Topic 5 - Underwriting

Question 1

ACA requirements that may change the availability of small group medical insurance

Answer 1

Requirements that may increase availability:

1. Small groups with 50+ EEs are required to offer coverage or pay a fee
2. Small groups with <50 EEs are offered temp tax credits for providing coverage

Requirements that may decrease availability:
1. Availability of guaranteed coverage in the individual markets leads to some ERs not seeing a need to offer ER coverage

Skwire Chapter 21, Page 357

Question 2

Characteristics a small group insurer should consider in evaluating experience

Answer 2

1. Financial viability - consider how long the ER has been in business and whether there is significant EE turnover
2. Industry and Occupation - consider the type of work done and the lifestyles of EEs
3. Group size - Large group = better spread of morbidity risk and lower per capita admin expenses
4. Worker’s compensation - in states that do not require small ERs to purchase this coverage, insurers will have to cover expenses that worker’s compensation would typically cover
5. Participation and ER 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 carrier or seeking coverage for the first time, consider the group’s motives for seeking new coverage

Skwire Chapter 21, Page 358

Question 3

Small group insurance underwriting criteria allowed by the ACA

Answer 3

1. Verification that the entity is a licensed ER in the state
2. Participation and contribution requirements for coverages issued outside open enrollment periods
3. A requirement that a group’s EEs live, work, or reside within the service area of the plan’s network
4. EE eligibility requirements, such as the number of hours worked
5. Enforcement of ER restrictions on coverage for late entrants (such as waiting periods)

Skwire Chapter 21, Page 359

Question 4

Small group insurance rating factors allowed by the ACA

Answer 4

1. Age - rating factors set by regulation and determined based on a range limitation of 3:1 for adults. separate factors for children, does not vary by age
2. Geographic Area - each state has defined a set of allowable rating zones, which address differences in provider payments, managed care programs, and competition
3. Benefit plan - rates may differ by amounts attributable to plan design, but not amounts due to the expected health status of groups who select the benefit plan
4. Managed care and negotiated discounts - benefit plan factors may account for network arrangements and care management protocols
5. Family composition
   a) Federal composite premium methodology prescribes that composite premium is calculated based on separate enrollee premiums for age 21 and older and for under age 21
   b) premium is given family composition equals the sum of the average enrollee premium amounts for each family member covered, but counting no more than three children under age 21
6. Tobacco use - premiums allowed to use a tobacco use rating load factor or up to 50%

Skwire Chapter 21, Page 360

Question 5

Reasons for experience rating

Answer 5

1. Many policyholders prefer to pay premiums based on their own experience, rather than having their experience pooled with other groups
2. Insurer wants to quote and charge premiums that are as competitive as possible
3. Insurer wants to avoid antiselection, with good groups going to competitors and bad groups staying

Skwire Chapter 27, Page 456

Question 6

Theoretical considerations in determining credibility levels

Answer 6

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. 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 exposures to double the credibility
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure and therefore credibility

Skwire Chapter 27, Page 457

Question 7

Practical considerations in determining credibility levels

Answer 7

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. 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 credibility level
6. Management philosophy regarding experience rating
7. The need for consistency between classes of business

Skwire Chapter 27, Page 458

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 (separate list) 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 (separate list)
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 EEs 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 experience through formula-based and re-underwriting methods
   b) All small groups with fully insured medical coverage are now subject tot he community rating restrictions of the ACA

Skwire Chapter 27, Page 459

Question 9

Pooling Methods

Answer 9

Regardless of the method chosen, a pooling charge must be applied to all groups being pooled to offset the average 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: Loss ratio used in pricing, 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 - for example, use both catastrophic claim pooling and a rate increase cap

Skwire Chapter 27, Page 460

Question 10

Loadings on the net premium (retention)

Answer 10

1. Expense loadings - usually 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 the insurer’s risk
9. Charge to cover risk of rate guarantees. When guarantees exist, consider the risk arising from misestimation risk and trend risk.

Skwire Chapter 27, Page 467

Question 11

Typical retrospective refund formula

Answer 11

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 carrier 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 + increases 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 coverage while in a loss position
7. Addition to premium stabilization reserve - 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

Skwire Chapter 27, Page 471

Question 12

Considerations when deciding whether to use retrospective experience rating

Answer 12

1. Group size - group must be large enough to have credible data and to warrant the additional 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

Skwire Chapter 27, Page 477

Question 13

Special funding arrangements for group insurance

Answer 13

1. Reserve-less plans (aka deferred premium or premium drag plans) - Insurer forgoes premiums equal to part or all of the claim reserve. 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 is 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 employer to fund an account which the insurer uses 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)

Skwire Chapter 27, Page 478

Question 14

Large Group program design considerations due to ACA

Answer 14

Underwriters must consider the impact on large group medical plans of the following changes

