Topic 2 - Manual Rates

Question 1

Sources of Internal Data (Group Medical Claims Costs)

Answer 1

1. Medical Claim System Data - billed claims, eligible claims, allowed amounts, paid amounts
2. Pharmacy Benefit Manager (PBM) data - For organizations that use 3rd-party PBMs to administer prescription drug claims -> Collect here
3. Premium billing and eligibility data - Includes exposure information needed to convert claims data into per member or employee basis
4. Provider contract system data - includes files of contractual reimbursement rates

Skwire, Chapter 21, Page 340

Question 2

Steps in developing claim costs for use in a rate manual (Group Medical Claim Costs)

Answer 2

1. Collect Data - Incurral period of at least 12 months to avoid seasonality issues. Best source is company’s own experience (separate list)
2. Normalize the data for important rating variables (separate list)
3. Project Experience period costs to the rating period - the trend rate should reflect changes in utilization of services, changes in average cost per service, and other factors, such as regulatory impacts and cost shifting among payers

Collect, Normalize, Project!

Skwire, Chapter 21, Page 341

Question 3

Important Rating Variables when Normalizing Data for use in the rate manual (Group Medical Claim Costs)

Answer 3

Many of these can now only be used in rating large groups due to the ACA

1. Age and Gender - May be appropriate to have separate factors for age and gender for different major service categories or different plan types (such as HDHP)
2. Geographic Area - Data should be adjusted to refelct one specific geographic area
3. Benefit Plan - Adjust the data to reflect a common benefit plan (commonly the richest plan)
4. Group Characteristics - Manual rate should represent the average group with respect to group characteristics, such as size and industry
5. Utilization Management Programs - adjust for any changes in these programs
6. Provider Reimbursement Arrangements - Adjust the exp to reflect a common reimbursement level
7. Other risk adjusters (based primarily on claim, diagnosis, encounter, and pharmacy data) - these may eventually become the primary method of risk adjustment

Skwire, Chapter 21, Page 343

Question 4

Methods of Adjusting Manual Rates for Specific Benefit Plans (Group Medical Claim Costs)

Answer 4

1. Claim Probability Distributions - Typically used to estimate the impact on claim costs of deductibles, coinsurance, and out-of-pocket maximums
2. Actuarial Cost Models - These models build estimated total claim costs by developing a net claim cost (after member cost sharing) for each detailed type of service and summing to get the total

Skwire, Chapter 21, Page 350

Question 5

Data Sources for Developing Dental Claim Costs

Answer 5

1. Company’s (O)wn Data (Best Source)
2. Outside (D)atabases - Prevailing Health Care Charges System, MDR Payemnt System, National Dental Advisory Service, ADA “Survey of Dental Fees
3. (C)onsulting Firms (Have manuals containing utilization Data)
4. Rate (F)ilings of Other Carriers
5. (T)hird Party Administrators
6. (R)einsurers

Mnemonic - COD & TFR (Company’s Own Data & The Fucking Rest

Skwire Chapter 22, Page 268

Question 6

Plan Characteristics that Impact Dental Claim Costs

Answer 6

1. Covered Benefits - plan soften have a missing tooth provision and limit replacement of dentures to once every 5-7 years
2. Cost sharing provisions - these provisions are very important because receiving proper dental care is very elective from the insured’s point of view. Provisions include deductibles, coinsurance, and copays, and maximum limits
3. Waiting Period - Used to discourage individuals from enrolling for one year to treat significant dental problems and then dropping coverage
4. Period of Coverage - will need to project past experience into the future. Dental trend should not be assumed to be the same as medical trend.

Mnemonic - BCWC Broken Crowns Will Cost

Skwire Chapter 22, Page 369

Question 7

Data Fields Included in pharmacy data files

Answer 7

These files include on record per prescription, nad the following information on each record:

1. Age, gender, and date of birth of the patient
2. Fill Date - Incurred date for the claim
3. Claim ID
4. Prescribing Provider ID
5. Pharmacy Provider ID
6. Drug Name - use a consistent source so the data does not have two different names for the same drug
7. Tier - category for the drug, as defined in the plan design
8. National Drug Code (NDC) - Eleven-digit code used to identify a specific form of a drug. A mapping of NDCs to drug names can be obtained from data vendors
9. Days supply - Usually grouped into 30-day, 60-day, or 90-day categories
10. Units - number of pills or a measurement of volume for liquid medications
11. Allowed amount - sum of discounted ingredient cost, dispensing fee, vaccine fee, and sales tax
12. Refill indicators - for prescriptions that allow refills, this shows which fill the current claim is for
13. Member and plan cost - these fields show how much of the allowed cost is paid by each party
14. Therapeutic class - categorization based on the conditions that the drugs are intended to treat
15. Other types of drug codes - RxNorm Concept Unique Identifier (RxCUI) and Generic Product Identifier (GPI)
16. Average wholesale price and wholesale acquisition cost

Skwire Chapter 23, Page 388

Question 8

Steps for calculating premiums for pharmacy benefits

Answer 8

1. Develop an allowed cost trend, which includes:
   a) Unit cost change
   b) Utilization change
   c) Mix Change - such as shift between generics and brand name drugs
2. Calculate adjustment factors for important rating variables (separate list) - factors that are already accounted for in allowed cost trend should not be included as a separate rating factor adjustment in order to avoid double counting
3. Estimate member cost sharing based on the projected allowed cost - if the plan design uses copays, use the average effective copay, rather than the nominal copay stated in the plan design
4. Calculate net plan liability and premium
   a) Projected Allowed Amount = Base Period Allowed * Trend * Other adj Factors
   b) Net Plan Liability = Projected Allowed Amount - Cost Sharing - Rebates
   c) Premium = Net plan liability + expenses + Profit Margin

Skwire, Chapter 23, Page 392

Question 9

Important Rating Factors for Pharmacy Benefits

Answer 9

1. (D)emographics - such as age and gender
2. (A)rea / Geography
3. (B)enefit Design - Changes in benefits may cause changes in drug use (induced utilization)
4. (F)ormulary - costs are impacted by:
   a) List of covered drugs and tier placement of drugs
   b) Formulary management programs, such as prior authorization, step therapy, and quantity limits
   c) Brand Patent Expiration
5. (C)ontracting - PBMs negotiate with pharmacies regarding dispensing fees and discounts off the average wholesale price (AWP)
6. (O)ther factors - changes in mail order utilization, changes in generic dispensing rate, changes in utilization management / cost management programs

Mnemonic: BAD F CO (These can be BAD For COsts)

Skwire Chapter 23, Page 393

Question 10

Payment Mechanisms for Prescription Drugs

Answer 10

1. Average Manufacturer Price (AMP) - Price manufacturers use to sell to wholesalers. In Canada, called the Manufacturer’s list price (MLP) and is regulated to ensure prices are reasonable in line with prices of alternative treatments
2. Wholesale Acquisition Cost (WAC) - Manufacturer’s suggested list price, which may also be used as a sale price to the wholesaler
3. Average Wholesale Price (AWP) - is based on data obtained from manufacturers and distributors, but it’s not an average nor is it based on any actual prices paid by anyone.
   a) WAC and AWP are the most widely accepted mechanisms. For brand drugs, WAC must equal 83.33% of AWP in the US due to legislation.
4. Actual Acquisition Cost (AAC) - price retails pay to wholesalers, negotiated between the two parties. In some cases, pharmacies buy drugs directly from manufacturers, in which case AAC = AMP.
5. Usual Customary (U&C) retail price - price consumers pay to retailers; includes retailer’s AAC + a markup
6. Maximum allowable cost (MAC) - typically used for generic drugs and can be viewed as a fee schedule.

