Learning Objective 2 - Manual Rates Flashcards Preview

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1

Skwire Chapter 3
Product Development

58. Steps of the product life cycle

1. Innovate - consists of:

a) Understanding the company's strategic perspective

b) Idea generation (see separate list of common drivers of product ideas)

c) Idea screening - check for consistency with corporate goals and feasibility with the corporation's abilities

d) Market assessment - to determine if a market exists for the product (see separate list of questions answered by a market assessment)

2. Design the product - this phase consists of determining the product structure, plan design options, contribution requirements, and regulatory compliance

3. Build the product (see separate list of steps for building the product)

4. Sell the product - the product is often test marketed, after which revisions are done before it is mass marketed

5. Assess the product - monitor financial results and consumer market feedback

6. Revise the product - changes may be indicated by the product assessment, regulatory requirements, or consumer demand

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Skwire Chapter 3
Product Development

59. Common drivers of product ideas

1. Innovator or follower - some companies are successful at innovating, while others are successful at following and learning from competitors

2. Changing laws and regulations - new rules can lead to new products developed specifically to operate within the new set of rules

3. Consumer demand - companies must constantly seek consumer feedback and market intelligence

4. Marketing and sales - these teams can spot holes in the product spectrum where consumer demand is not being fully met

5. Leveraging insurer capabilities - product development teams must know what the insurer does well and find ways to grow in those areas

6. Social need - for example, Medicare Part D served the social need of helping seniors who are being overwhelmed by the cost of expensive medications

7. Changing demographics - leads to a shift in the types of products that will be marketable and saleable

8. Changing economy and financial markets - leads to changes in purchasers' views of their need for insurance

9. Competitive advantage - product development ideas should utilize the company's competitive advantages

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Skwire Chapter 3
Product Development

60. Questions answered by a market assessment

1. What exists in the market today?

2. What is the product objective for the consumer?

3. What is the regulatory environment for this product?

4. What are the financial value and other benefits for the consumer?

5. What are the price targets? (the assessment may indicate a range of acceptable prices)

6. What is the likely reaction from competitors?

7. How will the sales team react?

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Skwire Chapter 3
Product Development

61. Steps for building a new product

1. Project enrollment - this is critical to helping senior management decide whether the product is worth pursuing

2. Price the product - includes an assessment of the market price sensitivity. After initial pricing, the projected enrollment should be reviewed again.

3. Perform financial assessments - to determine whether the new product can meet the company's required return on investment or return on equity

4. Implement the infrastructure needed to administer the product (process claims, bill and collect premiums, and service member inquiries)

5. Get senior management approval

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Skwire Chapter 3
Product Development

62. Key players in the product development cycle

1. Product development team - is responsible for generating new product ideas and studying the market

2. Senior management - sets the company goals and is responsible for marketing the decision to pursue a proposed idea

3. Marketing - is focused on advertising, name recognition, and branding

4. Sales - often has insights into price sensitivity and the types of products consumers want

5. Underwriters - can help quantify the risk associated with certain plan features

6. Information technology (IT) - can help in understanding the feasibility of the infrastructure needed to administer the product

7. Operations - work with IT teams to administer the product

8. Compliance - ensures the product is compliant with laws and regulations

9. Actuarial - prices the product and works on the projections and feasibility studies

10. Finance - reviews the projected enrollment and pricing to determine whether projections meet corporate profit targets

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Skwire Chapter 20
Pricing of Group Insurance

63. Components of gross premium

1. Claim costs

2. Administrative expenses - includes the costs of designing, developing, underwriting includes the costs of designing, developing, underwriting, and administering the product, as well as an allocation of overhead costs. Frequently much higher in the first year than in renewal years.

3. Commissions and other sales expenses - includes special bonuses, incentives, and advertising. Generally expressed as a percentage of premium.

4. Premium taxes

5. Other taxes and assessments - includes federal and state income taxes and new assessments due to the ACA

6. Risk and profit charges - depends on the degree of risk involved, the amount of capital allocated to support the product, and the expected return on the capital

7. Investment earnings - typically credited based on assets held

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Skwire Chapter 20
Pricing of Group Insurance

64. Considerations in developing administrative expense assumptions

1. How expenses are allocated to the product - allocation methods include:

a) Activity based allocation - distributes expenses according to some measure of use (e.g. actual postage expense can be charged to the function that generated the mail)

b) Functional expense allocation - determines how expenses are split by line of business for new and renewal business (done by surveying employees to determine how time is spent)

c) Multiple allocation methods - a combination of the other two methods

2. How administrative expenses should be allocated to groups - should differentiate between first year and renewal expenses. Various allocation bases exist (see separate list).

