Objective 2 - Manual Rates

Question 1

Components of gross premiums

Answer 1

1. Claim costs
2. Admin expenses - costs of designing, developing, underwriting, and administering product, and allocation of overhead. Often much higher in year 1
3. Commissions and other sales expenses - incl. special bonuses, incentives, advertising
4. Premium tax
5. Other taxes and assessments - fed and state income, PPACA assessments
6. Risk and profit charges - depends on degree of risk, capital allocated, and expected return
7. Investment earnings - typically credited based on assets held

Question 2

Considerations in developing administrative expenses

Answer 2

1. How expenses are allocated to product - methods:
   a) Activity based - according to some measure of use (i.e., postage can be charged to function that generated mail)
   b) Functional - how expenses are split by LOB for new/renewal (survey employees)
   c) Multiple - combination
2. How admin expenses should be allocated to groups - differentiate between first year / renewal (list)
3. What the competition uses in pricing - adjust to match others in marketplace

Question 3

Types of bases used for allocating expenses

Answer 3

1. Percent of premium
2. Percent of claims
3. Per policy
4. Per employee (certificate)
5. Per claim administered
6. Per case (for very demanding groups, expenses charged directly to case)

Question 4

Common rating characteristics included in manual rates for group health insurance

Answer 4

1. Age
2. Gender
3. Health status
4. Rating tiers (list)
5. Geographic factors
6. Industry codes
7. Group size
8. Length of premium period

Question 5

Common rating tiers for group health insurance

Answer 5

1. One tier: composite
2. Two tier: employee only, family
3. Three tier: Ee, Ee + 1 dependent, family
4. Four tier: Ee, Ee + 1 dependent, Ee + children, family
5. Five tier: EE, ES, E + 1C, E + Children, EF

Question 6

Considerations in developing a manual claim table for life insurance

Answer 6

1. Two approaches
   a) Manual premium tables - calculate manual premium, adjust for group size. Adj reflects margin, profit, and expenses approp for group size, rel to avg in table
   b) Manual claim tables - calculate manual claim rate, then add margin, profit, and expenses
2. Data sources - SOA studies, industry mort tables, pop stats, or own company experience (best if avail)
3. Changes in mortality - exp future mort impr
4. Reinsurance - net cost s/b factored into table or expenses
5. Conversions to ind life policies - create severe antiselection, s/b factored into rates
6. Manual adj made for group-specific traits (list)
7. Rates for group based on age/gender mix, but groups typically charge composite rate to all Ees

Question 7

Uses of general population data for pricing life insurance

Answer 7

1. Estimating annual mort impr
2. Determining ratios of mort by age bracket
3. Comparing male and female mort
4. Developing rates for non-working population (very young and very old)

Question 8

Manual claim table adjustments for group life (or group rating characteristics for life insurance)

Answer 8

1. Disability factors - adj if different waiver of prem approach
2. Effective date adj - if center date is not 7/1
3. Industry factors - generally SIC codes
4. Regional factors
5. Lifestyle factors (pct smokers, etc)
6. Marketing considerations - added charges for rate guarantees
7. Contribution schedules - 5% discount if Er pays all (reduces antiselection)
8. Case size factors and volume adj (lg groups lower mort or exp)
9. Plan options - optional benefits / Ee choice creates antiselection

Question 9

Types of living benefits for life insurance

Answer 9

Benefit (called accelerated death benefits) pays portion of face amt prior to death, with remaining paid at death

1. LTC benefits - monthly 2% of face, beginning with confinement to NH
2. Critical illness benefits - typically 25% of face amt upon occurrence of listed disease, i.e. stroke or cancer
3. Terminal illness benefit - 25-50% of face amt when insured has been dx with terminal illness and less than 6 (or 12) months to live

Question 10

Steps in developing claim costs for use in a rate manual

Answer 10

1. Collect data - at least 12 months to avoid seasonality. Best source is own company exp
2. Normalize the data for important rating variables (list)
3. Project exp period costs to rating period

