Module 9 - Establishing Renewal Rates for Group Insurance

Question 1

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

Answer 1

Insurers normally guarantee premium rates for one contract year, though insurers may initially guarantee rates for life insurance, accidental death and dismemberment (AD&D) and long-term disability (LTD) for two or more years, particularly for large groups. When the rate guarantee is longer (e.g., two or more years), the insurers may include an added margin in the rates for experience fluctuation so that it can maintain its minimum continuing capital and surplus requirements.

Question 2

Identify the objective of the renewal rating process.

Answer 2

An insurer’s objective for the renewal rating process is to set a group’s future premium rates at a level that supports its projected claims charges and expenses.

Question 3

Describe the components of projected claims charges insurers use in the experience analysis of life and LTD benefits, health care benefits, dental benefits and weekly indemnity/short-term disability (WI/STD) benefits.

Answer 3

(a) Life and LTD benefits:
Paid claims plus the change in incurred but not reported (IBNR) reserves, life waiver of premium reserves and disabled life reserves over the period of experience used in the analysis

(b) Extended health care benefits: Paid claims plus the change in IBNR reserves over the period of experience used in the analysis. Insurers also apply a cost trend factor to determine projected claims charges.

(c) Dental benefits: Paid claims plus the change in IBNR reserves over the period of experience used in the analysis. Insurers also apply a cost trend factor and a fee guide adjustment factor to determine the projected claims charges.

(d) WI/STD benefits: Paid claims plus the change in IBNR reserves over the period of experience used in the analysis.

Question 4

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

Answer 4

Depending on group size and the amount of available historical claims experience, insurers may use a group’s experience to determine all or part of the renewal rate. The degree to which experience is used is called the “credibility factor.” Insurers have their own formulas to determine this factor. For groups with a credibility factor less than 100%, the renewal rate is a blended rate comprised of the manual rate and the experience rate. The blended premium rate is calculated as:

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

For refund accounting benefits, insurers estimate the projected financial position for the end of the current contract period if the actual financial statement for this period is not available. If insurers project that the group will end the current year in a deficit position that they cannot recover from the claims fluctuation reserve (CFR), they can implement a deficit recovery program. If the deficit recovery program takes the form of a margin in the rates, renewal rates increase accordingly.

Question 5

Identify reasons a plan sponsor might cancel its group insurance contract. (4)

Answer 5

Reasons a plan sponsor may cancel a group insurance contract include:

(a) Renewal rates are uncompetitive.

(b) Service has not met expected standards.

(c) Funding method is no longer appropriate for the plan sponsor/plan.

(d) Plan sponsor is experiencing financial difficulties.

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

Question 6

Identify reasons an insurer might cancel a group insurance contract. (4)

Answer 6

Reasons an insurer may cancel a group insurance contract include:

(a) The plan sponsor’s plan no longer meets the insurer’s minimum group size.

(b) The insurer is no longer underwriting specific benefits.

(c) The plan’s claims experience trend has been poor.

(d) There is a new risk in the plan that the insurer does not want to insure.

Question 7

Describe the implications for the plan sponsor should an insurer decide not to renew its group insurance contract.

Answer 7

When an insurer decides not to renew the group insurance contract, the insurer usually provides more than 31 days’ notice, since the plan sponsor must find an alternative insurer. 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 8

Identify the information insurers are expected to provide to plan sponsors on every renewal of nonrefund accounting or refund accounting plans. (11)

Answer 8

For nonrefund accounting or refund accounting plans, insurers are expected to provide the following information on every renewal:

(a) Paid premiums

(b) Claims paid

(c) Changes in reserves

(d) Any pooling charges

(e) Expense levels or target-loss ratios for nonrefund accounting plans

(f) Breakdown of retention expenses for refund accounting plans

(g) Current year and previous year manual rates for plans that are not fully credible

(h) Changes in plan member demographics

(i) Financial statement projections showing expected surplus or deficit for refund accounting plans

(j) Justification for renewal action, including breakeven calculation

(k) Current and proposed renewal rates.

Question 9

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

Answer 9

In determining renewal rates, insurers examine:

(a) Changes in group demographics

(b) Claims experience during the past year

(c) Credibility factor of the group’s experience

(d) Any external factors that might affect any of the benefits.

Question 10

Explain how insurers reflect the demographics of the group in the renewal rating process. Use the ratio of males to females and age to illustrate.

