Pricing and Underwriting

Question 1

Components of new business underwriting for large groups

Answer 1

1. Review the characteristics of the group in order to screen, approve, and classify the group
2. Evaluate the group’s prior experience (for accuracy, adjusted to fit coverage being offered)
3. Develop the proposal (explain plan design, UW caveats, expense charges, PGs)

Question 2

Criteria used for underwriting large groups

Answer 2

1. Age and gender
2. Location or area
3. Type of industry
4. Financial stability
5. Ease of administration
6. Level of participation
7. Carrier persistency

Question 3

ACA initiatives that promote health care access and consumer choice

Answer 3

1. Prohibitions on pre-existing condition exclusions
2. Restricting the use of lifetime maxes
3. Prohibiting annual benefit maxes on essential benefits
4. Requiring most groups to offer coverage to dependents up until 26
5. Issuing grants to states to create high-risk pools for the uninsurable
6. Creating a health insurance exchange that is both guaranteed issue and w/o pre-existing condition exclusions

Question 4

Components of renewal underwriting for large groups

Answer 4

1. Evaluating the case (same info, better data)
2. Developing renewal recommendations (plan design changes, alternate rating and funding methods)
3. Revision underwriting
4. Renewal monitoring

Question 5

Special types of large groups

Answer 5

1. Association programs (of individuals, multiple-employer trusts)
2. Taft-Hartley groups
3. Purchasing alliances (groups come together to enhance purchasing power)

Question 6

Characteristics of successful multiple-employer health plans

Answer 6

1. Sponsoring association is a strong entity with a high % of eligible firms participating
2. Large pool of eligible members
3. Relatively small average employer size

Question 7

HIPAA requirements that increased antiselection in small group market

Answer 7

1. Small group carriers and HMOs must offer all their major med and comprehensive health products on guaranteed acceptance and renewal basis
2. Individuals can’t be rejected or singled out for special rating treatment due to health
3. Pre-existing condition limitations or exclusions can’t be imposed on individuals who have had continuous coverage for 12+ months

Question 8

Group characteristics used in underwriting small groups prior to ACA

Answer 8

1. Financial viability (so insurer can recoup acq costs)
2. Industry/occupation
3. Group size
4. Workers comp
5. Participation reqs
6. Employer contributions
7. Prior coverage and experience
8. Eligibility rules and classes

Question 9

Considerations in underwriting individuals for small group coverage prior to ACA

Answer 9

1. Enforcement of eligibility
2. Pre-existing condition limitations
3. Individual medical assessment
4. Post-issue underwriting
5. Underwriting optional benefits

Question 10

Rating parameters used in small group manual rates prior to ACA

Answer 10

1. Age
2. Gender
3. Geographic area
4. Group size
5. Industry
6. Managed care and negotiated discounts
7. Plan of benefits
8. Family composition
9. Participation levels
10. Tobacco use

Question 11

Rating parameters allowed in small group manual rates beginning in 2014

Answer 11

1. Age factors
2. Family composition factors
3. Tobacco use factor
4. Area factors
5. Plan benefit factors
6. Provider network factors

Question 12

Risk pooling programs for small group business

Answer 12

1. Reinsurance programs (carriers can place individuals or entire groups into program by paying the re premium)
2. Risk-adjustment formula programs

Question 13

Factors that influence an employee’s choice of health plan in a multiple-choice environment

Answer 13

1. Inertia
2. Plan provisions and costs
3. Employee and dependent demos
4. Employer actions and attitudes
5. Eligibility for other health insurance coverage
6. Information available about options
7. Provider and provider network attributes
8. Insurer and administration issues

Question 14

Situations where employees may be offered multiple choices

Answer 14

1. Choice between medical coverage and no coverage
2. Choice based on member cost sharing
3. Choice based on provider networks or medical management
4. Choice among insurers
5. Optional riders added to core coverage
6. Choice by each family member
7. Choice between CDHPs and traditional plans

Question 15

Techniques an underwriter can use to manage selection in a multiple-choice environment

Answer 15

1. Add a loading to the premium to pay for the additional cost of selection
2. Employee contributions or plan design limits
   a) Limit spread in monthly ee contributions
   b) Limit spread in benefits
   c) Mix favorable and unfavorable cost sharing or benefit provisions among options
   d) Avoid covering benefits with selection potential in only one option
3. Allowing one insurer to offer all the options
4. Participation requirements when multiple insurers offer plans (such as same elig rules, min participation reqs)

