SN102 AAA, Loss Ratios And Health Coverages

Question 1

Users and uses of LR’s - short term products

Part 1 of 2

Answer 1

1. Rate increases tracking increasing CCs, are anticipated on a regular basis
2. Regulators and legislators
   
   2. 1 Solvency oversight: LRs can be an indicator of solvency problems
   3. 2 Prospective rate review
      
      2. 2.1 Before intro of a product and when prem increases submitted
      3. 2.2 if expected LR > min standard, then rates not excessive
      4. 2.3 if expected LR + expense ratio > 1, then rates may be inadequate
      5. 2.4 if wide variations by rating cell, rate may be discriminatory
   4. 3 Retrospective review and refund calculations
      
      2. 3.1 past experience + anticipated future experience > the minimum LR standard
      3. 3.2 Anticipated future experience must > the minimum LR standard
      4. 3.3 included in the LR: change in claim reserves, and care management expense
      5. 3.4 claim administration not included as part of incurred claims
3. 4 risk pooling and transfer
   
   2. 4.1 losses > threshold are shared by all participating carriers

Question 2

Users and uses of LR’s - short term products

Part 2 of 2

Answer 2

1. Investment Analysts: prefer low LR because it means more risk margin
2. lenders: similar considerations as investment analysts
3. Rating agencies: gauge the effectiveness of operations and financial strength
4. Consumer ratings: highest LR as being of the best value to the customer
5. Company management: uses LR for product management, new product development, performance measurement, reporting to group policyholders, determining rate actions and compensation

Question 3

Problems with LR’s short term products

Legislative and regulatory issues

Answer 3

1. The public perspective (aka the economic value of the policy)
   
   1. 1 min standard LR implies that servicing, care mgmt, to the extent they are not reflected in the numerator, have no value
2. Changes in U/W requirements
3. Data reporting
4. Actuarial considerations
   
   4. 1 credibility of Data
   5. 2 the length of time considered in actual results
   6. 3 whether to limit data for LR’s to a geographic area
   7. 4 the use of claim and contract reserves in determining LR’s

Question 4

Problems with LR’s short term products

Comparability issues

Answer 4

1. Plan and benefit design (PPO vs HMO)
2. Financial arrangements: non-refunding vs refunding
3. Expense differences
   
   3. 1 MCO’s and commercial insurers
      
      3. 1.1 HMO treat expenses associated with medical care as claims
      4. 1.2 cause LR’s for HMOs > for commercial carriers
   4. 2 costs in distributing
4. Credibility and pooling: claim cost levels and expenses vary by area
5. Reinsurance, guarantee funds and market assessments
   
   5. 1 HMOs include reinsurance prem as a claim expense, and the reimbursements are subtracted from the claims
   6. 2 Insurers remove reinsured claims from claim experience, but reinsurance Prems are deductible from premiums
   7. 3 state assessments for risk pools or guarantee funds should be recognized in LR analysis
6. Conservatism

Question 5

Loss ratios: additional considerations for long term products

Answer 5

1. Level premium
2. When benefits are fixed, premiums are not anticipated to change unless claims experience worse than anticipated
3. Reserving and pre-funding
   
   3. 1 pre-funding of claims creates need for contract reserves
   4. 2 statutory reserves - preliminary term method with conservative assumptions
   5. 3 GAAP
      
      3. 3.1 Net level reserves are established
      4. 3.2 DAC: an offset to first year acquisition expenses
      5. 3.3 GAAP reserves are generally based on realistic assumptions
   6. 4 LR usually includes increase in the GAAP benefit reserve
4. Regulators
5. Company management
   
   5. 1 an increasing LR could indicate a potential problem is emerging
   6. 2 smaller blocks: less stable results makes analysis less meaningful
   7. 3 examine claim frequency, severity and persistency to understand problem
   8. 4 the maturing of a block of business results in an increasing LR

Question 6

Problems with LR’s Long term products

Answer 6

1. Legislative and regulatory issues
   
   1. 1 Economic value of the policies
   2. 2 when min LR levels are set too high, margins for fluctuation are squeezed
   3. 3 An actual to expected analysis is a better indicator of premium adequacy than a simple LR
2. Comparability issues
   
   2. 1 Definition of LR can be unclear
   3. 2 Durational LR’s can be compared to expected LR’s for the measured time period
3. Actuarial Considerations
   
   3. 1 treatment of reserves
      
      3. 1.1 change in reserves should be adjusted by the investment income assumed to be earned
   4. 2 Assumptions
      
      3. 2.1 When comparing actual results with lifetime benchmark LR’s, consider assumption differences
   5. 3 Benefit provided
   6. 4 expenses
      
      3. 4.1 expenses’ impact on LR’s of long term products less significant than short term
   7. 5 pooling, reinsurance and credibility

Question 7

Definition of loss ratio

Answer 7

1. Incurred claims divided by the earned premium for the calendar year
2. Lifetime LR is PV(expected claims) divided by PV(expected prem)
3. Products have expense levels which vary widely. Affects expected LR
4. Volume of business: fixed expenses on the LR decrease as size of block increase
5. The morbidity costs vary by U/W, which can result in different expected LR’s
6. Items included as claims can vary by carrier
   
   6. 1 Expenses: case management, rehabilitation services, capita red services
   7. 2 treatment of reinsurance may vary by carrier
   8. 3 benefit component can be paid claims, incurred, or incurred plus changes in contract reserves
7. Premium component can be collected prem, collected plus due, earned prem, or earned less changes in contract reserves
8. The nature of carrier can influence LR expectations