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Best Estimate Assumptions for Expenses
Basic Steps (Considerations) of Expense Study
Expense Study and Expense Review interchangable
- Determine the scope of the expense study
- Collect Expense Data
- Check the consistency of data with internal and external reports
- Determine which expenses will be excluded from the best estimate expense assumption
- Determine the Expense Categories to be used
- Determine the unit expense bases to be used
- Classify expenses to categories
- Allocate expenses to categories
- Determine the unit expenses
- Perform reasonability checks on the results of the study
Best Estimate Assumptions for Expenses
Data Sources for Expense Data
- General ledger or data warehouse (primary source)
- Agent/broker/payroll systems (commissions)
- HR systems
- Staff payroll systems
- Policyholder payment system
- Budget, Business planning and Financial Reports
- Investment management systems
- Transfer pricing analysis, agreement, and reports
Best Estimate Assumptions for Expenses
Categories of Expenses
- Acquisition - expenses related to marketing and selling policies (e.g., commissions, distribution, and policy issue expenses)
- Administration - expenses related to the operations and can include billing, premium collections, in-force management and monitoring and reporting
- Benefits - expenses related to validate benefit eligibility and pay the benefits
- Asset/Investment - expenses related to manage the investment portfolio
- Overhead - general expenses not included elsewhere and can include HR, IT, Legal, Actuarial, Executive Management
Acquisition. Administration, and Benefits Expenses are Directly related to policy activities
Best Estimate Assumptions for Expenses
Unit Measurements that can be used for Each Expense Category
at least 2 measurements for each identified categories
- Acquisition unit measurements can include number of policies issued, number of policy applications, number of certificates issued, benefit amount, sales commission, or issue premium
- Administration unit measurements can include number of in-force policies, number of in-force certificates, number of bills, number of terminations, number of riders, premium income, benefit amount
- Benefits unit measurements can include number of claims, benefit amount, number of termination claims paid
- Asset/Investment unit measurements can include market value, acquired value, disposal value, number of policy loans, mortgage payment, and bond interest
- Overhead unit measurements can include number of in-force policies, number of employees, surplus, fund value, number of in-force certificates, required capital
Best Estimate Assumptions for Expenses
Compare considerations for applying expenses when setting premium rates for:
Individual disability Insurance
Group Health Insurance
Similarities
* For both, can apply the expense study steps to determine the best estimate assumptions
* For both, need to include the overhead expenses at the organizational level.
* For both, expenses can include HR, IT, Actuarial, Legal and other Coporate expenses.
* For both, allocation of expenses methods may include transcation-based, activity-based, time study based, in-force based, staff based.
Differences
* Disability expense usually measured as expense per $100 coverage, expense per initial claims, expense per payment, expense per litigation case, and expense per recheck. Group Health usually measured as expense per policy.
* Disability includes periodic re-check expenses to verify continue disability. Group health don’t.
* Group Health expenses may be limited by the ACA.
* Disability expenses are often much higher in the earlier durations as management of the claims is intense. Thus duraitional adjustments may be considered in the unit expense assumption developments.
*Group health expenses may be priced by state.
Best Estimate Assumptions for Expenses
Methods (How) to Allocate Expenses to Expense Categories
- Transcation based - uses number of transcations or transcation amounts from admin system to allocate expenses
- Activity based - more details than transcation based. (e.g., A death claim transcation could involve activities as record claims, submit claim to reinsurer, internal claim investigation, approval from reinsurer, communication of approved or disputed claim, process claim payment, claim litigation etc.
- Time study based - individuals track time spend on various activities
- Expense based - considers management time relative to the expenses they manage (e.g., investment overhead as a percentage of assets)
- In-Force based - used when number of transcations not available
- Staff based - used for staff support functions such as HR, payroll, Cafeteria etc.
Best Estimate Assumptions for Expenses
Considerations in Determining a Base for Unit Expenses
- Direct underlying relationship between the base and expenses
- Limited the base units used
- Make sure the base units selected could be easily projected in valuation system (policies in force, lapses, claims etc.)
Underwriting and Rating
Describe characteristics of successful health plan underwriting and rating
Adequate - Rates are high enough to sufficiently cover the claims, expenses, and yield an acceptable return on equity.
