Objective 2 - Claim Costs Flashcards

Question

Group Life Claim Costs: Types of living benefits for Life Insurance

Answer 1

This benefit (also called an accelerated death benefit) pays a portion of the face amount prior to death, with the remaining 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 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 Mnemonic - Living: LTC -> LTC (2%), Terminal (25-50%), Critical (25%) Skwire, Chapter 24, Page 418

Answer 2

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 inter-company experience studies) a) 1987 Commissioners Group Disability Table - adopted by NAIC as the statutory minimum reserve basis for LTD. is still the most recent 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 Mnemonic - Own Company's Data, Fuck the Rest (and Databases) Skwire, Chapter 25, Pages 419 and 432

Answer 3

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. Incurral 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 Skwire, Chapter 25, Page 420

Answer 4

1. Net monthly premium = Incidence Rate * Sum (Benefit-t * Continuance-t * InterestDiscount-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) Skwire, Chapter 25, Page 422

Answer 5

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 Skwire, Chapter 25, Page 428

Answer 6

1. Requires (disclosure) of rating practices at the time of application - e.g., including a statement that the policy may be subject to the 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 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 Mnemonic - Disclose and Eliminate Actuarial Reimbursement Limits by Banning Switches Skwire, Chapter 26, Page 437

Answer 7

1. Defined qualified plans 2. Clarified taxation of premium and benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes 3. Standardized benefit triggers (see separate list from Leida Ch. 2) 4. Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans Skwire, Chapter 26, Page 441

Answer 8

1. Employer Group a) LTC is appealing because it complements other products (such as disability and life coverage) and relative to medical is a low-cost benefit with stable pricing b) May not be able to offer guaranteed issue to all active employees, since this could make the premiums more expensive than similar individual policies 2. Insurance Company a) Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee b) Costs vary significantly by participation level, making this a key assumption 3. Employees a) May not yet be aware of the risk covered by LTC insurance b) Concerned with the significant cost, which may even exceed the cost of individual policies 4. Insurance brokers - have found that group LTC insurance provides the opportunity to open the door to competitive life and disability markets Skwire, Chapter 26, Page 443

Answer 9

1. (Voluntary) Lapses - Lapse rates are much lower than for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection 2. (Mortality) - Most companies use the 1994 Group Annuitant Mortality Table 3. (Morbidity) - Major variables that impact claims costs are: a) Marital Status - costs are lower for married individuals because of the presence of a potential caregiver at home b) Gender - Females have significantly higher ultimate costs than males c) Benefit Trigger d) Area - Utilization patterns of LTC services vary by geographic area e) Case Management - companies using a case manager usually experience lower claims 4. (Selection) factors - to reflect underwriting wear-off. Depends on the level of underwriting performed 5. (Expenses) - start-up expenses are high relative to other types of business 6. (Interest) - the investment rate on assets is a key assumption because o fthe large amount of reserves 7. (Reserve) Basis - important considerations include the level of margins and how these margins are achieved 8. (Other) assumptions - Including the average daily benefit and the premium mode 9. (Profit) - Typically based on lifetime goals for pre-tax profits, post-tax profits, return on investments, or return on equity Mnemonic - Voluntary Mortality PROMISE Skwire, Chapter 26, Page 448

Answer 10

The component method for developing pricing trends combines the following to get the pricing trend 1. Core Cost Trend - the rate of increase in the covered cost per service, before adjusting for specific factors such as aging or one-time changes. 3 Parts: a) Unit Cost Trend - Change in payments to providers for a fixed basket of services b) Severity - Increase in the intensity of treatment c) Change in mix of services - such as changes in the distribution of type of service or provider 2. Core Utilization Trend - Includes changes in utilization due to external forces, such as the economy, the number of workdays during the period, and changes in medical practice 3. One-time Changes - a response to a specific, identifiable situation. Types include: a) A significant change during one period, followed by a return to normal the following period. I.e. Severe flu season or weather events b) A sustained change in claims level. Examples include legislative changes (new mandated benefits) and internal changes 4. Expected Population shifts - includes changes in geographic mix and age-gender mix 5. Structural changes - includes leveraging, benefit changes, changes to clinical programs, and network changes 6. Capitation - can impact trends if there is a material changes in the average capitation fee of bonus payments 7. Margin - added to best estimate trend to minimize change of a loss Skwire, Chapter 34, Page 599

Answer 11

1. How (accurate) were the original projected trend and PMPM estimates 2. Which assumptions were (driving) any variation? 3. How can the process be (modified) to achieve greater accuracy 4. What other (factors), expected or unexpected, drove trends Mnemonic: Accuracy Drives Improved Factors Skwire, Chapter 34, Page 606