Question 16

Steps for developing premium rates in a multiple choice environment

Answer 16

1. Determine the actuarial value of each benefit option as if it were sold on an independent basis
2. Estimate the enrollment mix by plan option
3. Estimate the relative health status factor for each option based on expected enrollment mix
4. Calculate preliminary selection adjusted rates for each option (actuarial rates from step 1 * relative health status factors in step 3)
5. Calculate the average selection load as ratio of average of step 4 and average of step 1
6. Calculate blended selection adjusted rates by multiplying step 1 by step 5

Question 17

Definition, steps, and uses of health risk adjustment

Answer 17

Definition - process of adjusting measures of healthcare utilization and cost to reflect health status of members

1st step = risk assessment (method used to assess relative risk of each person in group) which consists of:
a) Risk classification
b) Risk measurement
2nd step = payment adjustment (based on risk)

Question 18

Reasons for health risk adjustment

Answer 18

1. Require health plans and providers to compete on basis of efficiency and quality, not on risk selection
2. Preserve choice for consumers
3. Have consumers pay appropriate price for their choice of insurer or provider
4. Under certain reforms, health risk adjuster is needed to increase (decrease) premium for plans covering lower (higher) than average risks

Question 19

Risk classification schemes

Answer 19

1. Demographics
2. Utilization measures or claim expenditures
3. Diagnosis and pharmacy codes
4. Medical info/history
5. Perceived health status
6. Functional health status
7. Lifestyle and behavior factors

Question 20

Measures of predictive accuracy for risk assessment methods

Answer 20

Individual measures

1. Individual R-squared (% of variation in claim costs explained by the model)
2. Mean absolute prediction error (MAPE) - average of absolute values of prediction errors

Group measure
3. Predictive ratio = predicted claims for group/actual claims for group (reciprocal of A/E)

Question 21

Key concepts for evaluating risk adjusters

Answer 21

1. Bias
2. Transparency
3. Fairness and gaming
4. Encourage specific coding
5. Discourage upcoding
6. Data quality and credibility
7. Data availability
8. Clinical relevance
9. Timing

Question 22

Risk mitigation programs in ACA

Answer 22

1. Risk adjustment - applies to individual and small group, both inside and outside exchanges
2. Reinsurance - applies to individual only, both inside and outside exchanges (2014 benefit = 80% of claims between 60k and 250k for given individual)
3. Risk corridor - applies to individual and small group, only within the exchange

Question 23

Reasons for experience rating

Answer 23

1. Groups want it
2. Insurer wants to quote and charge premiums that are as competitive as possible
3. Insurer wants to avoid antiselection

Question 24

Theoretical considerations in determining credibility levels

Answer 24

1. Coverages with low claim frequency are more volatile and will require larger exposure base to be credible
2. Coverages with widely varying claim sizes will tend to be more volatile
3. Statistical confidence interval chosen by insurer
4. Historically, statistical fluctuation was considered to vary inversely with square root of # of claims or lives
5. For coverages with stochastically independent claims, longer experience periods can be used to increase exposure (and credibility)

Question 25

Practical considerations in determining credibility levels

Answer 25

1. Competitive pressures 2. Ability of administrative and management areas to cope with experience rating 3. Tradeoff between cost of experience rating and gains in quality and quantity of new business 4. Effect on existing business of a change in cred level 5. Management philosophy regarding experience rating 6. Need for consistency among classes of business

Question 26

Steps in prospective experience rating

Answer 26

1. Develop past claim experience (incurred claims restated) 2. Use pooling methods to dampen random statistical fluctuation 3. Calculate net premium (epected claim cost) = calculate historical claim cost per unit of exposure and trend it to account for changes in morbidity, mortality, demo, benefits, antiselection) 4. Calculate gross rates from net rates - apply loads (retention) to net premium 5. Make any final adjustments for politically sensitive policyholder 6. Plan choice considerations 7. Small group considerations (recognize experience with formula-based methods or re-underwriting method)

Question 27

Pooling methods

Answer 27

1. Catastrophic claim pooling 2. Loss ratio or rate increase limits 3. Credibility weighting 4. Multi-year averaging 5. Combo methods

Question 28

Loadings on net premium (retention)

Answer 28

1. Expense loadings 2. Deficit recovery charge 3. Termination risk charge 4. Pooling charges 5. Profit charge (contribution to free reserves) 6. Investment income 7. Explicit margin 8. Charge to cover risk of rate guarantees

