Chapter 16 Assumptions (3) Financial assumptions Flashcards
-expenses -inflation -investment return -taxes -solvency margin (26 cards)
Financial assumption: Benefit amount
- Long-term contracts usually have pre-determined benefits.
- however claims may vary with benefit size therefore some adjustment may be made for large cases.
- Average claim amounts have to be assessed for PMI.
Average claim for PMI should be based on own data & market data but should be adjusted for?
- differences in policy conditions
- differences in negotiated hospital contracts
- future trends in provider capacity and charges
Services by PMI providers to policyholders can be reimbursed in the following ways:
- indemnity or fee-for-service
- modified fee-for-service - network of preferred providers are paid a fee-for service.
- per-diem(hospitals) - hospitals are paid a fixed amount per day of patient hospitalisation regardless of care provided.
- per case
- capitation
- salary - healthcare professional care can be employed by the insurer.
Benefit Amount: LTC/CI
- Pre-determine benefits
- Only with very large benefit size would insurer to change assumptions (like expenses)
- Underlying experience may vary significantly by benefit size depending on:
- policyholder will tend to be from higher socio-economic groups &
- there is a stricter level of underwriting imposed for larger sums insured.
Benefit amount: PMI
-Here the actuary needs to project the number of claims & amount of each claim in order to assess premium payable.
Benefit inflation: LTC/CI
- For LTC contracts the sum insured may be inflated periodically.
- This is to ensure it keeps up with the costs of long-term care or medical services.
- premium may also be inflated periodically
- this rate should allow for age risk
- rate of inflation may be an index of medical costs, CPI or a fixed rate.
Benefit inflation: Short-term contracts
- Average claim amount may need to be adjusted for:
- 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: LTC/CI
- for LTC contracts charging the same premium for policies of different sizes causes cross-subsidies between policies.
- This 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.
Expense assumption: These will vary by ?
- inital
- renewal
- claim
- investment expenses
- withdrawal
- or termination
- and between per policy, per unit of premium
- or per unit of benefit.
Define the expense assumption
-Parameter values should reflect the expenses to be incurred in processing and administering the business to be written under the product being priced
Expense assumption: Data & grouping data
- 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.
Expense assumption: Comparison with life insurance
- More work is required to put a Health & care product on the books than for a life insurance product.
- Main reason for this is: extra underwriting effort required, non-medical limits are often lower
- Product development costs higher due to: effort to derive incidence rates, develop policy literature and train sales staff.
- Unlike life insurance healthcare insurance has be be sold to the client involving a lot of time in explaining key features to clients.
- claims expenses are more onerous for life insurance. Time & medical information is needed in validating a claim.
What is a non-medical limit?
-The maximum benefit for which one can apply for cover without automatically requiring specified underwriting evidence.
Expense inflation
- Any product that offers level premiums in return for an increasing risk must incorporate an element of expense inflation, even if premiums are annually reviewable
- it is important to allow for inflation of expenses, especially for long-term products.
- expenses are typically linked to a combination of wage and price inflation.
The insurance company might consider the following combination of inflation when setting parameter values for expense inflation:
The recent expense inflation experience of the company should be analysed to determine the basis for the future projection.
- current rates for both prices & earnings
- expected future rates of inflation
- differential between fixed interest government bonds and on index-linked gov bonds
- recent actual experience of the company industry
Commission
- Commission is oftern paid at ahigher rate on initial premium than on subsequent premiums toreflect additional work involved in selling a policy.
- these assumptions will be determined by amounts the insurer intends to pay the distributor as commission.
Clawback definition
- where salesperson is paid higher commission in one year than in subsequent years, if a policy lapses early then there is a chance the insurer will lose out.
- under these circumstances a policy is not deemed to be earned in the first few months into duration.
- the salesperson will have to pay back commission not earned if policy lapse early.
- insurer takes credit risk.
- the actuary must make assumptions about early lapses and the proportions of unearned commission that will be reclaimed.p
Commission and clawback: Data & grouping data
- Commission
- this may be influenced by current levels of sales remuneration in the market place and/or by any legislatively imposed rates of commission.
Clawback
- past experience by distribution channel will be the best guide to the relevant numbers.
- standard approach compares early lapses at each duration against policies exposed.
- analysis would be split by product
Adjustments
- actuary needs to include any special arrangements between salespeople & insurer.
- expected volumes by distributor are crucial where a single tariff premium is sold under different commission structures by the different distributors
- assumptions on volumes have to be monitored against actual experience & adjustments made as appropriate.
Loading commission into premiums enables?
- this enables appropriate rates to be loaded into premium formula.
- thus overall commission loadings will support commission paid.
-commission can be expressed as a % of premiums or a % of sum insured or occasionally fixed sum.
Commission: Comparison with life insurance
- Levels of remmuneration may be higher than on standard life insurance.
- A higher level of initial commission could be justified on a healthcare insurance policy due to extra effort needed on part of salesperson.
- This involves explaining the benefits to a prospective policyholder & collecting extra information required for underwriting purposes.
Investment return assumption should be consistent with which assumptions?
-The investment return assumption should be consistent with the inflation assumption
The investment return assumption will be affected by
- its significance for profitability, which will depend on:
1. size of reserves
2. duration of contract
3. extent of investment guarantees - the intended asset mix for the contract
- the extent of any reinvestment risk and extent to which this can be reduced by a suitable choice of assets.
-This assumption has little relevance for PMI but a big factor for LTCI.
The intended asset mix of the contract
- The process for determining the likely future return would be:
- consider likely mix of assets that will back the contract in future
- investigate the returns that such assets yield now
- attempt to predict the returns that will be obtained from the future asset mix bearing in mind the impact of future changes to the economic environment.i