GHDP-105-17, Page 1

Question 11

Layers (Participants) within the prescription drug distribution channel

Answer 11

1. Manufacturers produce drugs and typically sell them to wholesalers based on AMP or WAC
2. Wholesalers act as middlemen because retailers generally prefer to purchase drugs from one source rather than negotiating with hundreds of individual manufacturers. They sell to retailers based on WAC plus a markup or a discount off AWP
3. Retailers (Pharmacies) dispense prescription drugs to consumers, charging a U&C retail price. But if insurance is involved, the retailer will negotiate pricing with the insurer or its contracted pharmacy benefit manager (PBM).
4. Consumers purchase drugs at the U&C price if there is no insurance. If insurance is involved, consumers typically pay a copay or coinsurance and the insurer pays the rest of the negotiated price.
5. PBMs and insurers are not involved in distributing drugs except for PBMs who own mail service or specialty pharmacy facilities.

GHDP-105-17, Page 1

Question 12

Network and care management practices that impact dental claim costs

Answer 12

1. Provider Reimbursement Levels
   a) FFS Reimbursement may be based on usual, customary, and reasonable levels (UCR)
   b) PPO networks contract for reduced fees from a limited number of dentists. Dentists may not bill above that level
   c) Capitation is common with dental HMO plans
2. Care Management Practices - These will depend on the reimbursement method used. Practices include preauthorization and self-management (for capitated providers)

Skwire Chapter 22, Page 373

Question 13

Insured characteristics that impact dental claim costs

Answer 13

1. Age and gender - adults have higher costs than children, females have higher costs than males
2. Geographic area - can be significant factor
3. Group size - smaller groups have higher costs (due to adverse selection)
4. Prior coverage and pre-announcement - groups without prior coverage will have higher costs in the first year due to utilization by those who had put off having dental work done. If the plan is announced many months prior to becoming effective, this problem becomes even worse.
5. Employee turnover - high turnover increases cost since some new employees didn’t have prior coverage
6. Occupation or income - entertainers, professionals, and groups who are more aware of their benefits have higher costs
7. Contribution and participation - groups with less than 100% participation will have higher costs due to antiselection. The level of participation is inversely related to the required contribution level

Skwire Chapter 22, Page 378

Question 14

Considerations in developing a manual table for life insurance

Answer 14

1. Two approaches to use:
   a) Manual Premium tables - calculate the manual premium rate, then adjust for group size. This adjustment will reflect margin, profit, and expenses for appropriate group size, relative tot he averages built into the table.
   b) Manual Claims Table - calculate the manual claim rate, then add appropriate margin, profit, and expenses
2. Data sources - could use SOA studies, industry mortality tables, population statistics, or own company experience (best source if credible)
3. Changes in Mortality - expected future mortality improvement should be reflected
4. Reinsurance - the net cost of reinsurance should be factored into the claim table or expenses
5. Conversions to individual life policies - these create severe antiselection, which should be reflected in the manual rates
6. Manual adjustments are made for group-specific traits (separate list)
7. Rates for the group are based on age/gender mix, but groups typically end up charging a composite rate to all EEs

Skwire Chapter 24, Page 404

Question 15

Uses of general population data for pricing life insurance

Answer 15

1. Estimating Annual Improvements in Mortality
2. Determining ratios of mortality by age bracket
3. Comparing Male and Female mortality
4. Developing rates for the very young and the very old (non-working populations)

Skwire Chapter 24, Page 409

Question 16

Manual Claim Table Adjustments for Group Life

Answer 16

(could also be referred to as group rating characteristics for life insurance)

1. (D)isability Factors - adjustment is needed if a group has a different waiver of premium approach than is assumed in manual rates
2. (E)ffective Date Adjustment - and adjustment is needed if the central date of coverage is not July 1
3. (I)ndustry factors - based on industry codes such as SIC codes
4. (R)egional Factors
5. (L)ifestyle factors - adjustments based on % of EEs that smoke
6. (M)arketing considerations - e.g. added charges for rate guarantees
7. (C)ontribution Schedules - e.g. 5% discount if the ER pays the entire premium reduces antiselection)
8. Case (S)ize factors and volume adjustments - larger groups may have lower mortality or expenses
9. Plan (O)ptions - optional benefits and allowing lots of EE choices will create antiselection

Mnemonic - L MC RISE O D

Skwire Chapter 24, Page 412

Question 17

Types of Living Benefits for Life Insurance

Answer 17

This benefit (also called accelerated death benefits) pays a portion of the face amount prior to death, with the remaining benefit paid at death

1. LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home.
2. Critical illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer
3. Terminal illness benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with less than 6 or 12 months to live

Skwire Chapter 24, Page 418

Question 18

Data sources for estimating disability claim costs

Answer 18

1. A company’s own data is the best source if it is reliable and credible
2. Rate filings of competitors
3. Research of governmental and business publications
4. Data from consulting firms and reinsurers
5. Insurer studies - such as loss ratio studies and actual to expected incidence or termination rates
6. Industry data and tables (typically based on inter-company experience studies)

a) 1987 Commissioners Group Disability Table - adopted by the NAIC as the statutory minimum reserve basis for LTD. Is still the most recent intercompany incidence rate study.
b) SOA 2008 GLTD Experience Table - Provides considerable detail on claim termination rates
c) 2012 GLTD Valuation Table - will be replacing 1987 CGDT for use in developing minimum statutory reserves
d) TSA reports - contain exposure and actual to tabular ratios by industry classification
e) 1985 Commissioners Individual Disability Table A (CIDA) - basis for active life and claim reserves for individual policies
f) SOA Individual Disability Experience Committee Study 1990 - 20016

Mnemonic - Company’s Own Data, Fuck the Rest

Skwire Chapter 25, Page 419 and 432

Question 19

Types of disability income experience studies

Answer 19

1. Calendar year loss ratio study
   a) Compute the ratio of incurred claims to earned premium for a given calendar year
   b) Incurred claims are calculated as paid claims plus the increase in claim reserves
   c) May not provide a clear picture of historical trends because results are affected by reserve changes
2. Incurral year loss ratio study
   a) Compute the ratio of incurred claims to earned premium for a given incurral year
   b) Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve
   c) Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred
3. Study of actual-expected incidence or termination rates - ratios of a company’s actual claim incidence or termination rates compared to expected rates from published industry tables or company data

Skwire Chapter 25, Page 420

Question 20

Formula for disability income net monthly premium

Answer 20

1. Net monthly premium = IncidenceRate * Sum [Benefit(t) * Continuance(t) * InterestDIscount(t) ]
2. Summation runs the the entire length of the benefit period