Question 29

Typical retrospective refund formula

Answer 29

Account balance = prior year balance + premium + investment earnings - charged claims - expenses - risk charge - increase in stabilization reserve - profit Charged claims = claims pd + increase in claim reserves - pooled claims + pooling charges + conversion charges + claim margins Risk charge - covers risk that PH will terminate while in a loss position Addition to prem stabilization reserve - to reduce risk of deficit on termination; may need to have certain level of reserve before surplus can be paid as a refund

Question 30

Considerations in deciding whether to use retrospective experience rating

Answer 30

1. Group size 2. Contract provisions regarding funding arrangement 3. Company policies and practices 4. Company financial situation

Question 31

Advantages of self funding

Answer 31

1. Cost savings - no premium taxes, risk and retention charges are lowered 2. Plan design flexibility 3. Claims management 4. Cash flow - since sponsor holds its own IBNR reserves 5. Investment income

Question 32

Disadvantages of self funding

Answer 32

1. Risk assumption - the plan sponsor is liable for losses that exceed expectations 2. Cash flow - fluctuations in benefit plan costs from month to month must be managed 3. Administration - sponsor must arrange for all services needed 4. Legal liability - sponsor may be liable for actions taken by plan that adversely affect employees

Question 33

Stop loss contract types

Answer 33

1. 12/15 - covers losses incurred within a 12 month period and paid within 3 months of end of policy (run-out coverage) 2. 12/12 - covers losses incurred and paid w/i 12 month period 3. 15/12 - covers claims incurred within 12 month period or 3 months before it, and paid within 12 month period (run-in coverage) 4. Paid - covers claims incurred anytime after original effective date and paid within 12 month policy period 5. Incurred - covers claims incurred in the 12 month period but paid at any time (not common)

Question 34

Considerations in rating specific stop loss

Answer 34

1. Trend leveraging - effect increases as deductible increases 2. Area leveraging - works in same way as trend leveraging 3. Network leveraging - same 4. Variations by age and sex 5. Underlying plan design 6. Industry 7. Contract type (12/12 less costly than 12/15 - watch for antiselection by contract type)

Question 35

Underwriting considerations in setting a specific stop loss rate

Answer 35

1. Whether any of the current known large losses will have an effect on the upcoming policy year (options for handling the loss: rate the policy up, set a separate specific deductible aka lasering, or exclude from coverage) 2. How often plan sponsor switches stop loss insurers 3. Whether or not specific stop loss deductible is appropriate for the plan 4. Whether producer has established track record of success with the insurer 5. Specific stop loss rate history 6. Historical specific stop loss experience

Question 36

Steps for setting aggregate stop loss attachment factors

Answer 36

1. Obtain running 12 month (due to seasonality) paid losses for past 1-3 years 2. Adjust paid losses for specific stop loss reimbursements 3. Divide by # of certificates in each period to calculate losses paid PEPM (usually incurred PEPM) 4. Adjust for plan design changes from experience periods to rating period 5. Trend losses PEPM from midpoint of experience period to midpoint of rating period 6. Calculate weighted average of trended losses PEPM 7. For plans without full credibility, use a credibility formula to blend weighted average trended losses PEPM with manual losses 8. Adjust for contract type 9. Multiply by aggregate margin factor (e.g., 125%)

Question 37

Aggregate stop loss pricing and UW considerations

Answer 37

1. Aggregate margin factor (higher for small plans) 2. # of certificates - fewer certifications means more volatile 3. Specific stop loss deductible - higher means more volatile 4. Designs of employee benefit plan - leaner is more volatile 5. Profitability is mostly a function or careful underwriting, not high rates 6. Profitability is also driven by setting appropriate attachment points

Question 38

Aggregate stop loss product variations

Answer 38

1. Monthly accommodation - insurer allows plan to settle losses monthly (credit risk, cost to process interim benefits) 2. Aggregate only (rarely offered) 3. Terminal liability

Question 39

Types of antiselection

Answer 39

1. External - occurs as person is first becoming insured (if sick, will buy insurance) 2. Internal antiselection - occurs while person is insured (if sick, buy up; if healthy, buy down) a) Buy-down effect b) Premium leakage 3. Durational (cumulative) antiselection - occurs as people make decisions about whether to end coverage; higher cost insureds tend to keep their coverage in force longer because: a) Less likely to be able to find coverage elsewhere b) Less likely to be willing to become uninsured c) Emotionally less willing to change their coverage

