Objective 4 - Underwriting

Question 1

ACA requirements that may change the availability of small group medical insurance

Answer 1

Requirements that may increase availability:

1. Small groups with 50 or more employees are required to offer coverage or pay a fee
2. Small groups with under 50 employees are offered temporary tax credits for providing coverage

Requirements that may decrease availability:
1. The availability of guaranteed coverage in the individual market leads to some employers not seeing a need to offer employer coverage

Question 2

Characteristics a small group insurer should consider in evaluating experience

Answer 2

(But a small group insurer cannot decline coverage or rate groups based on these characteristics)

1. Financial viability - consider how long the employer has been in business and whether there is significant employee turnover
2. Industry and occupation - consider the type of work done and the lifestyles of employees
3. Group size - larger groups result in a better spread of morbidity risk and lower administrative expenses on a per capita basis
4. Workers’ compensation - in states that do not require small employers to purchase this coverage, insurers will have to cover expenses that workers’ compensation would typically cover
5. Participation and employer contributions - historically, insurers required certain participation and contribution levels to help ensure a better spread of risk. Under the ACA, these requirements are no longer allowed except when coverage is issued outside of open enrollment periods.
6. Prior coverage - for a group changing carriers or seeking coverage for the first time, consider the group’s motives for now seeking coverage

Question 3

Small group insurance underwriting criteria allowed by the ACA

Answer 3

1. Verification that the entity is a licensed employer in the state
2. Participation and contribution requirements for coverages issued outside open enrollment periods
3. A requirement that a group’s employees live, work, or reside within the service area of the plan’s network
4. Employee eligibility requirements, such as the number of hours worked
5. Enforcement of employer restrictions on coverage for late entrants (such as waiting periods)

Question 4

Small group insurance rating factors allowed by the ACA

Answer 4

1. Age - rating factors are set by regulation and were determined based on a range limitation of 3:1 for adults. A separate factor applies for children and does not vary by age.
2. Geographic area - each state has defined a set of allowable rating zones, which address differences in provider payments, managed care programs, and competition
3. Benefit plan - rates may differ by the amounts attributable to plan design, but not amounts due to the expected health status of groups who select the benefit plan
4. Managed care and negotiated discounts - benefit plan factors may account for network arrangements and care management protocols
5. Family composition
   a) The federal composite premium methodology prescribed that the composite premium is calculated based on separate enrollee premiums for age 21 and older and for ages under 21
   b) The premium for a given family composition equals the sum of the average enrollee premium amounts for each family member covered, but counting no more than three children under age 21
6. Tobacco use - premiums are allowed to use a tobacco use rating factor load of up to 50%

Question 5

Reasons for experience rating

Answer 5

1. Many policyholders prefer to pay premiums based on their own experience, rather than having their experience pooled with other groups
2. The insurer wants to quote and charge premiums that are as competitive as possible
3. The insurer wants to avoid antiselection, with good groups going to competitors and bad groups staying

Question 6

Theoretical considerations in determining credibility levels

Answer 6

1. Coverages with low claim frequency are more volatile and will require a larger exposure base to be credible
2. Coverages with widely varying claim sizes will tend to be more volatile
3. The statistical confidence interval chosen by the insurer
4. Historically, statistical fluctuation was considered to vary inversely with the square root of the number of claims or lives. So it will take 4 times the exposure to double the credibility
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure and therefore credibility

Question 7

Practical considerations in determining credibility levels

Answer 7

1. Regulatory restrictions on the use of experience rating for certain group sizes
2. Competitive pressures
3. Ability of administrative and management areas to accept the level of experience rating
4. The trade-off between the cost of experience rating and gains in the quantity and quality of new business
5. The effect on existing business of a change in the credibility level
6. Management philosophy regarding experience rating
7. The need for consistency between classes of business

Question 8

Steps in prospective experience rating

Answer 8

1. Develop past claims experience - should be incurred claims for an experience year (restated)
2. Use pooling methods (see separate list) to dampen random statistical fluctuation
3. Calculate net premium (expected claim cost)
   a) Calculate a historical claim cost per unit of exposure
   b) Trend the historical experience to account for changes in claim costs - bay be due to changes in morbidity, mortality, demographics, benefits, or antiselection
4. Calculate gross rates from net rates - apply loadings (retention) to the net premium (see separate list)
5. A final adjustment may be required when dealing with a politically-sensitive policyholder. Be sure to know the financial impact of any changes
6. Plan choice considerations - when employees can choose between an HMO, PPO, and/or indemnity, there is often antiselection against the indemnity play
7. Small group considerations
   a) Prior to the ACA, insurers recognized small group experience through formula-based and re-underwriting methods
   b) All small groups with fully insured medical coverage are now subject to the community rating restrictions of the ACA

Question 9

Pooling methods

Answer 9

(regardless of the method chosen, a pooling charge must be applied to all groups being pooled to offset the average cost of claim modifications made during the pooling process)