(offsets will also need to be reflected, which is discussed in a list from GHDP-101-13)

Skwire Chapter 25, Page 422

Question 21

Group characteristics that impact disability income claim costs

Answer 21

1. Age and gender
2. Occupation - may need to adjust claim costs for:
   a) Hourly vs salaried
   b) Blue vs grey vs white collar
   c) Union vs Non-Union
   d) commissioned sales personnel
3. Industry - for group insurance, it is more appropriate to rate based on industry than on occupation
4. Average earnings per employee - claim rates decrease as earnings increases
5. Area - claim costs vary due to the legal environment and the general attitude and culture of the area
6. Size of the group - claim costs follow a “U” shaped curve, with higher costs for the largest and smallest employers

Skwire Chapter 25, page 428

Question 22

Types of reserves in Disability income insurance

Answer 22

1. Active Life Reserve - Exists for policies priced on a level-premium basis. Consists of the excess premiums charges in early years to cover the premium shortfall in later years.
2. Disabled Life Reserve - Established to cover each disability claim and its projected length

GHDP-127-19, Page 237

Question 23

Types of disability income claim experience studies

Answer 23

1. Actual-to-expected morbidity - this is the most preferable method of examining disability income experience, but there is often not enough data for morbidity studies. Morbidity consists of:
   a) Rate of disability - number of disabled lives per thousand lives exposed
   b) the rate of recovery - measures the length of disability. The number of disabled lives that will recover at different points in time per thousand disabled lives
2. Loss Ratios - Due to the limited amount of data, most ratios are based on claims ratios:
   a) Cash claims ratio - claims dollars paid out divided by earned premiums
   b) Incurred claims ratio (preferred) - claims plus active life reserve plus claims reserve, divided by earned premium

GHDP-127-19, Page 269

Question 24

Parameters to consider in a disability income claims or persistency study

Answer 24

1. Occupational (C)lass - T Here are significant differences in morbidity and underwriting approaches from one occupation class to another
2. (O)ccupation - each class is made up of many occupations, and each occupation may perform somewhat differently based on socioeconomic trends
3. Policy (F)orm - a study by policy form is needed to determine whether pricing assumptions were correct for new forms
4. (E)xtra Benefits - some optional benefits (Such as COLA) require significant reserves
5. (A)ge - changes in medical treatment and technology will affect age experience
6. (D)uration - due to the wear off of underwriting selection, loss ratios will be higher on older blocks of business and extremely low on new blocks
7. (E)limination period - changes in experience may occur at one elimination period and not at another
8. (B)enefit Period - to-age-65 and lifetime benefits may affect the election of earn retirement
9. (I)ndemnity (benefit amount) - some studies have shown that the larger the indemnity, the poorer the experience
10. (I)ncome - studies have shown that higher replacement ratios (benefit amount divided by income) lead to higher morbidity
11. (G)eography - densely populated areas may have higher morbidity than less populated areas
12. (A)gent and Agency - data by agent can provide information on the ability of the agent to select good risks
13. (S)ex - higher morbidity for women has been demonstrated at least up until the mid-50 age grouping
14. (M)ode of premium payment - the annual premium payment mode generates more favorable experience, which the quarterly mode is the least favorable
15. (S)moking status - nonsmokers have lower disability costs that smokers
16. Combinations of the above parameters - to determine interactions

Mnemonic: SEE IF SMOking ADds A BIG Cost (SEE IF SMO AD A BIG C)

GHDP-127-19, Page 271

Question 25

Steps for Manual rating of disability coverage

Answer 25

1. Determine the base rates / premium (base premium = base rate * benefit amount)
   a) LTD: Base rate(x,g,e,w) = I(x,g,e) * RSV(x,g,e,0) / 12
   (RSV is the reserve at time 0, I is the probability of claim)
   b) STD: Base rate(x,g,e,w) = I(x,g,e) * D(x,g,e) / 12
   (D is the expected length of claim in weeks)
2. Deduct offset credits - to get the net base premium
3. Demographic adjustments - adjust the net base premium to reflect the person’s salary, industry, occupation, and location
4. Plan provision ajdustments - adjust for the definitions of disability, maximum or minimum monthly benefits, pre-existing clause, and antiselection
5. Non-claim adjustments (retention) - the prior steps give the final claim cost. Add loadings for commissions, expenses, premium taxes
6. Add profit - can be a % of premium or a needed ROI?ROE

GHDP-101-13, Page 17

Question 26

Steps for experience rating of disability coverage

Answer 26

1. Determine the group’s manual rate with profit and expenses removed (this is the final claim cost)
2. Determine the experience-based rate using the last 3-5 years of data
   a) Discount claims and reserves to the midpoint of the experience period or to the actual date of disability
   b) Divide by exposure to get the experience-based claim rate
   c) if large claims are pooled, add a pooling charge
3. Blend the manual rate and the experience-based rate to get the case cl aim rate
   a) Blended rate = Manual claim rate * (1 - Z) + Experience Claim Rate * (Z)
   b) Credibility (Z) = N / (N + K) where N = number of lifte years and K = constant (for example, 5000 for LTD, 250 for STD)
4. Final case premium = blended rate / target loss ratio

GHDP-101-13, Page 20

Question 27

Steps in the claim process for disability

Answer 27

1. Determine eligibility for coverage - is the claimant insured and actively at work, is there a pre-existing condition?
2. Determine if the definition of disability is met - often the most difficult step in the process
3. Determine the payment amount (usually straightforward)
   = Pre-disability income * benefit percent - offsets
4. Get ongoing proof of disabilities
   a) STD - often approved for a specified period based on the type of disablement. Reviewed at the end of the period
   b) LTD - reviewed annually, when the condition or treatment changes, or when the definition of disability changes

GHDP-101-13, Page 31

Question 28

Tools for the claim process for determining and handling disabilities

Answer 28

1. Medical evaluation - begins with an APS and can include independent medical exams
2. Rehabilitation plans - providing vocational training or physical rehabilitation
3. Financial evaluation of the claimant - verification of pr e- and post-disability earnings
4. Settlements - these are risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation)
5. Fraud review - check information for inconsistencies or alterations
6. Managed disability - techniques are used to “manage” disability and encourage a return to work

GHDP-101-13, Page 33

Question 29

Major effects of the year 2000 changes in the NAIC LTC Insurance Model Act

Answer 29

1. Requires (D)isclosure of rating practices at the time of application - e.g. including a statement that the policy may be subject to future rate increases
2. Requires an (A)ctuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience
3. Eliminates (M)inimum loss ratio requirements in the initial rate filing
4. Places limits on (E)xpense allowances in the event of a rate increase - if a rate increase is requested, the lifetime loss ratio must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase
5. Requires (R)eimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates
6. For policies in a rate spiral, guarantees policyholder the right to (S)witch to currently-sold insurance without underwriting
7. Authorizes the commissioner to (B)an companies for 5 years if they persist in filing inadequate initial premiums

Menomnic - BARED S M (BARED if they Sell Minimum rates)

