Experience Rating and Funding Methods Flashcards
Experience Rating and Funding Methods
How does group size impact the experience rating approach?
- Small group size = may not have adequate claims data, use manual rating
- Large group size = only use experience rating
- Mid-sized groups = use combination of manual and experience rates
Experience Rating and Funding Methods
Theoretical Considerations of Credibility Levels for Experience Rating
- Low frequency coverages (volatile, needs larger exposure base)
- Widely Varying Claim Sizes (Volatile)
- Confidence Interval
- Experience due to Statistical Fluctuation
- Non-Zero correlation between Experience Period and Projection Period
Experience Rating and Funding Methods
Practical Considerations of Credibility Levels for Experience Rating
- Regulatory restrictions
- Competitive pressures
- Admin and managerial units
- Added cost of experience rating and resulting gains (trade off in volume and quality)
- Management philosophy
- Internally self-consistency between classes of business
Experience Rating and Funding Methods
Prospective Rating Steps
- Incurred Claims Estimate
- Adjustments to Claim Experience (Incurred, but unpaid claims)
- Final Incurred Claims
- Adjustments to Reduce Effects of Random Variation (Pooling)
- Trend
- Retention
- Consider final adjustments
Experience Rating and Funding Methods
Incurred Claims Formula
Incurred Claims = Paid Claims + Ending Reserve - Beginning Reserve
Experience Rating and Funding Methods
Pooling Methods
- Catastrophic Claim Pooling
- Loss Ratio/Rate Increase Limit
- Credibility Weighted
- Multi-Year Averaging
- Combination
Experience Rating and Funding Methods
Factors with Impact on Expected Costs
- Changes in government programs
- Secular/cyclic trends in rates of disablement or length of disability
- Mortality trends
- Utilization or cost trends in medical trend
- Changes in demographic characteristics
- Changes in benefits in plan
- Antiselection opportunities by insureds
- Changes in insured, economic, or financial environment
Experience Rating and Funding Methods
Common Retention Items
- Expense loadings and ACA fees
- Deficit recovery charge
- Termination risk charge
- Pooling charges
- Profit charge
- Investment Income
- Explicit Margin
Experience Rating and Funding Methods
Retrospective Rating: Current Balance Formula
Current Balance = Prior Formula Balance + Premium + Investment Earnings - Claims Charged - Expenses Charged - Risk Charge - Premium Stabilization - Profit
Experience Rating and Funding Methods
Retrospective Rating: Claims Charged Formula
Claims Charged = Claims Paid + Increase in Claims Reserves - Pooled Claims + Pooling Charges + Conversion Charges + Claim Margins
- Incurred basis
Experience Rating and Funding Methods
Premium Stabilization Reserve Addition
Reduce risk of being in deficit by accumulating portion of PH surplus
Experience Rating and Funding Methods
Special Funding Arrangements
- Reserveless Plans
- Minimum Premium Contracts
- Retrospective Premium Arrangements
- Self-Insured Plans
- Level-Funded Contracts
- Stop-Loss Contracts
Experience Rating and Funding Methods
Reserveless Plans
Insurer forgoes portion of premium payments and PH promises to pay needed amount upon termination
Experience Rating and Funding Methods
Minimum Premium Contracts
Hybrid of self-insured and insured plans
- PH deposits funds into account as needed. Claims are paid from fund
- Insurer is liable for claims above expected amount (like stop-loss)
Experience Rating and Funding Methods
Retrospective Premium Arrangements
PH takes on aggregate claim risk in exchange for reduced risk charges and lower upfront premiums
- If experience is worse than expected, additional premium due
- If better experience, refund may be payable