1. Groups with more than 50 full-time equivalent EEs are subject to ER penalties if health benefit offerings do not meet minimum value requirements, including that the plan’s actuarial value must be at least 60% and certain classes of benefits must be covered
2. Benefit plans must allow the EE the option to cover dependents (but the ACA’s definition of dependent does not include spouses)
3. The maximum waiting period before benefits must be offered to eligible new EEs was shortened
4. Plans must be affordable (cost less than 9.5% of income single coverage) to avoid ER penalties
5. Penalties will apply to health plans with very rich benefits, starting in 2018

Min Value, Dependents, waiting, affordable, Cadillac plans

Skwire Chapter 30, Page 515

Question 15

Impact of the ACA exchanges on large group underwriting

Answer 15

1. The availability of exchange subsidies changes the equation for EEs who are comparing costs between individual plans and group plan options
2. Some ERs have dropped dependent coverage and transitioned non-Medicare retirees to public exchanges
3. The existence of subsidized individual coverage may create more early retirees
4. COBRA enrollment will decline
5. Dependents from low income families are more likely to enroll in exchange coverage due to subsidies

Skwire Chapter 30, Page 516

Question 16

Components of new business underwriting for large groups

Answer 16

1. Review the characteristics of the group in order to screen, approve, and classify the group (separate list regarding u/w criteria for large groups)
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 guarantees or funding alternatives that will be used

C->E->P

Skwire Chapter 30, Page7

Question 17

Criteria used for underwriting large groups

Answer 17

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 EE 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 economies of scale, but offset that with added complexity
6. Level of participation - in the past, insurers used maximum 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

Skwire Chapter 30, Page 517

Question 18

ACA initiatives that promote health care access and consumer choice

Answer 18

1. Prohibitions on pre-existing condition exclusions
2. Restricting the use of lifetime maximums
3. Prohibiting annual benefit maximums on essential benefits
4. Requiring most groups to offer coverage to dependents up until age 26
5. Creating a health insurance exchange that is both guaranteed issue and without pre-existing condition exclusions

Skwire Chapter 30, Page 520

Question 19

Components of renewal underwriting for large groups

Answer 19

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. Developing renewal recommendations - the first step is to present the new premium rates for the existing program. Recommendations may involve proposed plan design changes and alternative 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

Skwire Chapter 30, Page 532

Question 20

Special Types of Large Groups

Answer 20

1. Association programs:
   a) Association of individuals - such as members of a medical society, who formed together to further a common interest
   b) Multiple-ER trust - covers the EEs of two or more ERs 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 alliance - 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 ERs who contract directly with providers.

Skwire Chapter 30, Page 534

Question 21

Characteristics of successful mutliple-ER heatlh plans

Answer 21

1. 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 ER size

Skwire Chapter 30, Page 535

Question 22

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

Answer 22

1. (I)nertia - EEs often prefer to stay with a prior plan option
2. Plan (P)rovisions and Costs - Such as covered services and EE cost sharing amounts
3. EE and dependent (D)emographics - such as age, gender, health status, and family size
4. (E)R actions and attitudes - such as ER contributions towards premiums and the attitude toward managed care
5. Eligibility for (O)ther health insurance coverage - such as through a spouse’s plan
6. (I)nformation available about options - such as EE communications about advertising
7. Provider and provider (N)etwork attributes - such as provider availability, reputation, quality, and med management restrictions
8. Insurer and (A)dministration issues - such as claim administration and customer service

Mnemonic - I OPINE A D (I OPINE About Dollars)

Skwire Chapter 31, Page 549

Question 23

Situations where EEs may be offered multiple choices

Answer 23

1. Choice between medical coverage and no coverage - this creates antiselection because EEs who waive ER coverage often have lower average health costs than those who don’t
2. Choice between the ER’s plan and other available coverage, such as a spouse’s ER plan
3. Choice based on member cost sharing - options may differ by deductible, coinsurance, etc.
4. Choice based on provider networks or medical management - the level of provider choice, degree of med management, and the presence of specific providers may drive EE selection decisions
5. Choice based on prescription 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 EE
7. Optional riders added to core coverage - the insurer may allow EEs to buy coverage riders such as vision, disability, and dental
8. Choice between consumer-directed plans and traditional plans

Skwire Chapter 31, Page 543

Question 24

Techniques an underwriter can use to manage selection in a multiple-choice environment

Answer 24

1. Add a loading to the premium to pay for additional cost and selection
2. EE contributions or plan design limits - place reasonable limits on the cost and benefit differentials among plans
   a) Limit the spread in monthly EE 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 region
3. Allowing one insurer to offer all of the options - this allows that insurer to offset the antiselection from on option with the favorable selection in another option
4. Participation requirements when multiple insurers offer plans - for example, requiring all insurers to use the same eligibility rules, imposing minimum participation requirements on each option, or redistributing income among insurers through risk adjustment