Competitive - Rates are low enough to sell enough policies and enroll enough members to meet the health plan volume and growth targets.
Equitable - Rates will approximate any group’s costs without unreasonable cross-subsidization among groups. Equitable rates are achieved by applying appropriate rating factors and results in a higher persistency.
Underwriting and Rating
Types of Underwriting Depends on
1. The time at which u/w is done (e.g., at issue, during plan year, or renewal)
* at issue - ensure a valid ER-EE relationship, min participation, ability to pay, Other coverage, persistency. ACA does not allow rating by health status and preexisting conditions for small and individual plans.
* renewal - ACA allows large groups to experience rating
2. Group size
* The bigger the group size, the better insurer could spread the risk
* Note, ACA does not allow small groups and individual to rate based on group size
3. Risk arrangement (Self-insured or Fully-insured)
Underwriting and Rating
Community Rating vs. Experience Rating
Community Rating - The Collective Experience of all who are in the same risk pool are used in rating
* ACA requires that all individuals within an insurer be placed in the same risk pool for rating, although individual and small groups do not need to be in the same pool
Experience Rating - Manual rate is blended with the Group’s specific experience depending on the group’s size and the credibility of the data
* ACA ONLY Allowed Experience Rating for Large Group
Underwriting and Rating
Create a Data Request for Claim Data from A Large Group’s current Insurer. Justify each element requested.
Monthly Medical/RX Claims and Enrollment - This information will be used to determine the level of historical paid claims and PMPM trend factor
Historical Claim Lag Triangles - This information will be used to determine the completion factors to to apply to the paid claims
Large Claim Report - This information will be used to determine if a pooling adjustment is necessary
Plan Designs - This information will be used to net out the current insurer’s plan design from the historical experience thus the proposed plan design could be adjusted to the rate
Underwriting and Rating
Base Rate (Manual Rate) Development
Community Rating Method
- Reflect historical experience of all insureds to determine base rate
- Adjust for changes in health plan operation from base period to projection period
- Projection base rate - apply medical trend forward to projection period
- Convert claims data to incurred basis
- Incurred claims match with exposure data to develop PMPM
- Retention - Add retention load to PMPM claim cost
- Conversion of rates from member level to EE level (e.g., to account for different tier rating structure EE only, EE+family)
Underwriting and Rating
Historical Experience Info Reflected in the Base Rate
Base Rate is the average rate of insurer’s population. The population could be all large groups, all small groups, all individuals, all. This is Community Rating.
- Population (Medicare, Medicaid, Commercial Group, Other)
- Cost sharing
- Covered services (Benefit level)
- Provider payment arrangements
- Demographics
- Average members per contracct
- Geographic Area
- Health Status
- Occupation
- Coverage effective date
- Degree of health care management
- Level of out of network usage
- Claim admin, underwriting practices, distribution method
- Presence of workers compensation
ASOP
Describe guidance of ASOPs
23, 25, 41,12, 49
ASOP 23 - Guidance to actuary in selecting data, using data, relying on data supplied by others, reviewing data, preparing data for actuarial work and making appropriate disclosures of the data quality
ASOP 25 - Guidance to actuary when performing professional services with respect to selecting or developing credibility procedures and using those procedures to sets of data
ASOP 41 - Guidance to actuary with respect to actuarial communications
ASOP 12 - Guidance to actuary with respect to designing, reviewing, or changing risk classification systems
ASOP 49 - Guidance to actuary develop, certify or review the Medicaid managed care capitation rates on the behalf of state Mediciad agency or an MCO
Pharmacy Claim Costs Data Consideration
- Collected electronically when prescriptions are filled. Thus data is more complete and accurate than medical claim costs data
- Shorter lag (incurred and paid) than medical as claims processed at point of sale, and pharmacy generally submit claims to PBM every 2 weeks
- Pharmacies and PBMs perform safety check and drug utilization review prior to dispensing the prescription (verify compliance to Quantity Limit, Prior Authorization, Step Edit as well as potential adverse effects with current taken drugs)
- All above results Better data for analytics
- Own experience data is usually the best if credible.
- Could supplementary by data vendors
- Projections need to consider seasonality (e.g., Mondays fill pres highest, holidays low). At least 12 months of data to avoid seasonality