Question 11

Important rating variables when normalizing data for use in the rate manual

Answer 11

1. Age/gender - may have separate for major svc cat or plan types (i.e. HDHP)
2. Geographic area - adj to reflect one specific area
3. Benefit plan - adj to reflect common benefit plan (often richest)
4. Group characteristics - should represent “average group” wrt industry, group size, etc.
5. UM programs - adj for changes
6. Prov reimb arrangements - adj for changes
7. Other risk adjusters (based on claim, dx, enc, or Rx data) - may eventually become primary method of risk adj

Question 12

Methods of adjusting manual rates for specific benefit plans

Answer 12

1. CPDs - impact of ded, coins, MOOP, annual benefit max

2. Actuarial cost models - build est total claim costs by developing net claim cost by TOS and summing

Question 13

Data sources for estimating disability claim costs

Answer 13

1. Company’s own data is best if reliable and credible
2. Intercompany experience studies
3. Rate filings of competitors
4. Research of gov’t and business publications
5. Data from consulting firms and reinsurers

Question 14

Types of disability income experience studies

Answer 14

1. Calendar year loss ratio study
   a) Ratio of incurred claims to earned premium for CY
   b) Incurred claims calc as paid claims plus inc in rsv
   c) May not provide clear picture of hist trends because results impacted by rsv changes
2. Incurral year loss ratio study
   a) Ratio of incurred claims to earned prem for given incurral year
   b) Incurred claims calc as PV of claim pmts to date plus PV of current claim rsv
   c) Shows hist trends because full cost of claim attributed to year in which incurred
3. Study of actual-to-expected incidence or termination rates - ratios of company’s actual claim incidence/termination to expected rates from published industry tables or company data

Question 15

Formula for disability income net monthly premium

Answer 15

1. Net monthly premium = IncidenceRate *
   Sum(Benefit_t * Continuance_t * InterestDiscount_t)
2. Summation runs for the entire length of the benefit period
   (offsets reflected -separate list)

Question 16

Group characteristics that impact disability income claim costs

Answer 16

1. Age/gender
2. Occupation - may need to adjust for
   a) Hourly vs salaried
   b) Blue / grey / white-collar
   c) Union vs non-union
   d) Commissioned sales personnel
3. Industry - for group, more appropriate to rate on industry than occ
4. Avg earnings per employee - claim costs decrease as avg earnings increase
5. Area - vary due to legal environment and general attitude/culture of area
6. Size of group - follow “U”-shaped curve, costs are higher for smallest and largest groups

Question 17

Data sources for developing dental claim costs

Answer 17

1. Own company data (best)
2. Outside databases - Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA “Survey of Dental Fees”
3. Consulting firms (manual containing util data)
4. Rate filings of other carriers
5. TPAs
6. Reinsurers

Question 18

Plan characteristics that impact dental claim costs

Answer 18

1. Covered benefits - plans often have missing tooth provision and limit replacement of dentures to once every 5-7 years
2. Cost sharing provisions - important because receiving proper dental care is very elective from insured’s POV. Deductibles, coins and copays, and max limits
3. Waiting period - to discourage individuals from enrolling one year to treat significant dental problems and dropping covg
4. Period of coverage - trend past experience. Do not assume same trend as medical

Question 19

Network and care management practices that impact dental claim costs

Answer 19

1. Provider reimbursement levels
   a) FFS reimb may be based on UCR
   b) PPO networks contract for reduced fees from limited number of dentists. Dentist may not bill above these levels
   c) Capitation is common in HMOs
2. Care management - depend on reimbursement method. Include pre-auth and self-management (for cap providers)

Question 20

Insured characteristics that impact dental claim costs

Answer 20

1. Age/gender - adults higher than children, females higher than males
2. Geographic area
3. Group size - smaller groups higher (adverse selection)
4. Prior coverage and pre-announcement - groups without prior covg will have high costs in first year; if plan is announced months in advance, problem is worse
5. Employee turnover - high turnover increases costs
6. Occupation or income - entertainers, professionals, and benefit-aware groups have higher costs
7. Contribution and participation - groups with less than 100% have higher costs due to antiselection. Level of participation inversely related to required contribution level

