ID of potential issues may reduce project costs
4. Legal – some product ideas may present special legislative and regulatory problems, and the attorney may be able to offer alternative approaches or solutions that avoid problems in state approval
5. Investments – the significant impact of investment returns increases the importance of this function

Question 6

Types of DI claim experience studies (22)

Answer 6

1. A/E morbidity – this is the most preferable method of examining DI experience, but there is often not enough data for morbidity studies. Morbidity consists of:
   a. The rate of disability - # of disabled lives/1000 of exposure
   b. The rate of recovery – measures length of disability. # of disabled lives that will recover at different points in time/1000 of disabled lives
2. Loss ratios – due to limited amount of data, most studies are based on claims ratios:
   a. Cash claims ratio – claims dollars paid out divided by earned premiums
   b. Incurred claims ratio (preferred) – claims + ALR + claims reserve, divided by earned premiums

Question 7

Parameters to consider in a DI claims or persistency study (23)

Answer 7

1. Occupation class – there are significant differences in morbidity and UW approaches from one class to another
2. Occupation – each class is made up of many occupations, and each may perform somewhat differently based on socioeconomic trends
3. Policy form – a study by policy form is needed to determine whether pricing assumptions were correct for new forms
4. Extra benefits – some optional benefits (such as cost of living) require significant reserves
5. Age – changes in medical treatment and technology will affect age experience
6. Duration – due to wear off of UW selection, LR will be higher on older blocks of business
7. Elimination period – changes in experience may occur at one elimination period and not at another
8. Benefit period – to age 65 and lifetime benefits may affect the election of early retirement
9. Indemnity (benefit amount) – some studies have shown that the larger the indemnity, the poorer the experience
10. Income – studies have shown that higher replacement ratios lead to higher morbidity
11. Geography – densely populated areas may have higher morbidity than less populated areas
12. Agent and agency – data by agent can provide info on the ability of the agent to select good risks
13. Sex – higher morbidity for women has been demonstrated at least up until the mid-50 age group
14. Mode of premium payment – the annual premium payment mode generates more favorable experience, while quarterly mode is the least favorable
15. Smoking status – nonsmokers have lower disability costs
16. Combos of above – to determine interactions