Ihi Chpt 4 Individual Health Ins. Premiums

Front 1

GROSS PREMIUM STRUCTURES
(Considerations In Setting Gross Premium)

Back 1

The Rating Classes (Underwriting Factors)
 Quote “General–Rating Factors”

Organization of the Rating Classes
 Choose quinquennial cells and interpolate

The Policy Provisions
 Renewability and Premium Guarantees
 prems & margins must be higher
 structural, attained-age-related rate changes vs. overall rate schedule changes.

 Conditionally Renewable – prem rates changeable. Only a class of policies can be canceled.
 Guaranteed Renewable – prem rates changeable. No cancellations.
 Noncancelable and Guaranteed Renewable – prem rates cannot change from initial schedule. No cancellations.

 Exclusions (pre-existing condition; experimental treatment; suicide)
 Def’n of Disability
 Riders (WoP, RoP)

Front 2

The Elements of Premium Calculations (aka Pricing Assumptions or Pricing Components)

Back 2

MILE MOM

Front 3

Morbidity (level of claim costs)

Back 3

 For DI, Claim Cost = periodic payment * duration


Morbidity depends on:
 Marketing
 ph’s other covg
 Underwriting level (guar issue or questionnaire or medical exam)
 Duration (UW wearoff; CAST)
 demographics (age, sex, health, industry, and location)
 Antiselection
 plan richness
 number of options

Front 4

Interest

Back 4

 Interest Assumptions are used in:
 Asset Shares profit-measuring
 reserving

Interest Assumptions Depend On:
 Type of analysis:
 pricing or reserving (GAAP / Stat / tax) or profit-measuring (ROI vs ROE)

Front 5

Lapses ( = 1 – persistency)

Back 5

Lapses Depend On:
 Age
 Duration (1st year highest)
 Premium increases
 Mode (monthly)
 Product Type

Front 6

Expenses

Back 6

 % of Gross Prem, % of claims, per policy, or per benefit unit
 Types of Expenses:
 Acquisition
 Administrative
 Marketing
 Commissions
 Overhead
Mnemonic: AAMCO (the filling station) is Expensive.
 Premium Taxes


 First Year > Renewal Year.
 Expense Charges and the Expense Allocation Method:
 agg. expense charges s/equal agg. expenses incurred
 fair and equitable among rating classes
 competitive.

Front 7

Mortality (part of lapses)

Back 7

nothing

Front 8

Other

Back 8

The following factors will affect the premiums to be charged:
 Political pressure
 Competition
 future outlook
 the Relative Importances of the assumptions
 find out by sensitivity testing
 Interactions between the pricing components (Expenses ↑  Lapses ↑ too)
 Length of forecast
 Reinsurance costs and recoveries

Front 9

Margins

Back 9

 Implicit (bad) or Explicit ( = realistic + margin) (good)
Margins depend on:
 Profit Goal
 dividend philosophy
 risk level (esp. guarantees)

Front 10

The Experience Data Used For Developing Premiums

Back 10

see below

Front 11

Source of Data

Back 11

 Cpy’s own data for a similar product (best)
 Industry studies (SOA)
 Government studies
 state
 national (worst)

 Small or New cpy’s need to use the extenal data

Front 12

Data Appropriateness / Quality Issues

Back 12

 See General-Data Quality and General-Data Adjustments

Front 13

The Profitability (Loss Ratio) Regulations

Back 13

 Min and Max LR regulations
 Min LR must be met for lifetime and after each new rate schedule
 Can’t raise premiums to recover losses
 IF LR < expected, premiums must be lowered.
 Risky Products are allowed lower LR’s
 Ultimate credible LR must be used

Front 14

PROFITABILITY CALCULATION METHODS

Back 14

Used to determine the appropriate premium.

Front 15

Asset Share Model method

Back 15

 Follows hypothetical group of policies; analyzes it in detail
Its Uses:
 can start with a test premium = competition, and vary by trial-and-error
 sensitivity testing

Choices in the Asset Share Model
 The representative cells
 Policy Year (simple) or Calendar year (more useful)
 The Profit Measure (ROI or Profit as a % of Premium)

Assumptions Required
Essentially, run through the MILE MOM mnemonic.
 Morbidity
 Interest/discount rates (and Tax Rate)
 Lapse rate
 Expenses
 Others particular to measuring profitability
 premium and claims timing (assume uniform through year)
 claim size
 reserves held

Front 16

Formula methods and Loss Ratio Method

Back 16

 simple and cheap, but:
 limited to flat %-of-premium assumptions for profits and expenses

Front 17

Cash Flow method – used by HMO’s

Back 17

 only a 1-2 year projection
 assumes future periods will cover costs from this period.
Reasonable, b/c:
 HMO’s receive statutory advantages, since in public interest.
 steady stream of new customers

Technique:
 Project:
 claims,
 expenses, and
 enrollment;
 compute claim cost PMPM
 add loadings

Front 18

RENEWAL RATING

Back 18

Experience Monitoring for Purposes Of Renewal Rating – Considerations in Designing MIS’s
 must show A vs. E
 LR’s
 Enrollment
 Expenses

 A and E must be on the same basis:
 same mix of business
 same rating classes
 same Stat or GAAP or Pricing or Reserving basis

 Difficult to get them on the same basis, b/c:
 original pricing reserves no longer available
 current reserves are on FPT basis.

 Should Monitor gain/loss:
 in each assumption individually
 as frequently as possible, given available cpy resources

Front 19

Methods Available To Determine The Rate Increase

Back 19

(same as for profitability calcs)

Front 20

Asset Shares method

Back 20

 Recalculate using the updated assumptions
 Problem: Current Block of Business different from original:
 different MILE MOM statistics now
 mix of business changed
 durations vary now

Front 21

Loss Ratio method – most commonly used for renewal rating

Back 21

 Compare A-E LR
 project future LR’s
 Recalculate premium rates to meet the “target loss ratio”
 (Must adjust all premiums to a common rate schedule)
 original rating classes must be preserved.

Front 22

Implementation of the Increase

Back 22

 file rate schedule with all states.
 implementation occurs at different times.


Done.