Question 21

Major effects of year 2000 changes in NAIC LTC Model Act

Answer 21

1. Requires disclosure of rating practices at time of application - e.g., statement that policy may be subject to future rate increases
2. Requires actuarial certification at time of initial rating - must include statement that initial rates are sufficient to cover costs under moderately adverse experience
3. Eliminates MLR requirements in initial filing
4. Places limits on expense allowances in event of rate increase - if increase requested, lifetime MLR must not be less than weighted avg of 58% of initial premium and 85% of premium increase
5. Requires reimbursement of unnecessary rate increases - could result if revised premium schedules are more than double initial rates
6. For policies in rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting
7. Authorizes commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums

Question 22

Major effects of HIPAA on LTC

Answer 22

1. Defined qualified plans
2. Clarified taxation of premium and benefits - established that qualified LTC insurance contract shall be treated as accident & health insurance contract for tax purposes
3. Standardized benefit triggers (list)
4. Allowed tax reserves to be calculated on one-year preliminary term basis for tax-qualified plans

Question 23

Major stakeholders in the group LTC policy design process

Answer 23

1. Employer group
   a) LTC is appealing because it complements other products (DI and life) and relative to medical is low-cost w/ stable pricing
   b) May not be able to offer guaranteed issue to all active employees, since could make premiums more expensive than similar individual policies
2. Insurance company
   a) Concerned with up-front acq costs, risk of low enrollment, and need to sell to both Er and Ee
   b) Costs vary sig by participation level, so this is key
3. Employees
   a) May not yet be aware of risk covered by LTC ins
   b) Concerned with sig cost, which may exceed cost of ind policies
4. Insurance brokers - have found group LTC ins provides open door to competitive life/DI markets

Question 24

Assumptions needed for a LTC pricing model

Answer 24

1. Voluntary lapses - much lower lapse than other types of health ins. Premiums sensitive to change in lapse, esp. w/ inflation protection
2. Mortality - most companies use 1994 Group Annuitant Mortality (94 GAM) table. Selection factors needed if UW is good
3. Morbidity - major vars impacting claim costs are:
   a) Marital status - costs lower for married individuals (built in caregiver)
   b) Gender - females higher ult costs than males
   c) Benefit trigger
   d) Area - util patterns vary by area
   e) Case management - companies w/ case manager have lower claims
4. Selection factors - reflect UW wear-off, depending on level of UW performed
5. Expenses - start-up expenses high rel to other types of business
6. Interest - investment rate on assets is key because of large reserves
7. Reserve basis - important considerations include level of margins, how margins are achieved
8. Other assumptions - avg daily benefit and premium mode
9. Profit - typically based on lifetime pre-tax, post-tax, ROI, or ROE

Question 25

Reasons for experience rating

Answer 25

1. Groups want it - at least those w/ good experience want prem to reflect
2. Insurer wants to quote and charge competitive premiums
3. Insurer wants to avoid antiselection (good groups to competitors, bad groups stay)

Question 26

Theoretical considerations in determining credibility levels

Answer 26

1. Coverages with low claim freq are more volatile and require larger exposure basis to be credible
2. Coverages w/ wildly varying claim sizes tend to be more volatile
3. Statistical confidence interval chosen by insurer
4. Historically, stat fluctuation considered to vary inversely w/ square root of number of claims or lives. So double credibility is 4x exposure
5. For cov w stochastically independent claims, longer experience periods can be used to increase exposure and credibility

Question 27

Practical considerations in determining credibility levels

Answer 27

1. Competitive pressures
2. Ability of administrative and mgmt areas to cope w experience rating
3. Trade off between cost of experience rating and gains in quantity and quality of new business
4. Effect on existing business of change in credibility level
5. Management philosophy regarding experience rating
6. Need for consistency among classes of business

Question 28

Steps in experience rating

Answer 28

1. Develop past claim experience - should be incurred for experience year (restated)
2. Use pooling methods (list) to dampen random statistical fluctuation
3. Calculate net premiums (exp claim cost)
   a) Calculate historical claim cost per exposure unit
   b) Trend historical exp to account for changes in claim costs - due to morbidity, mort, demog, bene, or antiselection
4. Calculate gross rates from net - apply retention load to net prem (list)
5. Final adjustment may be required when dealing w politically-sensitive policyholder. Be sure to know financial impact of changes
6. Plan choice considerations - when Ees can choose between HMO, PPO, and/or indemnity, often antiselection against indemnity
7. Small group considerations - recognize experience to some degree. May use one of:
   a) Formula-based methods (at least 10 lives) - initially assigned to a rate class and reassigned at renewal if experience differs by specified amount
   b) Re-underwriting method - look at outlier cases to see causes of bad experience to determine prospective rates

