Objective 6 - Pricing, Benefit Design, and Funding

Question 1

Components of new business underwriting for large groups

Answer 1

1. Review the characteristics of the group in order to screen, approve, and classify the group (see separate lists for U/W criteria for large groups)
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 2

Criteria used for underwriting large groups

Answer 2

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 can 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 - a 75% minimum participation rule is common, but is often modified to consider participation in all plan options offered by the employer (or through a spouse’s employer)
7. Carrier persistency - due to competitive considerations, setup costs for a new group are not commonly recouped in the first or second contract year

Question 3

ACA initiatives that promote health care access and consumer choice

Answer 3

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. Issuing grants to states to create high-risk pools for the uninsurable
6. Creating a health insurance exchange that is both guaranteed issue and without pre-existing condition exclusions

Question 4

Components of renewal underwriting for large groups

Answer 4

1. Evaluating the case - renewal evaluations focus on the same type of information used in initial underwriting, but now there is 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 composition
4. Renewal monitoring - experience must be tracked throughout the year, with more formal analysis two or four times per year

Question 5

Special types of large groups

Answer 5

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 6

Underwriting group disability and life

Answer 6

1. LTD and Life insurance are risky due to low frequencies and potentially large claims
2. Credibility is low and experience rating is only used for very large groups
3. Non-contributory plans are preferred to get high participation.
4. Considerations for disability:
   a. Overinsurance must be avoided through offsets and lower replacement ratio for high income individuals
   b. Industries which are cyclical, seasonal, or subject to high turnover should be avoided
   c. Consider the extent to which the employer actively supports disabled employees returning to work
5. Considerations for life:
   a. Underwriting safeguards include participation requirements, benefit formulas related to earnings, age-based rating, and evidence of insurability for very large face amounts
   b. Carriers differentiate products by adding new benefit features such as benefit provisions, beneficiary financial counseling, and universal life

Question 7

Characteristics of successful multiple-employer health plans

Answer 7

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 8

HIPAA requirements that increased antiselection in the small group market

Answer 8

1. Small group carriers and HMOs must offer all of their major medical and comprehensive health insurance products on a guaranteed acceptance and renewal basis (with very limited exceptions)
2. Individuals cannot be rejected or singled out for special rating treatment due to their health
3. Pre-existing condition limitations or exclusions cannot be imposed on individuals who have had continuous coverage for more than 12 months

Question 9

Group characteristics used in underwriting small groups prior to the ACA

Answer 9

1. Financial viability - carriers need to retain groups long enough to recoup high acquisition expenses, so the group needs to be financially strong enough to stay in business
2. Industry/occupation - carriers must consider the type of work done and the lifestyles of employees. Under HIPAA, there are no ineligible industries, but surcharges are applied in sates where they are allowed
3. Group size - larger groups result in a better spread of morbidity risk and lower administrative expenses
4. Workers’ compensation - some carriers require that all eligible employees be covered by workers’ compensation
5. Participation requirements - these help ensure a better spread of risk by not allowing too many healthy employees to opt out of coverage
6. Employer contributions - the higher the employer contribution, the higher employee participation tends to be
7. Prior coverage and experience - for groups seeking coverage for the first time, find out why the group is now seeking coverage
8. Eligibility rules and classes - groups need to define who is eligible for coverage (for example, full-time employees who have been with the company for at least 3 months)

Question 10

Considerations in underwriting individuals for small group coverage prior to the ACA

Answer 10

1. Enforcement of eligibility - check to see if each applicant meets the group’s eligibility guidelines
2. Pre-existing condition limitations - HIPAA limits the use of these for individuals who had prior coverage
3. Individual medical assessment - the key was to convert information on individuals into a numerical measure for establishing the employer group’s premium rate (often done by applying debit points based on medical conditions)
4. Post-issue underwriting - may result in coverage being rescinded if fraud or material misrepresentation is later discovered
5. Underwriting optional benefits - carriers generally offer the optional benefit only at issuance

Question 11

Rating parameters used in small group manual rates prior to the ACA

Answer 11

1. Age - may states limited the spread from highest age rate to lowest age rate
2. Gender - baby groups were usually charged gender-distinct rates. Larger groups were often given unisex rates
3. Geographic area - geographic factors account for claim cost variations by state and area
4. Group size - groups have a lower per insured cost as size increases (but states limited the use of group size factors)
5. Industry - factors were applied to risky industries, but were generally limited to a range of only 15%
6. Managed care and negotiated discounts - most carriers apply the effects of managed care programs through the use of benefit factors
7. Plan of benefits - most states require that rating factors only account for differences in plan design and not differences in the types of groups that select the plans
8. Family composition - carriers typically use structures with two, three, or four tiers
9. Participation levels - this was not a widely used rating factor
10. Tobacco use - many states consider rating upon tobacco use to be health status rating, and therefore do not allow it
11. Other possible rating characteristics included employer contribution level, evidence of prior coverage, and percentage of employees that are full-time and part-time, presence of dual plans