1. Catastrophic claim pooling - remove large claims
2. Loss ratio or rate increase limits - put a cap on one of the following:
   a) the loss ratio used in pricing,
   b) the rate increase proposed, or
   c) the aggregate claim dollars a group will be charged
3. Credibility weighting - weight with the expected incurred claims for the entire pool
4. Multi-year averaging - combine several years of experience (may give more weight to recent years)
5. Combination methods - for example, use both catastrophic claims pooling and a rate increase cap

Question 10

Loadings on the net premium (retention)

Answer 10

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

Question 11

Typical retrospective refund formula

Answer 11

Policyholder account balance = prior balance carried forward + premiums + investment earnings - claims charged - expenses - risk charge - premium stabilization reserve addition - profit

1. Prior year’s balance - ending balance is carried forward if not eliminated at prior year end
2. Premiums - amount may be adjusted for interest based on the timing of payments
3. Investment earnings - very important for coverages with significant reserves
4. Claims charged = claims paid + increase in claims reserves - pooled claims + pooling charges + conversion charges + claim margins
5. Expense charges typically vary by duration to allow for the recovery of acquisition costs
6. Risk charge covers the risk that the policyholder will terminate coverage while in a loss position
7. Addition to premium stabilization reserve - to reduce the risk of a deficit on termination. The insurer may require a certain level of reserve before surplus can be paid as an experience refund.
8. Profit - usually built into other assumptions since the insurer is reluctant to show explicit profit in the formula

Question 12

Considerations in deciding whether to use retrospective experience rating

Answer 12

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

Question 13

Special funding arrangements for group insurance

Answer 13

1. Reserveless plans (aka deferred premium or premium drag plans) - the insurer forgoes premiums equal to part or all of the claim reserves. In return, the insurer receives a terminal premium when the group terminates (but it risks not receiving this payment). The policyholder chooses how to invest money.
2. Fully insured plans - the standard arrangement. Policyholder pays insurer, who pays claims
3. Self-insured plans - a trust receives employer money and pays the claims. Stop loss is usually purchased from an insurer. Governed by ERISA, so premium taxes and state mandates are avoided
4. Minimum premium contracts - fully insured plan that includes a minimum premium rider (provides for the employer to fund an account which the insurer uses to pay claims). Avoids premium tax on the portion of premium used to pay claims.
5. Stop loss contracts (specific and/or aggregate) - used with self-insured plans to provide insurance for claims that exceed the expected claim level
6. Retrospective premium arrangements - the policyholder pays some percent of the regular premium (e.g., 90%). At the end of the period, the policyholder is liable for an additional premium up to some amount (there is a risk of nonpayment).

Question 14

Large group program design considerations due to the ACA

Answer 14

Underwriters must consider the impact on large group medical plans of the following changes

1. Groups with more than 50 full-time equivalent employees are subject to employer penalties if health benefit offerings do not meet minimum value requirements, including that the plan’s actuarial value must be at least 60% and certain classes of benefits must be covered
2. Benefit plans must allow the employee the option to cover dependents (but the ACA’s definition of dependent does not include spouses)
3. The maximum waiting period before benefits must be offered to eligible new employees was shortened
4. Plans must be affordable (cost less than 9.5% of income for single coverage) to avoid employer penalties
5. Penalties will apply to health plans with very rich benefits, starting in 2018

Question 15

Impact of the ACA exchanges on large group underwriting

Answer 15

1. The availability of exchange subsidies changes the equation for employees who are comparing costs between individual plans and group plan options
2. Some employers have dropped dependent coverage and transitioned non-Medicare retirees to public exchanges
3. The existence of subsidized individual coverage may create more early retirees
4. COBRA enrollment will decline
5. Dependents from low income families are more likely to enroll in exchange coverage due to subsidies

Question 16

Components of new business underwriting for large groups

Answer 16

1. Review the characteristics of the group in order to screen, approve, and classify the groups (see separate list regarding the underwriting criteria for large groups)
2. Evaluate the group’s prior coverage - prior data needs to be checked for accuracy and will need to be adjusted to fit the coverage being offered
3. Develop the proposal - explain the plan design, underwriting caveats, expense charges, and any performance guarantees or funding alternatives that will be used

Question 17

Criteria used for underwriting large groups

Answer 17

1. Age and gender - age is highly correlated with future mortality and morbidity. Age-gender factors are good predictors for several medical conditions, such as pregnancy and heart disease
2. Location or area - there are significant regional and local differences in health care practices and prices
3. Type of industry - industry risk comes from health hazards, high stress, and employee lifestyles
4. Financial stability - layoffs result in COBRA coverage and can cause a spike in disability claims and elective medical and dental services
5. Ease of administration - larger groups have economies of scale, but offset that with added complexity
6. Level of participation - in the past, insurers used minimum participation requirements. But with the ACA requiring guarantee issue, many insurers have added participation and contribution levels to their rating formulas.
7. Carrier persistancy - due to competitive considerations, setup costs for new groups are not commonly recouped in the first or second contract year

