Chapter 13 Assumptions (2) Financial assumptions Flashcards
-expenses -inflation -investment return -taxes -solvency margin
What are the main financial assumptions an insurer needs for pricing (and other exercises)? (9)
- Benefit amount,
- Benefit inflation,
- Expenses,
- Expense inflation,
- Commission,
- Commission clawback,
- Investment income,
- Taxes.
- We also consider volumes of business/mix Of Business
Benefit amount: intro
When considering how to set benefit amount assumptions used to price health care insurance contracts, it is often useful to consider two different groups/types into which healthcare contracts may fall; what are these groups? (2)
What general guidelines prevail for the benefit amount assumptions based on the two groups mentioned above? (3)
- It is useful to consider how benefit amount might differ between
- long term contracts (LTCI, CI), and
- short term contracts (PMI)
The following guidelines usually prevail for benefit amount assumptions
- Long-term contracts (LTCI, CI) usually have pre-determined benefits.
- however claims may vary with benefit size therefore some adjustment may be made for large cases.
- For short term contracts (PMI), claims are often not pre-determined, and so average claim amounts have to be assessed
Benefit amount: LTC/CI, long-term contracts
Briefly describe considerations for the benefit amount assumption with respect to these policies (4)
- Benefits are usually pre-determine
- Only with very large benefit size would insurer to change assumptions (like expenses)
- Underlying experience may vary significantly by benefit size depending on:
- policyholder tending to be from higher socio-economic groups
- there being a stricter level of underwriting imposed for larger sums insured
Benefit amount: PMI, short-term contracts, intro
In what way do benefits for short term contracts differ to benefits for long term contracts? (4)
Key aspect of benefits for short term contracts compared to long term
- Short term contracts are indemnity based
- To assess premium payable, benefit assumption will need to project
- the number of claims, and amount of each claim…
- …and come up with an average claim amount
Benefit amount: PMI, short-term contracts, own data
Briefly discuss the approaches which could be taken to set the average claim amount assumption for PMI contracts in terms of
- appropriate own data being available (2)
- what influences the average benefit amount assumption (7)
If sufficient own data is available
- average claim amount should be based on own data, ideally
- assuming sufficient data exists for this
Potential factors to be considered which might influence the PMI average assumption benefit/claim assumption might be
- medical inflation,
- treatment costs,
- demand for expensive treatment,
- treatment protocols,
- charging structure of providers,
- age profile and other risk aspects
- premium rates usually vary by age
market data may also be used, but should be adjusted for
- differences in policy conditions
- differences in negotiated hospital contracts
- future trends in provider capacity and charges
Benefit amount: PMI, short-term contracts, own data
Briefly discuss the approaches which could be taken to set the average claim amount assumption for PMI contracts in terms of
- what can be done in the absence of sufficient ‘own data’ (4)
- adjustments that need to be made in respect of the above (4)
If sufficient own data is not available may make use of external data to obtain average claim size, eg
- market data which has average claim size for existing insurer
- reinsurer data under a reinsurance treaty
- price lists availale in the market
When using external data, it is important to adjust for
- differences in policy conditions
- differences in negotiated hospital contracts
- future treatments and trends in provider capacity and charges
Benefit amount: PMI, short-term contracts, impact of providers’ charging structures, intro
One of the key aspects which influences the average benefit/claim assumption for PMI contracts is the method used to reimburse the provider of care.
List the various ways in which providers of care can be reimbursed (6)
- Indemnity/Fee-for-Service
- Modified Fee-for-Service
- Per-Diem
- Per-Case
- Capitation
- Salary
Benefit amount: PMI, short-term contracts, impact of providers’ charging structures, detail
One of the key aspects which influences the average benefit/claim assumption for PMI contracts is the method used to reimburse the provider of care.
Briefly describe the following ways in which providers of healthcare services can be reimbursed:
- Indemnity/Fee-for-Service (3)
- Modified Fee-for-Service (2)
- Per-Diem (2)
- Per-Case (4)
- Capitation (4)
- Salary (2)
Indemnity/Fee-for-Service:
- standard fees for specified treatments fixed by healthcare representative bodies.