Skiwre Chapter 26, Page 437

Question 30

Major effects of HIPAA on LTC

Answer 30

1. Defined qualified plans
2. Clarified taxation of premium and benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes
3. Standardized benefit triggers (Leida Chapter 2)
4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans

Skwire Chapter 26, Page 441

Question 31

Major stakeholders in the group LTC policy design process

Answer 31

1. Employer Group
   a) LTC is appealing because it complements other products (such as disability and life) and relative to medical is a low-cost benefit with stable pricing
   b) May not be able to offered guaranteed issue to all active employees, since this could make the premiums more expensive than similar individual policies
2. Insurance Company
   a) Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee
   b) Costs vary significantly by participation level, making this a key assumption
3. Employees
   a) May not be yet aware of the risk covered by LTC insurance
   b) Concerned with significant cost, which may even exceed the cost of individual policies
4. Insurance brokers - have found that group LTC insurance provides the opportunity to open the door to competitive life and disability markets

Skwire Chapter 26, Page 443

Question 32

Assumptions needed for a LTC pricing Model

Answer 32

1. Voluntary lapses - lapse rates are much lower than for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection
2. Mortality - most companies use the 1994 Group Annuitant Mortality table
3. Morbidity - major variable that impact claim costs are:
   a) Marital status - costs are lower for married individuals because of the presence of a potential caregiver at home
   b) Gender - females have significantly higher ultimate costs than male
   c) Benefit trigger
   d) Area - utilization patterns of LTC services vary by geographic area
   e) Case management - companies using a case manager usually experience lower claims
4. Selection factors - to reflect underwriting wearoff. Depends on the level of underwriting performed
5. Expenses - start-up expenses are high relative to other types of business
6. Interest - the investment rate on assets is a key assumption because of the large amount of reserves
7. Reserve basis - important considerations include the level of margins and how these margins are achieved
8. Other assumptions - including the average daily benefit and the premium mode
9. Profit - typically based on lifetime goals of pre-tax profits, post-tax profits, return on investments, or return on equity

Mnemonic SLIP MORE M (SLIP MORE Members if assumptions wrong)

Skwire Chapter 26, Page 448

Question 33

Misconceptions regarding LTC rate Increases

Answer 33

1. Misconception 1: These products are annually renewable
   a) LTC is guaranteed renewable and priced on an issue age basis
   b) Premiums are expected to remain level and cover all future costs
2. Misconception 2: using historical loss ratios to determine performance is appropriate
   a) Claims and loss ratios are low in early policy years, but this does not mean the product is profitable
   b) A large portion of early premiums need to be set aside as contract reserves to pre-fund future claims
   c) This can be addressed by including the change in contract reserves in the claims calculation
3. Misconception 3: Companies have time to wait and see how experience will unfold
   a) As more time passes without a rate increase, the future premium base to which the rate increase would be applied shrinks
   b) This results in much larger increase needs in order to produce the targeted lifetime loss ratio

Mechanics and Basics of LTC Rate Increases, Page 1

Question 34

LTC Pricing Assumptions that often drive the need for a rate increase

Answer 34

1. Morbidity - misses on this assumption may not become apparent for many years because of the gap between the average issue age and the average age of LTC claimants
2. Persistency - higher persistency leads to significantly higher claims because more policyholders remain in later years when claim costs are extremely high
3. Interest - investments are key to ensuring that the contract reserves grow enough to support the company’s future liabilities. The recent economic recession has resulted in investment earnings that are much lower than what was assumed.

Mechanics and Basics of LTC Rate Increases, Page 7

Question 35

Types of Critical Illness Policies

Answer 35

1. Standalone - offers coverage only for critical illness
   a) Basic - covers only cancer, heart attack, stroke, and sometimes coronary artery bypass graft
   b) Enhanced - includes 15-20 additional conditions and costs about 30% more
2. Acceleration - combines coverage for both critical illness and death. Pays the face amount on the earlier to occur of critical illness and death.
   a) An alternative is partial acceleration. Some percentage (25-50%) of the face amount is paid for critical illness, after which the remaining face amount remains in force as death protection only.

GHDP-126-19, Page 1 and 7

Question 36

Areas of specific concern for product design of critical illness insurance

Answer 36

1. Definitions - limiting benefits for conditions that are non-life threatening when diagnosed
2. Avoidance of antiselection at issue
3. The potential high cost of benefits for some conditions beyond age 75
4. The potential high cost of long-term guarantees due to advances in medical science leading to earlier detection

GHDP-126-19, Page 1

Question 37

Definition of Critical Illness Insurance

Answer 37

Critical illness is an insurance product that pays the face amount when:

1. The insured is diagnosed with a condition covered in the policy. The diagnosis must be made by a doctor and must be supported by objective evidence
2. The condition meets the definition in the policy (separate list) and is not excluded by any other policy provision
3. The insured survives for a specified period (usually 30 days) following diagnosis

GHDP-126-19, Page 2

Question 38

Conditions covered by critical illness

Answer 38

Basic Policy Coverage

1. Life-threatening Cancer
2. Heart attack - may exclude mild heart attacks that occur within a couple of days following angioplasty
3. Stroke - the definition requires a measurable neurological deficit that persists for 30 consecutive days
4. Coronary artery bypass graft - similar procedures which do not involve grafts are always excluded

Covered in enhanced policies

1. Multiple sclerosis
2. Kidney failure requiring dialysis
3. Major organ transplants
4. Cardiovascular: heart valve replacement and aortic surgery
5. Degenerative: motor neuron disease, Parkinson disease, and Alzheimer disease
6. Brain: Coma and benign brain tumor
7. Head: blindness, deafness, and loss of speach
8. Body: loss of limbs, paralysis, major burns, and occupational HIV
9. Loss of independence (covered by only some companies)

GHDP-126-19, Page 2

Question 39

Optional Product features on critical illness policies

Answer 39

1. Return of premiums on Death
   2 Return of premiums on expiry - returns premiums on the policy’s expiration date if the policy is still in force
2. Return of premiums on surrender - retruns a defined percentage of the premiums upon surrender prior to the expiry date. The percentage may increase to 100% over time
3. Face amount increasing (to keep up with inflation) or decreasing (to match the declining principal remaining on a mortgage loan)
4. Partial benefits (10-25% of the face amount) - payable for some non-life threatening conditions which have been excluded in the policy
5. Assistance benefit - provides medical consulting advice for the diagnosed critical illness
6. Guarantee that premiums will not change

GHDP-126-19, Page 5

Question 40

Main approaches used to develop premium rates for critical illness insurance

Answer 40

1. “Costing” - calculate premium rates based on all the related costs, usually with the help of commercial product modeling software. Uses assumptions for the expected costs for all elements, including profit objectives and limitations on capital available for new business
2. “Pricing” - Premium rates are positioned relative to the company’s major competitors to achieve the desired level of sales. A commercial premium rate quotation is typically used.

Both Pricing Approaches are used concurrently, with assumptions and target rates being adjusted until a good balance between financial objectives and competitiveness is found.