Question 18

ACA initiatives that promote health care access and consumer choice

Answer 18

1. Prohibitions on pre-existing condition exclusions
2. Restriction the use of lifetime maximums
3. Prohibiting annual benefit maximums on essential benefits
4. Requiring most groups to offer coverage to dependents up until age 26
5. Creating a health insurance exchange that is both guaranteed issue and without pre-existing condition exclusions

Question 19

Components of renewal underwriting for large groups

Answer 19

1. Evaluating the case - renewal evaluations focus on the same type of information used in initial underwriting, but now there is access to better claim and premium data
2. Developing renewal recommendations - the first step is to present the new premium rates for the existing program. Recommendations may involve proposed plan design changes and alternate rating and funding methods
3. Revision underwriting - includes developing cost estimates for any changes in plan design or group compositon
4. Renewal monitoring - experience must be tracked throughout the year, with more formal analysis two or four times per year

Question 20

Special types of large groups

Answer 20

1. Association programs:
   a) Association of individuals - such as members of a medical society, who formed together to further a common interest
   b) Multiple-employer trust - covers the employees of tow or more employers in the same industry
2. Taft-Hartley groups - state laws differ with respect to eligibility rules, types of coverage permitted, and minimum size requirements
3. Purchasing alliances - formed when two or more non-affiliated large groups come together to solicit insurance (in order to enhance their purchasing power). A more recent version of a purchasing alliance is a coalition of very large employers who contract directly with providers.

Question 21

Characteristics of successful multiple-employer health plans

Answer 21

1. The sponsoring association is a strong entity with a high percentage of eligible firms participating
2. There is a large pool of eligible members
3. There is a relatively small average employer size

Question 22

Factors that influence an employee’s choice of health plan in a multiple-choice environment

Answer 22

1. Inertia - employees often prefer to stay with a prior plan option
2. Plan provisions and costs - such as covered services and employee cost sharing amounts
3. Employee and dependent demographics - such as age, gender, health status, and family size
4. Employer actions and attitudes - such as employer contributions towards premiums and the attitude towards managed care
5. Eligibility for other health insurance coverage - such as through a spouse’s plan
6. Information available about options - such as employee communications and advertising
7. Provider and provider network attributes - such as provider availability, reputation, quality, and medical management restrictions
8. Insurer and administration issues - such as claim administration and customer service

Question 23

Situations where employees may be offered multiple choices

Answer 23

1. Choice between medical coverage and no coverage - this creates antiselection because employees who waive employer coverage often have lower average health costs than those that don’t
2. Choice between the employers plan and other available coverage, such as a spouse’s employer’s plan
3. Choice based on member cost sharing - options may differ by deductible, coinsurance, etc.
4. Choice based on provider network or medical management - the level of provider choice, the degree of medical management, and the presence of specific providers may drive employee selection decisions
5. Choice based on prescription drug formularies - such as differences in coverage and cost sharing for drugs that treat chronic conditions
6. Choice among insurers - two or more insurers may offer health plan options to the same employee
7. Optional riders added to core coverage - the insurer may allow employees to buy coverage riders such as vision, disability, and dental
8. Choice between consumer-directed plans and traditional plans

Question 24

Techniques an underwriter can use to manage selection in a multiple-choice environment

Answer 24

1. Add a loading to the premium to pay for the additional cost of selection
2. Employee contributions or plan design limits - place reasonable limits on the cost and benefit differentials among plans. For example:
   a) Limit the spread of monthly employee contributions
   b) Limit the spread in benefits
   c) Mix favorable and unfavorable cost sharing or benefit provisions among options to avoid one always being the best plan for high risks
   d) Avoid covering benefits with selection potential (e.g., infertility) in only one option
3. Allowing one insurer to offer all of the options - this allows that insurer to offset the antiselection from one option with the favorable selection in another options
4. Participation requirements when multiple insurers offer plans - for example, requiring all insurers to use the same eligibility rules, imposing minimum participation requirements on each option, or redistributing income among insurers through risk adjustment

Question 25

Steps for developing premium rates in a multiple-choice environment

Answer 25

1. Determine the actuarial value of each benefit option as if it were sold on an independent basis
2. Estimate the enrollment mix by plan option
3. Estimate the relative health status factor for each option based on the expected enrollment mix
4. Calculate the preliminary selection adjusted rates for each option. This equals the actuarial rates from step 1 multiplied by the relative health status factors in step 3.
5. Calculate the average selection load as a ratio of the average of the step 4 selection adjusted rates and the average of the step 1 actuarial rates
6. Calculate the blended selection adjusted rates by multiplying the step 1 actuarial rates by the average selection loading from step 5

Question 26

Definition, steps, and uses of health risk adjustment

Answer 26

1. Definition - the process of adjusting measures of healthcare utilization and cost to reflect the health status of members
2. The first step is risk assessment - the method used to assess the relative risk of each person in a group (may be referred to as a risk adjuster). Consists of:
   a) Risk classification - to group individuals into classes based on risk characteristics
   b) Risk measurement - to determine the level of risk for the classes
3. The second step is payment adjustment - the method used to adjust payments to reflect differences in risk
4. Risk assessment methods are used for provider profiling, case management, provider payment, and rating and underwriting
5. Risk adjustment is being used to adjust payments to Medicare and Medicaid plans. And the ACA includes a risk adjustment provision that will apply to most individuals and small group plans

