Objective 1 Flashcards
Types of antiselection
- External - as person is first becoming insured
- Internal - while the person is insured
a) Buydown effect - upon rate increase, some insureds switch to lower cost plans. Actual premium increase is less than expected
b) Premium leakage - unhealthy individuals less likely to switch. Claim cost reduction not as much as premium reduction - Durational (cumulative) - as people make decisions about whether to lapse
Mechanisms for controlling external antiselection
- Individual underwriting before issue
- Pre-existing condition limitations
- Requiring an enrollment mechanism that doesn’t permit antiselection (i.e., minimum participation percentages for associations)
Tools used in the underwriting process
- Individual application
- Attending physician statement
- Commercial databases (i.e. MIB)
- Internal data (i.e. prior applications and claims)
- Telephone interviews
- Inspection reports
- Lab testing
- Medical exams (expensive - uncommon for medical covg)
- Tax returns
- Pre-existing condition provisions
Actions available to the underwriter
- Offer full coverage w/ no restrictions
- Decline coverage
- Offer coverage at a higher premium (temporary or permanent)
- Offer a standard policy with an exclusion rider
- Offer a different policy than the one applied for (substandard risk pool)
- Offer a different benefit plan than the one applied for (longer elimination period or shorter benefit period)
Criteria for selecting claims to investigate
- Timing - don’t investigate beyond time liming for rescinding
- Conditions - certain conditions can’t be pre-existing
- Size - don’t investigate if cost of investigation > cost of claim
- Sentinel conditions or procedures - related to others that lend selves to antiselection (HIV)
Situations in which the CAST model does not work well
- First 3-4 durations: apply additional underwriting selection factors
- Later durations: choose a higher k2 and recalibrate
- Severe and volatile rate spiral: stronger terms such as
ShockLapse = [RateIncrease - Trend] / [(RateIncrease - Trend) + (1 + Trend) / EF]
EF = elasticity factor; higher for healthy than unhealthy lives
Uses of health insurance financial models
- Pricing
- Reserving
- Monitoring results
- Solvency testing
- Financial forecasting
- Actuarial appraisals
Essential characteristics of a good model
- Reliable accuracy
- Suitability for use
- Appropriate precision
- Sensibility
- Effectively communicated
Steps in building a forecast model
- Choose basic structure
a) Tools: spreadsheets, DB models, sequential programs
b) Model types: asset share, reserve development - Choose info to be carried (depends on purpose)
- Choose assumptions and build prototype projection
a) Starting values and assumptions built in
b) Prototype cell defined, then projected to end of forecast period - Extending the prototype
- Validating the model (separate list)
- Documenting the model
- Designing output / communicating results
Methods for validating forecast models
- Starting values compared directly to actual values for that year
- Year to year changes compared to historical results
- Model results checked for reasonableness by people familiar with the business
- Stress testing
Assumptions needed for forecasting
- Lapse
- Mortality
- Claim costs
- Expense
- Profit
- Model office
Bases used as expected amounts for actual to expected analysis
- Original pricing assumptions
- Profit target
- Current pricing
- Tabular (for DI or LTC)
Types of reserves in disability income insurance
- Active life reserve (for level-premium policies)
2. Disabled life reserve (cover disability claim and its projected length)
Factors that stimulate product development for disability income
- Responding to the competition
- Consumer demands
- Claims experience
- Governmental influences
Areas that participate in the product development process
- Sales and marketing
- Other home office disciplines
a) Actuarial
b) Underwriting
c) Claims - Data processing iand systems
- Legal
- Investments
Types of disability income claim experience studies
- Actual-to-expected morbidity: consists of
a) Rate of disability
b) Rate of recovery - Loss ratios: due to limited data, more common:
a) Cash ratio: paid claims over earned premium
b) Incurred claims ratio (preferred): (claims + active life reserve + claims reserve) / earned premium
Parameters to consider in a disability income claims or persistency study
- Occupation class
- Occupation
- Policy form
