Sec S Exp Rate, Multi-Choice, LGs, SGs, Refund Form, Cred Lvls

Question 1

Steps for developing premium rates in a mutliple-choice environment

Answer 1

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 2

Situations where employees may be offered multiple choices

Answer 2

1. Choice between medical coverage and no coverage - this creates antiselection because employees who waive employer coverage often have lower than 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, coninsurance, 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 presecription 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 3

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

Answer 3

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 4

Special funding arrangements for group insurance

Answer 4

1. Reserveless plans (aka deferred premium or premium drag plans) - the insurer foregoes 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 i usually purchased from an insurer. Governed by ERISA, so premium taxes and state mandates are avoided
4. Minimum premium contracts - fully insured plan 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 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

Characteristics of successful multiple-employer health plans

Answer 6

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 7

Reasons for experience rating

Answer 7

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 8

Steps in prospective experience rating

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 (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 - 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

Answer 9

• Regardless of 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 - e.g., use both catastrophic claim pooling and a rate increase cap

Question 10

Loadings on the net premium (retention)

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. This risk arises due to misestimation risk and trend risk

Question 11

Characteristics a small group insurer should consider in evaluating experience

Answer 11

• But 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 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 expenses 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 12

Typical retrospective refund formula

Answer 12

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 that the policyholder will terminate cover 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 13

Considerations in deciding whether to use retrospective experience rating

Answer 13

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 14

Theoretical considerations in determining credibility levels

Answer 14

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 4 times 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 15

Practical considerations in determining credibility levels

Answer 15

1. Regulatory restrictions on the use of experience rating for certain group sizes
2. Competitive pressures
3. Ability of administrative 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 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 e.g.:
   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 e.g., 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

Descriptions of buy down effect and premium leakage

Answer 17

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