Question 29

Pooling methods

Answer 29

Regardless of method chosen, pooling charge must be applied to all groups being pooled to offset the avg cost of claim modifications made during pooling process

1. Catastrophic claim pooling - forgive large claims
2. Loss ratio or rate increase limits - cap on loss ratio used in pricing, rate increase proposed, or aggregate claim dollars charged
3. Credibility weighting - weight with expected incurred for entire pool
4. Multi-year averaging - combine several years of experience (may give more weight to recent years)
5. Combination methods - for instance, catastrophic pooling and rate increase cap

Question 30

Loadings on net premium (retention)

Answer 30

1. Expense loadings - usually largest part of retention
2. Deficit recovery charge (may make rates uncompetitive) - charged to specific policyholder to recover past losses
3. Termination risk charge - charged to everyone to finance (in advance) risk of groups leaving while in deficit position
4. Pooling charges - usually in net premium
5. Profit charge or contribution to free reserves - may be built into other assumptions
6. Investment income - may be credited (net of investment mgmt costs and taxes)
7. Explicit margin - reduces insurer’s risk
8. Charge to cover risk guarantees. Arises due to misestimation and trend risk

Question 31

Typical retrospective refund formula

Answer 31

Policyholder account balance = prior year balance + premium + investment earnings - charged claims - expenses - risk charge - increase in stabilization reserve - profit

1. Prior year balance - ending balance carried forward if not eliminated at prior year end
2. Premiums - may be adjusted for interest based on payment timing
3. Investment earnings - important for covg with sig reserves
4. Charged claims = paid claims + reserve increase - pooled claims + pooling charges + conversion claims + claim margins (may adj for credibility)
5. Expense charges typically vary by duration to allow recovery of acq costs
6. Risk charge covers risk that policyholder will terminate while in deficit position
7. Addition to PSR - to reduce risk of deficit on termination. Insurer may require certain level of reserve before surplus can be paid as exp fund
8. Profit - usually built into other assumptions since insurer is reluctant to show explicit profit in formula

Question 32

Considerations in deciding whether to use retrospective experience rating

Answer 32

1. Group size - must be large enough to have credible data and warrant time and cost
2. Contract provisions regarding funding arrangement - some arrangements (like retro premium arrangements) will replace experience rating formula
3. Company policies and practices - overriding factor
4. Company financial situation - crucial for insurers with small surplus (i.e. Blues)

Question 33

Special funding arrangements for group insurance

Answer 33

1. Reserveless plans (aka deferred premium or premium drag) - insurer foregoes premiums equal to part or all of claim reserves. In return, insurer receives terminal premium when group terminates (risk of not receiving pmt). Policyholder chooses how to invest.
2. Fully insured plans - standard arrangement. Policyholder pays insurer, who pays claims.
3. Self-insured plans - trust receives employer money and pays claims (so, latitude in choice of investments). Stop loss usually purchased from insurer. Governed by ERISA (no premium taxes, state mandates).
4. Minimum premium contracts - fully insured plan that includes minimum premium rider (provides for employer to fund trust which insurer uses to pay claims). Avoids premium tax on portion of premium used to pay claims.
5. Stop loss contracts (specific / aggregate) - trends are leveraged, so give special attention
6. Retrospective premium arrangements - policyholder pays some percent of regular premium (i.e., 90%). At end of period, policyholder liable for additional premium up to some amount (risk of nonpayment)

Question 34

Components of medical trend

Answer 34

1. General macro economic factors (“force of trend”) - force of trend is trend in average per capita reimb to providers of medical care sec from all types of private payers
2. Changes in demog and health status of covered pop
3. Structure of carrier’s provider contracts and changes in that structure
4. Managed care initiatives - some initiatives have one-time effect, others (i.e. implementing capitation) have longer term impact
5. Benefit and cost sharing provisions, and changes in them
6. Random fluctuations - major source of var for small blocks

Question 35

External sources of trend info

Answer 35

1. Proprietary databases
2. Medicare - history of cost increases for 65+ and disabled pop. Distorted by elif expansions and leg changes
3. National health expenditure portion of GDP - generally not helpful for current monitoring because publication of index is slow, subject to revision
4. Medical CPI/PPI - M-CPI measures increase in out-of-pocket costs and consumer portion of health insurance costs. PPI measures the cost of producing units of health care services.
5. Trend surveys - typically compiled by consultants. Provides second opinion of internal trends.