GHDP-129-19, Page 2

Question 41

Steps for developing critical illness incidence rates

Answer 41

1. Start with (G)eneral population age-specific incidence rates from government sources and research organizations for the various illnesses covered
2. Adjust these rates to fit the condition (D)efinitions in the policy
3. Apply any applicable (T)rends (such as a decrease in heart attack rates)
4. Use ratios of (I)nsured lives to population mortality to adjust rates from the general population to an insured population
5. Use ratios of nonsmoker to (S)moker mortality to segment rates into nonsmoker and smoker rates
6. Use ratios of select to (U)ltimate insured mortality to create select and ultimate rates
7. (C)ompare the rates to any available insurance experience and adjust as deemed necessary
8. Sum the rates for each of the major conditions covered, then add small amounts (about 1%) for each additional covered condition

Mnenomic: G D T I, S U C (Go Develop The Incidence So Underwriting Can -use it- )

GHDP-129-19, Page 3

Question 42

Rating Approaches for Medicare Supplement

Answer 42

Methodology used may be mandated by regulation

1. Attained age - rates are based on the individual’s current age
2. Issue age - rates are based on the individual’s age when the policy was issued
3. Community rates - all participants pay the same rate. Some modified community rating approaches differentiate based on age, sex, duration, or other parameters

GHDP-128-19, Page 13

Question 43

Loss Ratio Standards for Medicare Supplement Products

Answer 43

Rate Filings must show that the following loss ratios meet the standard, which is the greater of the original expected loss ratio that the company filed and the statutory minimum

1. The lifetime loss ratio (with premiums and claims calculated on a present value basis)
2. The future loss ratio (with premiums and claims calculated on a present value basis)
3. The expected third-year loss ratio

GHDP-128-19, Page 14

Question 44

Medicare Supplement Pricing Assumptions

Answer 44

1. (M) Morbidity - past claim cost need to be trended forward to the rating period
2. (M) Mortality - This is not a significant assumption for Med Supp, and is frequently combined with the persistency assumption
3. (P) Persistency - this should be based on the company’s experience for similar products
4. (I) Investment Earnings - these will be credited to the various types of reserves that are held
5. (S) Selection factors / underwriting - for underwritten policies, selection factors may be used for the first one to three years
6. (A) Age and sex distribution - most policies are sold to individuals turning age 65
7. (S) Smoker vs. Non-Smoker - if rates vary by smoker status, then the distribution of smoker status must be estimated
8. (A) Area factors - claim costs by area may come from rating manuals or government statistics
9. (E) Expenses and Taxes
10. (O) Other considerations - modal factors and policy fees are sometimes used

Mnemonic M ASSMP I A E O (Medicare ASSuMPtion Is An Easy One)

GHDP-128-19, Page 23

Question 45

Steps in the product development cycle

Answer 45

Product development is the process by which new products are created and existing products evolve

1. Innovate - consists of:
   a) Understanding the company’s strategic perspective
   b) Idea generation (separate list)
   c) Idea screening - check for consistency against corporate goals / abilities
   d) Market assessment - to determine if a market exists for the product (separate list)
2. Design the product - this phase consists of determining the product structure, plan design options, contribution requirements, and regulatory compliance
3. Build the Product (separate list)
4. Sell the product - Often test-marketed, after which revisions are done before it is mass marketed
5. Assess the product - monitor financial results and consumer and market feedback
6. Revise the product - changes may be indicated by the product assessment, regulatory requirements, or consumer demand

Skwire Chapter 3, Page 27

Question 46

Common drivers of product ideas

Answer 46

1. Innovator or follower - some companies are successful at innovating, while others are successful at following and learning from competitors
2. Changing laws and regulations - new rules can lead to new products developed specifically to operate within the new set of rules
3. Consumer demand - companies must constantly seek consumer feedback and market intelligence
4. Marketing and sales - these teams can spot holes in the product spectrum where consumer demand is not being fully met
5. Leveraging insurer capabilities - product development teams must know what the insurer does well and find ways to grow in those areas
6. Social need - for example, Medicare Part D served the social need of helping seniors who were being overwhelmed by the cost of expensive medications
7. Changing demographics - leads to shift in the types of products that will be marketable and saleable
8. Changing economy and financial markets - leads to changes in purchasers’ views of their need for insurance
9. Competitive Advantage - product development ideas should utilize the company’s competitive advantages\

Skwire Chapter 3, Page 29

Question 47

Questioned answered by a market assessment

Answer 47

1. What (e)xists in the market today?
2. What is the product (o)bjective for the consumer?
3. What is the (r)egulatory environment for this product?
4. What are the financial value and other benefits for the (c)onsumer?
5. What are the (p)rice targets? (the assessment may indicate a range of acceptable prices)
6. What is the likely (r)eaction from competitors?
7. How will the (s)ales team react?

Mnemonic - eorcrs - Scorer (scoring the market)

Skwire Chapter 3, Page 31

Question 48

Steps for building a new product

Answer 48

1. Project enrollment - this is critical to helping senior management decide whether the product is worth pursuing
2. Price the product - includes an assessment of the market price sensitivity. After initial pricing, the projected enrollment should be reviewed again.
3. Perform financial assessments - to determine whether the new product can meet the company’s required return on investment or return on equity
4. implement the infrastructure needed to administer the product (process claims, bill and collected premiums, and service member inquiries)
5. Get senior management approval

Skwire Chapter 3, Page 33

Question 49

Key Players in the product development cycle

Answer 49

1. (P)roduct Development Team - Is responsible for generating new product ideas and studying the market
2. (S)enior management - sets the company goals and is responsible for making the decision to pursue a proposed idea
3. (M)arketing - is focused on advertising, name recognition, and branding
4. (S)ales - often has insights into price sensitivity and other types of product customers want
5. (U)nderwriters - can help quantify the risk associated with certain plan features
6. (I)nformation technology (IT) - can help in understanding the feasibility of the infrastructure needed to administer the product
7. (O)perations - work with IT teams to administer the product
8. (C)ompliance - ensures the product is compliant with laws and regulations
9. (A)ctuarial - prices the product and works on the projections and feasibility studies
10. (F)inance - reviews the projected enrollment and pricing to determine whether projections meet corporate profit targets

Mnemonic - MUSIC OPS F A (Musical Ops of Finance and Actuary)

Skwire Chapter 3, Page 35

Question 50

Components of Gross Premiums

Answer 50

1. Claim Costs
2. Administrative expenses - includes costs of designing, developing, underwriting, and administering the product, as well as allocation of overhead costs. Frequently much higher int he first year than in renewal years.
3. Commissions and other sales expenses - includes special bonuses, incentives, and advertising. Generally expressed as a percentage of premium.
4. Premium taxes
5. Other taxes and assessments - includes federal and state income taxes and new assessments due to the ACA
6. Risk and profit charges - depends on the degree of risk involved, the amount of capital allocated to support the product, and the expected return on capital
7. Investment earnings - typically credited based on assets held

Skwire Chapter 20, page 325

Question 51

Considerations in developing administrative expense aassumptions

Answer 51

1. How expenses are allocated to the product - allocation methods include:
   a) Activity based allocation - distributes expenses according to some measure of use (e.g., actual postage expenses can be charged to the function that generated the mail)
   b) Functional expense allocation - determines how expenses are split by line of business for new and renewal business (done by surveying employees to determine how time is spent)
   c) Multiple allocation methods - a combination of the other two methods
2. How administrative expenses should be allocated to groups - should differentiate between first year and renewal expenses. Various allocation bases exist (separate list)
3. What the competition includes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace

Skwire Chapter 20, Page 326

Question 52

Types of bases used for allocating expenses

Answer 52

1. Percent of Premium
2. Percent of Claims
3. Per Policy
4. Per EE (Certificate)
5. Per Member (each person covered)
6. Per claim administered
7. Per case (some expenses are charged directly to the case for very demanding groups)

Skwire Chapter 20, page 327

Question 53

Common rating characteristics included in manual rates for group health insurance

Answer 53

1. Age
2. Gender
3. Health status
4. Rating Tiers (separate list)
5. Geographic factors
6. Industry Codes
7. Group Size
8. Length of the premium Period

Skwire Chapter 20, Page 332

Question 54

Common rating tiers for group health insurance

Answer 54

1. One Tier: Composite
2. Two Tier : EE only, Family
3. Three Tier: EE Only, EE+Dep, Family
4. Four Tier: EE Only, EE+Dep, EE+Chldrn, Family
5. Five Tier: EE Only, Couple, EE+Chld, EE+Chldrn, Family

Skwire Chapter 20, Page 333

Question 55

Common Purposes for trend analysis

Answer 55

1. Financial reporting - should meet the following criteria:
   a) Be done on a retrospective basis
   b) Be done at the enterprise level, as well as the division or market level
   c) For statutory reporting, include a provision for adverse deviation. But for GAAP reporting, be on a best-estimate basis
2. Pricing - for setting premiums or for planning and budgeting. Trend rates may be calculated on the following basis:
   a) Eligible charges (billed charges before provider contracts for discounts are applied)
   b) Covered charges (allowed charges)
   c) Net paid claims - shows the bottom line trend after accounting for changes in provider contracts, member cost sharing, and coordination of benefits
3. Experience analysis - for analyzing changes in a block of business over time

Skwire Chapter 34, Page 595

Question 56

Components of Medical Trend

Answer 56

The component method for developing pricing trends combines the following to get the pricing trend:

1. Core (C)ost trend - the rate of increase in the covered cost per service, before adjustments for specific factors such as aging or one-time changes. Consts of three parts
   a) Unit cost trend - the change in payments to providers for a fixed basket of services
   b) Severity - the increase in the intensity of treatment
   c) Change in mix of services - such as changes in the distribution of type of service or provider
2. Core (U)tilization trend - includes changes in utilization due to external forces, such as the economy, the number of workdays during the period, and changes in medical practice
3. (O)ne-time changes - a response to a specific, identifiable situation. Types include:
   a) A significant change during one period, followed by a return to normal the following period. Examples include a severe flue season and weather events.
   b) A sustained change in claims level. Examples include legislative changes (new mandated benefits) and internal changes
4. Expected (P)opulation shifts - includes change in geographic mix and age-gender mix
5. (S)tructural changes - includes leveraging, benefit changes, changes to clinical programs, and network changes
6. (C)apitation - can impact trends if there is a material changes in the average capitation fee or bonus payments
7. (M)argin - added to best estimate trend to minimize the chances of a loss

Mnemonic: U PS CO M C (Use PaSt COsts to Make Changes)

Skwire Chapter 34, Page 599

Question 57

Key Questions to ask when analyzing trends

Answer 57

1. How accurate were the original projected trend and PMPM estimates?
2. Which assumptions were driving any variation
3. How can the process be modified to achieve greater accuracy?
4. What other factors, expected or unexpected, drove the trends?

Mnemonic - Original Assumptions; Modify Factors?

Skwire Chapter 34, Page 606

Question 58

Factors that may influence future trends

Answer 58

1. The impact of exchanges - enrollees will likely change health plans more frequently than in the past, which will require insurers to have a more in-depth understanding of the impact of population shift
2. Cost savings initiatives - including accountable care organizations, clinical interventions, and wellness programs
3. The economy - some economic factors may help in setting better trend estimates

Skwire Chapter 34, Page 610

Question 59

Desired characteristics of premium rates

Answer 59

1. Adequate - High enough to generate an acceptable return on equity
2. Competitive - low enough to enroll enough members to meet volume and growth targets
3. Equitable - to avoid an unreasonable amount of cross-subsidization among groups (which will improve persistency)

Mnemonic - ACE those premium rates

Kongstvedt Chapter 22, Page 473

Question 60

Information gathered during underwriting for managed health care

Answer 60

1. Health Status - determined based on:
   a) for individual and small group: Physician exams, prescription drug histories, and medical questionnaire
   b) For large groups: medical cost experience and a list of employees’ major health conditions
2. Ability to pay the premium - based on income verification and credit history
3. Availability of other coverage - information is needed for coordination of benefits with other insurance and workers’ compensation
4. Historical persistency - groups that frequently change carriers may not persist long enough for the insurer to recoup acquisition costs

Kongstvedt Chapter 22, Page 474

Question 61

Steps in the rate formula for managed health care

Answer 61

1. Develop the projection period base rate PMPM - based on historical medical costs trended forward and reflects the average characteristics of the block of business
2. Apply group-specific additive adjustments - such as the added cost of covering mandated services in a given sate
3. Apply group-specific multiplicative adjustments - includes factors for the benefit plan, geographical area, age/gender, degree of health care management, and health status
4. Add retention loads - includes administrative expenses, a buildup of contingency reserves, coordination of benefits savings, and profit
5. Convert to a contract rate (per employee or subscriber) - for group coverage, this includes developing tiered rates (employee only, family, etc.)

Kongstvedt Chapter 22, Page 479

Question 62

ACA rating requirements effective in 2014

Answer 62

1. Plans may not impose pre-existing condition exclusions
2. Rating variation is only allowed based on:
   a) Age (limited to a 3-to-1 ratio from highest to lowest age band)
   b) Geographic rating area
   c) Plan design and network relativities
   d) Tobacco use (limited to a 1.5 to 1 ratio)
   e) Family Composition
3. Individual and small group plans must be offered on a guaranteed issue and renewal basis
4. Waiting period for coverage must not exceed 90 days

Kongstvedt Chapter 22, Page 481

Question 63

Rate setting approaches (Leida Ind)

Answer 63

1. Re-rating - Rating based on direct, existing experience (e.g., the experience of an existing block)
2. Fundamental pricing - rating from other data sources (used as benchmarks), which are adjusted to apply to the current situation
   a) Tabular method - an existing table (or a modification of it) is used as the morbidity basis for pricing (e.g.using the 1985 CIDA table for pricing DI). Typically used for long-term, non-inflation-sensitive products.
   b) Buildup and density functions (see separate list) - a model is built to determine expected claims in the rating period. Generally used for inflation-sensitive products.
   c) Simulation - an existing distribution of expected claims is projected into the rating period, using all known information about the claimants (including prior claim experience)

Leida Chapter 5, Page 161

Question 64

Major considerations in the rate setting process (Leida Ind)