Answer 12

1. The Impact of Exchanges - enrollees will likely change health plans more frequently than in the past, which will require insurers to have a more in-depth understanding of the impact of population shift 2. Cost savings initiatives - includes accountable care organizations (ACOs), clinical interventions, and wellness programs 3. The economy - some economic factors may help in setting better trend estimates Skwire, Chapter 34, Page 610

Answer 13

1. Adequate - High enough to generate an acceptable return on equity 2. Competitive - low enough to enroll enough members to meet volume and growth targets 3. Equitable - to avoid an unreasonable amount of cross-subsidization among groups (which will improve persistency) Mnemonic - ACE!!! those premiums Kongstvedt, Chapter 22, page 473

Answer 14

1. Health Status - Determined based on: a) For individual and small group - Physician exams, prescription drug history, and medical questionnaires b) For large groups - medical cost experience and a listing of employees' major health conditions 2. Ability to pay the premium - based on income verification and credit history 3. Availability of other coverage - information is needed for coordination of benefits with other insurance and workers' compensation 4. Historical persistency - groups that frequently change carriers may not persist long enough for insurer to recoup acquisition costs Kongstvedt, Chapter 22, Page 474

Answer 15

1. Develop the projection period base rate PMPM - based on historical medical cost trended forward, and reflects the average characteristics of the block of business 2. Apply group-specific additive adjustments - such as the added cost of covering mandated services in a given state 3. Apply group-specific multiplicative adjustments - includes factors for the benefit plan, geographical area, age/gender, degree of health care management, and health status 4. Add retention loads - includes administrative expenses, a buildup of contingency reserves, coordination of benefits savings, and profit 5. Convert to a contract rate (per EE or per subscriber) - for group coverages, this includes developing tiered rates (employee only, family, etc) ( Projection Base PMPM + Additive Adjustments ) x Multiplicative Adjustments + Retention -> Contract Rate Kongstvedt, Chapter 22, Page 479

Answer 16

1. Financial Reporting - Should meet the following criteria: a) Be done on a retrospective basis b) Be done at the enterprise level, as well as the division or market level c) For statutory reporting, include a provision for adverse deviation. But for GAAP reporting, be on a best-estimate basis 2. Pricing - For setting premiums or for planning and budgeting. Trend rates may be calculated on the following bases: a) Eligible charges (billed charges before provider contracts or discounts are applied) b) Covered charges (allowed charges) c) Net paid claims - shows the bottom line trend after accounting for changes in provider contracts, member cost sharing, and coordination of benefits 3. Experience Analysis - for analyzing changes in a block of business over time Skwire, Chapter 34, Page 595

Answer 17

1. Re-rating - rating based on direct, existing experience (e.g. the experience of an existing block) 2. Fundamental Pricing - rating from other data sources (used as benchmarks), which adjusted to apply to the current situation a) Tabular Method - an existing table (or a modification of it) is used as the morbidity basis for pricing (e.g. the 1985 CIDA table for pricing DI). Typically used for long-term, non-inflationary-sensitive products. b) Buildup and density functions (see separate list) - a model is built to determine expected claims in the rating period. Generally used for inflation-sensitive products. c) Simulation - an existing distribution of expected claims is projected into the rating period, using all known information about the claimants (including prior claim experience) Leida, Chapter 5, Page 161

Answer 18

1. The Market - competitors' pricing sets expectations for consumers, limited pricing options 2. Existing products - expectations will be based on the pricing strategies used for the current products. 3. Distribution System - the compensations system, the structure of the distribution system, and the level of company control are all relevant in pricing. 4. Regulatory Situation - limitations may exist that impact how rates are set, and whether needed rate increases are allowed 5. Strategic plan and profit goals - pricing practices should reflect the company's goals Mnemonic - MED-RS (Medical Risk Scores) Leida, Chapter 5, Page 161

Answer 19

1. Age - Claim costs increase significantly by age for almost all health insurance coverages 2. Duration - durational trends are the trends in excess of those generated by insured age alone. They typically come from initial underwriting and from cumulative anti-selection. 3. Gender - most coverages vary rates by gender 4. Martial status - this is a big factor for LTC - since having a spouse at home can decrease the need for a nursing home 5. Parental (or family) status - Rates must vary base don how many people are insured 6. Occupation - an important rating factor for DI coverages, but not for other coverages (what about dental?) 7. Geographic area - rates may vary by area due to different patters of care, provider contracts, availability of care, and legal requirements 8. Current Health status 9. Past claim history 10. Smoking status 11. Weight 12. Presence and nature of other coverage 13. Situation specific factors - e.g., whether the policyholder converted from another plan Leida, Chapter 5, Page 164

