Module 5 Flashcards
Identify factors impacting which plan funding arrangements are available to a plan sponsor.
A group benefits plan sponsor has different options for managing its associated financial risk or liability. Funding arrangements available to a plan sponsor depend on the size of the plan, the volume of premium or deposits, the type of benefits, the volume of claims, current regulatory requirements and tax considerations, the degree of financial risk the plan sponsor can assume and the insurer’s willingness to take on (i.e., underwrite) the particular risk associated with the plan.
Distinguish between funding arrangements and pricing.
The funding arrangement of a group benefits plan describes who assumes the underlying risk of paying claims and expenses. It reflects the plan sponsor’s basic decision of whether to insure or self-insure all or some of its group benefits. When the funding arrangement includes sharing risk with an insurer, the plan is insured. In that case, the insurer uses a process called underwriting to evaluate the risk of the plan, decide whether to insure it and set a price for the plan. Pricing involves determining the cost of expected claims plus administration charges, then establishing premium rates based on these projected costs.
Distinguish between factors considered by a plan sponsor to evaluate funding arrangements and factors considered by an insurer.
When choosing a plan funding arrangement, plan sponsors consider:
(a) Assumption of financial liability or risk, i.e., who assumes financial responsibility for paying a plan’s eligible claims costs (the plan sponsor or an insurer)
(b) Financial accountability for experience results, i.e., who shares in the financial results of the plan if there are favourable results (i.e., a surplus with premiums exceeding claims cost) or unfavourable results (i.e., a deficit with claims costs exceeding premiums or deposits).
An insurer considers the above factors as well as the basis of rate determination on plan renewal (i.e., whether the group’s claims experience directly influences rates set at contract renewal) as it’s ultimately the insurer that determines which funding arrangement options will be available to a particular plan sponsor.
Describe how the level of financial risk assumed by a plan sponsor changes as it moves from fully insured funding to fully self-insured
From a plan sponsor’s perspective, assumption of risk falls along a continuum, with a fully insured plan at one end (full transfer of financial risk from the plan sponsor to an insurer), a self-insured plan at the other end of the continuum (full acceptance of financial risk by the plan sponsor) and several possible variations of risk sharing between the plan sponsor and insurer in between.
Distinguish between a fully insured plan and a self-insured plan
In a fully insured plan, the insurer assumes full liability for all claims costs and plan expenses under the plan, and there is no financial risk to the plan sponsor. The plan sponsor’s financial liability is limited to the premiums payable to the insurer for coverage, and its liability does not increase during the current contract year even if premiums are insufficient to cover claims and plan expenses. The insurer holds the ultimate risk for premium adequacy. All claims incurred while the plan is in force are the liability of the insurer even if the plan sponsor terminates the group contract and the insurer pays these claims after contract termination (i.e., when the plan sponsor is no longer paying premiums).
In a self-insured plan, the plan sponsor assumes all risk and is solely liable for all claims costs, related plan expenses and legal aspects of the plan; there is no insurance.
Explain financial accountability for experience results in the context of insured plan funding and how experience results are determined.
Financial accountability for experience results refers to the treatment of an insured group plan’s premium surplus or deficit (i.e., who shares in the surplus or deficit). The insurer prepares an annual financial accounting to determine whether the plan produced a premium surplus or a deficit during the reporting period. The reporting period corresponds to the most recent contract year. The insurer normally prepares the financial report 60 to 90 days after the contract anniversary date or the date it received the last premium payment for the period.
In general terms, the year-end balance is the sum of plan revenues (premiums the plan sponsor paid to the insurer plus any interest credits on premiums) less claims charges (paid claims, change in reserves set aside to pay future claims, pool charges for arrangements made to limit the plan sponsor’s financial exposure to higher-than-expected claims and conversion charges if an individual insurance policy is issued under a conversion provision), retention expenses (nonclaims costs associated with administering the plan), interest charges and taxes. The financial information reported to the plan sponsor depends upon the specific type of funding arrangement.
Describe the key characteristics of the insured nonrefund arrangement
Under an insured nonrefund (fully insured) arrangement, the insurer holds the ultimate risk for premium adequacy. If the claims experience is higher than expected and the premiums are not sufficient to cover the claims paid, the plan sponsor’s risk and liability are limited to the premium amount. Conversely, if the claims experience is lower than expected and premiums exceed the claims paid, the insurer keeps the surplus.
Discuss when it is appropriate to use a fully pooled rating methodology and provide examples of benefits.