Answer 64

1. The market - competitors’ pricing sets expectations for consumers, limiting pricing options
2. Existing products - expectations will be based on the pricing strategies used for current products
3. Distribution system - the compensation system, the structure of distribution system, and the level of company control are all relevant in pricing
4. Regulatory situation - limitations may exist that impact how rates are set, and whether needed rate increases are allowed
5. Strategic plan and profit goals - pricing practices should reflect the company’s goals

Leida Chapter 5, page 161

Question 65

Major rating variables for health insurance (Leida Ind)

Answer 65

1. Age - claim costs increase significantly by age for almost all health insurance coverages
2. Duration - durational trends are the trends in excess of those generated by insured age alone. They typically come from initial underwriting and from cumulative antiselection
3. Gender - most coverages vary rates by gender
4. Marital status - this is a big factor for LTC, since having a spouse home can decrease the need for a nursing home
5. Parental (or family) status - rates must vary based on how many people are insured
6. Occupation - an important rating factor for DI coverages, but not for other coverages
7. Geographic area - rates may vary by area due to different patterns of care, provider contracts, availability of care, and legal requirements
8. Current health status
9. Pas claim history
10. Smoking status
11. Weight
12. Presence and nature of other coverage
13. Situation-specific factors - e.g., whether the policyholder converted from another plan

Leida Chapter 5, Page 164

Question 66

Types of age rating structures

Answer 66

1. Attained age rating - a policyholder’s rate is a function of his or her age at renewal. Also referred to as step rating if rates are grouped into age bands
2. Entry age or issue age rating - the rate reflects the age of the policyholder when the policy was issued
3. Uni-age rating - the rate structure doesn’t recognize age at all, leading to subsidization of older individuals. Most community rate structures are uni-age

Leida Chapter 5, Page 164

Question 67

Tabular method formulas for calculating net premiums (Leida Ind)

Answer 67

1. Net Premium = SUM (Pr(CLMz) * ACz * V^z * lz) over z (issue year to final year)
   a) Pr(CLMz) is probability of a claim occurring (incidence rate) in year z
   b) ACz is the average claim cost (assuming a claim occurs) in year z
   c) V^z is the present value factor corresponding to year z
   d) lz is the proportion of originally issued lives still in force in year z
2. The average claim cost is calculated as follows: ACz = SUM (CM$s * Pr(1-TNs) * V^s) over s (1 to final clm payment)
   a) s is the claim duration
   b) CM$s is the claim dollars payable at duration s
   c) Pr(1-TNs) is the probability of a claimant at claim duration 0 remaining disabled at duration s
   d) Final clm payment is the claim duration of the final possible claim payment

Leida Chapter 5, Page 176

Question 68

Using the Buildup and Density Function approach for pricing (Leida Ind)

Answer 68

1. Buildup approach - each claim type (inpatient, outpatient, etc.) has its own claim cost calculation, as the product of claim frequency times average cost per service
2. Density functions - calculates a distribution of the expected annual claims for an individual, with no calculation of the different categories of benefits. Is useful when calculating the impact of deductibles and out-of-pocket limits.
3. Combining build and density function - for PPO products, may calculate in-network costs using the buildup approach (due to copays), and out-of-network costs using the density approach (due to copays), and out-of-network costs using the density approach (due to deductibles). The two are combined to get a final claim cost.

Leida Chapter 5, Page 180

Question 69

Steps of the re-rating approach for pricing (Leida Ind)

Answer 69

1. (G)ather Experience on existing business - use incurred claims (preferably on a runout basis) and earned premiums. The reliability of the data should be assessed before using it.
2. (R)estate experience - past premiums should be restated to the rate levels currently in effect
3. (P)roject past results to the future - adjust for items that cause future experience to differ from past experience
4. (C)ompare the projection against desired results - a rate increase is calculated by determining how much rates need to change to produce the desired loss ratio (which is based on the expected level of expenses and profit)
5. Apply regulatory and management (A)djustments (separate list)

GRPCA - Get Right Prices, Can Adjust

Leida Chapter 5, page 188

Question 70

Adjustments needed for using past claims to project future claims (Leida Ind)

Answer 70

1. Changes in the covered population
2. Changes in duration - should anticipate duration effects in the claim costs
3. changes in benefits - changes may be explicit (such as a change in copays) or implicit (such as a change in how a policy provision is interpreted)
4. Changes in claim costs - must project changes in frequencies and changes in average costs
5. Leveraging - as trends change the average claim costs, the impact of deductibles and copays causes claims to increase at a rate greater than trend
6. Other changes - includes antiselection, changes in underwriting, and changes in business practices.

Projected Claims(t) = Claim Cost PMPM(s)

• (Number of members (t)
• (1 + leveraged claim cost trend) ^ ( t-s )
• (Avg Durational Factor(t) / Average Durational Factor (s)
• (1 + Antiselection factor due to lapses(t-s) )
• (1 + Adjustment factor for other changes(t-s) )

Leida Chapter 5, Page 193

Question 71

Reasons for management adjustments in pricing

Answer 71

1. Competitiveness of the premiums for new business
2. Profitability in other lines of business
3. Relations with the public or the sales force
4. Social policy
5. Desire to manage the block from a long-term perspective (e.g., phase in a large rate increase

Leida Chapter 5, Page 202

Question 72

Methods for calculating Gross Premiums

Answer 72

1. Block Rating (short time horizon) approach - claim costs are calculated for the rating period (typically a one-year period), and premiums are calculated by adding on expenses and profit charges. Gross premium = G = [ N * ( 1 + E^N ) + E^F ] / ( 1 - E^G )
   a) N = net premium (claim cost)
   b) E^N = Percent of claim expenses
   c) E^F = fixed expenses
   d) E^G = Percent of premium expenses + profit as a percent of premium
2. Asset Share Approach - involves long-term projections of various items, in order to determine the necessary premium

Leida Chapter 5, Page 204

Question 73

Items included in asset share projections

Answer 73

1. Exposure values - including the number of policies sold or in force, number of claims or claim payments, number of premium collections, and number of units sold or in force
2. Revenue values - including premium, investment returns, and explicit subsidies
3. Claim values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves
4. Capital values - must model the cost of the capital used by the line of business
5. Expenses targets - expense loadings may be very detailed. The cost of capital is sometimes treated as an expenses.
6. Profit Targets - profit is calculated in one of the following ways:
   a) Percent of premium - preserve values of profits divided by present value of premiums
   b) Return on investment (ROI) - this is the interest rate in which the present value of future profits will exactly equal the initial investment
   c) Return on equity (ROE) - this is like the ROI method, except the initial investment is increased by the amount of capital that is set aside to cover the business

Leida Chapter 5, Page 207

Question 74

LTC Pricing Assumptions (ASOP #18)

Answer 74

1. Morbidity (separate list for considerations in setting claim costs)
2. Mortality - consider the effect of selection and classification of applicants
3. Lapses - consider marketing, competitiveness, payment mode/method, nonforfeiture benefit
4. Expenses - Product development, commissions, marketing, compliance, underwriting, issuance, policyholder service and claim administration
5. Taxes - reflect tax reserve basis of the plan as well as the premium, income, or other applicable tax rates
6. Investment return - consistent with returns on assets supporting liabilities
7. Mix of business - consider distribution of age, gender, marital status, underwriting classes, distribution system, and plan options
8. Change over time - for assumptions likely to change, consider reflecting change

