Gh-Dp Section 8

Front 1

Design approaches to minimize adverse selection

Back 1

1. limit the frequency of choice
2. limit the degree of change
3. level the spread between options
4. require proof of insurability before increasing coverage
5. group certain coverages together
6. delay full payment
7. offer an HSA
8. maintain parallel deisign
9. test the program with employees, not a design restriction
10. use judiciously so as not to reduce excessively the flexibility

Front 2

Pricing Alternative to Minimize Adverse Selection

Back 2

1. risk-based pricing
a. used in medical and dental through tiered pricing
b. why don't all group life plans recognize age, gender, smoker?
i. administering different prem schedules increases cost
ii. premiums by gender may be prohibited someday
2. er subsidization - higher participation helps spread the risk
3. anticipating adverse selection in pricing
a. adjustment of the price tags for anticipated experience
b. loading the prices of the lesser-valued option
c. push cost adverse selection into the highest-valued option
d. spread cost adverse selection over the price of all options
4. may encourage adverse selection to phase out an option

Front 3

Underwriting the Risk (External Antiselection) (broad list)

Back 3

1. controls
2. types of underwriting
3. u/w tools
4. analysis of the information
5. underwriting actions
6. pre-ex investigation, material misrepresentation, and recession

Front 4

Underwriting the Risk (External Antiselection) (controls)

Back 4

1. individual (medical) underwriting before issue
2. pre-existing conditions provisions
3. enrollment mechanism that doesn't permit antiselection

Front 5

Underwriting the Risk (External Antiselection) (types of underwriting)

Back 5

1. medical, paramedical, nonmedical
2. health insurance medical underwriting means medical questions on app

Front 6

Underwriting the Risk (External Antiselection) (u/w tools)

Back 6

1. the application
2. attending phys statement
3. internal data
4. phone interviews
5. lab tests
6. medical exams
7. tax returns
8. preexisting provisions

Front 7

Underwriting the Risk (External Antiselection) (analysis of the information)

Back 7

1. debit manuals: point value of applicant guides the underwriting action
2. genetic testing: politically controversial and not presently done
3. predictive models: e.g. credibility formulas, diagnosis-based risk adjusters, debit manuals

Front 8

Underwriting the Risk (External Antiselection) (underwriting actions)

Back 8

1. full coverage with no restriction
2. offer coverage at a higher premium rate
3. offer a standard policy, but exclude coverage for that specific condition or affected body system (through exclusion rider)
4. offer a different policy or plan than the one applied for
5. offer a different plan of benefits than the one applied for
6. decline coverage completely
7. limitations of underwriting action (open enrollment for med supp)

Front 9

Underwriting the Risk (External Antiselection) (pre-ex investigation, material misrepresentation, and recession)

Back 9

1. material misrepresentation when claimant lies on the app
2. deciding when to conduct an investigation
a. timing: insurer has a limited amount of time after issue to rescind because of bad information on app
b. conditions: some conditions excluded from being preexisting (accidents, for example)
c. size: don't investigate of cost of investigation > cost of claim
d. sentinel conditions: some conditions related to others lend themselves to antiselection
3. possible outcomes of investigation: reformation and recession

Front 10

Changes in plan (internal antiselection)

Back 10

1. when policyholders are provided opportunities to antiselect, they will do so
2. premium leakage
a. insurers allow policyholders to change to higher deductible at renewal
b. higher risk policyholders will keep the richer benefit
3. the buy-down effect
a. common with coverage with high or frequent rate increases
b. insurer never receives the full value of the prem increase
i. older policyholders go to medicare and drop coverage
ii. policyholders witch to lower cost plan
c. due to antiselection, claims do not drop as much as prem

Front 11

Antiselection upon lapse (CAST/durational antiselection)

Back 11

1. more lapsing policyholders will be low risk than high risk
2. large rate increases that increase lapse rates will also increase antiselection
3. measured by looking at experience by duration

Front 12

Why determining optimal rate level for a block is challenging

Back 12

1. rate increase often leads to anti-selective lapse
2. profit maximizing rate increase must consider the competition
3. regulations on how much renewal rates may vary within a class of insureds

Front 13

Formulas for price induced lapse and profit capacity

Back 13

1. L = S(P'/M) S is a function
2. adjusted price P' = P/A
3. L = 1/2 = S(z) if z = 1
4. ProfitCapacity = Io * C * [A * Phi - B * Vo]