Answer 20

1. Attained Age Rating - a policyholder's rate is a function of his or her age at renewal. Also referred to as step rating if rates are grouped into age bands. 2. Entry age or issue age rating - the rate reflects the age of the policyholder when the policy was issued 3. Uni-age rating - the rate structure doesn't recognize age at all, leading to subsidization of older individuals. Most community rate structures are uni-age. Leida, Chapter 5, Page 164

Answer 21

Tabular method formulas for calculating Net Premiums 1. Net Premium = Sum( Pr (Claim) * Averge Claim Cost * Discount factor * proportion of originally issued lives still in force) over z. a) Pr(claim) is the probability of a claim occurring (incidence rate) in year z b) AC(z) is the average claim cost (assuming a claim occurs) in year z c) v(z) is the discount factor corresponding to year z d) l(z) is the proportion of originally issued lives still in force in year z 2. The average claim cost (AC(z) ) is calculated as follows: Sum ( clm$ * Pr ( 1 - Tn(s) ) * v(s) over s a) s is the claim duration b) clm$ is the claim dollars payable at duration s c) Pr (1-Tn(s) ) is the probability of a claimant at claim duration 0 remaining disabled at duration s d) FnlCmPyt is the claim duration of the final possible claim payment Leida, Chapter 5, Page 176

Answer 22

1. Buildup approach - each claim type (impatient, outpatient, etc.) has its own claim cost calculation, as the product of claim frequency times average cost per service. The total claim cost is the sum of the various categories. Works well for benefits with copays. 2. Density Function - calculates a distribution of the expected annual claims for an individual, with no calculation of the different categories of benefits. Is useful when calculating the impact of deductibles and out-of-pocket limits. 3. Combining buildup and density functions - for PPO products, may calculate in-network costs using a buildup approach (due to copays), and out-of-network costs using the density approach (due to deductibles). The two are combined to get a final claim cost. Leida, Chpater 5, Page 180

Answer 23

1. Gather Experience on existing Business - use incurred claims (preferably on a runout basis) and earned premiums. The reliability of the data should be assessed before using it. 2. Restate experience - past premiums should be restated to the rate levels currently in effect. 3. Project past results to the future - adjust for items that cause future experience to differ from past experience (see separate list) 4. Compare the projection against desired results - a rate increase is calculated by determining how much rates need to change to produce the desired loss ratio (which is based on the expected level of expenses and profit) 5. Apply regulatory and management adjustments (see separate list for reasons for management adjustments) Mnemonic - Gather, Restate, Project, Compare, Apply Leida, Chapter 5, Page 188

Answer 24

1. Changes in Covered (Populations) 2. Changes in (Duration) - should anticipate durational effects in the claim costs 3. Changes in (Benefits) - changes may be explicit (such as a change in copays) or implicit (such as a change in how a policy provision is interpreted) 4. Changes in claim (Costs) - must project changes in frequencies and changes in average costs, e.g. Trend 5. (Leveraging) - as trends change the average claim cost, the impact of deductibles and copays cause claims to increase at a greater rate than trend 6. (Other) Changes - includes antiselection, changes in underwriting, and changes in business practices Project claims(t) = Claim Cost PMPM(s) * # of Members(t) * (1+leveraged claim cost trend)^(t-s) * Average Dur Factor(t) / Average Durational Factor(s) * (1 + Antiselection Factor due to lapses (t-s) ) * (1 + Adjustment factor for other changes (t-s) ) t - Projection period s - Experience period Mnemonic - Only Bother with PaiD CLaims (O B PD CL) Leida, Chapter 5, Page 193

Answer 25

1. Competitiveness of the premiums for new business 2. Profitability in other lines of business 3. Relations with the public or the sales force 4. Social Policy 5. Desire to Manage a block from a long-term prospective (e.g. phase in a large rate increase) Leida, Chapter 5, Page 202

Answer 26

1. Block Rating (Short time horizon) Approach - claim costs are calculated for the rating period (typically a one-year period), and premiums are calculated by adding on the expenses and profit charges. Gross Premium = G = [N * (1 + E^N) + E^F] / (1 - E^G) a) N = Net premium (Claim Costs) b) E^N = Percent of claim expenses c) E^F = fixed expenses d) E^G = percent of premium expenses + profit (% of prem) 2. Asset Share Approach - involves long-term projections of various items, in order to determine the necessary premium Leida, Chapter 5, Page 204