Skwire Chapter 31, Page 549

Question 25

Steps for developing premium rates in a multiple-choice environment

Answer 25

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 actual 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 loadings from step 5

Skwire Chapter 31, Page 550

Question 26

Definition, steps, and uses of health risk adjustment

Answer 26

1. Definition - process of adjusting measures of healthcare utilization and cost to reflect the health status of members
2. The first step is risk assessment - the method used to assess the relative risk of each person in a group (may be referred to as a risk adjuster). Consists of:
   a) Risk classification - to group individuals into classes based on risk characteristics
   b) Risk measurement - to determine the level of risk for the classes
3. The second step is payment adjustment - the method used to adjust payments to reflect differences in risk
4. Risk assessment methods are used for provider profiling, case management, provider payment, and rating/underwriting
5. Risk adjustment is being used to adjust payments to Medicare/Medicaid plans. And the ACA includes a risk adjustment provision that will apply to most individual and small group plans

Skwire Chapter 33, Page 571

Question 27

Reasons for health risk adjustment

Answer 27

These are the major goals and policy arguments for requiring risk adjustment

1. Require heatlh plans and providers to compete on the basis of efficiency and quality, not on risk selection
2. Preserve choice for consumers
3. Have consumers pay an appropriate price for their choice of insurer or provider
4. Under certain reforms (such as guaranteed issue and rating limitations), a health risk adjuster is needed to compensate plans with higher-than-average risks through transfer payments from plans covering lower-than-average risks

Skwire Chapter 33, Page 572

Question 28

Risk Classification Schemes

Answer 28

These are the criteria that can be used to classify risks

1. (D)emographics - age, gender, family status, or geographic location
2. (U)tilization measures or claim expenditures - these are generally viewed as inappropriate for health risk adjustment because they could reward an insurer for high historic costs resulting from inefficiencies
3. (D)iagnosis and pharmacy codes - these codes are commonly used in health risk assessment
4. Medical information or (H)istory - based on biomedical measures (such as blood pressure, cholesterol, heigh, and weight) or medical history questionnaires (to determine prior medical conditions)
5. (P)erceived health status - based on answers to a health questionnaire
6. (F)unctional health status - based on ability to perform activities of daily living
7. (L)ifestyle and behavior factors - such as smoking, fitness level, substance abuse, or diet
8. (M)ultiple classification criteria - it is common to use more than one of the above criteria simultaneously (commonly diagnosis and demographic info)

MD HLP FU D (MD’s HeLP FUck Diagnosis)

Skwire Chapter 33, Page 574

Question 29

Types of antiselection

Answer 29

1. External antiselection - occurs as the person is first becoming insured. Those with expensive health conditions will seek insurance
2. Internal antiselection - occurs while the person is insured. When given the opportunity, healthy individuals will be more likely to decrease coverage while unhealthy individuals will tend to increase coverage. A common example of interan antiselection is premium leakage (separate list)
3. Duration (cumulative) antiselection - occurs as people make decisions about whether to end coverage. Higher cost insureds tend to keep their coverage in force longer because they are:
   a) Less likely to be able to find coverage elsewhere (although no longer grue in markets affected by ACA)
   b) Less likely to be willing to become uninsured
   c) Emotionally less willing to change their insurance coverage

Leida Chapter 4, Page 110

Question 30

Mechanisms for controlling external antiselection

Answer 30

1. Individual underwriting before issue - includes initial screening of applicants by the agent
2. Pre-existing condition limitations
3. Requiring an enrollment mechanism that doesn’t permit antiselection (such as minimum participation percentages for associations)

Leida Chapter 4, Page 111

Question 31

Tools used in the underwriting process

Answer 31

1. Individual application - includes individual identifying 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 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 UW entirely

Leida Chapter 4, Page 114

Question 32

Actions available to the underwriter

Answer 32

1. Offer full coverage with no restrictions (for major medical, this is generally only legal option now due to 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 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

Leida Chapter 4, Page 122

Question 33

Process for investigating Claims

Answer 33

1. Most carriers have a rigorous process to uncover cases where the applicant had 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 exceed 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 applied 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 intentional misrepresentation of a material fact

Leida Chapter 4, Page 124

Question 34

Descriptions of buy down effect and premium leakage

Answer 34

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 plan costs, 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

Leida Chapter 4, Page 127

Question 35

Approaches used for modeling antiselection

Answer 35

1. Partition models - population is broken into subsets (e.g. healthy vs unhealthy), which are modeled separately. Individuals are ranked by cost, and a line is drawn to define the subsets
   a) Drawing the line in a Cumulative Antiselection Theory (CAST) Model - the cutoff line is chosen so that the ratio of average claim costs between the unhealthy and healthy groups is a chosen multiple (such as 5 or 10)
   b) Drawing the line in a Minnesota Antiselection Model - This model defined boundary conditions on the antiselection which might occur in a specific situation, in order to estimate the antiselection expected under different scenarios
   c) Drawing the line in internal antiselection - a modified CAST model can be used, adding a decrements to reflect the potential of insured to change benefit plans
2. Deterministic vs Stochastic models - deterministic models typically project results based on expected values. But a true picture of the future requires distributions of potential values, which are provided by stochastic models.
3. Markov processes - in most cases, a two-subset partition model is sufficient. But if more partitions are needed, a Markov chain can be created to determine the population distribution in the future time periods