Front 14

Rules of determining optimal rate level for a block

Back 14

1. for sustainable block maximize profit with moderate rate increases and low lapse
2. for blocks with the least healthy mixes of insureds, maximize rate increase within the limits of the rating law
3. for healthier mix of insureds, rate increase to set the premium to the market price
4. track competitive prices by market
5. lapse is as important as cost or risk
6. build a good lapse model
7. monitor base lapse vs. price-induced lapse
8. if lapses exceed a base level, then prices are too high
9. set a target lapse rate for each class of insureds

Front 15

New business underwriting for large groups

Back 15

1. characteristics of the group: see master list
2. larger employers often opt for self-funded ASO contracts
3. little emphasis on health status of individuals
4. HIPAA requirements
5. plan design

Front 16

Evaluating large group experience by LOB

Back 16

1. group life: volatile due to low frequency and variations in amounts of coverage
2. DI may also have low claim frequencies, but large liabilities
3. medical plans
a. for large groups, one year of experience is adequate
b. consider discounts, cost containment programs, service area, network size, ease of access, projected enrollment, provider reimbursement
c. multiple choice scenarios
4. wellness: hard to measure impact of wellness and DI
5. dental and vision plans: large antiselection risk
a. cost sharing, frequency limits, exclusions, and participation requirements

Front 17

Developing the large group proposal

Back 17

1. large group RFPs are lengthy
2. consider plan design, funding arrangements, and enrollment patterns
3. charges for admin expenses case-specific
4. performance guarantees: speed and accuracy of claims processing and cust. service
5. funding alternatives: fully-insured, self-funded, combination approach

Front 18

Large group renewal underwriting

Back 18

1. evaluating the case: change in enrollment, antiselection, catastrophic claims, admin
2. developing renewal recommendations
a. present new premium rates for the existing program
b. may propose alternate funding methods or plan design changes
3. renewal monitoring - review claims and incurred but unreported liabilities

Front 19

Underwriting group DI

Back 19

1. disability claims are subjective and volatile
2. groups are classified by occupation and industry
3. overinsurance must be avoided
4. firms with a history of employment fluctuation are higher risk
5. non-contributory plans are desirable

Front 20

Underwriting group life

Back 20

1. experience rating is usually based on several years experience
2. consider additional risks if benefits in retirement or terminal illness benefit

Front 21

Individual underwriting considerations

Back 21

1. HIPAA restricts underwriting and rating practices
2. not allowed to decline unhealthy small group applicants
3. however, debit points may be assigned to each group
4. approaches used for individual medical assessments
a. short form apps and long form apps
b. medical records, attending physician statements (APS), follow up calls, exams, prescriptions, predictive models
5. post-claim u/w cost effective, but can cause litigation
6. pre-ex conditions limited to 12 mos. for new entrants, 18 mos. for late entrants
7. post-issue underwriting: discovers facts were misrepresented, take action

Front 22

Med supp administrative considerations

Back 22

1. generally similar to other medical coverage
2. insurers must maintain experience data to support rate increases
3. billing and eligibility is simplified by lack of dependent coverage
4. CMS has developed medicare crossover to share data with secondary payers
a. claims paid in a timely fashion and claim information is available quickly
b. insurer must sign a voluntary data sharing agreement to participate

Front 23

U/W group life insurance can be divided into 2 topics

Back 23

1. the legal requirements under state and other insurance laws
a. must be an eligible group
b. must meet minimum size/participation
c. must meet specific eligibility and benefits requirements
2. the insurers own u/w standards (risk selection)
a. see master list
b. eligibility
i. full time employees are nearly always eligible
ii. spouses and children may be eligible for dependent coverage
iii. retirees carry significantly higher risk
c. benefit schedule: age reductions are used to lower risk
d. indiv u/w for high amounts, late entrants, small groups

Front 24

Risk management for group life

Back 24

1. identify concentrations by industry or geographic area
2. review the insurers ability to withstand a variety of scenarios
3. potential solutions: catastrophic reinsurance, per-life reinsurance, industry risk pool, limit concentration of business

Front 25

DI u/w practices and considerations

Back 25

1. group characteristics: see master list
2. plan design
a. benefit richness
i. function of benefit percent, benefit taxability, and maximum benefit
ii. high benefit percents a poor risk if benefits available on a tax-free basis
b. pay especially close attention to definition of disability
3. scenarios where indiv u/w required
a. small groups, higher amounts, enroll after they are initially eligible
4. see also group ch 24 flashcard (sect 7?)