Question 36

Micro-economic variables for modeling health care consumption

Answer 36

These affect individual consumption of health care, but have less impact on force of trend

1. Health status
2. Availability and scope of insurance
3. Access to care
4. Actions of PCPs

Question 37

Macro-economic variables that affect health care cost trends

Answer 37

1. Wealth - increased wealth is leading indicator of increased consumption and also research investment
2. General inflation
3. Physician supply - increased supply should decrease price and increase quantity and quality of care (but has not decreased prices in past)
4. More specialists - appears to have led to greater use of tech and more intense therapies
5. Population aging - increases consumption
6. Effect of 3rd party payers - decreases consumer sensitivity to cost and increases consumption
7. Managed care - affected consumption (shift from IP to OP)

Question 38

Trend analysis techniques

Answer 38

1. Actuarial models - projects util and price by TOS, but result mostly based on hist exp
2. Linear regression of hist claim costs - basically projects hist avg trend, but does adj for random fluctuation
3. ARIMA models - do not work for cyclical changes that affect trends, so only good for short periods
4. External indicator models - typically statistical in nature and rely on causal modeling tech. Requires use of leading indicators or coincident indicator that has specified future values (such as Health Cost Index)

Question 39

Common challenges in trend analysis

Answer 39

1. Changes in claim processing and payment patterns
2. Seasonality - can smooth out w/ 12 mo avg
3. One-time events (i.e. high flu season) - can sig change claims during one period, followed by return to normal levels later
4. Margins - in some cases, adding explicit margin for uncertainty can be appropriate / required
5. Changes in prior period estimates - base period claim costs may not be complete when claims are projected, so reserve estimate will impact projected
6. Legislative changes - rating laws, mandated benefits, and others can cause 1-time or ongoing changes in trends

Question 40

Desired characteristics of premium rates

Answer 40

1. Adequate - high enough to generate acceptable ROE
2. Competitive - low enough to enroll enough members to meet volume and growth targets
3. Equitable - to avoid unreasonable amount of cross-subsidization among groups (which improves persistency)

Question 41

Information gathered during underwriting for managed health care

Answer 41

1. Health status - determined based on:
   a) Ind/SG: physician exams, Rx histories, medical questionnaires
   b) LG: medical cost experience and listing of employees’ major health conditions
2. Ability to pay premium - based on income verification and credit history
3. Availability of other coverage - info needed for COB with other insurance and workers’ comp
4. Historical persistency - groups that frequently change carriers may not persist long enough for insurer to recoup acquisition costs

Question 42

Steps in rate formula for managed health care

Answer 42

1. Develop projection period base rate PMPM - based on historical medical costs trended forward, and reflects avg characteristics of block of business
2. Apply group-specific additive adjustments - such as added cost of covering mandated services in a given state
3. Apply group-specific multiplicative adjustments - includes factors for benefit plan, geog area, age/gender, DoHM, and health status
4. Add retention loads - includes admin expenses, buildup of contingency reserves, COB savings, and profit
5. Convert to contract rate (per Ee or subscriber) - for group coverages, includes developing tiered rates (Ee only, family, etc.)