Question 27

Reasons for health risk adjustment

Answer 27

These are the major goals and policy arguments for requiring risk adjustment

1. Require health plans and providers to compete on the basis of efficiency and quality, not on risk selection
2. Preserve choice for consumers
3. Have consumers pay an appropriate prices for their choice of insurer or provider
4. Under certain reforms (such as guaranteed issue and rating limitations), a health risk adjuster is needed to increase the premium for plans covering lower-than-average risks and decrease the premium for plans with higher-than-average risks

Question 28

Risk classification schemes

Answer 28

These are the criteria that can be used to classify risks

1. Demographics - age, gender, family status, or geographic location
2. Utilization measures or claim expenditures - these are generally viewed as inappropriate for health risk adjustment because they could reward an insurer for high historic costs resulting from inefficiencies
3. Diagnosis and pharmacy codes - these codes are commonly used in health risk assessment
4. Medical information or history - based on biomedical measurements (such as blood pressure, cholesterol, height, and weight) or medical history questionnaires (to determine prior medical conditions).
5. Perceived health status - based on answers to a health questionnaire
6. Functional health status - based on ability to perform activities of daily living
7. Lifestyle and behavior factors - such as smoking, fitness level, substance abuse, or diet
8. Multiple classification criteria - it is common to use more than one of the above criteria simultaneously (commonly diagnosis and demographic information)

Question 29

Risk assessment models in use today

Answer 29

1. Hierarchial Condition Category (HCC) models - ICD-9 diagnosis codes are classified into diagnostic groups, which are then aggregated into condition categories. Hierarchies are then applied so that an individual is indicated only for the most severe manifestation of a condition.
   a) The Department of Health and Human Services (HHS) uses the HHS-HCC model for risk adjustment in the individual and small group markets under the ACA
   b) CMS and the CMS-HCC model to risk adjust payments to Medicare Advantage and Part D plans
2. Adjusted Clinical Groups (ACGs) - groups diagnosis codes into Adjusted Diagnosis Groups (ADGs). Each member is assigned to only on ACG based on his or her age, gender, and ADGs.
3. Chronic Illness and Disability Payment System (CDPS) - individuals are assigned to medical condition categories based on diagnosis codes. Medical costs are predicted based on medical condition and demographic categories.
4. Clinical Risk Groups - uses diagnosis and some procedure codes to calculate a risk score for each member
5. Milliman Advanced Risk Adjusters - can be used with diagnosis-only data, pharmacy-only data, or a combination of the two
6. Diagnostic Cost Groups - medical costs are predicted based on medical condition and demographic categories
7. Episode Risk Groups (ERGs) - claims are grouped based on an episode of care concept. individuals are assigned to medical condition categories based on their diagnosis codes and pharmacy data
8. Impact Pro - designed for underwriting and rating and for identifying potential high cost members for case management
9. Medicaid Rx - members are assigned to medical condition categories based on prescription drugs used. They are also assigned to a demographic category.
10. Pharmacy Risk Groups - a score is computed for each member based on pharmacy risk groups (using a mapping of National Drug Codes (NDCs)) and demographic categories
11. RxGroups - uses a mapping of NDCs into mutually exclusive categories based on each drug’s therapeutic indication
12. RxRisk - a pharmacy-based model that assigns each member into medical condition categories and a demographic category
13. Wakely Risk Assessment Model - incorporates cost changes due to benefit and coverage changes newly required under the ACA

Question 30

Measures of predictive accuracy for risk assessment methods

Answer 30

Individual measures -

1. Individual R-squared - the percentage of the variation in claim costs explained by the model. Is a standardized measure (results on a scale from 0 to 1), which helps in comparing results between studies. But can be overly sensitive to the prediction error for individuals with large claims.
2. Mean absolute prediction error (MAPE) - the average of the absolute values of the prediction errors. Can be expressed as a percentage by dividing the result by the mean actual medical costs.

Group measure -
3. Predictive ratio = predicted claims for the group / actual claims for the group. Is the reciprocal of the common actual-to-expected ratio

Question 31

Key concepts for evaluating risk adjusters

Answer 31

1. Bias - risk adjusters should not be statistically biased. The factors used should be directly related to risk.
2. Transparency - knowing how the methodology works helps parties understand why payment is being adjusted
3. Fairness and gaming - a risk adjuster needs to be accurate, practical, predictable, and not subject to gaming
4. Encourage specific coding - the diagnosis grouping used for payment adjustment should not be based on vague or unspecified diagnosis codes. And it should not reward proliferation of coding by assigning higher risk for several clinically-similar codes.
5. Discourage upcoding - certain diagnoses or drugs that are subject to high coding variation due to their discretionary nature should be excluded
6. Data quality and credibility - if diagnosis codes are not captured consistently across insurers, then risk adjustment may produce biased estimates
7. Data availability - some types of data (such as treatment history and perceived health status) are difficult to collect
8. Clinical relevance - the grouping of individuals into risk classes should be clinically meaningful
9. Timing - insurers prefer an adjuster that allows them to determine what their payments will be at the time they set premiums. This criteria favors a prospective adjuster over a concurrent one.