Question 12

Rating parameters allowed in small group manual rates beginning in 2014

Answer 12

1. Age factors (limited to a 3:1 ratio from highest to lowest rate)
2. Family composition factors
3. Tobacco use factor (limited to a 1.5:1 ratio)
4. Area factors
5. Plan benefit factors
6. Provider network factors
7. Renewal rates = new business rates

Question 13

Risk pooling programs for small group business

Answer 13

1. Reinsurance programs - many states have these programs to help distribute the added risks of guaranteed issue requirements. Carriers can place individuals or entire groups into the reinsurance program by paying the reinsurance premium.
2. Risk-adjustment formula programs - a couple of states have developed risk-adjustment formulas to help normalize the risk of guaranteed issue

Question 14

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

Answer 14

1. Inertia - employees often prefer to stay with a prior plan option
2. Plan provisions and costs - such as covered benefits 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 employee contributions 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 selection tools
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 15

Situations where employees may be offered multiple choices

Answer 15

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 do not
2. Choice based on member cost sharing - options may differ by deductible, coinsurance, etc.
3. 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
4. Choice among insurers - two or more insurers may offer health plan options to the same employee
5. Optional riders added to core coverage - the insurer may allow employees to buy coverage riders such as vision, disability, and dental
6. Choice by each family member - some insurers are now allowing employees to choose a different option for each covered family member
7. Choice between consumer-directed plans and traditional plans

Question 16

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

Answer 16

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 in 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 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 17

Steps for developing premium rates in a multiple-choice environment

Answer 17

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 18

Reasons for group experience rating

Answer 18

1. Groups want it - at least those with good experience want the premium to reflect it
2. The insurer wants to quote and charge premiums that are as competitive as possible
3. The insurer wants to avoid antiselection (good groups going to competitors and bad groups staying)

Question 19

Theoretical considerations in determining credibility levels

Answer 19

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 4x the coverage to double the credibility
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure and therefore credibility

Question 20

Practical considerations in determining credibility levels

Answer 20

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

Question 21

Steps in prospective experience rating

Answer 21

1. Develop past claim 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 due to changes in morbidity, mortality, demographics, benefits or antiselection
4. Calcualte gross rates from net rates by applying 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 to account for antiselection in multi-option scenarios
7. Small group considerations to recognize experience to some degree:
   a. Formula-based methods (for groups with at least 10 lives) - a group is initially assigned to a rate class and then reassigned at renewal if experience differs by a specified amount.
   b. Re-underwriting method - look at outlier cases to see causes of bad experience to determine prospective rates

Question 22

Pooling methods

Answer 22

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 - forgive 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 - ex., catastrophic claim pooling and a rate increase cap

Question 23

Loadings on the net premium (retention)

Answer 23

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

Question 24

Typical retrospective refund formula

Answer 24

Policyholder account balance = prior year’s balance + premium + investment earnings - charged claims - expenses - risk charge - increase in stabilization reserve - profit
Charged claims = claims paid + increase in claim reserves - pooled claims + pooling charges + conversion charges + claim margins
Risk charge covers the risk that the policyholder will terminate coverage while in a loss position
Addition to premium stabilization reserve reduces the risk of a deficit on termination; a certain level of reserve may be required before surplus can be paid as an experience refund

Question 25

Considerations in deciding whether to use retrospective experience rating

Answer 25

1. Group size - the group must be large enough to have credible data and 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 - an overriding factor
4. Company financial situation - crucial for insurers with a small surplus (e.g. Blues plans)

Question 26

Special funding arrangements for group insurance

Answer 26

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 (risk of not receiving terminal 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 (so there is latitude in the choice of investments). Stop loss is usually purchased from an insurer. Governed by ERISA (no premium taxes or state mandates).
4. Minimum premium contracts - fully insured plan that includes a minimum premium rider (provides for the employer to fund a trust 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) - trends are leveraged, so give them special attention
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 27

Advantages of self funding

Answer 27

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 claims 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 28

Disadvantages of self funding

Answer 28

1. There is no risk transfer - the plan sponsor is liable for losses that exceed expectations
2. Budgeting - fluctuations in benefit plan costs from month to 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 29

Considerations in rating specific stop loss

Answer 29

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 costs, males are more expensive than females at all ages, partly due to prevalence of accidents among young adults
5. Underlying plan design - such as maximums, managed care features, and extension of benefit provisions
6. Industry - may adjust rates based on industry of a plan sponsor
7. Contract type - a 12/12 contract is less costly than a 12/15. Watch for anti-selection by contract type.