3. What the competition includes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace

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Skwire Chapter 20
Pricing of Group Insurance

65. Types of bases used for allocating expenses

1. Percent of premiums

2. Percent of claims

3. Per policy

4. Per employee (certificate)

5. Per member (each person covered)

6. Per claim administered

7. Per case (some expenses are charged directly to the case for very demanding groups)

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Skwire Chapter 20
Pricing of Group Insurance

66. Common rating characteristics included in manual rates for group health insurance

1. Age

2. Gender

3. Health status

4. Rating tiers (see separate list)

5. Geographic factors

6. Industry codes

7. Group size

8. Length of premium period

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Skwire Chapter 20
Pricing of Group Insurance

67. Common rating tiers for group insurance

1. One tier: composite

2. Two tier: employee only, family

3. Three tier: employee only, employee and one dependent, family

4. Four tier: employee only, employee with one dependent, employee with children, family

5. Five tier: employee only, couple, employee with child, employee with children, family

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Skwire Chapter 22
Estimating Medical Claim Costs

68. Sources of internal data

1. Medical claim systems data - includes billed claims, eligible claims, allowed amounts, and paid amounts

2. Pharmacy benefit manager (PBM) data - organizations that use third-party PBMs to administer prescription drug claims will need to collect this data from them

3. Premium billing and eligibility data - includes exposure information that is needed to convert claims data into per member pr employee basis

4. Provider contract system data - includes files of contractual reimbursement rates

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Skwire Chapter 22
Estimating Medical Claim Costs

69. Steps in developing claim costs for use in a rate manual

1. Collect data - data should be collected for an incurral period of at least 12 months (to avoid seasonality issues). The best source of data is a company's own experience (see separate list).

2. Normalize the data for important rating variables (see separate list)

3. Project experience period costs to the rating period - the trend rate should reflect changes in utilization of services, changes in the average cost per service, and other factors, such as regulatory impacts and cost shifting among players

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Skwire Chapter 22
Estimating Medical Claim Costs

70. Important rating variables when normalizing data for use in the rate manual

Many of these variables can only be used in large groups, due to the ACA

1. Age and gender - it may be appropriate to have separate age and gender factors for different major service categories or different plan types (such as high deductible plans)

2. Geographic area - the data should be adjusted to reflect one specific geographic area

3. Benefit plan - adjust the data to reflect a common benefit plan (commonly the richest plan)

4. Group characteristics - the manual rate should represent the average group with respect to group characteristics, such as industry and group size

5. Utilization management programs - adjust for any changes in these programs

6. Provider reimbursement arrangements - adjust the experience to reflect a common reimbursement level

7. Other risk adjusters (based primarily on claim, diagnosis, encounter, and pharmacy data) - these may eventually become the preliminary method of risk adjustment

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Skwire Chapter 22
Estimating Medical Claim Costs

71. Methods of adjusting manual rates for specific benefit plans

1. Claim probability distributions - these are typically used to estimate the impact on claim costs of deductibles, coinsurance, and out-of-pocket maximums

2. Actuarial cost models - these models build estimated total claim costs by developing a net claim cost (after member cost sharing) for each detailed type of service and summing to get the total

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Skwire Chapter 22
Estimating Dental Claim Costs

72. Data sources for developing dental claim costs

1. Own company data (best source)

2. Outside databases - Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA "Survey of Dental Fees"

3. Consulting firms (have manuals containing utilization data)

4. Rate filings of other carriers

5. Third party administrators

6. Reinsurers

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Skwire Chapter 22
Estimating Dental Claim Costs

73. Plan characteristics that impact dental claim costs

1. Covered benefits - plans often have a missing tooth provision and limit the replacement of dentures to once every 5-7 years

2. Cost sharing provisions - these provisions are important because receiving proper dental care is very elective from the insured's point of view. Provisions include deductibles, coinsurance and copays, and maximum limits.

3. Waiting period - used to discourage individuals from enrolling for one year to treat significant dental problems and then dropping coverage

4. Period of coverage - will need to project past experience into the future. Dental trend should not be assumed to be the same as medical trend.

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Skwire Chapter 22
Estimating Dental Claim Costs

74. Network and care management practices that impact dental claim costs

1. Provider reimbursement levels

a) FFS reimbursement may be based on usual, customary, and reasonable levels (UCR)

b) PPO networks contract for reduced fees for a limited number of dentists. The dentist may not bill above those levels.

c) Capitation is common with dental HMO plans

2. Care management practices - these will depend on the reimbursement method used. Practices include preauthorization and self-management (for capitated providers).