Answer 27

1. Exposure Values - including the number of policies sold or in force, number of claims or claim payments, number of premium collections, and number of units sold or in force 2. Revenue values - including premium, investment income, and explicit subsidies 3. Claim Values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves 4. Capital Values - must model the cost of the capital used by the line of business 5. Expense targets - expense loadings may be very detailed. The cost of capital is sometimes treated as an expense. 6. Profit Targets - profit is calculated in one of the following ways: a) % of Premium - PV of profits / PV of Premium b) Return on Investment (ROI) - Interest rate at which the PV of future profits = initial investment c) Return on Equity (ROE) - this is like ROI method, except the initial investment is increased by the amount of capital that is set aside to cover the business Leida, Chapter 5, Page 207

Answer 28

1. Determine the base rates / premium (Base premium = base rate * benefit amount) a) LTD: Base Rate (x,g,e,w) = I(x,g,e) * RSV(x,g,e,0) / 12 (RSV is the reserve at time 0, I is the probability of claim) b) STD: Base rate(x,g,e,w) = I(x,g,e) * D(x,g,e) / 12 (D is the expected length of claim in weeks) 2. Deduct offset credits - to get to the net base premium 3. Demographic adjustments - adjust the new base premium to reflect the person's salary, industry, occupation, and location 4. Plan provision adjustments - adjust for the definition of disability, maximum and minimum monthly benefits, pre-existing clause, and antiselection 5. Non-claim adjustments (Retention) - the prior steps give the final claim cost. Add loadings for commissions, expenses, and premium taxes 6. Add profit - can be a % of premium or a needed ROI/ROE GHC-101-13, Page 17

Answer 29

1. Determine the group's manual rate with profit and expenses removed (this is the final claim cost) 2. Determine the experience-based rate using the last 3-5 years of data a) Discount claims and reserves to the midpoint of the experience period or to the actual date of disability b) Divide by exposure to get the experience-based claim rate c) if large claims are pooled, add a pooling charge 3. Blend the manual rate and the experience-based rate to get the case claim rate a) Blended rate = manual claim rate * (1-Z) + Experience Claim Rate * Z b) Credibility (Z) = N / (N + K) Where N = number of life years and K = constant (for example, 5000 for LTD, 250 for STD) 4. Final case premium = blended rate / target loss ratio GHC-101-13, Page 20

Answer 30

1. Determine eligibility for coverage - is the claimant insured and actively at work, is there a pre-existing condition? 2. Determine if the definition of disability is met - this is the most difficult step of the process 3. Determine the payment amount (usually straightforward) = Pre-disability income * benefit percent - offsets 4. Get ongoing proof of disabilities a) STD - often approved for a specified period based on the type of disablement. Reviewed at the end of the period b) LTD - reviewed annually, when the condition or treatment changes, or when the definition of disability changes GHC-101-13, Page 31

Answer 31

1. Medical Evaluation - Begins with an APS and can include independent medical exams 2. Rehabilitation plans - providing vocational training or physical rehabilitation 3. Financial Evaluation of the claimant - verification of pre- and post-disability earnings 4. Settlements - These are Risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation) 5. Fraud review - check information for inconsistencies or alterations 6. Managed disability - techniques are used to "manage" disability and encourage a return to work GHC-101-13, Page 33

Answer 32

1. Average Manufacturer's Price (AMP) - the price manufacturers use for selling to wholesalers. In Canada, this is called the manufacturer's list price (MLP) and is regulated to ensure the prices charged are reasonable and in line with the prices of alternative treatments 2. Wholesale acquisition Cost (WAC) - the manufacturer's suggest list price, which may also be used as a sale price to the wholesaler 3. Average wholesale price (AWP) - is based on data obtained from manufacturers and distributors, but it's not an average nor is it based on any actual prices paid by anyone a) WAC and AWP are the most widely accepted mechanisms. WAC must = 80% of AWP in the US, due to legislation 4. Actual acquisition Cost (AAC) - The price retailers pay to wholesalers, negotiated between the two parties. In some cases, pharmacies buy directly from manufacturers, in which case AAC = AMP 5. Usual, & Customary (U&C) retail price - the price consumers pay to retailers. It includes the retailer's AAC plus a markup. 6. Maximum Allowable Cost (MAC) - is typically used for generic drugs and can be viewed as a fee schedule. GHC-105-14, Page 1