Question 30

Underwriting considerations in setting a specific stop loss rate

Answer 30

1. Whether any of the current known large losses will have an effect on the upcoming policy year. The U/W may rate the policy up for the known loss, set a separate 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 31

Steps for setting aggregate stop loss attachment factors

Answer 31

1. Obtain running 12-month paid losses for the past 1-3 years. Use running 12-month due to seasonality.
2. Adjust paid losses or SSL reimbursements
3. Divide by number of certificates in each period to calculate losses paid PMPM. Many will use incurred PEPM instead of PMPM.
4. Adjust for plan design changes from experience periods 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 (ex: 125%)

Question 32

Aggregate stop loss underwriting considerations

Answer 32

1. Profitability is largely driven by setting appropriate attachment points
2. Aggregate margin factor - insurers generally have a higher factor for smaller plans due to the volatility caused by low numbers of employees
3. Specific stop loss deductible - should fall within a range from 5-15% of the plan’s expected aggregate losses

Question 33

Aggregate stop loss product variations

Answer 33

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 per covered life (called a ghost deductible - has same effect as the SSL deductible would have)
3. Terminal liability - converts a 12/12 policy into a 12/15 policy, but only in the year the policy terminates. Useful for policyholders wanting to switch from self-funding to conventional funding

Question 34

Disability income underwriting practices and considerations

Answer 34

1. Group characteristics (see separate list)
2. Plan design - including:
   a. Benefit richness - overinsurance, high maximum benefits, definition of disability
   b. The group’s financial condition and outlook of the firm, and safety of the workplace
   c. Voluntary plans - participation rate must be adequate
   d. Individual underwriting - may be needed for groups of less than 10, high face values, or late entrants
3. Manual rates - fit to the group
4. Historical experience - must be accurate and complete

Question 35

Group disability underwriting characteristics

Answer 35

1. Industry - some industries may be too hazardous to underwrite
2. Occupation
3. Age distribution
4. Gender distribution
5. Income distribution
6. Group size
7. Location
8. Employment status - seasonal employees may not have enough job security

Question 36

Insurer group life underwriting factors

Answer 36

1. Industry - either decline coverage or use a SIC factor to adjust rates
2. Contribution level - a 100% employer-paid plan has the least antiselection and beast spread of risk
3. Eligibility - usually require full time and actively at work. Must decide what to do with dependents and retirees (antiselection is greater).
4. Participation level - most states require 75% (needed anyway by the insurer to ensure and adequate spread of risk)
5. Benefit schedule - want minimum spread of amounts to reduce risk (less employee antiselection)
6. Prior experience - expected mortality can be developed from past experience for very large groups. But experience is rarely fully credible, so it is usually combined with expected manual claims.
7. Past rate history - rate history is usually needed to fully understand the prior experience
8. Individual underwriting - group life is generally offered with little or no individual underwriting is sometimes required for large amounts of insurance, late entrants, small groups, and some voluntary plans.

Question 37

Methods for mitigating concentration risk on life insurance

Answer 37

1. Obtain catastrophe reinsurance
2. Obtain per-life reinsurance
3. Participate in an industry risk pool
4. Limit the volume of business written in certain locations

Question 38

Medicare Supplement administrative considerations

Answer 38

1. Insurers must maintain and report detailed experience data, including exposure data and loss ratios.
2. Medicare Crossover is used to share data with insurers who pay secondary to Medicare
   a. Participation is voluntary but it allows for electronic exchange of eligibility and claim information.
   b. The initial system investment for this process is expensive, but it can result in reductions in admin expenses and payment lag due to efficiencies and reduced staffing needs

Question 39

Techniques used to apply the underwriter’s medical underwriting decision

Answer 39

1. Denial - provides the greatest protection for the health plan, and is useful when other options do not provide sufficient protection
2. Exclude conditions - coverage may be issued with a rider that excludes coverage for specific conditions. Exclusions may be temporary or permanent.
3. Rating class - charge an individual a rate that is different than the standard rate. Can be effective as long as the additional premium is not high enough to generate significant adverse selection.
4. Pre-existing condition limitations - eliminates coverage (for a certain amount of time) for conditions which existed prior to the coverage start date

Question 40

Why it is difficult to determine the optimal rate level for an individual/small group health block

Answer 40

1. Antiselection - health members leave to find better rates elsewhere
2. Competitive pressures
3. Regulatory limits on rate increases

Question 41

Rules for determining the optimal rate level for a individual/small group health block

Answer 41

1. For sustainable (healthy) blocks, maximize profit by setting rates at the market level, keeping rate increases moderate and lapses low
2. For unhealthly blocks, the optimal strategy is to maximize the rate increase within regulatory limits.