Fully pooled rating is the most appropriate for types of benefits where the incidence of claims is low but the dollar amount of each claim can be very high. This type of rating is also appropriate when the past claims experience does not provide a credible basis for setting premium rates (i.e., the past claims experience of the group is not representative of future claims experience of the group).
Accidental death and dismemberment (AD&D) and critical illness (CI) benefits have lower claims incidence and are typically fully pooled, regardless of group size. Life insurance and long-term disability (LTD) benefits also have lower claims incidence and can have high claims amounts. These benefits are usually fully pooled unless the group is large enough for the insurer to consider its claims experience in the renewal rating. Weekly indemnity/short-term disability (WI/STD), health care and dental benefits are usually fully pooled only for very small groups.
Explain the basis of premium rate renewal for an insured plan underwritten on a fully pooled basis.
An insurer amalgamates its claims experience for its entire block of business into one pool using the average claim incurred for each grouping of age, gender, occupational class and geographical location for similarly sized groups for a particular group insurance product. This rating method enables an insurer to determine a common or pooled rate that provides a more meaningful basis for setting premium rates. This pooled rate is called the insurer’s manual rate.
A distinguishing characteristic of fully pooled rating is that the past experience of each individual group plan does not affect the plan’s premium rates on contract renewal. If a benefits plan has unfavourable experience in one contract period (usually 12 months) but most groups in the pool have favourable experience, premium rates for the former could decrease or stay the same for the following contract period. Conversely, premium rates might increase for a group with favourable experience if the rest of the pool has unfavourable experience. Under fully pooled underwriting, rate changes also reflect changes in a particular group plan’s demographic composition.
Explain the basis for premium rate renewal for an insured plan underwritten on a prospectively rated (or experience-rated) basis.
A prospectively rated plan’s premium rates are determined in whole or in part by the group’s own claims experience. “Prospectively rated” refers to using past claims experience to predict future claims experience. If a group benefits plan has favourable claims experience, the plan sponsor will enjoy lower rates with prospective rating. Conversely, prospective rating allows insurers to increase premium rates for plan sponsors with unfavourable claims experience.
Explain why insurers normally have minimum requirements for group size and premiums when determining the rating methodology to be used to set premium rates
Insurers normally have minimum requirements for group size and annual premium amounts when determining whether to apply fully pooled rating or prospective rating. These requirements vary by line of benefit and relate to the volatility or predictability of the event that triggers a benefit claim. The more unpredictable the event, the larger the group size and/or premium requirement.
For life insurance and LTD benefits, the minimum number of lives is typically higher than that required for health and dental benefits.
Outline the advantages and disadvantages of the insured nonrefund funding arrangement
The main advantage of an insured nonrefund arrangement is that the plan sponsor’s risk is limited to the premiums due. The insurer retains financial and legal liability for the plan. With respect to legal liability, the insurer is legally liable for the payment of claims, and in the case of any legal dispute, the insurer is the named party. An additional advantage to the plan sponsor is that industry drug pooling through the Canadian Drug Insurance Pooling Corporation (CDIPC) can help mitigate the adverse premium cost impact of high individual drug claims at the annual renewal.
For plans with positive experience, a disadvantage is that the plan sponsor does not participate in positive financial results. If the plan is fully pooled, adverse pool experience can negatively impact renewal rates even if an individual plan performs well.
Describe an insured refund arrangement.
An insured refund arrangement is similar to an insured nonrefund arrangement; however, its distinguishing characteristic is that the plan sponsor shares in the financial results of the plan. “Refund” refers to the plan sponsor receiving a refund if there is a surplus at the end of the contract year.
Describe the financial accounting completed by insurers for plans funded using the refund accounting method.
The annual financial accounting report details paid premiums, claims charges (including changes in reserves), expenses (including applicable taxes), and interest credits or charges. The basic formula for deriving the year-end balance is paid premium minus claims charges minus expenses plus or minus interest. The resulting balance is called a surplus if positive and a deficit if negative. The reporting period corresponds to the most recent contract year.
Describe the claims fluctuation reserve (CFR) in a refund accounting plan.
A CFR (also called a premium stabilization reserve/fund or rate stabilization reserve/fund) is a fund the insurer establishes from plan surpluses to offset a future deficit. The insurer allocates all or part of the surplus a plan generates in a favourable year to the CFR. While the CFR funds belong to the plan sponsor, the insurer has first call on the funds if there is a deficit. Once the financial accounting is completed, only funds in the CFR automatically go toward offsetting a deficit. This gives the insurer some protection against shortfalls resulting from unfavourable experience and mitigates the possibility of the plan terminating in a deficit position.
