Question 1

Group risks: special characteristics Briefly list the special characteristics specific to group risks which differentiate it from individual business (6)

Accepted Answer

group risks generally have lower premiums than individual risks free cover limits limited insured information changes in workforce (new comers/leavers) control of intermediary flexible benefits

Question 2

Special characteristics: lower premiums Why might risks insured within group business generally have lower premiums than for otherwise equivalent risks for individual business?

Accepted Answer

reduced anti-selection (harder to anti-select, than for individual business) less underwriting costs greater economies of scale

Question 3

Special characteristics: free cover What do we mean by 'free cover limit'? (3)

Accepted Answer

free cover limit refers to the level of insurance/benefit offered with no underwriting needed below this free cover limit, members will not be individually underwritten it does not in any way related to cover being provided 'free of charge'

Question 4

Special characteristics: limited insured information What do we mean by limited insured information? (4) What mechanisms are put in practice in light of the above data limitations (from the insurer's POV)? (3)

Accepted Answer

Limited information full details of the individual members may not be known by the insurer at the time when the period of insurance begins, in terms of age gender, etc in addition, there are likely to be changes in staff over the period cover such information becomes available later during insurance term In light of above data issues, in practice initial/deposit premium approach is taken, whereby insurer makes estimate of premium required (which is paid upfront by insured) and serves as deposit retrospective adjustment premium can then be paid at the end of the period of cover

Question 5

Special characteristics: changes in workforce In what way is "changes in the workforce" a factor when pricing group risks specifically? (7)

Accepted Answer

Significant changes to the workforce can alter riskiness of a group scheme, hence, the price which ought to be charged for the risk leavers may be relatively healthy or unhealthy if leavers are mostly healthy =\> unhealthy worker effect if leavers mostly unhealthy/ill-health retirees =\> healthy worker effect joiners/newcomers often viewed positively as likely to be young and healthy a down-sizing of the workforce might prompt members to make claims while they are still covered takeovers/mergers need investigation, to determine their past experience an increase in the size of the workforce might improve claims experience as newcomers are often younger and fitter. care should be taken if M/A.

Question 6

Special characteristics: control of intermediary In what way is the intermediary's role of special importance in the context of health insurance contracts for group risks? (4)

Accepted Answer

an intermediary may influence the data available, so the insurer must ensure the information is accurate, and it is receiving the same level of information as its competitors the insurer would like to exert some influence over group policyholders in order to reduce work related health risks encourage claimants back to work, however this may be impeded by the intermediary.

Question 7

Special characteristics: flexible benefits What do we mean by 'flexible benefits' in the context of health insurance contracts for group risks? (4) Give examples of flexible benefits which might be found in practice within flexible benefit schemes (2) What implications arise for pricing (of group risks) due to flexible benefits being offered? (3)

Accepted Answer

Flexible benefits arise where the insured (or employee) can select from a range of benefits through flexible benefit schemes, individuals are permitted to have a choice in cover chosesn and amount of cover chosen usually offered in a group risk context, and meant to embrace many aspects of the employee package, not just insurances Examples of flexible benefits buying more leave days out of salary additional pension contributions Implications of flexible benefits increased anti-selection =\> insurer be highly vigilant about this insurer may impose limits and other restrictions on choice of such benefits.

Question 8

Experience rating: pricing group schemes, using past experience What do we meant by experience rating? (2) Why is experience rating used? (5)

Accepted Answer

Experience rating the phrase given to the practice whereby the premium for a group contract depends wholly or partially on the past experience of that group. the book rate calcualted is adjusted by that group's history Experience rating is used because the pure book rate/risk premium the insurer calculates won't allow for things such as nuances/peculiarities specific to the scheme/workplace the working processes employers attitude towards safety and healthcare and so, these particular risk features are possibly best demonstrated by that group's past claims history, suitably adjusted for expected experience in coming policy term

Question 9

Comparison with pricing individual business: pricing group schemes, using past experience How does pricing of group contracts compare with that of individual contracts in terms of use of historical/past claims information? Consider the group setting (2) and then the individual setting (3)