Leida Chapter 4, Page 132

Question 36

Situation in which the CAST model does not work well

Answer 36

1. in the first 3-4 durations, when the impact of underwriting wear off overwhelms the CAST effects. The solution is to apply additional underwriting selection factors
2. In later durations, where only a fraction of the original population remains. The solution is to choose a higher value of k(2), and recallibrate the model.
3. At all durations, when a rate spiral is severa and volatile. The projection formulas may need stronger terms to fit this type of situation, such as:
   - —- Shock Lapse = [Rate Increase - trend] / [(Rate Increase - trend) + (1 + trend) / EF]
   - —- EF = elasticity factor, which measures the ability and willingness of the population to change coverage after a rate increase 9e.g., may be 1.3 for health lives and 0.8 for unhealthy lives)

Leida Chapter 4, Page 137

Question 37

Traditional techniques for controlling antiselection that are prohibited by the ACA

Answer 37

1. Underwriting, including offering alternative coverage or denying coverage
2. Health status rating
3. Pre-existing condition exclusions
4. Exclusionary riders
5. Lifetime or annual dollar limits
6. Limiting benefit coverage or imposing very high cost sharing designed to attract healthier risks
7. Rescissions, except in cases of fraud or intentional misrepresentation
8. Marketing practices that discourage unhealthy risks from signing up

Leida Chapter 4, Page 140

Question 38

ACA mechanisms for controlling antiselection

Answer 38

1. Coverage mandates and premium subsidies to encourage participation
   a) Premium subsidies - available to lower income individuals to make coverage more affordable
   b) Employer mandate - requires employers with 51 or more EEs to offer affordable insurance coverage that meets a minimum coverage level or pay a penalty
   c) Individual mandate - requires all individuals to obtain insurance that provides minimum essential coverage or pay a penalty (separate list)
2. Aligning market rules on and off the exchanges - the subsidies offered in the exchanges will attract a different health risk to the exchanges. To mitigate this selection impact, regulations impose certain requirements (see separate list)
3. Open enrollment periods - to limit the opportunity for antiselection by only allowing members to enroll or change coverage during a set time period (except when there is a qualifying life event). The ACA established a single open enrollment period in the individual market each year.
4. Minimum benefit levels - individual and small group policies must cover all essential health benefits and provide at least a bronze actuarial value (except for catastrophic plans for certain individuals). THere is also a cap on out of pocket spending and there must be no cost sharing for preventive services

Question 39

Implications for an employer to consider before deciding to self fund long-term disability (LTD) coverage

Answer 39

(some of these overlap with the disadvantages of self-funding from The Role of the Actuary in Self-Insurance)

1. (G) Loss of third-party guarantee for employees - an employer who self funds is responsible for the entire LTD liability, so there is no third-party insurer to guarantee benefit payments
2. (V) Volatility in claims - an employer who self-funds will not benefit from insurance risk pooling, so it is not protected against fluctuations in claim incidence and severity. The employer is also at risk for claims liabilities that are larger than expected.
3. (E) Economic cycles - LTD claim costs are often tied to economic conditions. Claim costs often increase at the same time the company’s profits are suffering
4. (R) EE Relations - any legal suit regarding a claim will be brought against the ER
5. (A) Accounting regulations - financial accounting standards that require ERs recognize a liability for self-funded LTD benefits
6. (T) Tax Risks - if a trust is used for maintaining reserves, contributions are limited to paid claims plus a reasonable claim reserve. These are substantial penalties for making excess contributions.

Mnemonic GREAT V - GREAT Volatility!

GHDP-118-17 (Risks in Self-insuring LTD), Page 1

Question 40

Coverage options for groups that have kept transitional coverage

Answer 40

These groups must choose one of the following in 2018 once transitional relief expires

1. Purchase ACA-compliant coverages
2. Drop coverage
3. Find some way to be defined as a large group
4. Enter into a self-funded arrangement, or coverage administered by a third party administrator with or without stop-loss

Level Funding: An alternative to the ACA for small groups, Page 41

Question 41

Description of level funding products

Answer 41

1. Level funding is an ASO product with integrated stop-loss coverage. It allows groups to benefit form the advantages of self-funding, while limiting the disadvantages
2. The cost components of level funding products are:
   a) An ASO fee to cover administrative and selling expenses
   b) Aggregate stop-loss (ASL) coverage
   c) Specific stop-loss (SSL) coverage
   d) A paid claims fund held by the insurer to cover the group’s expected non-stop loss claim costs over the projection period
   e) An IBNR fund to cover claims incurred during the projection period, but paid afterward
3. A sixth, unofficial component is an incurred claims cost projection, which is used to develop several of the other cost components
4. The paid claims fund is what allows the group to pay fixed monthly payments
   a) The payment into the fund = the ASL corridor (or aggregate margin factor) * The Group’s projected paid claims below the SSL deductible
   b) The payment pre-funds the group’s maximum liability. Any amounts greater than this are covered by stop loss.
   c) If the group’s actual paid claims are below the maximum liability, the group will receive some portion of the paid claims fund’s surplus as a refund.

