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29 Cards in this Set

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INTRODUCTION: METHODS OF INSURING
 Experience Rating
 rates based on ph’s prior claims experience
 Pooling (Manual Rating)
 rates based on demographics / underwriting factors
 healthy ph’s subsidize unhealthy ones (within the same class)
 Community Rating
 Pure CR, modified CR, etc.

 Blended Rates
 pooling combined with experience rating
 Prospective rating – premium rate is set in advance
 Retrospective rating – premium is paid but adjusted afterwards

Self-Insuring vs. Partial Insuring vs. Full Insuring
Type of Funding Method What does Er pay? Type of policy bought
Self-Insuring  All claim costs
 ASO premiums  ASO policy
Partial Insuring  claim costs up to a limit
 stop-loss premiums
 conversion policy premiums  Specific and aggregate stop-loss insurance.
 Sometimes conversion policies also.
Full Insuring  premiums only  full insurance
CHOOSING BETWEEN EXPERIENCE RATING VS. POOLING
Reasons to Use Experience Rating
 Competitivity
 To prevent antiselective lapses
 When a group’s experience is credible
Reasons to use Pooling
 When group’s experience is not credible (opposite of above)
 easier and cheaper
 Community Rating regulations may prohibit experience rating.
Other Considerations in Deciding between Experience Rating and Pooling
 administrative abilities
 Management’s Philosophy
Difficulties With Experience Rating
(“Complexities in developing an experience rating system”)
 Difficult to combine exp. rating with pooling / CR
 Retrospective rating is difficult
 cannot be used for new groups
 An MCO may have to pay different capitation rates for patients in each Er group. Difficult to administer.
 experience different in each care category (hospital, physician)
 Converting from pooling or CR to experience rating can cause rate increases.
 use a formula to cap the rate increases
 phase in experience rating gradually.
 State approval of experience rates is required
PROSPECTIVE EXPERIENCE RATING
Summary of Steps
1. Analyze Past Claims Experience
2. Determine the Credibility
3. Apply Pooling
4. Apply Trend/Inflation factor
The result is the Net Premium (Pure Premium).
5. Add loadings
6. Final Adjustments
The result is the Gross Premium.
ANALYZING THE GROUP’S PAST CLAIMS EXPERIENCE
(“Development of Claims Experience”)
Means computing incurred claims.
Incurred Claimsexperience period
= Paid Claimsexperience period
+ Increase in Claim Reservesexperience period

where:
Paid Claims include:
 Claim amounts paid
 Loss Adjustment Expenses
 Liabilities due to conversions

Claim Reserves Include:
 IBNR reserve
 ICOS liability
 Due and Unpaid liability
 misc. recurring liabilities
 future Loss Adjustment Expenses
Considerations in recognizing the experience of small groups
Formula-Based Rating (aka Band Rating or Tier Rating)
 Each group has an expected claims cost, μ, based on demographics.
 Eleven rate bands are created
 After each policy year, a group is reassigned to a new rate band
 Regulations, Competitivity, and Market Forces limit the reassignment.

Case-By-Case Reunderwriting
 Examines the causes of claims to determine premium rates
 is a large claim an anomaly, or will it reoccur?
 time-consuming / expensive

A Combination
 “larger” small groups have more significance to the insurer.
DETERMINING A GROUP’S CREDIBILITY
Credibility is highest:
 for large groups
 for high-freq, low-severity coverage (e.g. medical)
 If Claims are not independent from year to year
 If claim amount variance is low

Other considerations in evaluating/setting the credibility level:
 desired confidence interval
 The measure of credibility
 the exposure unit (lives or life-years)
 Effect on existing business.
 Competitivity
 Administrative ability to analyze claim distribution
APPLYING POOLING — TYPES OF POOLING METHODS
Pooling:
 algebraically combines a group’s experience with other groups’
 replaces pooled claims with a flat pooling charge
 is not a contractual obligation.

Pooling is poorly described in this chapter. For more information, I recommend reading the following materials:
 Core Case Study: Tables MM-2a, MM-2b, and MM-3a.
 The 2001 Exam – Question #3 and its solution

These materials provide the numerical examples that you will need to handle the exam questions from this chapter.
Regular Pooling (also called Credibility Weighting)
 Premium rate charged =
Z * Experienced Claim Rate + (1–Z) * Manual Claim Rate

or, equivalently:
Z * Incurred Claims + (1–Z) * Expected Incurred Claims.

 PEPM rates are called composite rates.
 Case Study tells you to compute all rates as PEPM first, then apply relativities to adjust them into tiered PMPM rates.

Manual Rate PEPM =
= Base premium rate PEPM (from the rate manual)
x (age, sex, regional, and benefit factors)
Catastrophic Claims Pooling (Stop-Loss Pooling)
 Individual Stop-Loss pooling
 Aggregate Stop-Loss pooling

On the Exam:
 Individual stop-loss for claims > $50,000.
 stop-loss pooling applies to every group, even 100% credible groups.