Question 43

Rate setting approaches

Answer 43

1. Rerating - rate based on direct, existing experience (i.e., exp of existing block)
2. Fundamental pricing - rating from other data sources (benchmarks), adjusted to apply to current situation
   a) Tabular method - existing table (or modification) used as morb basis for pricing (85CIDA for DI). Typ used for LT, non-inflation sensitive products
   b) Buildup and density functions (list) - model built to determine expected claims in rating period. Gen used for inflation-sensitive products.
   c) Simulation - existing distribution of claims projected into rating period, using all known info about claimants (incl prior claim exp)

Question 44

Major considerations in rate setting process

Answer 44

1. Market - competitor pricing sets expectations for consumers, limits options
2. Existing products - expectations for company’s product based on current products
3. Distribution system - compensation system, structure of distribution system, level of company control
4. Regulatory situation - limitations may exist that impact how rates are set, whether needed rate increases allowed
5. Strategic plan and profit goals - should be reflected

Question 45

Major rating variables

Answer 45

1. Age
2. Duration - typically from initial UW and cumulative antiselection
3. Gender - unless prohibited by law
4. Marital status - big factor for LTC
5. Parental / family status - rates vary based on number of people insured
6. Occupation - important for DI, not for most other covg
7. Geographic area - patterns of care, provider contracts, avail of care, legal reqs
8. Current health status
9. Past claim history - sometimes for renewal rates
10. Smoking status
11. Weight
12. Presence and nature of other coverage
13. Situation-specific factors - e.g., whether policyholder converted from another plan of same insurer

Question 46

Type of age rating structures

Answer 46

1. Attained age rating - function of age at renewal. Can also be called step rating
2. Entry age or issue age - age of policyholder when issued
3. Uni-age rating - doesn’t recognize age at all. Most community rate structures

Question 47

Tabular method formulas for calculating net premiums

Answer 47

1. Net Premium = NP = Sum_z Pr(Clm_z) * AC_z * v^t * l_z
   a) z ranges from issue year to final year
   b) Pr(Clm_z) is probability of claim in year z (incidence rate)
   c) AC_z is average claim cost (given claim) in year z
   d) v^t is PV factor at duration t
   e) l_z proportion of originally issued lives still in force in yr z
2. Avg claim cost calculated as
   AC_z = Sum_s Cm$_s * PR(1-Tn_s) * v^s
   a) s is claim duration, ranging from 1 to final possible claim payment
   b) Cm$_s is claim dollars payable at duration s
   c) Pr(1-Tn_s) is probability of claimant at dur 0 remaining disabled at dur s

Question 48

Using the buildup and density function approach for pricing

Answer 48

1. Buildup approach - cost model: sum of freq * avg cost per svc over all categories. Works well for copay plans
2. Density functions - CPDs. Dist of annual claims for ind, with no diff categories. Works well for impact of deductibles/MOOP
3. Combination of 1 and 2 - for PPO products, may calculate IN with 1 and OON with 2. Combined for final cost.

Question 49

Steps of the rerating approach for pricing

Answer 49

1. Gather experience on existing business - use incurred claims (pref on runout basis) and earned premiums. Reliability should be assessed before using
2. Restate experience - past premiums restated to rate levels currently in effect
3. Project past results to future - adjust for items that cause future exp to differ from past (list)
4. Compare projection against desired results - rate increase is calculated by determining how much rates need to change to produce desired LR (based on exp level of expenses, profit)
5. Apply regulatory and management adjustments (mgmt adj - list)

Question 50

Adjustments needed for using past claims to project future claims

Answer 50

1. Changes in covered population
2. Changes in duration - anticipate durational effects
3. Changes in benefits - may be explicit (change to copays) or implicit (change in how policy provision is interpreted)
4. Changes in claim costs - must project changes in frequencies and avg costs
5. Leveraging - deductibles and copays cause bigger trend change in paid than allowed
6. Other changes - include antiselection, changes in UW, changes in business practices
   Projected claims_t = Claim cost PMPM_s * number of members_t * (1 + leveraged trend)^(t-s)) * Avg durational factor_t / Avg durational factor_s * (1 + Antiselection factor due to lapses_t-s) * (1 + Adj factor for other changes_t-s)
   There is an incorrect “-1” on the trend factor in book

Question 51

Reasons for management adjustments in pricing

Answer 51

1. Competitiveness of premiums for new business
2. Profitability in other LOBs
3. Relations with public or sales force
4. Social policy
5. Desire to manage from long-term perspective (phase in large rate increase)