Answer 33

1. Manufacturers produce drugs and typically sell them to wholesalers based on AMP or WAC 2. Wholesalers act as a middlemen because retailers generally prefer to purchase drugs from one source rather than negotiating with hundreds of individual manufacturers. They sell to retailers based on WAC plus a markup or a discount off AWP 3. Retailers (pharmacies) dispense prescription drugs to consumers, charging a U&C retail price. But if insurance is involved, the retailer will negotiate pricing with the insurer or its contracted pharmacy benefit manager (PBM) 4. Consumers purchase drugs at the U&C price if there is no insurance. If insurance is involved, consumers typically pay a co-payment or coinsurance and the insurer pays the rest of the negotiated price. 5. PBMs and insurers are not involved in distributing drugs except for PBMs who own mail service or specialty pharmacy facilities GHC-105-14, Page 1

Answer 34

1. Misconception 1: These products are annually renewable a) LTC is guaranteed renewable and priced on an issue age basis b) Premiums are expected to remain level and cover all future costs 2. Misconception 2: Using historical loss ratios to determine performance is appropriate a) Claims and loss ratios are low in early policy years, but this does not mean the product is profitable b) A large portion of early premiums need to be set aside as contract reserves to pre-fund future claims c) This can be addressed by including the change in contract reserves in the claims calculation 3. Misconception 3: Companies have time to wait and see how experience will unfold a) As more time passes without a rate increase, the future premium base to which the rate increase would be applied shrinks b) This results in much larger increase needs in order to produce the targeted lifetime loss ratio Mechanics and Basics of LTC Rate Increases, Page 1

Answer 35

1. Morbidity - misses on this assumption may not become apparent for many years because of the gap between the average issue age and the average age of LTC claimants 2. Persistency - higher persistency leads to significantly higher claims because more policyholders remain in later years when claim costs are extremely high 3. Interest - Investments are key to ensuring that the contract reserves grow enough to support the company's future liabilities. THe recent economic recession has resulted in investment earnings that are much lower than what was assumed. Mechanics and Basics of LTC Rate Increases, Page 7

Answer 36

1. Selection of data (See separate list) 2. Reliance on data and other information supplied by others - the actuary may rely on such information, but should disclose this reliance 3. Review of data - the actuary should review the data for reasonableness and consistency, unless such as review is not practical 4. Limitation of the actuary's responsibility - the actuary is not required to audit the data or determine whether data supplied by others is intentionally misleading 5. Use of Data - the actuary must decide whether the data is of sufficient quality, if adjustments need to be made, or if data defects prevent the analysis from being done 6. Documentation regarding data quality (see separate list) Selection Reliance Review Limitation Use Documentation ASOP #23, Page 3

Answer 37

1. Appropriateness for intended use 2. Reasonableness, comprehensiveness, and consistency of the necessary data elements 3. Any known material limitations of the data 4. The cost and feasibility of obtaining alternative data in a reasonable time frame 5. The cost and benefit associated with using an alternative data set or data source 6. Sampling methods that were used to collect the data ASOP #23, Page 3

Answer 38

1. Process the actuary followed to evaluate the data, and any limitations due to data that was not reviewed 2. A description of any material defects the actuary believes are in the data 3. A description of any adjustments or modifications made to the data 4. Source of the data 5. any limitations on the use of the actuarial work product due to data quality issues 6. Any unresolved material concerns the actuary may have about the data 7. Any results that may be biased due to data quality issues, included the magnitude of the bias 8. Disclosures in accordance with ASOP#41 in the following situations: a) If any material assumption or method was prescribed by law b) If the actuary relies on other sources and thereby disclaims responsibility for any material assumption or method c) If the actuary has otherwise deviated materially from ASOP guidance ASOP #23, Page 6

Answer 39

1. When the actuary is required by applicable law to evaluate credibility 2. When the actuary chooses to evaluate the credibility of subject experience 3. When the actuary is blending subject experience with other experience 4. When the actuary represents the data being used as statistically or mathematically credible ASOP #25, page 1

Answer 40

1. The actuary should use an appropriate credibility procedure when determining if the subject has full credibility or when blending the subject experience with the relevant experience. In selecting a procedure, consider: a) Whether the procedure is expected to produce reasonable results b) Whether the procedure is appropriate for the intended use and purpose c) Whether the procedure is practical to implement when considering its cost and benefit 2. The Actuary should exercise professional judgment in selecting relevant experience to blend with the subject experience. This relevant experience should have characteristics similar to the subject experience. 3. The actuary should use professional judgment when selecting, developing, or using a credibility procedure 4. The actuary should consider the homogeneity of both the subject experience and the relevant experience ASOP #25, Page 3

Objective 2 - Claim Costs Flashcards

(64 cards)