Sec B Stop Loss, Self Fund, Underwriting

Question 1

Basic forms of stop loss coverage

Answer 1

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 2

Stop loss contract types

Answer 2

• 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 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 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 on payment dates
  6. Different run-in and run-out lengths exists, resulting in contracts such as 12/18 and 24/12

Question 3

Steps for setting aggregate stop loss attachment factors

Answer 3

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 per employee per month (PEPM). Many will use incurred PEPM instead of paid PEPM
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 (for example, 125%)

Question 4

Advantages of self funding

Answer 4

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 5

Disadvantages of self funding

Answer 5

1. Risk assumption - the plan sponsor is liable for losses that exceed expectations
2. Cash flow - 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 6

Tools used in the underwriting process

Answer 6

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 provisions replace underwriting entirely

Question 7

Actions available to the underwriter

Answer 7

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 8

Components of new business underwriting for large groups

Answer 8

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 gurantees or funding alternatives that will be used

Question 9

Criteria used for underwriting large groups

Answer 9

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 lifestyle
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 economics 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 persistency - due to competitive considerations, setup costs for new groups are not commonly recouped in the first or second contract year

Question 10

Components of renewal underwriting for large groups

Answer 10

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. Develping 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 to four times per year

Question 11

Process for investigating claims

Answer 11

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 applieed 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 intential misrepresentation of a material fact

Question 12

Reasons why past claim patterns may not be representative of future patterns

Answer 12

• These would affect the validity of using the development method for calculating reserves*
  1. The company starts using electronic submission of claims
  2. A change in work flow due to a change in claim administrative systems
  3. Slow-downs or speed-ups in the claim administration department
  4. Changes in benefits
  5. Changes in the level of claim backlog

Question 13

Steps for using the authorization method to project claims

Answer 13

1. Gather data on the number of authorized services as of the valuation date
2. Adjust authorized services - adjust for differences between initial authorizations and actual services rendered. Differences arise due to appeals, poor data, and issues with coordination of benefits and enforceability of rules
3. Calculate an average cost per service rendered - this average cost is frequently a blend of provider contractual amounts and actual payments made
4. Estimate incurred claims - multiply the # of services by the cost per service
5. Calculate the estimated IBNR - equals the estimated incurred claims minus the amount of paid claims to date

Question 14

Considerations in rating specific stop loss

Answer 14

1. Trend leveraging - effect increases as the dedutible increases
2. Area leveragin - works in same way as trend leveraging (if an area is 10% higher cost, it has 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 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 anti-selection by contract type

Question 15

Underwriting considerations in setting a specific stop loss rate

Answer 15

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 thet 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 16

Aggregate stop loss pricing and underwriting considerations

Answer 16

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 of 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 17

Aggregate stop loss product variations

Answer 17

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 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