Answer 10

To determine renewal rates, insurers require certain plan member demographic information from the plan sponsor (called “renewal data”). For example, for life insurance and LTD benefits, insurers confirm the age and sex of plan members covered under the group. Insurers compare the prior year’s plan member data with the renewal data to identify any differences in the composition of the group. Conversely, if a significant decrease in the ratio of males to females is the only change, this will likely mean a lower manual rate for life insurance because of the lower mortality rate associated with females, as well as a higher manual rate for LTD because of the higher morbidity rate for females.

If a significant increase in the ratio of males to females in a group is the only change, this will likely mean a higher manual rate for life insurance because of the higher mortality rate (frequency of death claims) associated with males, as well as a lower manual rate for LTD because of the lower morbidity rate (frequency of disability claims) for males.

Claims incidence for most group insurance benefits increases with increased age. A decrease in the average age of the group affects group demographics and will likely lower the manual rates for some benefits. This can occur if a plan sponsor acquires a business with a younger workforce or if a significant number of plan members retire. Conversely, an increase in the average age of the group will likely increase the manual rates for some benefits. This can occur if a plan sponsor has high turnover among its younger employee cohort or is experiencing difficulty recruiting for entry-level positions that typically attract younger people.

Question 11

Outline which benefit rates are highly impacted by the average age of the group.

Answer 11

Benefit rates that are highly impacted by the average age of the group are life, LTD, WI/STD and extended health care.

Question 12

Explain how a change in earnings levels impacts a group renewal rating, and provide an example.

Answer 12

If at least one benefit is based on plan members’ earnings, insurers require the plan sponsor to provide updated earnings data. For these benefits, a change in earnings can impact the premium rate. Since the coverage amounts change, the manual rates may also change, changing the renewal rate. For example, if earnings increase for older employees, their coverage amounts also increase, and the renewal rate is expected to increase.

Question 13

Describe the paid claims-loss ratio.

Answer 13

The paid claims-loss ratio of a group for any given period is the ratio of paid claims to paid premiums for that period. Note that some insurers calculate this ratio using the ratio of paid claims to billed premiums.

Question 14

Describe the incurred claims-loss ratio and target-loss ratio.

Answer 14

The incurred claims-loss ratio is the ratio of incurred claims (paid claims plus the change in life waiver of premium reserve, disabled life reserve and incurred but not reported (IBNR) reserve and, if used, interest credit on reserves) to paid premiums.

The target-loss ratio is effectively equal to paid premiums less retention.

Question 15

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

Answer 15

To determine the required experience adjustment, insurers factor retention or expense charges into the rating by dividing the incurred claims-loss ratio by the target-loss ratio and subtracting one.

An incurred claims-loss ratio of 89% and projected retention charge of 15% results in a required experience adjustment of +4.7%, calculated as:

Incurred claims-loss ratio 89%
Target-loss ratio 85%
Required experience adjustment +4.7%
(0.89 ÷ 0.85) - 1 = 1.047 - 1 = .047

Question 16

Assume that the current life rate is $0.110, a group’s life experience is 80% credible, the experience adjustment rate is +15% and the manual rate is $0.220. Calculate the blended premium rate and the required premium rate adjustment.

Answer 16

The blended premium rate is calculated as:

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

= (0.80 x $0.110 x 1.15) + [(1 - 0.80) x $0.220]

= $0.101 + $0.044 = $0.145

The required premium rate adjustment is the blended rate relative to the current rate:

= ($0.145 ÷ $0.110) - 1

= .318 or +31.8%

Question 17

Describe economic/legislative and economic factors that insurers consider in the renewal rating process

Answer 17

Insurers consider:

(a) Regulatory/legislative factors. Changes in taxation can impact renewal rates for all benefits. Changes in government-sponsored health care plans can also impact renewal rates.

(b) Economic factors. Examples are inflation, interest and employment rates. These factors affect renewal rates for some benefits more than others. Extended health care renewal rates, specifically drug and hospital premium rates, normally consider inflation, which may have a different impact depending on geographic location and plan design. Insurers consider plan design features, particularly deductibles, given that flat dollar deductibles can erode over time due to inflation in health care costs (called “deductible erosion”). For dental benefits, insurers adjust rates for plans based on the current provincial/territorial dental fee guides, which are adjusted annually. Insurers also apply cost trend factors, which consider claims utilization patterns to health care and dental rates. For life and LTD, insurers may apply economic adjustment factors to the renewal rating to reflect, for example, increased claims coincident with periods of high unemployment.

