Objective 5 - Underwriting

Question 1

ACA requirements that may change the availability of small group medical insurance (3)

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

Requirement that may decrease availability:
3) 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 (6)

Answer 2

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 a 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 expense 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 (5)

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 (6)

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 prescribes 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 (3)

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 (5)

Answer 6

1) Coverages with low claim frequency are more volatile and will require a larger exposure base to be credible
2) Coverages with wildly 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 (i.e. it will take 4x 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 (7)

Answer 7

1) Regulatory restrictions on the use of experience rating for certain group sizes
2) Competitive pressures
3) Ability of administration 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 (7)

Answer 8

1) Develop past claim experience - should be incurred claims for an experience year (restated)
2) Use pooling methods to dampen random statistical fluctuation
3) Calculate net premium
a) Calculate a historical claim cost per unit of exposure
b) Trend the historical experience to account for changes in claim costs - may 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
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 plan
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 (5)

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: the loss ratio used in pricing, the rate increase proposed, or 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 claim pooling and a rate increase cap

Question 10

Loadings on the net premium (retention) (9)

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 that policyholder’s past losses
4) Termination risk charge - charged to all policyholders 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. When guarantees exist, consider the risk arising from misestimation risk and trend risk.

Question 11

Typical retrospective refund formula (8)

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 claim 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 the 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 (4)

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 (6)

Answer 13

1) Reserveless plans (aka deferred premium or premium drag plans) - the insurer foregoes 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 plans 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 (5)

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 (5)

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 (3)

Answer 16

1) Review the characteristics of the group in order to screen, approve, and classify the group
2) Evaluate the group’s prior experience - 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 for underwriting large groups (7)

Answer 17

These criteria are used to screen, approve, and classify large groups

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 and contribution levels to their rating formulas.
7) Carrier persistency - 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 (5)

Answer 18

1) Prohibitions on pre-existing condition exclusions
2) Restricting 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 (4)

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 propose plan design changes and alternate rating and funding methods.
3) Revision underwriting - includes developing cost estimates for any changes in plan design or group composition
4) Renewal monitoring - experience must be tracked throughout the year, with more formal analysis two to four times per year

Question 20

Special types of large groups (3)

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 two 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 (3)

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 (8)

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 toward 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 (8)

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 who don’t
2) Choice between the employer’s 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 networks 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 (4)

Answer 24

1) Add a loading to the premium to pay for the additional cost of selection
2) Employee contributions of plan design limits - place reasonable limits on the cost and benefit differentials among plans. For example:
a) Limit the spread in monthly employee contributions
b) Limit the spread in benefits
c) Mix the 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 option
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 (6)

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 the 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 (5)

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 ti 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 individual and small group plans.

Question 27

Reasons for health risk adjustment (4)

Answer 27

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

1) Require health plans and providers compete on the basis of efficiency and quality, not on risk selection
2) Preserve choice for consumers
3) Have consumers pay an appropriate price 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 compensate the plans with higher-than-average risks through transfer payments from plans covering lower-than-average risks

Question 28

Risk classification schemes (8)

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

Types of antiselection (3)

Answer 29

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 common example of internal antiselection is premium leakage.
3) Durational (cumulative) antiselection - occurs as people make decisions about whether to end coverage. Higher cost insureds 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 30

Mechanisms for controlling external antiselection (3)

Answer 30

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 31

Tools used in the underwriting process (specifically to managing antiselection) (10)

Answer 31

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 others 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 provision replace underwriting entirely.

Question 32

Actions available to the underwriter (6)

Answer 32

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 33

Process for investigating claims (3)

Answer 33

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 a pre-existing condition
c) Size - don’t investigate a claim if the cost of investigation exceeds the cost of the claim
d) Sentinel conditions or procedures - some conditions are related to others 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 been applied if the insurer had been aware of the condition
b) Rescission - declaring the policy void from the beginning. The ACA prohibits rescissions of health insurance policies unless the insurer can prove fraud or intentional misrepresentation of a material fact.