Accepted Answer

Some form of experience rating is usually incorporated in PMI group pricing ie using insureds' past claims history to calculate premiums Whereas, individual business is normally priced on a community basis, the premium is assessed with all other lives in the same risk cell without reference to indiviual claims experience premiums is calculated irrespective of the partiular insured's claim history, and other individual rating factors eg age, are likely to be used

Question 10

Credibility factor: pricing group schemes, using past experience What do we mean by credibility factor? (2) Write down a formula which expresses how the credibiliy factor features in the calculation of the risk premium (4)

Accepted Answer

Credibility factor relates to the factor/value between 0 and 1 representing the porportion of the final risk premium derived from past experience, the balance coming from the book rate Formula for risk premium, allowing for credibility factor: Risk premium=Z\ A+ (1-Z)\ E. Where: Z= credibility factor/prop of risk premium derived from past claims experience A = experience rated premium ie risk premium for a given group E= book rate premium ie insurer's standard risk premium (eg PMI benefits) for a given group

Question 11

Credibility factor: pricing group schemes, using past experience What does the value of the credibility factor depend on? (5)

Accepted Answer

Value of crediblity factor depends on: the volume of the group experience data/size of scheme should be large to justify value closer to 1 premiums calculated for which Z\>0 are experience rated may also be competitive reasons to use a higher credibility factor commercial practices and market practices in many territories have given full credibility to many group PMI schemes, where less than 100 man-years of information is available

Question 12

Burning cost, definition: pricing group schemes, using past experience What do we mean by 'burning cost'? (8)

Accepted Answer

Burning cost accumulation of claims in 1 or more recent years, which may be taken as first measure of premium adequacy typically, it's the estimated cost of claims in the forthcoming insurance period, calculated from previous years' experience adjusted for changes in the numbers insured, the nature of cover and medical inflation. must allow for estimates of relevant year's IBNR/RBNS reserves, but must exclude/subtract values from prior years, to prevent double counting note that the term can refer to the adjusted claims cost, or to describe the historic claims cost only

Question 13

Burning cost, uses: pricing group schemes, using past experience What can the burning cost premiums be used for? (5)

Accepted Answer

Uses of burning cost comparison to risk premium yearly burning cost calculations can be used to compare emerging claim costs over the year against the risk premiums paid the comparisons would also need to include estimates of all claims reported by not yet settled and claims incurred but not reported in burning cost these provide the earliest possible feedback on premium adequacy in checking premium adequacy, burning cost needs to be compared against the risk premiums paid in the relevant period

Question 14

Relevance of previous experience: pricing group schemes, using past experience To what extent, and how, is previous experience relevant when pricing group contracts? (3) What kind of significant changes can alter the applicability of past experience to future? (5)

Accepted Answer

Past experience is important because the pricing actuary will look at the past claims history available to judge the extent to which it might be considered a good proxy to the future risk experience. the actuary will have to make suitable adjustments to the data before using it as a base for pricing. Significant changes... of personnel of location of work practice in the cover required ..are among the factors that can alter the applicability of the past experience to the future.

Question 15

PMI group pricing context: experience rating In the context of PMI group contracts specifically, briefly discuss experience rating according to: how is experience rating carried out (3) the level of credibility factor which can be affored, and why (3) scenario of a new scheme (to insurer) with limited claims history (2)

Accepted Answer

How experience rating is carried out Some form of experience rating is usually incorporated in group PMI pricing at a level below that which strict statistical approach would demand. May be due to commercial pressures/market practice Credibility level The the frequency of claim that applies with group PMI permits a wider use of experience rating where full or partial credibility will be afforded to past history. Depends on number of member years available at time of pricing New scheme with little claims history For a new scheme to an exsiting insurer there may be very little past claims history available =\> places the existing insurer at an advantage.

Chapter 20 Pricing (2) Group business Flashcards

-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.

Brainscape's Knowledge GenomeTM

Chapter 20 Pricing (2) Group business Flashcards

-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.

Brainscape's Knowledge Genome^TM