(c) Other factors insurers consider when finalizing renewal rates include the overall profitability of the group benefits plan, the relationship with the plan sponsor/advisor and past experience with respect to deficit recovery.

Question 18

Explain the purpose of a financial accounting

Answer 18

The purpose of the financial accounting is to determine the financial position of the plan at the end of the contract period. Insurers carry out financial accounting only for refund accounting plans and for some self-insured plans with an administrative services only (ASO) agreement with an insurer or a third-party administrator (TPA).

Question 19

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

Answer 19

The insurer prepares an annual financial accounting to determine the experience results, i.e., 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 financial report is normally prepared 60 to 90 days after the contract anniversary date.

The formula used to derive the year-end balance for a group benefits plan is:
Paid Premiums - Claims Charges - Retention + Interest = Year-End Balance.

Question 20

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

Answer 20

Claims charges used in the financial accounting of a refund accounting plan include:

(a) Paid claims (claims for which payment has been issued for the accounting period) less any claims that exceed the pooling level, if applicable

(b) Changes in reserves, including IBNR reserves, life waiver of premium reserves, and LTD disabled life reserves

(c) Pool charges for large amount pooling and/or aggregate stop-loss pooling and/or duration pooling. There are various ways in which insurers reflect pool charges. They can be expressed as separate premium rates, as a percentage of gross premiums or included in the retention charges.

(d) Life conversion charges.

Question 21

Identify costs included in the retention component in the formula used to derive the year-end balance when completing a financial accounting of a refund accounting plan.

Answer 21

Retention includes:

(a) General administration charges

(b) Claims administration charges

(c) Risk charges

(d) Profit charge (some insurers include this in the general administration charge or other expenses such as the risk charge)

(e) Premium tax

(f) Advisor commissions, if any, and if not included in general administration

(g) Direct disbursements, such as printing charges

Question 22

Explain what is included in the interest component in the formula used to derive the year-end balance when completing a financial accounting of a refund accounting plan.

Answer 22

Interest may be a credit or a charge and includes:

(a) Interest on reserves, including IBNR reserves, claims fluctuation reserves (CFRs), life waiver of premium reserves and LTD disabled life reserves

(b) Interest on cash flow (paid premiums minus paid claims minus retention).

Question 23

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

Answer 23

Refund accounting plans are often cross-rated for surpluses or deficits. This means that a surplus produced under one benefit can be used to offset a deficit produced under another benefit. A transfer of funds from the CFR any deficit that remains after the inter-benefit transfer of surplus.

If the CFR is insufficient to cover the deficit, the plan sponsor and insurer may enter into a deficit recovery arrangement. This may be done through a lump-sum payment, payments amortized over a defined period and/or through a margin in the renewal premium rates for partial or total deficit recovery.

Question 24

Define the claims fluctuation reserve (CFR) and identify who owns it.

Answer 24

The CFR (also known as a “premium stabilization reserve/fund” or “rate stabilization reserve/fund”) is a fund the insurer establishes in a refund accounting plan from plan surpluses to offset potential future deficits. The insurer allocates all or part of the surplus a plan generates in a favourable year toward funding the CFR. This gives the insurer some protection against shortfalls resulting from future unfavourable experience and the possibility of the plan terminating in a deficit position.

While the plan sponsor owns the funds in the CFR, the insurer determines how the funds are used. The insurer refunds the CFR to the plan sponsor only on plan termination (less the final accounting of claims charges and expenses). In the interim, the insurer holds the CFR in a restricted account and credits the plan sponsor with interest earned on the funds.

Question 25

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

Answer 25

A self-insured plan with an ASO arrangement has similarities to a refund accounting plan, depending on the plan sponsor’s payment option. For billed in advance (budgeted ASO) arrangements, 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 plans using a billed in arrears payment option (i.e., claims and expenses are reimbursed to the insurer or TPA through a payment in the following month), the insurer/TPA prepares monthly statements.

Question 26

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

Answer 26

An insurer and/or advisor may propose the following alternatives:

(a) Introduce or increase cost sharing through plan member contributions and/or coinsurance and deductibles

(b) Introduce cost management features on extended health care and dental benefits such as dispensing fee caps on drug and generic substitution of drugs, or reduced frequency of dental oral examinations

(c) Reduce benefits through lower benefit maximums or shorter benefit durations for disability benefits.