Question 34

Descriptions of buy down effect and premium leakage

Answer 34

These occur when policyholders are allowed to buy down their benefits (move to higher deductibles)

1) Buy-down effect - upon receiving a rate increase, some policyholders switch to lower cost plans, so the actual premium increase will be less than what the insurer expected
a) The buy-down effect is the lost premium due to buy-downs
b) Buy-down effect = actual pure premium before buy down - actual pure premium after buy down
2) 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.
a) Premium leakage = expected pure premium after buy down - actual pure premium after buy down

Question 35

Approaches used for modeling antiselection (3)

Answer 35

1) Partition models - the population is broken into subsets (e.g., healthy vs. unhealthy), which are modeled separately. Individuals are ranked by cost, and a line is drawn to define the subsets.
a) Drawing the line in a Cumulative Antiselection Theory (CAST) model - the cutoff line is chosen so that the ratio of average claim costs between the unhealthy and healthy groups is a chosen multiple (such as 5 or 10)
b) Drawing the line in a Minnesota Antiselection Model - this model defined boundary conditions on the antiselection which might occur in a specific situation, in order to estimate the antiselection expected under different scenarios
c) Drawing the line in internal antiselection - a modified CAST model can be used, adding a decrement to reflect the potential of the insured to change benefit plans.
2) Deterministic vs. stochastic models - deterministic models typically project results based on expected values. But a true picture of the future requires distributions of potential values, which are provided by stochastic models.
3) Markov processes - in most cases, a two-subset partition model is sufficient. But if more partitions are need, a Markov chain can be created to determine the population distribution in future time periods.

Question 36

Assumptions needed for projecting values in antiselection models (5)

Answer 36

1) Trends in claim costs (from aging, duration, secular trend, etc.)
2) Lapsation, separately for each sub-population (often varies by size of rate increase)
3) Movement between populations, often expressed as a net movement from healthy to unhealthy
4) The time value of money (interest)
5) Premium rate increases

Question 37

Situations in which the CAST model does not work well (3)

Answer 37

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 (constant), 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 healthy lives and 0.8 for unhealthy lives)

Question 38

Traditional techniques for controlling antiselection that are prohibited by the ACA (8)

Answer 38

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 39

ACA mechanisms for controlling antiselection (5)

Answer 39

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 or more employees to offer affordable insurance coverage that meets a minimum coverage level, or pay a penalty
c) Individual 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.
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
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 preventive 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

Question 40

Requirements that mitigate antiselection between exchange plans and off-exchange plans (7)

Answer 40

1) Insurers must include all ACA-compliant policies in a single risk pool. 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 for signing up
7) Open enrollment periods are identical on an off the exchange

Question 41

Implications for an employer to consider before deciding to self fund long-term disability coverage (6)

Answer 41

1) Loss of third-party guarantee for employees - an 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 42

Coverage options for groups that have kept transitional coverage (4)

Answer 42

These groups must choose one of the following in 2018 once transitional relief expires

1) Purchase ACA-compliant coverage
2) Drop coverage
3) Find some way to be defined as a large group
4) Enter into a self-funding arrangement, such as an ASO, ASO with stop loss, a minimum premium arrangement, or coverage administered by a third party administrator with or without stop-loss

Question 43

Description of level funding products (4)

Answer 43

1) Level funding is an ASO product with integrated stop-loss coverage. It allows groups to benefit from the advantages of self-funding, while limiting the disadvantages.
2) The cost components of level funding products are:
a) An ASO fee to cover administrative and selling expenses
b) Aggregate stop-loss (ASL) coverage
c) Specific stop-loss (SSL) coverage
d) A paid claims fund held by the insurer to cover the group’s expected non-stop-loss claim costs over the projection period
e) An IBNR fund to cover claims incurred during the projection period, but paid afterward
3) A sixth, unofficial component is an incurred claims cost projection, which is used to develop several of the other cost components
4) The paid claims fund is what allows the group to pay fixed monthly payments
a) The payment into the fund = the ASL corridor (or aggregate margin factor) * the group’s projected paid claims below the SSL deductible
b) This payment pre-funds the group’s maximum liability. Any amounts greater than this are covered by stop loss.
c) If the group’s actual paid claims are below the maximum liability, the group will receive some portion of the paid claims fund’s surplus as a refund

Question 44

Considerations when offering a level funding product (5)

Answer 44

1) Insurers would want better-risk small groups to choose ACA products since these groups are very profitable under community rating. But these groups will seek lower-cost alternatives, so they could go to competitors who offer level funding policies.
2) Insurers have not yet had much success with level funding products. But this should change once transitional policies go away, making level funding products the cheapest option for many groups.
3) Level funding products are not easy to price, sell, and administer:
a) Insurers must have the skills to properly project the expected claim costs of individual small groups. They also must become familiar with stop-loss products.
b) Insurers should retain legal expertise to understand the stop-loss regulations in their states and develop contracts appropriately
c) Selling stop-loss policies often requires the filing of rates and forms with state departments of insurance
4) Level funding products should be designed and priced to closely resemble the fully insured products they are replacing
5) Most small groups are not familiar with self-funding or stop loss, so insurers will need to help them and their brokers understand these products

Question 45

Use of credibility for group long term disability (LTD) insurance

Answer 45

1) Valuation of claims
a) The 2012 GLTD valuation standard requires insurers to reflect company-specific termination experience in their valuation assumptions
b) The formula for determining the full credibility standard (f) is:
i) f = selected variance factor * (1.44 / 0.05) ^ 2
ii) f = number of claim terminations required for full credibility
iii) Selected variance factor varies by claim duration: 4.0 for 2-24 months, 3.0 for 25-60 months, 2.5 for 65-120 months, and 2.0 for 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 + ( rho / mu)^2), where mu and rho are the mean and standard deviation of the claim amounts
ii) For insurers with fewer claims than lambda, C = (number of expected claims / lambda) ^ 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 underlying credibility model

Question 46

Challenges in applying credibility for LTD insurance (8)

Answer 46

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
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 47

Reasons LTD claim experience tends to be more volatile in early claims durations (4)

Answer 47

1) Terminations in early durations are dominated by recoveries (as opposed to deaths), and there is a strong correlation between recoveries and 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

Question 48

Common features of the group medical insurance (14)

Answer 48

1) Premium rates are usually guaranteed for one year
2) Groups usually consist of employees (and their dependents) of a single company or a governmental unit, or members of a union
3) Healthy individuals tend to remain healthy and incur few claims, while many illnesses tend to last more than one year
4) Insurance coverage is written without individual health underwriting
5) Premium rates do not change during the contract year
6) Retrospective experience rating may be used for larger groups
7) Insurers have a manual rating system that includes many factors, such as geographic location, age, and gender
8) Most insurers use the group’s own claim experience in projecting claim costs
a) For groups with less than 300 members, insurers typically blend the group’s own experience with a manual rate
b) This requires a credibility table or formula, which should not vary by too many factors and should be relatively easy to explain
9) Purchasers of group health insurance tend to be very knowledgeable about their benefits and will shop around for competitive premiums
10) The market for health insurance coverage is very price competitive
11) The policyholder is usually advised by a consultant or broker who has little loyalty to the insurer
12) Competitive pressure exerts a downward price influence and reduces profit margins
13) Most covered individuals incur at least some claims over the course of the year
14) The distribution of medical claims by individual has a very high variance

Question 49

Considerations for applying a credibility to the group medical insurance market (3)

Answer 49

1) Many credibility models apply to products for which claims are rate, so they must model claim frequencies. But for group medical insurance most individuals have claims, so a reasonable simplifying assumption is that all individuals have claims
2) Individuals who have high claims in one year will tend to have above average claims in the next year, so the credibility of a group of only one member is significant
3) Because the market is competitive, insurers that use inappropriate credibility levels could experience significant losses

Question 50

Basic credibility formula for group medical insurance

Answer 50

This formula was created using a least squares credibility model
z = (K1 + (n-1)K2) / (1 + (n-1)K3)
where:
n = number of individuals in the group
K1 = credibility of a group of one individual. It equals the regression coefficient of an individual’s claims in the current year based on the prior year. Typically around 25%.
K2 = regression coefficient of claims for individuals in the current year based on the claims of others in the same group in the prior year. It is difficult to estimate, so it is often set equal to K3.
K3 = measure of how the claims of each individual are related to others within the same group. It is commonly set equal to 1%.