ASOP #18, Page 4

Question 75

Considerations in setting LTC claim cost assumptions (ASOP #18)

Answer 75

1. Claim costs will vary by nursing home, assisted living facility, and home health care
2. Substitution effect among the various benefits
3. Increased demand for LTC services due to the presence of insurance
4. Availability of benefits from other programs (such as Medicare)
5. Availability of LTC services in the geographical area
6. The effect of underwriting selection and underwriting classes
7. The financial benefits to the claimant of remaining eligible for benefits (not getting well)
8. The effect of mortality on termination rates
9. The effect of marketing and claims processes

ASOP #18, Page 4

Question 76

Actuarial standards for the use of data (ASOP #23)

Answer 76

1. Data that is completely accurate, appropriate, and comprehensive is frequently not available, so the actuary should use available data that allows the actuary to perform the analysis
2. Considerations in selection data (see separate list)
3. Review of data - the actuary should review the data for reasonableness, unless such a review is not necessary or practical
4. The actuary should use appropriate data (see separate list)
5. Reliance on data and other information supplied by others - the accuracy of this information is the responsibility of those who supply it. The actuary may rely on this information, but should disclose this reliance
6. Confidentiality - the actuary should handle data containing confidential information consistent with Precept 9 of the Code of Professional Conduct
7. Limitation of the actuary’s responsibility - the actuary is not required to audit the data or determine whether data supplied by others is intentionally misleading

ASOP #23, Page 2

Question 77

Considerations in selecting data to use in an actuarial analysis (ASOP #12)

Answer 77

1. The scope of the assignment and the intended use of the analysis
2. The desired data elements and possible alternative data elements
3. Whether the data is appropriate and sufficiently current
4. Whether the data is internally consistent
5. Whether the data is reasonable given relevant external information that is readily available
6. The degree to which the data is sufficient for the analysis.
7. Any known significant limitations of the data
8. The availability of alternative data, and the benefit and practicality of obtaining this data
9. Sampling methods that were used to collect the data

ASOP #23, Page 2

Question 78

Categories of data used in an actuarial analysis (ASOP #23)

Answer 78

1. The data is of acceptable quality to perform the analysis
2. The data requires enhancement before the analysis can be performed, and it is practical to obtain additional or corrected data
3. Judgmental adjustments or assumptions can be applied to the data, or the analysis results to allow the actuary to perform the analysis
4. The data is likely to have significant defects
5. The data is so inadequate that it cannot be used to satisfy the purpose of the assignment

ASOP #23, Page 4

Question 79

Required documentation related to data quality (ASOP #23)

Answer 79

1. The source of the data
2. Any limitations on the use of the actuarial work product due to uncertainty about data quality
3. Whether the actuary reviewed the data, and any limitations due to data not reviewed
4. A summary of unresolved concerns the actuary may have about questionable data values
5. A summary of any significant steps the actuary has taken to improve the data
6. A summary of significant judgmental adjustments or assumptions the actuary applied to the data or to the results
7. The existence of results that are highly uncertain or potentially biased due to the quality of the data
8. The extend of the actuary’s reliance on data and other information supplied by others
9. Disclosures in accordance with ASOP #41 if:
   a) Any material assumption or method was prescribed by law
   b) The actuary relies on other sources and thereby disclaims responsibility for any material assumption or method
   c) The actuary has otherwise deviated materially from the guidance of this ASOP

ASOP #23, Page 6

Question 80

Situations in which ASOP #25 Applies

Answer 80

1. When the actuary is required by applicable law to evaluate credibility
2. When the actuary chooses to evaluate the credibility of experience
3. When the actuary is blending subject experience with other experience
4. When the actuary represents the data being used as statistically or mathematically credible

ASOP #25, Page 1

Question 81

Recommended Practices for using credibility procedures (ASOP #25)

Answer 81

1. The actuary should use an appropriate credibility procedure when determining if the subject experience has full credibility or when blending the subject experience with the relevant experience. In selecting a procedure, consider:
   a) Whether the procedure is expected to produce reasonable results
   b) Whether the procedure is appropriate for the intended use and purpose
   c) Whether the procedure is practical to implement when considering its cost and benefit
2. The actuary should exercise professional judgment in selecting relevant experience to blend with the subject experience. This relevant experience should have characteristics similar to the subject experience.
3. The actuary should use professional judgment when selecting, developing, or using a credibility procedure
4. The actuary should consider the homogeneity of both the subject experience and the relevant experience

ASOP #25, Page 3

Question 82

Disclosures required in an actuarial report

Answer 82

This report states the actuarial findings and identifies the methods, procedures, assumptions, and data used

1. The intended users of the report
2. The scope and intended purpose of the assignment
3. The acknowledgement of qualification as specified in the Qualification Standards
4. Any cautions about risk and uncertainty
5. Any limitations or constraints on the use or applicability of the findings
6. Any conflict of interest
7. Any information on which the actuary relied that has a material impact on the findings and for which the actuary does not assume responsibility
8. The information date (date through which data and other information has been considered)
9. If appropriate, the documents comprising the actuarial report

ASOP #41, Page 7

Question 83

Disclosure Requirements for assumptions and methods used in an actuarial report

Answer 83

1. The communication should identify the party responsible for each material assumption and method
2. If the assumption or method is prescribed by law, disclose the applicable law, the assumptions or methods affected, and that the report was prepared in accordance with the law
3. If a material assumption or method is selected by another party, the actuary has three choices:
   a) If it does not conflict with the actuary’s professional judgment, no disclosure is needed
   b) If it significantly conflicts with the actuary’s professional judgement, then close this fact
   c) If the actuary is unable or not qualified to judge its reasonableness, then disclose this fact

In the case of either b or c, also disclose the affected assumption or method, the party who set it, and the reason it was set by this party, rather than the actuary

ASOP #41, Page 5 and 8

Question 84

Purpose of the Cancer Claims Cost Tables work group and its report

Answer 84

1. Propose new valuation tables for cancer policies. New tables were created for two types of benefits:
   a) First occurrence benefit - generally a lump sum amount paid on the first occurrence of a cancer
   b) Hospitalization benefit - generally a daily indemnity amount paid when the person is confined to a hospital for the treatment of a covered cancer
2. Document the process followed in preparing the proposed tables
3. Make the experience gathered for this effort available to practitioners in the industry. This should aid actuaries pricing and reviewing product filings.

Report on the Proposed 2016 Cancer Claim Cost Valuation Tables, Page 7

Question 85

Goals of the graduation method chosen for creating the values of hte new cancer tables

Answer 85

1. Smooth the inherent volatility in the data collected
2. Provide a good fit to the initial data
3. Demonstrate flexibility to control the risk of negative reserve calculations due to declining data patterns for younger and older ages
4. Demonstrate flexibility to develop reasonable patterns where data over a number of attained ages had to be aggregated

Report on the Proposed 2016 Cancer Claim Cost Valuation Tables, Page 7