See example in chapter notes.
Multi-Year Averaging
 claims experience = weighted average of last few years’ experiences.
 Like stop-loss pooling, Multi-Year pooling is independent of credibility pooling, and is applied first.
 The solution to Question #3(d) on the 2001 Sample Exam shows multi-year pooling being used instead of stop-loss pooling.

Multi-year averaging is not useful when there is
 high turnover in the group
 when older experience is not useful.
 for medical insurance

See example in chapter notes.
Loss Ratio pooling
 equivalent to aggregate stop-loss.
TRENDING
 Experienced claim costs are trended from the midpoint of the experience period to the midpoint of the upcoming coverage period.

 Manual claim costs are trended from the beginning of their effective date to the
beginning of the coverage period.

See example in chapter notes.
Numbers that must be trended:
Experienced Claims
 Incurred claims during the experience period
 Catastrophic claims (> $50,000) during the experience period
 Prior coverage period claims used in multi-year averaging

Manual Claims
 Base manual claims rate
 The stop-loss pooling charge in the manual table
Claim Cost Trend includes the effects of:
 inflation
 legislation
 economic factors
 utilization
 provider reimbursement trends
 benefit changes
 mortality/morbidity trends
 demographic changes
See “General–Trends” for a consolidation of this list with similar lists.
LOADING THE NET RATES TO GET THE GROSS RATES
Types of Retention Items (loadings) (margins)
 Expense Loading (largest)
 Commissions
 Deficit Recovery Charge
 Termination Risk Charge (aka Risk Charge)
 protects the ins cpy in case ph terminates while in debt
The TRC reflects:
 the ph's ability to pay,
 existing deficits
 riskiness of the group
 funding arrangement
 Profits
 Investment Income (credited to ph)
 Explicit Margin (comfort factor)
 Misestimation Risk Charge and Trend Risk Charge
 used when premiums guaranteed for over a year
 reflect risk of underestimating claims, expenses, risks, or trends

Gross Premium PEPM =
Net Premium PEPM + Admin Expenses PEPM
(1 – Commissions% - Risk&Profit%)
FINAL ADJUSTMENTS
 Politically sensitive policyholders
 Exposure changes
 if group grew rapidly, avg. exposure date is 2/3, not 1/2 way through the year.
 affects trending
 update Manual rates/factors frequently
 Multi-Option Considerations
 If ins cpy is insuring only one of the er’s plan options  More antiselection.
RETROSPECTIVE RATING
Appropriate For:
 large groups only (retro. rating is expensive)
 financially stable groups
 groups that want a competitive rate
 So ins cpy can recoup any losses
 When the Ins Cpy is financially stable, b/c:
 default risk
 group might terminate while in a deficit
 depending on company policy
 Retro. Rating is difficult for MCOs to use
 providers are offered bonuses if claim costs are low.  Who should get the refund: the providers or the employer group?
DIFFERENCES BETWEEN RETROSPECTIVE AND PROSPECTIVE RATING
Claims Reserves are larger for Retrospectively-rated groups, b/c:
 overconservatism is refunded to ph anyway
 more risk (default; termination in deficit)
 more conversions

The Rate Stabilization Reserve
 Surplus, held by the ins cpy on behalf of the ph.
 Protects the ins cpy from risks.
 Higher R. S. R. needed for low-freq, high-severity covg (e.g. LTD)

On the exam: rate stabilization reserve = $50,000.

Investment Income
 credited to ph for competitivity
 = r% * mean fund

(zero on the exam)
THE EXPERIENCE REFUND
New account balance =
New account balance =
prior account balance carried forward
+ premiums paid in
+ investment earnings credited
– claims charged (see below)
– Loadings, commissions, and expenses.

Then:
Experience Refund = Account balance in excess of rate stabilization reserve

As in the prospective methods:
Claims Charged = Incurred claims – pooled claims + pooling charge
[+ conversion charges]


All amounts must be computed on an aggregate dollar amount basis, not PMPM.
SPECIAL FUNDING ARRANGEMENTS
Funding Arrangements refer to:
 how and when cash will flow,
 whether and how risk is transferred.
 e.g. Prospective or Retrospective rating; Self-Insuring or Fully Insuring.
Reserveless Plans
 ph exempt from premiums up to a % of the claims reserve
 grace period
 ph can invest money as it desires.
 effectively a one-time reduction in premiums
 Terminal premium if contract ends.

Risks to Insurer:
 must set aside an offsetting asset in place of claims reserve
 default risk
 ongoing financial underwriting is needed.
Self-Insured Plans
 No guarantor.
 A trust is the funding vehicle
 ASO services hired.
Minimum Premium Contracts
 now superseded.
 Hybrid of self-insured and fully-insured.
 Similar to stop-loss
Partial Self-Insuring
blank
Stop-Loss Insurance
Considerations for the employer group
 Individual or Aggregate
 Large groups can withstand higher attachment points

Considerations for the Ins Cpy
 Large groups’ claims most predictable  premium lower.
 Misestimation risk
 Expected Claims is key
 conservatism is required
 especially for LTD or AD&D
 deductible leveraging.
Retrospective premium rider
Blank

Done