Setting Premium Rates Flashcards
Setting Premium Rates
Fundamental Rate Setting Process
- Measure past
- Adapt it to the future
- Use results to project the future to determine rate levels
Setting Premium Rates
Rate Setting Considerations
- Market
- Existing products
- Distribution system
- Regulatory
- System
- Strategic plan and profit goals
Setting Premium Rates
Major Rate Structure Elements
- Age
- Duration
- Gender
- Marital Status
- Parental Status
- Occupation
- Geographic Area
- Other (Health status, Other Coverages, Claim history)
Setting Premium Rates
Uses of Fundamental Pricing
- Pricing new benefit
- When experience is inappropriate or insufficient
Setting Premium Rates
Fundamental Pricing: Tabular Method Uses
Long-term, non-inflation sensitive products (like DI)
Setting Premium Rates
Fundamental Pricing: Buildup and Density Function Uses
Inflation-sensitive products
Setting Premium Rates
Fundamental Pricing: Buildup Function
Category Claim Cost = Claim Freq * Average Cost
Setting Premium Rates
Fundamental Pricing: Density Function
Describe total claim of individual in a year
- Good for calculating impact of deductibles and OOP, but not for copays
Setting Premium Rates
Fundamental Pricing: Simulation Advantages
- Examine whole distribution of future results over the whole portfolio
- Allow extensive (non-linear) relationships between variables
Setting Premium Rates
Rerating Steps
- Gather Experience
- Restate Experience
- Project Past Results to Future
- Compare Projection Against Desired Results
- Apply Regulatory and Management Adjustments
Setting Premium Rates
Elements That Might Cause Future Experience to Differ from Past
- Covered Population change
- Duration change
- Benefit change
- Claim Cost change
- Leveraging
- Healthcare Reform Items (Risk Adj, Risk Corridor)
Setting Premium Rates
Needed Rate Change Formula
= Projected LR / Desired LR -1
Setting Premium Rates
Block Rating Steps
- Calculate annual claim costs
- Add expense and profit to get gross premium
- Adjust for change when calculating rates
- Normalization = Translate claim costs into age/gender-neutral basis
- Apply demographic rate relativities to get final claim costs
Setting Premium Rates
Asset Share Elements
- Exposure (Policies Sold)
- Revenue (Premium, investment income)
- Claims
- Level of Capital
- Expense and Profit Targets