Question 52

Methods for calculating gross premiums

Answer 52

1. Block rating (ST horizon) approach - claim costs calculated for rating period (usually 1 year), and premiums are calc by adding expenses and profit charges. Gross premium is
   G = [N * (1 _ E^N) + E^F] / (1 - E^G)
   a) N = net prem (claim cost)
   b) E^N = pct of claims expenses
   c) E^F = fixed exp
   d) pct of prem exp + profit
2. Asset share approach - involves LT proj of various items, to determine necessary premium

Question 53

Items included in asset share projections

Answer 53

1. Exposure values - number of policies sold or in force, number of claims or claim payments, number of prem collections, number of units sold or in force
2. Revenue values - premiem, inv inc, explicit subsidies
3. Claim values - claims (paid/incurred), reserves (claim, claim adj exp, policy)
4. Capital values - must model cost of capital used by LOB
5. Expense targets - loadings may be very detailed. CoC sometimes treated as exp
6. Profit targets - calculated in one of these ways
   a) Percent of premium - PV profits div by PV of prem
   b) ROI - interest rate at which NPV is 0
   c) ROE - like ROI method, except initial investment increased by amount of capital set aside to cover business

Question 54

Steps for manual rating of disability coverage

Answer 54

1. Determine base rates / premium ( base prem = base rate * benefit amt )
   a) LTD: Base Rate = I * Rsv / 12
   (RSV reserve at time 0, I probability of claim)
   b) STD: Base Rate = I * D / 12
   (D is exp length of claim, in weeks)
2. Deduct offset credits - to get Net Base Premium
3. Demograpic adjustments - adjust Net Base Premium to reflect salary, industry, occupation, location
4. Plan provision adjustments - adjust for definition of disability, max or min monthly benefits, pre-ex clause, antiselection
5. Non-claim adjustments (retention) - prior steps final claim cost. add loadings for commissions, expenses, premium taxes
6. Add profit - can be percent of premium or needed ROI/ROE

Question 55

Steps for experience rating of disability coverage

Answer 55

1. Determine group’s manual rate with profit and expenses removed (final claim cost)
2. Determine experience-based rate with last 3-5 years of data
   a) Discount claims and reserves to midpoint of experience period or to actual date of disability
   b) Divide by exposure to get experience-based claim rate
   c) If large claims are pooled, add pooling charge.
3. Blend the manual rate and experience-based rate to get case claim rate
   a) Blended rate = Manual (1-Z) + Experience * Z
   b) Credibility = Z = N/(N+K) where N is number of life years and K is constant (i.e., 5000 for LTD, 250 for STD)
4. Final case premium = blended rate / target LR

Question 56

Steps in claim process for disability

Answer 56

1. Determine eligibility for coverage - claimant insured and actively at work, pre-ex?
2. Determine if definition of disability is met - most difficult step
3. Determine payment Amt (straightforward)
   = pre-dis income * benefit percent - offsets
4. Get ongoing proof of disabilities
   a) STD - often approved for spec period based on type of disablement. Reviewed at end of period
   b) LTD - reviewed annually, when condition/treatment changes, or when def of disability changes

Question 57

Tools of the claim process for determining and handling disabilities

Answer 57

1. Medical evaluation - begins with APS, can include ind medical exams
2. Rehab plans - providing vocational training or PT
3. Financial evaluation of claimant - verification of pre-, post-disability earnings
4. Settlements - risky, so be sure insurer is not perceived as taking advantage of claimant (legal representation)
5. Fraud review - check info for inconsistencies / alterations
6. Managed disability - techniques used to manage, encourage return to work

Question 58

Uses of health insurance loss ratios

Answer 58

1. Evaluating organization’s performance
2. Providing consumers with info on relative quality of competing health plans
3. Projecting future earnings growth of HMOs
4. Testing products against MLR standards
5. Comparing insurers and MCOs

Question 59

Users of loss ratios

Answer 59

1. Legislators - ensure reasonable percent of premium goes to cost of benefits
2. Regulators - monitor insurance companies (evaluate rates, solvency)
3. Investors, analysts, lenders - track trends in company earnings
4. Rating agencies - refer to LR trends in reports
5. Insurance companies / MCOs - set target premiums, determine needed rate increases, assess product viability/perf, compare results with other companies
6. Consumer advocates - compare perf of companies, reasoning high LRs are best for consumers