Question 32

Risk mitigation programs in the ACA

Answer 32

These are also referred to as premium stabilization programs or the “three Rs”

1. Risk adjustment - permanent program (began in 2014) (see separate list)
2. Reinsurance - only in effect for three years (2014-2016)
   a) Applies to individual only, both within and outside the exchanges
   b) Administered by the state or HHS for state-run exchanges, or by HHS for the federal exchange
3. Risk corridor - only in effect for three years (2014-2016)
   a) Applies to qualified health plans sold through an exchange and similar plans offered by the same insurer off the exchange
   b) Administered by HHS

Question 33

Description of ACA risk adjustment program

Answer 33

1. Applies to individual and small group markets
2. Risk adjustment is needed because the ACA requires guaranteed issue and limits the rating variables in these markets, which creates an incentive for a health insurer to select a lower-cost portfolio of individuals
3. The purpose of ACA risk adjustment is to mitigate antiselection between health insurers and also between the markets inside and outside the exchange
4. Insurers that attract a lower-than-average risk will pay into the pool while insurers that attract a higher-than-average risk will be paid from the pool
5. Risk adjustment is administered by the state or HHS for state-run exchanges, or by HHS for the federal exchange

Question 34

Risk transfer formula for ACA risk adjustment

Answer 34

This formula is used to calculate risk transfers for all plans in a market.
Ti = { [ (PLRSi * IDFi * GCFi) / SUM(si * PLRSi * IDFi * GCFi) ] - [ (AVi * ARFi * IDFi * GCFi) / SUM(si * AVi * ARFi * IDFi * GCFi) ] } * Ps

Ti = Transfer payment to plan i
Ps = State average premium
PLRSi = Plan i's plan liability risk score
IDFi = Plan i's induced demand factor
ARFi = Plan i's allowable rating factor
AVi = Plan i's actuarial value
GCFi = Plan i's geographic cost factor
si = Plan i's share of the state enrollment

The denominator is summed across all plans in the risk pool in the market in the state

Question 35

Advantages of self funding

Answer 35

1. Cost savings - premium taxes are avoided, insurer risk and retention charges are minimized, and administrative costs are sometimes lower than those of insured plans
2. Plan design flexibility - design is not limited to the insurer’s offerings and is not subject to state mandated benefits
3. Claims management - plan sponsors can select their own claim administration vendors
4. Cash flow - cash position may be improved since the sponsor holds its own IBNR reserves
5. Investment income - the sponsor receives investment income on reserves held

Question 36

Disadvantages of self funding

Answer 36

1. Risk assumption - the plan sponsor is liable for losses that exceed expectations
2. Cash flow - fluctuations in benefit plan costs from month the month must be managed
3. Administration - the sponsor must arrange for all services needed by the plan
4. Legal liability - the sponsor may be liable for actions taken by the plan that adversely affect employees

Question 37

Basic forms of stop loss coverage

Answer 37

1. Specific stop loss - insures the plan against losses in excess of an annual deductible per covered person
2. Aggregate stop loss - insures the plan against losses in excess of an annual deductible for the entire plan

Question 38

Stop loss contract types

Answer 38

The contract type is used to limit the period during which eligible losses must be incurred or paid

1. 12/15 - covers losses incurred within a 12-month policy period and paid within 3 months of the end of the policy. The extra 3 months is referred to as run-out coverage
2. 12/12 - covers losses incurred and paid within the 12-month policy period
3. 15/12 - covers claims paid within the 12-month policy period and incurred during that period or within the 3 months before that period. Is referred to as a run-in policy
4. Paid - a run-in policy that covers claims paid during the 12-month policy period and incurred at any time after the original effective date
5. Incurred - pays for all losses incurred in the period but paid at any time. is not common because an integral part of stop loss design is the limitation in payment dates
6. Different run-in and run-out lengths exist, resulting in contracts such as 12/18 and 24/12

Question 39

Considerations in rating specific stop loss

Answer 39

1. Trend leveraging - effect increases as the deductible increases
2. Area leveraging - works in same way as trend leveraging (if an area is 10% higher cost, it has the same leveraging effect as a 10% trend rate)
3. Network leveraging - network discounts also leverage
4. Variations by age and sex - for excess medical sots, males are more expensive than females at all ages, partly due to prevalence of accidents among young males
5. Underlying plan design - such as maximums, managed care features, and extension of benefit provisions
6. Industry - may adjust rates based on industry of plan sponsor
7. Contract type - a 12/12 contract is less costly than a 12/15. Watch for antiselection by contract type.

Question 40

Underwriting considerations in setting a specific stop loss rate

Answer 40

1. Whether any of the current known large losses will have an effect on the upcoming policy year. The underwriter may
   
   • rate the policy up for the known loss,
   • set a separate specific deductible for it (lasering), or
   • exclude it from coverage (rarely done).
2. How often the plan sponsor switches stop loss insurers
3. Whether or not the specific stop loss deductible is appropriate for the plan
4. Whether the producer has an established track record of success with the insurer
5. Specific stop loss rate history
6. Historical specific stop loss experience

Question 41

Steps for setting aggregate stop loss attachment factors

Answer 41

1. Obtain running 12-month paid losses for the past 1-3 years. Use running 12-month due to seasonality.
2. Adjust paid losses for specific stop loss reimbursements.
3. Divide by number of certificates in each period to calculate losses paid PEPM
4. Adjust for plan design changes from experience period to rating period
5. Trend losses PEPM from midpoint of experience periods to midpoint of rating period
6. Calculate weighted average of trended losses PEPM. May give more weight to most recent periods
7. For plans without full credibility, use a credibility formula to blend weighted average trended losses PEPM with manual losses
8. Adjust for contract type (such as 12/12 or 12/15)
9. Multiply by the aggregate margin factor (for example, 125%)

Question 42

Aggregate stop loss pricing and underwriting considerations

Answer 42

1. Aggregate margin factor - insurers generally have a higher factor for smaller plans due to the volatility caused by low numbers of employees
2. Number of certificates - plans with fewer certificates are more volatile and therefore have a greater chance of exceeding the aggregate attachment point
3. Specific stop loss deductible - plans with higher specific deductibles are more volatile. It should fall within a range from 5-15% of the plan’s expected aggregate losses
4. Design of the employee benefit plan - “leaner” plans are more volatile than richer plans
5. Profitability is mostly a function of careful underwriting, not high rates
6. Profitability is also driven by setting appropriate attachment points

Question 43

Aggregate stop loss product variations

Answer 43

1. Monthly accommodation - insurer allows plan to settle losses monthly. Additional costs will need to be added to reflect cost of processing interim benefits, opportunity cost of money, and credit risk.
2. Aggregate only (rarely offered) - includes a maximum amount eligible for reimbursement for covered life (called a ghost deductible - has same effect as the specific stop loss deductible would have had)
3. Terminal liability - converts a 12/12 policy into a 12/15 policy, but only in the year the policyholder terminates. Useful for policyholders wanting to switch from self-funding to conventional funding.

Question 44

Types of antiselection

Answer 44

1. External antiselection - occurs as the person is first becoming insured. Those with expensive health conditions will seek insurance.
2. Internal antiselection - occurs while the person is insured. When given the opportunity, healthy individuals will be more likely to decrease coverage while unhealthy individuals will tend to increase coverage.
   a) Buy-down effect - upon receiving a rate increase, some poliyholders switch to lower cost plans, so the actual premium increase will be less than expected
   b) Premium leakage - unhealthy individuals are less likely to buy down their benefits. So the claim cost reduction is less than the premium reduction and not enough premium is collected.
3. Durational (cumulative) antiselection - occurs as people make decisions about whether to end coverage. Higher cost insured tend to keep their coverage in force longer because they are:
   a) Less likely to be able to find coverage elsewhere (although this is no longer true in markets affected by the ACA)
   b) Less likely to be willing to become uninsured
   c) Emotionally less willing to change their insurance coverage

Question 45

Mechanisms for controlling external antiselection

Answer 45

1. Individual underwriting before issue - includes initial screening of applicants by the agent
2. Pre-existing condition limitations
3. Requiring an enrollment mechanism that doesn’t permit antiselection (such as minimum participation percentages for associations)

Question 46

Tools used in the underwriting process

Answer 46

1. Individual application - includes individual identifying information, financial information (if relevant to the coverage), medical history, and a release to obtain information from third parties
2. Attending physician statement - the insurer may choose to request an APS from any physician listed in the application
3. Commercial databases - used to check information provided in the application
4. Internal data - such as prior applications and claim databases
5. Telephone interviews - these can replace the need for requesting third party information, thereby speeding up the underwriting process
6. Inspection reports - a class of information obtained through direct contact with the applicant or other related to the applicant
7. Lab testing - may detect tobacco, illegal drugs, or the presence of some medical conditions
8. Medical exams - due to high costs, rarely used in underwriting for medical coverages
9. Tax returns - often the best source of financial information
10. Pre-existing condition provisions - used to protect against antiselection. For some coverages (such as hospital indemnity), these provisions replace underwriting entirely

Question 47

Actions available to the underwriter

Answer 47

1. Offer full coverage with no restrictions (for major medical insurance, this is generally the only legal option now, due to the ACA)
2. Decline coverage
3. Offer coverage at a higher premium rate - the added load may be either temporary or permanent, based on the condition
4. Offer a standard policy with an exclusion rider - the rider excludes coverage for a specific condition or body system
5. Offer a different policy than the one applied for - e.g., offer coverage in a substandard risk pool
6. Offer a different benefit plan than the one applied for - e.g., offer a longer elimination period or shorter benefit period on a disability income policy

Question 48

Process for investigating claims

Answer 48

1. Most carriers have a rigorous process to uncover cases where the applicant has lied during underwriting
2. This process requires scanning claims for further investigation, based on the following criteria:
   a) Timing - usually do not investigate claims beyond the time limit for rescinding a contract
   b) Conditions - certain conditions (e.g., accidents) can be ruled out as being pre-existing condition
   c) Size - don’t investigate a claim if the cost of investigation exceed the cost of the claim
   d) Sentinel conditions or procedures - some conditions are related to other that lend themselves to antiselection (e.g., certain diseases may be an indicator of the presence of HIV)
3. The actions the insurer may take after an investigation include:
   a) Reformation - the contract is reissued retroactively under the terms which would have applied if the insurer had been aware of the condition
   b) Rescission - declaring the policy void from the beginning. The ACA prohibits rescissions of the health insurance policies unless the insurer can prove fraud or intentional misrepresentation of a material fact

Question 49

Situations in which the CAST model does not work well

Answer 49

1. In the first 3-4 durations, when the impact of underwriting wear off overwhelms the CAST effects. The solution is to apply additional underwriting selection factors.
2. In later durations, where only a fraction of the original population remains. The solution is to choose a higher value of k2, and recalibrate the model
3. At all durations, when a rate spiral is sever and volatile. The projection formulas may need stronger terms to fit this type of situation, such as:
   Shock lapse = [Rate increase - trend] / [(Rate increase - trend) + (1 + trend) / EF]
   EF = elasticity factor, which measures the ability and willingness of the population to change coverage after a rate increase (e.g., may be 1.3 for health lives and 0.8 for unhealthy lives)

Question 50

Traditional techniques for controlling antiselection that are prohibited by the ACA

Answer 50

1. Underwriting, including offering alternative coverage or denying coverage
2. Health status rating
3. Pre-existing condition exclusions
4. Exclusionary riders
5. Lifetime or annual dollar limits
6. Limiting benefit coverage or imposing very high cost sharing designed to attract healthier risks
7. Rescissions, except in cases of fraud or intentional misrepresentation
8. Marketing practices that discourage unhealthy risks from signing up

Question 51

ACA mechanisms for controlling antiselection

Answer 51

1. Coverage mandates and premium subsidies to encourage participation
   a) Premium subsidies - available to lower income individuals to make coverage more affordable
   b) Employer mandate - requires employers with 51 ore more employees to offer affordable insurance coverage that meets a minimum coverage level, or pay a penalty
   c) Inidividual mandate - requires all individuals to obtain insurance that provides minimum essential coverage, or pay a penalty that is the greater of:
   i) A flat per-person fee of $95 in 2014, $325 in 2015, $695 in 2016, and increasing with inflation thereafter. The household fee is limited to three times those amounts, and each child counts at 50% of those amounts.
   ii) A percentage of all income over the tax filing threshold. The percentage is 1% in 2014, 2% in 2015, and 2.5% in 2016 and thereafter.
   iii) The total penalty for a household cannot exceed the national average premium for a bronze qualified health plan
2. Aligning market rules on and off the exchanges - the subsidies offered in the exchanges will attract a different health risk to the exchanges. To mitigate this selection impact, regulations impose certain requirements (see separate list)
3. Open enrollment periods - to limit the opportunity for antiselection by only allowing members to enroll or change coverage during a set time period (except when there is a qualifying life event). The ACA established a single open enrollment period in the individual market each year.
4. Minimum benefit levels - individual and small group policies must cover all essential health benefits and provide at least a bronze actuarial value (except for catastrophic plans for certain individuals). There is also a cap on out of pocket spending and there must be no cost sharing for preventative services.
5. Premium stabilization programs (the three R’s) - the reinsurance, risk corridor, and risk adjustment programs are perhaps the most direct tools used by the ACA to confront antiselection (see separate list)

Question 52

Requirements that mitigate antiselection between exchange plans and off-exchange plans

Answer 52

1. Insurers must include all ACA-compliant policies in a single risk pool. So identical plans must have identical rates on and off the exchanges
2. Risk adjustment will be applied to even out risk between insurers and between the on- and off-exchange portions of the risk pool
3. Insurers must pay the same commissions to brokers and agents on and off exchanges
4. The exchange fee (3.5% of premium for each exchange policy) must be spread across the entire single risk pool, including off-exchange policies
5. Carriers participating in exchanges must offer at least one gold and one silver level plan on the exchange
6. Carriers are prohibited from marketing practices intended to discourage unhealthy individuals from signing up
7. Open enrollment periods are identical on and off the exchange

Question 53

Implications for an employer to consider before deciding to self fund long-term disability (LTD) coverage

Answer 53

(some of these overlap with disadvantages of self funding from GHA-104-15)