Level Funding: An alternative to the ACA for small groups, Page 41

Question 42

Considerations when offering a level funding product

Answer 42

1. Insurers would want better-risk small groups to choose ACA products since these groups are very profitable under community rating. But these groups will seek lower-cost alternatives, so they could go to competitors who offer level funding policies.
2. Insurers have not yet had much Success with level funding products. But this should change once transitional policies go away, making level funding products the cheapest option for many groups.
3. Level funding products are not easy to price, sell, and administer:
   a) Insurers must have the skills to properly project the expected claim costs of individual small groups. They also must become familiar with stop-loss products
   b) Insurers should retrain legal expertise to understand the stop-loss regulations in their states and develop contracts appropriately
   c) Selling stop-loss policies often requires the filing of rates and forms with state departments of insurance
4. Level funding products should be designed and priced to closely resemble the fully insured products they are placing
5. Most small groups are not familiar with self-funding or stop loss, so insurers will need to help them and their brokers understand these products

Level Funding: An alternative to the ACA for small groups, Page 44

Question 43

Uses of credibility for group long-term disability (LTD) insurance

Answer 43

1. Valuation of claims
   a) The 2012 Group LTD valuation standard requires insurers to use credibility to reflect company-specific claim termination experience in their valuation assumptions
   b) The formula of determining the full credibility standard (f) is:
   i) 0.05 = 1.44 * (Selected variance factor / f) ^ 0.5
   ii) f = # of claim terms required for full credibility
   iii) The selected variance factor varies by claim duration: 4.0 for 2-24 months, 3.0 for 25-60 months, 2.5 for 61-120 months, and 2.0 for 120+ Months. Factor ensures that fewer terms are required to be considered fully credible in later claim durations, since terminations in later durations are less volatile
   c) For insurers with fewer terminations than f, the credibility factor (C) = (number of expected terminations / f) ^0.5
2. Experience rating - the most common formula is: Premium rate = C * Exp rate + (1-C) * manual rate
3. Manual rate-making - for estimating credibility factors for manual rate development, approaches include:
   a) Subjective educated judgements, such as deeming experience to be credible if results are stable across multiple time periods
   i) Advantage: Simplicity and flexibility
   ii) Disadvantage: It may be difficult to justify subjective decisions on credibility
   b) Formal procedures, such as limited fluctuation credibility concepts
   i) The minimum number of claims required for full credibility = x = (1.96^2 / 0.05^2) * (1 + ( sigma / mu )^2 ), where mu and sigma are the mean and std dev of the claim amounts
   ii) For insurers with fewer claims than x, C = (number of expected claims / x ) ^0.5
   iii) Advantage: Objective and theoretically justifiable
   iv) Disadvantages: may be difficult to implement and may not be applicable depending on the experience and underlying credibility model

SOA: LTD Credibility Issues, Page 5

Question 44

Challenges in applying credibility for LTD Insurance

Answer 44

1. Non-independence of claims
   a) Claim incidence is not independent due to external factors (such as economic recessions) and group-specific dynamics (such as work conditions and physical demands in the economy)
   b) Claim terminations are not independent due to external factors such as changes in the economy
2. Heterogeneous claims - claim experience does not always emerge similarly to how it did in the past, due to:
   a) Changes in the demographic mix of employees
   b) External factors like economic rescissions
   c) Changes in underwriting or claim management practices
   d) Changes in plan design
3. Competitive pricing pressures - due to a competitive market environment, there is pressure to give past experience more credibility than it theoretically should be given
4. Claim Duration - claim experience tends to be more volatile in the early claim durations (separate list)
5. Benefits from other sources - the approval of social security benefits or the loss of worker’s compensation benefits can significantly impact net benefit amounts
6. Outlier claims - when credibility is based on claim amounts, large outlier claims could artificially increase the credibility of the past experience
7. Regulatory requirements - some states have adopted credibility requirements, such as requiring credible data to support changes to existing pricing factors
8. Estimating parameters of a credibility model is often based on a combination of subjective opinion and empirical testing

SOA: LTD Credibility Issues, Page 11

Question 45

Reasons LTD claim experience tends to be more volatile in early claim durations

Answer 45

1. Terminations in early durations are dominated by recoveries (as opposed to deaths), and there is a strong correlation between recoveries and cause of disability
2. Benefits from other sources are typically awarded within the first few years of claim, creating irregular payment streams
3. The change in definition of disability from “own occupation” to “any gainful occupation” usually occurs within the first few years of claim, resulting in a spike in recoveries at that time
4. The maximum benefit period for mental and nervous claims is usually limited to 24 months

SOA: LTD Credibility Issues, Page 13

Question 46

Common features of the group medical insurance market

Answer 46

1. premium rates are usually guaranteed for one year
2. Groups usually consist of employees (and their dependents) of a single company or a govt unit, or members of a unit
3. Healthy individuals tend to remain healthy and incur few claims, while many illnesses tend to last more than one year
4. Insurance coverage is written without individual health underwriting
5. Premium rates do not change during the contract year
6. Retrospective experience rating may be used for larger groups
7. Insurers have a manual rating system that includes many factors, such as geographic location, age, and gender
8. Most insurers use the group’s own claim experience in projecting claim costs
   a) For groups with less than 300 members, insurers typically blend the group’s own experience with a manual rate
   b) This requires a credibility table or formula, which should not vary by too many factors and should be relatively easy to explain
9. Purchases of group health insurance tend to be very knowledgeable about their benefits and will shop around for competitive premiums
10. The market for health insurance coverage is very price competitive
11. The policyholder is usually advised by a consultant or broker who has little loyalty to the insurer
12. Competitive pressure exerts a downward price influence and reduces profit margins
13. Most covered individuals incur at least some claims over the course of the year
14. The distribution of medical claims by individual has a very high variance

Practical Approach - Group Medical Credibility, Page 3

Question 47

Considerations for applying credibility to the group medical insurance market

Answer 47

1. Many credibility models apply to products for which claims are rare, so they must model claim frequencies. But for group medical insurance most individuals have claims, so a reasonable simplifying assumption is that all individuals have claims.
2. Individuals who have high claims in one year will tend to have above average claims in the next year. So credibility of a group of only one member is significant
3. Because the market is competitive, insurers that use inappropriate credibility levels could experience significant losses

Practical Approach - Group Medical Credibility, Page 4

Question 48

Basic credibility formula for group medical insurance

Answer 48

This formula was created using a least squares credibility model

z = k1 + (n-1) k2 / (1 + (n-1)*k3)

1. n is the number of individuals in the group
2. k1 is the credibility of a group of one individual. it equals the regression coefficient of an individual’s claims in the current year based on the prior year. It is typically around 25%
3. k2 is the regression coefficient of claims for individuals in the current year based on the claims of others in the same group in the prior year. It is difficult to estimate, so it is often set equal to k3
4. k3 is a measure of how the claims of each individual are related to others within the same group. It is commonly set = to 1%

Practical Approach - Group Medical Credibility, Page 5`

Question 49

Adjustments to the basic credibility formula for group medical insurance

Answer 49

1. Adjustment for EE turnover. Let p be the probability that an individual will stay in the group.

Formula change: z = p*k1 + (n + p) k2 / (1 + (n-1)k3)

2. Adjustment for variance of members’ expected claims
   a) Calculate an adjusted group size n’ = n*(u^2) / (u^2 + o^2), where u and o ^2 are the mean and variance of hte group’s age-sex factors
   b) Then calculate credibility by replacing n with n’ in the credibility formula
3. Adjust for specific stop loss
   a) because of very high deductibles, k2 < k3
   b) Let s = k2/k3. Therefore, k2 in the credibility formula can be replaced with sk3
   c) s can be estimated as 100% - 10%(attachment point / 50000)
4. Formula for factional years of experience, where f is the fraction of the year of experience and z1 equals z from the basic credibility formula

Formula: zf = fz1 / (1 + (f - 1)z1 )

5. Multiple years of experience - calculate a separate credibility percentage to apply to each year. The most recent year is year 1, the year before that is year 2, etc.
   a) For year 1, calculate z using the basic credibility formula
   b) For years 2+

zt = (1 - Sum Zr )*Zt-1, summed over r from 1 to t-1

Practical Approach - Group Medical Credibility, Page 8

Question 50

Qualifying events under COBRA that mandate continuing coverage

Answer 50

1. A death of a covered EE
2. A termination or reduction in hours for a covered EE
3. A divorce or legal separation of a covered EE from his or her spouse
4. A dependent child ceasing to be dependent under the terms of the plan
5. In respect to a retired EE only, a reorganization or bankruptcy by the ER

Role of the Actuary in Self-Insurance, Page 12

Question 51

Plan-related risks transferred to the insurer with a fully insured contract

Answer 51

1. Financial risks, such as the risk that actual claims deviate unfavorably from expected claims
2. Operational risks, such as the risk that the admin operations of the plan fail or cost more than expected
3. Litigation risks, such as the risk that a plan participant sues the plan for failure to pay legitimate claims
4. Fiduciary risks, such as the risk that plan assets, including EE contributions, are squandered