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Skwire Chapter 22
Estimating Dental Claim Costs

75. Insured characteristics that impact dental claim costs (378)

1. Age and gender - adults have higher costs than children. females have higher costs than males

2. Geographic area - can be a significant factor

3. Group size - smaller groups have higher costs (due to adverse selection)

4. Prior coverage and pre-announcement - groups without prior coverage will have high costs in the first year due to utilization by those who had put off having dental work done. If the plan is announced many months prior to becoming effective, this problem becomes even worse.

5. Employee turnover - high turnover increases costs since some new employees didn't have prior coverage

6. Occupation or income - entertainers, professionals, and groups who are more aware of their benefits have higher costs

7. Contribution and participation - groups with less than 100% participation will have higher costs due to antiselection. The level of participation is inversely related to the required contribution level.

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Skwire Chapter 23
Estimating Pharmacy Claim Costs

76. Data fields included in pharmacy data files (388)

These files include one record per prescription, and the following information on each record

1 . Age, gender. and date of birth of the patient

2. Fill date - this is the incurred date for the claim

3. Claim ID

4. Prescribing provider ID

5. Pharmacy provider ID

6. Drug name - use a consistent source so the data does not have two different names for the same drug

7. Tier - the category for the drug, as defined in the plan design

8. National Drug Code (NDC) - an eleven-digit code used to identify a specific form of a drug. A mapping of NDCs to drug names can be obtained from data vendors.

9. Days supply - scripts are generally grouped into 30-day, 60-day, or 90-day categories

10. Units - the number of pills or a measurement of volume for liquid medications

11. Allowed amount - sum of discounted ingredient cost, dispensing fee, vaccine fee, and sales tax

12. Refill indicators- for prescriptions that allow refills, this shows which fill the current claim is for

13. Member and plan cost - these fields show how much of the allowed cost is paid by each party

14. Therapeutic class - categorization based on the conditions that the drugs are intended to treat

15. Other types of drug codes - RxNorm Concept Unique ldentifier (RxCUI) and Generic Product Identifier (GPI)

16. Average wholesale price and wholesale acquisition cost

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Skwire Chapter 23
Estimating Pharmacy Claim Costs

77. Steps for calculating premiums for pharmacy benefits (392)

1. Develop an allowed cost trend, which includes:

a) Unit cost change

b) Utilization change

c) Mix change-such as a shift between generics and brand name drugs

2. Calculate adjustment factors for important rating variables (see separate list) - factors that are already accounted for in allowed cost trend should not be included as a separate rating factor adjustment, in order to avoid double counting

3. Estimate member cost sharing based on the projected allowed cost - if the plan design uses copays, use the average effective copay, rather than the nominal copay stated in the plan design

4. Calculate net plan liability and premium

a) Projected allowed amount= base period allowed amount• trend factor • other adjustment factors

b) Net plan liability = projected allowed amount - member cost sharing - rebates

c) Premium = net plan liability + expenses + profit margin

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Skwire Chapter 23
Estimating Pharmacy Claim Costs

78. Important rating factors for pharmacy benefits (393)

1. Demographics - such as age and gender

2. Area

3. Benefit design - changes in benefits may cause changes in drug use. This is referred to as induced utilization.

4. Formulary - costs are impacted by:

a) The list of covered drugs and tier placement of drugs

b) Formulary management programs, such as prior authorization, step therapy, and quantity limits

c) Brand patent expirations

5. Contracting - PBMs negotiate with pharmacies regarding dispensing fees and discounts off the average wholesale price

6. Other factors - these include changes in mail order utilization, changes in the generic dispensing rate, and changes in utilization management or cost management programs

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Skwire Chapter 24
Estimating Life Claim Costs

79. Considerations in developing a manual table for life insurance (404)

1. Two approaches can be used:

a) Manual premium tables - calculate the manual premium rate, then adjust for group size. This adjustment will reflect the margin, profit. and expenses appropriate for the group size, relative to the averages built into the table.

b) Manual claim tables - calculate the manual claim rate, then add the appropriate margin, profit, and expenses

2. Data sources - could use SOA studies. industry mortality tables, population statistics, or own company experience (which is the best source, if credible)

3. Changes in mortality- expected future mortality improvement should be reflected

4. Reinsurance -the net cost of reinsurance should be factored into the claim table or expenses

5. Conversions to individual life policies -these create severe antiselection, which should be reflected in the manual rates

6. Manual adjustments are made for group-specific traits (see separate list)

7. Rates for the group are based on age and gender mix, but groups typically end up charging a composite rate to all employees

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Skwire Chapter 24
Estimating Life Claim Costs