Front 26

How to manage the underwriting cycle

Back 26

1. do not try to expand market share when market is under pricing
2. consider risk objectives
3. timely evaluation of experience and trends
4. counter-cyclical marketing
5. cost-effective administration
6. consistent management compensation goals

Front 27

Small group claim cost variation by u/w, group size, pre-existing limits

Back 27

1. u/w: guarantee issue claim costs > underwritten claim costs for durations 1-3
2. group size: incurred claim costs exhibit a U-shaped pattern by group size
3. pre-existing condition limitations: no limitation claim costs are higher at later durations

Front 28

Managing the life cycle of major medical insurance

Back 28

1. durational effects
a. underwriting makes claims in early years lower
b. over time u/w wears off and antiselection occurs, loss ratios occur
2. cohort grouping
a. policies issued at the same time should be analyzed together
b. typically, newer cohorts will partially subsidize older ones
3. durational rating
a. automatically increases rates by duration of the policy
b. higher rates to long-standing policies to reflect durational deterioration
4. what happens to a closed block
a. without new issues, there are no low cost policies buffering claim increases
b. correct anticipation of CAST effect is essential
5. prefunding or subsidizing with better risks will make the block easier to manage
6. managing the product cycle
a. helpful characteristics to avoid large rate increases: low cost local networks or major market presence
b. where durational rating is not allowed, carriers often develop new products every 2-3 years and close existing block

Front 29

Reasons for experience rating

Back 29

1. groups prefer premium based on own experience rather than pooled
2. may help insurer quote more competitive rates
3. competitive pressures despite theoretical justification to pool
4. policyholder held financially accountable for its past claims experience

Front 30

Considerations of credibility levels for experience rating

Back 30

1. theoretical considerations
a. low frequency claims more volatile and require larger exposure for credibility
b. coverages with widely varying claim sizes will tend to be more volatile
c. typical measure is lives covered but may use longer period rather than more lives
2. practical considerations
a. competitive pressures
b. administrative ability to cope with experience rating
c. trade-off between the added cost and the resulting gains in volume
d. management philosophy regarding experience rating

Front 31

Prospective experience rating

Back 31

1. changes in the premium to be charged for a future period
2. incurred claims = paid claims + ending reserve - starting reserve
3. pooling methods (details follow)
4. trending midpoint of experience to midpoint projection
5. calculating gross rates from net rates
a. expense loadings (also known as retention loadings/items)
b. deficit recovery charge
c. termination risk charge
d. pooling charges
e. profit charge
f. investment income
g. explicit margin

Front 32

Prospective experience rating (pooling methods)

Back 32

1. pooling charge must be >= claim modifications made
2. catastrophic claim pooling
3. loss ratio/rate increase limits
4. credibility weighting
a. pooled clms = C * IncClms + (1-C) * ExpectedIncClms
b. loss ratio (pooled) = C * LRbeforePooling + (1-C) * PooledLR
5. multi-year averaging
a. pooled loss ratio in year Z = (5*LR in yr Z + 3*LR in Z-1 + 1*LR in Z-2) / 9
6. combination - many of the methods can be used together

Front 33

Retrospective Experience Rating

Back 33

1. balance = prior balance + prem + investment - claims charged - expenses - risk charge - rate stabilization reserve addition - profit
2. claims charged = clms paid + clm reserve increase - pooled clms + pooling charges + conversion charges + clm margins
a. specific stop-loss claims are removed
b. claims > aggregate stop-loss pooling level are removed
c. stop loss pooling charge is added back in
d. add in excess claim cost for conversion privileges
3. rate stabilization reserve addition: reduce risk of being in deficit by accumulating portion of policyholder surplus
4. profit: margins often built into other assumptions, rather than shown explicitly

Front 34

Special Funding Arrangements

Back 34

1. reserveless plans: insurer forgoes some prem and policyholder promise to pay amount upon termination
2. fully-insured plans
a. insurer bears immediate risk of adverse experience
b. insureds have security of insurer being the claim guarantor
c. premium tax owed on money flowing to the insurer
d. contracts subject to insurance laws
3. self-insured plans
a. employer takes on the role as the primary risk taker
b. employer may purchase stop-loss
c. premium tax is avoided
d. state regs on insurance contracts will not apply
4. minimum premium contracts
a. hybrid of insured and self-insured plans
b. policyholder deposits funds to an account as needed
c. clms are paid from fund, insurer liable for clms > expected
d. state premium tax is avoided
5. stop-loss contracts
a. used with self-insured plans
b. specific stop-loss insures claims of individuals covered
c. aggregate stop-loss covers the claims of the plan as a whole
6. retrospective premium
a. the policyholder takes some claim risk in exchange for reduced risk charges and lower up-front prem

Front 35

Product development (three broad steps)

Back 35

1. product need
2. design
3. take the product to market

Front 36

Product development steps (product need)

Back 36

1. external product drivers
a. the plan holder (ers)
b. brokers/agents/employe benefit consultants
c. direct market input: surveys and focus groups
d. legislation and regulations
2. internal product drivers: group sales force and home office staff
3. evaluate strategic fit
a. fit into company's traditional market segments?
b. fit into company's stated profit objectives?
4. clarifying the product: planning changes to current systems
5. expected profit margins

Front 37

Product development steps (designing the product)

Back 37

1. legal requirements: policy forms and rates must be filed
2. packaged vs. tailor made: simple offerings for small groups, larger more complex
3. antiselection and claims volatility
a. plan design, u/w, and provisions reduce antiselection
4. administrative and systems issues
5. managed care issues (details follow)
6. self-insured issues: focus on ASO services being supplied
7. organizational considerations for blue cross and HMOs
a. BCBS plans focus is local
b. HMOs localized, and must provide out-of-area benefits

Front 38

Product development steps (designing the product - managed care issues)

Back 38

1. network development
a. critical in marketing and achieving financial goals
b. what is the perceived quality of the network?
c. alternatives in accessing networks include:
i. create a network or buy into an existing one
ii. joint venture
iii. rent: gain access to PPO networks for a fee
iv. passive networks
2. provider reimbursement methods (capitation, FFS)
3. carve-out networks and services
4. managed care data requirements
a. who goes where? efficiency of providers

Front 39

Product development steps (going to market)

Back 39

1. training and implementation
a. methods to field train staff: training manual, training sessions, teleconferencing, videos, bulletins, web-based methods
b. train home office in rating, underwriting, or administering new product
2. advertising and sales promotion
3. test marketing

Front 40

Four Flex Pricing Objectives

Back 40

1. objective 1: realistic pricing
a. price tags should closely represent the value of each option
2. objective 2: equity
a. ees should receive an equal dollar amount or percentage of pay
3. objective 3: no losers
a. be able to repurchase prior coverage with no increase in costs
4. objective 4: no additional company cost
5. generally impossible to achieve all four simultaneously

Front 41

Flex Pricing Approaches (flat credit structures)

Back 41

1. flat credit structures allocate equal credits to all ees
a. objective 2 (equity) is always achieved
2. variation 1: family credits
a. ee allocation = current company cost for a family
3. variation 2: average credits
a. ee allocation = avg cost of current plan per covered ee
4. variation 3: single coverage credits
a. ee allocation = company cost of the ee-only coverage
b. in order to have no losers, price tags must be decreased
5. net pricing and flat credit approaches
a. flat credit approaches unlikely to be on a net pricing basis

Front 42

Flex Pricing Approaches (buy back structures)

Back 42

1. credits = avg cost of each ee to the er prior to flexible program
2. takes into account cost based on whether they cover dependents
3. the buy-back approach can be used in a net pricing scenario

Front 43

Flex Pricing Approaches (election based structures)

Back 43

1. price tags and credits = buy-back for option A
2. option B or C have the same net cost, regardless of family status
3. comes closest to meeting all four objectives

Front 44

Flex Pricing Steps

Back 44

1. step 1: data collection and analysis
2. step 2: preliminary option pricing (requires that a relative value for each option be determined)
3. step 3: preliminary subgroup pricing (most common category is dependent coverage)
4. step 4: anticipation of changes in claims experience (trend)
5. step 5: taxes and administration fees
6. step 6: adjustments to realistic price tags (details follow)
7. step 7: no-coverage option pricing (whether to allow ees to waive coverage)
8. step 8: pricing by business unit or location

Front 45

Flex Pricing Steps (adjustments to realistic price tags)

Back 45

1. subsidized pricing
a. encourage the selection of a particular option
b. limit the potential for adverse selection in an option
c. difficult to reprice consistently in future years
2. carve-out pricing
a. ee will not have as full an appreciation of the cost
b. difficult to explain to employees what the prices represent
c. future price increases more difficult to explain

Front 46

Forming a flexible credit structure (3 key elements)

Back 46

1. sources of credits
a. current benefits, benefit reductions, wellness credits, ee payroll deductions, additional er money
2. amount of credits: current and also a strategy for how the credit pool may increase in future
3. allocation of credits
a. equity in benefit value: price tags set realistically and credits on a per capita basis
b. repurchase of current program = no losers
c. organizational objectives: cost mgmt, service recognition, ee performance, health awareness
d. component credit allocation: credits are allocated for each benefit. the sum of components = ees total credit allocation

Front 47

Testing the flex pricing structure

Back 47

1. winners and losers: out-of-pocket cost of the prior plan and flex plan compared
2. employer cost analysis
a. cost = expected claims + expenses and taxes + credits - price tags
3. reasonableness

Front 48

Considerations when selecting credibility procedures

Back 48

1. be familiar with various credibility methods and strengths/weaknesses of each
2. produce results that are reasonable
3. do not bias the results in any material way
4. are practical to implement
5. consider need to balance responsiveness and stability
6. prior experience should have characteristics similar to the subject experience
7. any credibility procedure requires informed judgment

Front 49

Types of credibility procedures

Back 49

1. note: see SN126 below
2. classical credibility
a. makes assumptions about form of the underlying probability distribution
b. volume such that the loss is within a given % of expected at a given probability
3. empirical credibility
a. measure statistical relationship of subject experience and prior periods
b. no underlying distribution is assumed
4. bayesian credibility procedures
a. merge prior distributions with statistical info producing new distributions

Front 50

Statistical Paradigms

Back 50

1. frequentist paradigm
a. probability of an event is based on its relative frequency
b. all prior and/or collateral information is ignored
c. proponents view it as being objective
d. examples: test of statistical hypotheses, confidence intervals, and unbiased estimates
2. bayesian paradigm
a. prior and collateral information is incorporated into the model
b. examples: bayes theorem, conditional probabilities, prior distributions, predictive distributions, and (posterior) odds ratios

Front 51

Three approaches to credibility

Back 51

1. the most well-developed approach is least squares credibility
a. referred to as Buhlmanns approach
2. the limited fluctuation and buhlmann approaches involve the explicit calculation of Z, and the use of equation C = ZR + (1-Z)H
3. bayesian approach requires neither the direct calculation of Z nor the equation above

Front 52

Bayesian approach to credibility

Back 52

1. enables statistical inference by computing inverse probabilities
a. we are inferring backwards from results to causes
2. predictive distribution provides more than just the expected aggregate losses
a. provides the tail of the distribution of aggregate losses

Front 53

Why important to do exploratory data analysis first

Back 53

1. substantial insight can be gained by using simple approaches
2. exploratory data analysis may yield a complete solution
3. often gives insight into the process generating the data
4. can often reveal errors in data

Front 54

Describe prior and posterior probabilities

Back 54

1. initial or prior probability is assessed before the experiment was performed
2. posterior probability is revised estimate based on results

Front 55

Given a claims distribution, how do you calculate Z?

Back 55

1. Z = Cov[sum(Xi1),Sum(Xi2)] / Var[sum(Xi1)]

Front 56

Drivers of generic dispensing rate (GDR) increases

Back 56

1. PBMs, ers, and health plans pushed for increased generic use to mitigate costs
2. big-name patent expirations in recent years
3. strong plan design and formulary incentives
a. prior authorization programs
b. closed formularies
c. cost sharing
4. increased public acceptance
5. retail outlets encourage generic drug use by aggressive marketing

Front 57

Why does medicare Part D have high GDR?

Back 57

1. part D design encourages consumerism to avoid the coverage gap
2. seniors use more heavily in categories where generics are available
3. budget-conscious senior population

Front 58

Premium increase formulas (hint: formulas break prem trend into 3 components)

Back 58

1. PY12 indicates plan year starting July 1, 2011
2. PY12 PMPM Premium = (PY10 PMPM Experience) X (Trend PY10 to PY12)
3. PY11 PMPM Premium = (PY09 PMPM Experience) X (Trend from PY09 to PY11)
4. PY12 prem trend = (PY12 PMPM Prem) / (PY11 PMPM Prem) =
a. (PY10 PMPM Experience) / [ (PY09 PMPM Exper) X (Expected Trend PY09 to PY10 from PY11 Calc) ]
b. X [ (Expected Trend PY10 to PY11 from PY12 Calc) / (Expected Trend PY10 to PY11 from PY11 Calc) ]
c. X (Expected Trend PY11 to PY12 from PY12 Calc)

Front 59

3 components of premium increase (aka describe formula on prior card)

Back 59

1. first component measures how well carrier estimated PY10 costs when calculating PY11 premium
2. second measures whether carrier's expected trend from PY10 to PY11 has changed
3. third component is carrier's expected trend from PY11 to PY12