Role of the Actuary in Self-Insurance, Page 15

Question 52

Considerations for the plan sponsors primary fiduciary when selecting an insurer for a fully insured product

Answer 52

1. Financial Strength
2. Cost
3. Claim payment timing and practices
4. Governance and internal controls
5. Compliance record and reputation
6. Expertise
7. Reporting ability
8. Appeals process
9. Complaints record
10. Provider network breadth

Role of the Actuary in Self-Insurance, Page 15

Question 53

Potential cost savings when a plan sponsor chooses to self-insure health benefits

Answer 53

1. state premium tax savings
2. Elimination of state-mandated benefits
3. avoidance of the health insurer fee
4. Removal of insurer expenses and risk charges
5. Claims costs

Role of the Actuary in Self-Insurance, Page 16

Question 54

Decisions that must be considered by a plan sponsor when choosing to self-insure

Answer 54

1. How benefits are administered
2. What benefits to offer
3. Which, if any, provider network to utilize
4. Which pharmacy benefit program to offer

Role of the Actuary in Self-Insurance, Page 16

Question 55

Advantages of self-insurance

Answer 55

1. Potential cost savings
2. Plan design flexibility
3. Immediately reap the savings from wellness or disease management programs
4. Claims management (select own vendors)
5. Cash flow (can hold own IBNR reserves)
6. Investment income
7. Benefit from favorable claims experience

Role of the Actuary in Self-Insurance, Page 16

Question 56

Disadvantages of self-insurance

Answer 56

1. Exposure to several different financial risks:
   a) Costs not fully predictable
   b) Actual claims may deviate from expected
   c) Plan sponsors must be prepared for monthly volatility of claims
2. Exposure to other risks such as fiduciary, legal, and reputational risks
3. Plan sponsors are exposed to the administrator’s operational risk
4. Fully insured arrangements are easier for employers to understand and budget
5. Smaller or more risk-averse self-insured ERs will likely purchase Stop-Loss Insurance (SLI)

Role of the Actuary in Self-Insurance, Page 17

Question 57

General steps of the process used to establish self-insured rates

Answer 57

1. Request data from the TPAs
2. Gather data and review for reasonableness
3. Develop initial estimates using a projection methology with adjustments for the following:
   a) Enrollment changes
   b) Benefit changes
   c) Network/provider reimbursement changes
   d) Large claims
   e) Trend
   f) Administrative fees
   g) SLI

Role of the Actuary in Self-Insurance, Page 28

Question 58

Primary mechanisms for managing the financial risks of self-insuring

Answer 58

1. Specific SLI protects the plan from large single medical claim events
2. Aggregate SLI protects the plan sponsor from an accumulation of adverse medical events in total

Role of the Actuary in Self-Insurance, Page 30

Question 59

Self-Insured plans - financial risks that should be considered for mitigation or transfer

Answer 59

1. Natural / random claim volatility
   a) Certain diagnoses develop claims at different rates
   b) Hospital contracts can affect cash-flow timing
   c) Accident claims and claims that give rise to subrogation
   d) Occurrence of out-of-network claims
   e) Internal processes and systems of TPAs
2. A lull in claim payments will arise in the first few months of a newly self-insured plan during which excess cash flow can be used to build a reserve
3. The impact of catastrophic claims on an EE benefit plan

Role of the Actuary in Self-Insurance, Page 31

Question 60

Services actuaries can provide to quantify the potential risk and trade-offs between stop-loss carriers

Answer 60

1. Evaluating adequate aggregate and specific limits under the policy
2. Evaluating the potential trade-off in policy terms, conditions, and limitations
3. Evaluating the accuracy of appropriateness of policy premiums

Role of the Actuary in Self-Insurance, Page 34

Question 61

Key areas of review to avoid potential gaps in coverage between SLI and the underlying plan benefits

Answer 61

1. Experimental and investigational definitions
2. Clinical trial definitions
3. Coverage of claims outside the U.S.
4. Usual, reasonable, and customary definitions
5. Medicare eligibility for end-state renal disease claimants or covered retirees
6. Coordination of benefits and subrogation provisions
7. Coverage of other administrative fees such as legal fees or network access fees
8. Cost containment vendor fees
9. State surcharges and assessments

Role of the Actuary in Self-Insurance, Page 34

Question 62

Actuaries advising plan sponsors should pay special attention to the following technical analysis

Answer 62

1. Claims projections
2. Budgeting
3. Risk allocation
4. Risk Management
5. Plan design
6. Claims control features (networks or allows claim charges)