80. Uses of general population data for pricing life insurance (409)

1. Estimating annual improvements in mortality

2. Determining ratios of mortality by age bracket

3. Comparing male and female mortality

4. Developing rates for the very young and the very old (the non-working population)

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Skwire Chapter 24
Estimating Life Claim Costs

81. Manual claim table adjustments for group life (412)

Manual claim table adjustments for group life (could also be referred to as group rating characteristics.for life insurance)

1. Disability factors - an adjustment is needed if a group has a different waiver of premium approach than is assumed in the manual rates

2. Effective date adjustment -an adjustment is needed if the central date of coverage is not July 1

3. Industry factors - based on industry codes such as SIC codes

4. Regional factors

5. Lifestyle factors - e.g. adjustments based on the percentage of employees that smoke

6. Marketing considerations - e.g. added charges for rate guarantees

7. Contribution schedules - e.g., a 5% discount if the employer pays the entire premium (since that reduces antiselection)

8. Case size factors and volume adjustments - larger groups may have lower mortality or expenses

9. Plan options - optional benefits and allowing lots of employee choices will create antiselection

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Skwire Chapter 24
Estimating Life Claim Costs

82. Types of living benefits for life insurance ( 418)

This benefit (also called accelerated death benefits) pays a portion of the face amount prior to death, with the remaining benefit paid at death

1. LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home

2. Critical illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer

3. Terminal illness benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with a terminal illness with less than 6 or 12 months to live

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Skwire Chapter 25
Estimating Disability Claim Costs

83. Data sources for estimating disability claim costs ( 419, 432)

1. A company's own data is the best source if it is reliable and credible

2. Rate filings of competitors

3. Research of governmental and business publications

4. Data from consulting firms and reinsurers

5. Insurer studies - such as loss ratio studies and actual to expected incidence or termination rates

6. Industry data and tables (typically based on intercompany experience studies)

a) 1987 Commissioners Group Disability Table - adopted by the NAIC as the statutory minimum reserve basis for LTD. Is still the most recent intercompany incidence rate study.

b) SOA 2008 GLTD Experience Table -provides considerable detail on claim termination rates

c) 2012 GLTD Valuation Table- will be replacing the 1987 CGDT for use in developing minimum statutory reserves

d) TSA reports - contain exposure and actual to tabular ratios by industry classification

e) 1985 Commissioners Individual Disability Table A (CIDA) - the basis of active life and claim reserves for individual policies

f) SOA Individual Disability Experience Committee 1990-2006 Study

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Skwire Chapter 25
Estimating Disability Claim Costs

84. Types of disability income experience studies ( 420)

1. Calendar year loss ratio study

a) Compute the ratio of incurred claims to earned premium for a given calendar year

b) Incurred claims are calculated as paid claims plus the increase in claim reserves

c) May not provide a clear picture of historical trends because results are affected by reserve changes

2. lncurral year loss ratio study

a) Compute the ratio of incurred claims to earned premium for a given incurral year

b) Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve

c) Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred

3. Study of actual-to-expected incidence or termination rates - ratios of a company's actual claim incidence or termination rates compared to expected rates from published industry tables or company data

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Skwire Chapter 25
Estimating Disability Claim Costs

85. Formula for disability income net monthly premium ( 422)

1. Net monthly premium = lncidenceRate * SUM(Benefit t *Continuance t * lnterestDiscount t)

2. The summation runs for the entire length of the benefit period (offsets will also need to be reflected, which is discussed in a list from GHC-101-13)

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Skwire Chapter 25
Estimating Disability Claim Costs

86. Group characteristics that impact disability income claim costs ( 428)

1. Age and gender

2. Occupation - may need to adjust claim costs for:

a) Hourly vs. salaried

b) Blue collar vs. grey collar vs. white collar

c) Union vs. non-union

d) Commissioned sales personnel

3. Industry-for group insurance, it is more appropriate to rate based on industry than on occupations

4. Average earnings per employee -claim rates decrease as average earnings increases

5. Area -claim costs vary due to the legal environment and the general attitude and culture of the area

6. Size of group - claim costs follow a "U" shaped curve, with higher costs for the largest and smallest employers

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Skwire Chapter 26
Pricing Group Long-Term Care Insurance

87. Major effects of the year 2000 changes in the NAlC LTC Insurance Model Act (437)

1. Requires disclosure of rating practices at the time of application - e.g., including a statement that the policy may be subject to future rate increases

2. Requires an actuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience

3. Eliminates minimum loss ratio requirements in the initial rate filing

4. Places limits on expense allowances in the event of a rate increase - if a rate increase is requested, the lifetime loss ratio must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase

5. Requires reimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates

6. For policies in a rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting

7. Authorizes the commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums