Rating and Premium Setting Flashcards
Module 2
If the pure premium is $1,000 and the loading percentage is 40%, what is the gross premium?
While pure premium is simply the expected claim experience, gross premium is the pure premium divided by 1 minus the loading percentage. In this case, the gross premium is $1,000 divided by .60, or $1,666.67.
Stated differently, 60% of the gross premium ($1,667 3 .60 5 $1,000) would be allocated for losses (this would be the loss ratio) and 40% of the gross premium ($1,667 3 .40 5 $667) would be allocated for loading (also known as the expense ratio).
What is included in the loading percentage?
A markup the insurer charges to cover its objective risk, profit and costs of marketing, adjudicating and processing claims, coordinating benefits and providing access to its network.
In other words, all costs, other than losses and loss adjustment expenses, are included in the loading percentage. These costs are reduced by any investment earnings when premiums are calculated.
What are two major factors that determine the size of the loading percentage?
The loading percentage differs greatly between group and non-group markets.
For example, in one study the loading percentage was about 10% in group markets and about 50% in individual markets.
The loading fee also varies greatly by firm size, with smaller loading percentages for larger groups.
In addition, the size of the loading percentage is going to depend not only on the actual marginal costs of running the insurance plan but also on the nature of the competition the insurer faces.
What does the Affordable Care Act (ACA) require in terms of the medical loss ratio for small groups up to 100 workers and nongroup plans, and what is its mandate for fully insured large groups?
The (ACA) requires that the medical loss ratio for small groups up to 100 workers and for nongroup plans be no less than 80%.
For fully insured large groups, the medical loss ratio cannot be less than 85%. If an insurer has a medical loss ratio below these thresholds, it is required to refund a share of its premiums back to purchasers.
The ACA requirement does not apply to plans where the employer is responsible for the payment of covered plans, that is, self-funded plans.
What is carve-out coverage? Provide an example
Coverage that may have been provided as part of a particular plan but is now provided separately is carve-out coverage. Prescription drug and mental health benefits are often carved out.
Explain in words the concept of objective risk in health insurance.
Objective risk is dispersion (which is often measured by standard deviation, variance or range) in losses related to some measure of expected losses and the number of covered lives.
Objective risk ________ as the size of expected losses increases.
As the law of large numbers states, objective risk will decrease as the number of covered lives increases.
In simpler language, losses are relatively more ___________ when the number of exposure units increases.
Declines
Predictable
Describe the purpose of underwriting using the concept of reliable risk pools.
To establish a number of risk pools or risk classes, with each pool having expected losses significantly different from the others, a small dispersion of possible outcomes and a large number of covered lives.
Knowledge
One might start by establishing differences based on gender and age on the theory that older people have higher claims experience, perhaps because of the prevalence of chronic conditions.
Different risk classes could be established based on geography, occupation or industry.
The problem for insurers is that, while the differences across these groups may be meaningful, there is also dispersion around each of the expected claims estimates. In addition, some potential risk classes may be too small to provide much assurance that the expected claims and dispersion measures are
reliable
Explain the concept of community rating.
Community rating is a rating system in which all individuals and/or groups are placed in a single risk pool.
This system was used by Blue Cross and Blue Shield plans in earlier years and by health maintenance organizations (HMOs) well into the 1970s. It has some relevance in today’s market because it is sometimes advocated by proponents of universal health insurance plans.
Also, community rating is the basis of some other modern rating systems.
Insurers compute the ______ _____ experience per covered life for the recent past and project that value forward for general inflation and anticipated changes in real medical care costs and patterns of utilization.
Then they add the ______________ costs, a normal profit and a contribution to reserves in case the utilization is worse than anticipated.
Finally, they ________ the investment on premiums and reserves held.
- Actual claims
- Administration
- Subtract
What is manual rating?
Manual rating is a system in which insurers place insureds in groups according to their loss-producing characteristics.
In the individual market, for example, such
factors as age, gender, location, occupation and health status may be used to classify policyholders.
In the group market, the mix of employees and dependents with those characteristics may be used, as well as firm-specific factors.
What is prospective rating
Involves the use of an employer’s previous data to develop a rate for the future. In other words, an employer’s current premium is based, at least to some extent, on the previous loss experience of that employer. Past experience is used to develop a future premium.
What is retrospective rating
Current experience is used to calculate the current premium. Essentially, the insurer has the firm open a checking account from which the insurer writes checks to pay the claims of the firm’s employees and their dependents as those claims arrive. In addition, the insurer charges the firm a fee to administer the plan and adjudicate claims. At the end of the year, the firm and the insurer settle accounts. Typically, the firm will make a retro payment at the end of the year to reconcile the monthly or quarterly payments with the actual claim experience. If prepayments are insufficient to pay claims, the firm is responsible for paying the claims.
What is a credibility factor, and how is it used with experience rating?
Credibility refers to the extent to which an insurer can rely upon the loss data of an employer when using experience rating. The loss data of a small employer for only a short period of time is not as credible or reliable as the data from a larger employer over a long period of time.