1. Loss of third-party guarantee for employees - and employer who self funds is responsible for the entire LTD liability, so there is no third-party insurer to guarantee benefit payments
2. Volatility in claims - an employer who self funds will not benefit from insurance risk pooling, so it is not protected against fluctuations in claim incidence and severity. The employer is also at risk for claims liabilities that are larger than expected
3. Economic cycles - LTD claim costs are often tied to economic conditions. Claim costs often increase at the same time the company’s profits are suffering
4. Employee relations - any legal suit regarding a claim will be brought against the employer
5. Accounting regulations - financial accounting standards require that employers recognize a liability for self-funded LTD benefits
6. Tax risks - if a trust is used for maintaining reserves, contributions are limited to paid claims plus a reasonable claim reserve. There are substantial penalties for making excess contributions

Question 54

Considerations when selecting a risk adjustment model

Answer 54

1. Intended use - consider the degree to which the model was designed to estimate what the actuary is trying to measure
2. Impact on program - consider whether the risk adjustment system may cause changes in behavior because of underlying incentives
3. Model version - if a new version of a previously-utilized model is used, consider the materiality of changes to the model
4. Population and program - consider if the population and program to which the model is being applied are consistent with those used to develop the model
5. Timing of data collection, measurement, and estimation - consider the impact of timing differences between when the model is developed and when it is applied
6. Transparency - consider whether the model provides an appropriate level of transparency for the intended use
7. Predictive ability - consider the predictive ability of the model and the characteristics of the various common predictive performance measures
8. Reliance on experts - consider whether the individuals incorporating their specialized knowledge into the model are experts in risk adjustment
9. Practical considerations - consider practical limitations, such as the cost of the model, the actuary’s familiarity with the model, and its availability

Question 55

Uses of credibility for group long-term disability (LTD) insurance

Answer 55

1. Valuation of claims
   a) The 2012 Group LTD valuation standard requires insurers to use credibility to reflect company-specific claim termination experience in their valuation assumptions
   b) The formula for determining the full credibility standard (f) is:
   i) 0.05 = 1.44 * (selected variance factor / f) ^ 0.5
   ii) f = number of claim terminations required for full credibility
   iii) The selected variance factor varies by claim duration: 4.0 for 2-24 months, 3.0 for 25-60 months, 2.5 for 61-120 months, and 2.0 for greater than 120 months. This factor ensures that fewer terminations are required to be considered fully credible in later claim durations, since terminations in later durations are less volatile.
   c) For insurers with fewer terminations than f, the credibility factor (C) = (number of expected terminations / f) ^ 0.5
2. Experience rating - the most common formula is: Premium rate = C * experience rate + (1-C) * manual rate
3. Manual ratemaking - for estimating credibility factors for manual rate development, approaches include:
   a) Subjective educated judgments, such as deeming experience to be credible if results are stable across multiple time periods
   i) Advantage: simplicity and flexibility
   ii) Disadvantage: it may be difficult to justify subjective decisions on credibility
   b) Formal procedures, such as limited fluctuation credibility concepts
   i) The minimum number of claims required for full credibility = lambda = (1.96^2 / 0.05^2) * (1 + (standard deviation / mu)^2 ), where mu and standard deviation are the mean and … of the claim amounts
   ii) For insurers with fewer claims than lambda, C = (number of expected claims / labmda) ^ 0.5
   iii) Advantage: objective and theoretically justifiable
   iv) Disadvantages: may be difficult to implement and may not be applicable depending on the experience and the underlying credibility model

Question 56

Challenges in applying credibility for LTD insurance

Answer 56

1. Non-independence of claims
   a) Claim incidence is not independent due to external factors (such as economic recessions) and group-specific dynamics (such as work conditions and the physical demands of some jobs)
   b) Claim terminations are not independent due to external factors such as changes in claims management practices or changes in the economy
2. Heterogeneous claims - claim experience does not always emerge similarly to how it did in the past, due to:
   a) Changes in the demographic mix of employees
   b) External factors like economic recessions
   c) Changes in underwriting or claim management practices
   d) Changes in plan design
3. Competitive pricing pressures - due to a competitive market environment, there is pressure to give past experience more credibility than it theoretically should be given
4. Claim duration - claim experience tends to be more volatile in the early claim durations (see separate list)
5. Benefits from other sources - the approval of Social Security benefits or the loss of workers’ compensation benefits can significantly impact net benefit amounts
6. Outlier claims - when credibility is based on claim amounts, large outlier claims could artificially increase the credibility of the past experience
7. Regulatory requirements - some states have adopted credibility requirements, such as requiring credible data to support changes to existing pricing factors
8. Estimating parameters of a credibility model is often based on a combination of subjective opinion and empirical testing

Question 57

Reasons LTD claim experience tends to be more volatile in early claim durations

Answer 57

1. Terminations in early durations are dominated by recoveries (as opposed to deaths), and there is a strong correlation between recoveries and the cause of disability
2. Benefits from other sources are typically awarded within the first few years of claim, creating irregular payment streams
3. The change in definition of disability from “own occupation” to “any gainful occupation” usually occurs within the first few years of claim, resulting in a spike in recoveries at that time
4. The maximum benefit period for mental and nervous claims is usually limited to 24 months