- benefits paid to policyholders based on these standard fees
- may be a gap in cover if benefit paid to insured < standrd fee
Modified Fee-for-Service:
- health insurers/providers negotiate a maximum fee per service or a discount at standard rates (within approved provider network).
- policyholder would be limited to seeking treatment from a network of preferred providers and reimburse at this fee
Per-Diem:
- hospitals are paid a fixed amount per day policyholder is hospitalised, regardless of reason; daily rates may vary by ward.
- average charge is total charges by ward divided by days
Per-Case:
- hospitals are paid a fixed amount per case or hospital admission.
- can differentiate by medical speciality.
- may be combined with per-diem
- will be based on case average adjusted for trends
Capitation:
- healthcare providers receive a pre-payment regardless of usage.
- payment usually made monthly
- determined by service costs divided by number of members
- suitable for general practitioners (due to higher utilisation), not specialists
Salary:
- healthcare professionals can be employed by insurer or Health Management Organisation.
- paid regardless of type and frequency of services
Benefit inflation: intro
In what way does benefit inflation impact the benefit assumptions set for various exercises? (2)
What factors should generally be considered when deciding on how to inflate benefit assumptions during a given exercise? (5)
Influence of benefit inflation
- Size of benefit is linked to medical or care need and changes over time.
- Needs to be inflated periodically to allow for this.
Factors to consider for benefit inflation
- Increasing benefit and premium with index or fixed rate not appropriate since risk increases with age and some initial funding must take place. Involves modelling.
- Complicated by absence of a simple/published index that’s linked to medical costs.
- Consumer price index can be used but doesn’t allow for salary inflation of medical personnel or medical technology advances.
- For products that reimburse/indemnify the policyholder, also need an assumption for inflation of costs.
Benefit inflation: LTC/CI, long-term contracts
Why/how might we need to consider benefit inflation for long-term healthcare contracts? (2)
What methods can be used to set rates according to which benefits increase for long term contracts, and give key consdirations related to each method? (6)
For LTC contracts the sum insured may be inflated periodically. This is because
- benefit size linked to medical care need and changes over time.
- it helps ensure benefit keeps up with the costs of long-term care or medical services.
Premium may also be inflated periodically; rate of inflation may be
- an index of medical costs,
- such an index may not actually readily/easily exist
- CPI
- easily available, but doesn’t allow for salary inflation of medical personnel or medical technology advances.
- fixed rate
- may not be entirely appropriate…
- …as insured risk increases with age + initial funding must occur
Benefit inflation: PMI, short-term contracts
Why/how might we need to consider benefit inflation for short-term healthcare contracts? (6)
Average claim amount may need to be adjusted for inflation over time due to:
- medical inflation
- likely changes in medical treatment protocols
- costs of treatment
- demand for more expensive treatment
- future charging structure of hospitals
- future age profile of portfolio
Expenses: intro
What is the key consideration to be factored into setting expense assumptions? (3)
What other key factor might impact expense assumptions? (2)
- Parameter values should reflect the expenses to be incurred in…
- …processing and administering the business to be written…
- …under the product being priced
- Expense treatement might be affected by tax regime. If “I-E” tax applies, can net expenses down for this (must be in line with investment income expense treatment)
Expenses: different types
What different types of expenses might exist?
Direct expenses (can be directly attributable to particular products)
- inital expenses
- renewal
- claim expenses
- investment expenses
- withdrawal/termination expenses
Overheads (cannot be directly attributable to any one product)
- propety costs
- computer costs
- salaries/wages
- determined by
- and between per policy, per unit of premium -or per unit of benefit.