- Extra benefits
- Age
- Duration
- Elimination period
- Benefit period
- Indemnity
- Income
- Geography
- Agent and agency
- Sex
- Mode of premium payment
- Smoking status
- Combinations of above
Considerations in establishing morbidity assumptions for LTC
- Data sources (insured best, but more population-based exists, needs to be adjusted)
- Integration of coverages
- Reinstatements
- Transfers
- Coordination with other coverage (must coordinate with Medicare)
- Pre-existing requirement
- Level of care/charge levels
- Area
- Policy options and benefit triggers
- Age/gender
- Marital status
- Morbidity improvement
- Underwriting
- Marketing (broker/career agents)
- Claim administration (care mgmt)
- Reinsurance
- Regulatory considerations (moderately adverse)
Considerations in pricing LTC
- Morbidity (list)
- Investment earnings
- Expenses (excl profit) - non-comm 13-18%, first year comm very high
- Voluntary lapses
- Mortality - 1994 GAM. Many actuaries feel rates are too high
- Surplus strain / reserve
- Profit - takes 7-10 years to emerge
- Loss ratio requirements - most states 60% min ind. NAIC model reg requires cert of adeq under moderately adverse exp instead
Loss ratio calculation approaches for LTC
Very different results due to significant investment income
- PV of paid claims to collected premiums (lowest)
- PV of discounted incurred claims to earned premiums (second lowest, required by most states)
- PV of undercounted incurred claims to earned premiums (investment income on claim reserve)
- PV of discounted incurred claims + PV of change in policy reserve divided by PV of earned premiums (investment income on policy reserve but not claim reserve)
- PV of undiscounted incurred claims + PV of change in policy reserve divided by PV of earned premiums
Medicare Supplement pricing assumptions
- Morbidity
- Mortality (not significant assumption)
- Persistency
- Investment earnings
- Selection factors / underwriting
- Age / sex distribution (mostly turning 65)
- Smoker vs non-smoker (if vary rates)
- Area factors
- Expenses and taxes
- Other considerations (modal factors / policy fees)
Steps for developing critical illness incidence rates
- Start w/ general population age-specific incidence rates
- Adjust to fit condition definitions in policy
- Apply applicable trends
- Adjust to insured population (using insured/pop mortality ratio)
- Segment smoker/nonsmoker (using mortality)
- Create select and ultimate rates (using mortality)
- Compare to available insurance experience and adjust as necessary
Types of critical illness policies
- Standalone
a) Basic - cancer, heart attack, stroke, sometimes coronary artery bypass graft
b) Enhanced - 15-20 additional conditions, 30% higher premium - Accelaration - with life insurance
a) Alternative - partial accelaration. Portion payable on critical illness, rest remains as death protection only
Definition of critical illness insurance
Critical illness is an insurance product that pays the face amount when:
- Insured is diagnosed with a condition covered in the policy. Diagnosis made by doctor, supported by objective evidence.
- Condition meets the definition in the policy, not excluded by any other policy provision.
- Insured survives for a specified period after diagnosis (usually 30 days).
Conditions covered by critical illness insurance
Basic:
1. Life-threatening cancer
2. Heart attack (may exclude mild heart attack right after angioplasty)
3. Stroke (measurable neurological deficit persisting 30 con sec days)
4. Coronary artery bypass graft (similar with no graft not covered)
Enhanced
1. MS
2. Kidney failure w/ dialysis
3. Major organ translpant
4. Cardiovascular (heart valve replacement, aortic surgery)
5. Degenerative (motor neuron, Parkinson, Alzheimer)
6. Brain (coma, benign brain tumor)
7. Head (blindness, deafness, loss of speech)
8. Body (loss of limbs, paralysis, major burns, occupational HIV)
9. Loss of independence (some companies)
Optional product features on critical illness policies
- Return of premium on death
- Return of premium on expiry
- Return of premium on surrender (increasing percent)
- Face amount increasing (COLA) or decreasing (loan protection)
- Partial benefits (10-25%) payable for some non-life threatening excluded conditions
- Assistance benefit
- Guarantee premiums won’t increase
Tools used for financial management
Informational 1. Financial analysis (historical) 2. Modeling (future) Risk transfer options 1. Reinsurance 2. Acquisitions of business