Role of the Actuary in Self-Insurance, Page 35

Question 63

The minimum information needed to determine appropriate COBRA base premiums

Answer 63

1. The plan’s claim data (both paid and incurred) for the base period
2. Information on all applicable administrative and vendor costs
3. Information relating to any stop-loss premiums, parameters, and reimbursements
4. Projected covered lives for the coming determination period

Role of the Actuary in Self-Insurance, Page 37

Question 64

Areas of opportunities and challenges for actuaries working in the self-insured market as a result of the ACA

Answer 64

1. Determining the ACA minimum Value (MV) for self-insured plans
2. Enrollment and expense projections
3. Minimum essential coverage (MEC) plan cost estimates
4. Setting affordable EE contributions
5. Balancing benefits and ER budget
6. Defined contribution plans

Role of the Actuary in Self-Insurance, Page 37

Question 65

The basic functions of SLI transactions

Answer 65

1. A potential insured solicits advice from a financial adviser
2. The financial adviser solicits bits from possible insurers
3. The winning bidder issues a policy
4. The insured pays premium
5. The insurer pays eligible claims that are submitted by the insured
6. The insurer may share the risk with a reinsurer, a transaction that is not visible to the insured

Role of the Actuary in Self-Insurance, Page 43

Question 66

Parameters that refine stop-loss coverage

Answer 66

1. The benefit types covered
2. The contract basis of SLI
3. How known risk exposures are covered by SLI (e.g., laser, load premium, laser pooling)
4. The maximum liability of the SLI

Role of the Actuary in Self-Insurance, Page 47

Question 67

Stop loss contract basis

Answer 67

The contract basis 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 of coverage is referred to as runout 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 exist, resulting in contracts such as 12/18 and 24/12

Role of the Actuary in Self-Insurance, Page 47

Question 68

Stop loss product variations

Answer 68

Specific stop loss variations

1. A no-laser guarantee
2. A no-laser rate cap
3. Aggregating specific stop loss

Aggregate stop loss variations

1. Aggregate-only
2. Aggregate attachment points below 100% of the expected claims
3. Aggregate accommodation

Role of the Actuary in Self-Insurance, Page 51

Question 69

Requirements for level funding

Answer 69

1. Some form of SLI that involves aggregate insurance
2. Clearly defined and robust specific advance funding and/or aggregate accommodation
3. The aggregate attachment point be fully funded
4. The ASO/TPA administrator pays all claims from these funds

Role of the Actuary in Self-Insurance, Page 54

Question 70

Adjustments made to determine specific stop loss manual rates

Answer 70

1. Group risk characteristics - age, gender, area, industry, trend
2. Underlying benefits - particularly the out-of-pocket-max
3. Contract provisions - contract basis, contract length and benefit carve outs
4. Claims cost controls - provider networks, reference-based pricing plans, etc.
5. Deductible leveraging - particularly on the group risk characteristics

Role of the Actuary in Self-Insurance, Page 57

Question 71

Varying factors used to determine the expected aggregate claims cost percentage

Answer 71

1. The number of EEs covered by the plan
2. The aggregate factor to be quoted, such as 125% of expected first dollar claims
3. The specific stop-loss deductible
4. The aggregate benefit limit, for example, maximum aggregate claim of $1M

Role of the Actuary in Self-Insurance, Page 61

Question 72

Basic data elements needed to analyze stop-loss risk

Answer 72

1. Eligibility and enrollment information, including the location of the self-insured plan and members
2. Underlying health benefit plan design
3. Current rates, proposed renewal rates and name of the incumbent
4. Past stop-loss experience, including both premiums and claims
5. Claimants with high claims costs, typically any member exceeding one-half the specific deductible
6. Claimants with diagnoses and/or prognoses that indicate a high likelihood of a large claim

Role of the Actuary in Self-Insurance, Page 62

Question 73

Variables that can influence the completion factors for stop-loss

Answer 73

1. Specific deductible
2. Contract basis
3. Plan’s TPA

Role of the Actuary in Self-Insurance, Page 68

Question 74

Methods used to calculate a reserve for a specific stop-loss block of business

Answer 74

The most common method used to calculate stop-loss reserves is to select an ultimate loss ratio

1. Earned Premiums * Ultimate Loss Ratio = Estimate of incurred Claims
2. Reserves = Estimate of Incurred Claims - Paid Premiums

Another option is the Bornhuetter-Ferguson (BF) Method

1. The BF approach implicitly combines the loss ratio and development methods
2. The general formula is: Reserve = Expected Losses * (1 - Completion Factor)

Role of the Actuary in Self-Insurance, Page 68

Question 75

Methods used to calculate a reserve for an aggregate stop-loss block of business

Answer 75

1. Policy year-to-date method
   a) Eligible year-to-date losses are compared to pro rata attachment points
   b) Reserves are established for each policy on which eligible losses exceed the pro rata attachment point
2. Loss ratio method: Include margin for adverse deviations that is expected for the block of business

Role of the Actuary in Self-Insurance, Page 69