Expenses: different types, overview to determining
Give broad principles by which we can determine
- direct expenses (8)
- overhead expenses (5)
Direct expenses (can be directly attributable to particular products)
- for PMI it is possible to outsource admin at a fixed per policy fee, negotiated annually
- exchanges uncertain admin costs for certain fixed policy fees
- for LTC contracts charging the same premium for policies of different sizes causes cross-subsidies between policies.
- can be removed by using individual calculations, policy fees, or a sum insured differential.
- per-policy contributions to fixed costs are made by reference to expected volumes
- care must be taken to ensure competitiveness
Overheads (cannot be directly attributable to any one product)
- based on company’s recent experience
- if not available then parameter values based on a similar line or industry or data from a reinsurer may be used
- expenses need to be divided by function
- and whether assumption is expected to be proportional to
- premium or
- benefit size or
- amount per contract
Expenses: per-policy expenses
What risks arise with per policy expenses in a healthcare context? (3)
What methods can be used to mitigate the above risks when setting per-policy expense assumptions (9)
Per-Policy Expenses:
- for healthcare, premium often expressed as rate per unit of sum assured
- we therefore calculate an average benefit size and use these loadings for all policy sizes.
- valid if volumes are as expected, but raises a key risk regarding expenses that do not vary by size of contract, esp if volumes not as expected
Risk for expenses that do not vary by contract size. Different ways to handle the problem:
-
Individual calculation of premium rates or charges:
- calculate prem/charges using actual benefit level, age, term etc for policies; then load explicitly for per-policy expenses.
- better for large cases, for small can make it uncompetitive.
-
Policy Fee Addition to Premium:
- modified if premium uncompetitive
- idea is that policy fee covers per-policy costs and premium rate covers other proportionate expenses
-
Sum Insured Differential:
- different premium rates charged according to which band benefit falls into
- need to estimate the number of policies likely in each band
Expenses: fixed expenses
What factors need to be considered when setting fixed expenses?
When setting fixed expenses
- Need to allow for likely volumes of business sold. Uncertain for competitive product lines.
- Need to recoup fixed expenses in aggregate over all policies sold.
Expenses: comparison with life insurance
Expenses for healthcare contracts differ to expenses for life insurance contracts, and so we’d expect this to be reflected in the expense assumptions.
How do expenses for healthcare insurance contracts compare with expenses for life insurance contracts?
Consider:
- the work required to sell/develop health insurance contracts (5)
- the need to sell the contract (vs customers’ desire to buy) (2)
- claims prorcess (2)
- More work is required to put a health and care product on the books than for a life insurance product….
- …main reasons for this are:
- extra underwriting effort required to assess morbidity,
- non-medical limits are often lower
- product development costs may also be higher due to:
- effort to derive incidence rates, develop policy literature and train sales staff.
- Unlike life insurance healthcare insurance has to be sold to the client involving a lot of time in explaining key features to clients
- Claims expenses are more onerous than for life insurance
- time and medical information is needed in validating a claim.
Expenses: non-medical limit
We have seen that one of the reasons that expenses for health insurance products differs compared to life insurance contracts is due to the difference in difficulty developing and selling health insurance contracts, which may also be impacted by the use of non-medical limits.
What is a non-medical limit? (2)
- The maximum benefit for which one can apply for cover without automatically requiring specified underwriting evidence
- Comparable to free cover limit in group insurance context
Expenses: marginal costing
What do we mean by ‘marginal costing’ of policies? (2)
Briefly describe the rationale behind a marginal costing approach to setting expense assumptions (6)
Marginal costing refers to
- setting expense assumptions such that we cover the variable expenses, incurred only because policy exists
- using expense loadings that only just cover marginal expenses, to stay competitive
Rationale for marginal costing
- Expense loadings often used as optional margin to secure competitiveness (which need to be carefully monitored as failure to cover expenses can lead to insolvency and failure to cover claims)
- What really matters is that TOTAL expense contribution is correct, not necessarily expense contribution per policy because…
- …total profit is total profit contribution summed over all policies;
- …hence, we want expense loadings that will maximize total profit over all products…
- …and this may be achieved by having low per-policy margins.