Question 40

Mechanisms for controlling external antiselection

Answer 40

1. Individual underwriting before issue (includes initial screening by agent) 2. Pre-existing condition limitations 3. Requiring an enrollment mechanism that doesn't permit antiselection (like minimum participation % reqs)

Question 41

Tools used in the underwriting process

Answer 41

1. Individual application 2. Attending physician statement 3. Commercial databases (to check data) 4. Internal data 5. Telephone interviews 6. Inspection reports 7. Lab testing 8. Medical exams (high cost, rarely used) 9. Tax returns 10. Pre-existing condition provisions

Question 42

Actions available to the underwriter

Answer 42

1. Offer full coverage with no restrictions 2. Decline coverage 3. Offer coverage at a higher premium rate 4. Offer a standard policy with an exclusion rider 5. Offer a different policy than the one applied for 6. Offer a different benefit plan than the one applied for (such as longer elim period or shorter ben period)

Question 43

Process for investigating claims

Answer 43

Scanning claims for further investigation, based on following criteria: 1. Timing - can't rescind beyond time limit 2. Conditions - certain ones can be ruled out as pre-existing 3. Size - don't investigate if cost of investigation > cost of claim 4. Sentinel conditions or procedures - some conditions are related to others that lend themselves to antiselection (like certain diseases as indicator for HIV) Actions an insurer may take after investigation: 1. Reformation - reissue contract retroactively 2. Rescission

Question 44

Situations in which CAST model does not work well

Answer 44

1. In first 3-4 durations, when impact of UW wear off overwhelms the CAST effects (solution = apply additional UW selection factors) 2. In later durations, where only fraction of original population remains (solution = choose higher value of k2 and recalibrate model) 3. At all durations, when a rate spiral is severe and volatile

Question 45

Traditional techniques for controlling antiselection that are prohibited by ACA

Answer 45

1. Underwriting, including denying coverage or offering alternative coverage 2. Health status rating 3. Pre-existing condition exclusions 4. Exclusionary riders 5. Lifetime or annual dollar limits 6. Limiting benefit coverage or imposing very high cost sharing designed to attract healthier risks 7. Rescissions, except in cases of fraud or intentional misrepresentation 8. Marketing practices that discourage unhealthy risks from signing up

Question 46

ACA mechanisms for controlling antiselection

Answer 46

1. Coverage mandates and premium subsidies to encourage participation a) Premium subsidies b) Employer mandate c) Individual mandate 2. Aligning market rules on and off the exchanges 3. Open enrollment periods - people can only enroll or change coverage during set time period 4. Minimum benefit levels 5. Premium stabilization programs (reinsurance, risk corridor, risk adjustment)

Question 47

Penalties for not following individual mandate

Answer 47

1. Flat per person fee of $95 in 2014, $325 in 2015, $695 in 2016, and increasing with inflation after a) Household fee is limited to 3x those amounts, and each child counts at 50% of those amounts 2. Percentage of all income over the tax filing threshold - 1% in 2014, 2% in 2015, 2.5% in 2016 on Total penalty for a household can't exceed national average premium for a bronze qualified health plan

Question 48

Requirements that mitigate antiselection between exchange plans and off-exchange plans

Answer 48

1. Insurers must include all ACA compliant policies in a single risk pool, so identical plans must have identical rates on and off exchanges 2. Risk adjustment will be applied to even out risk between insurers and between the on-a and off- exchange portions of the risk pool 3. Insurers must pay same commissions to brokers and agents on and off exchanges 4. Exchange fee (3.5% of premium for each exchange policy) must be spread across the entire single risk pool, including off-exchange policies 5. Carriers participating in exchanges must offer at least one gold and one silver level plan on exchange 6. Carriers are prohibited from marketing practices intended to discourage unhealthy individuals from signing up 7. Open enrollment periods are identical on and off exchange

Question 49

Differences between the risk adjustment models used by the ACA and by Medicare Advantage

Answer 49

1. HHS-HCC model is concurrent (predicts morbidity data in same year as diagnosis data) while CMS-HCC model is prospective (predicts morbidity data in year following diagnosis data) 2. HHS-HCC model uses different condition categories and coefficients 3. HHS-HCC model is part of the process of transferring money between insurers, rather than adjusting capitations paid by the government to insurers 4. HHS-HCC model reflects member's cost sharing in his or her risk score

Question 50

Potential pitfalls related to the ACA risk corridor program

Answer 50

1. Profits aren't profits 2. Allowable costs reflect various adjustments 3. Risk is shared with both policyholders (through MLR rebates) and the government (through risk corridor payments) so risk corridor formulas must consider how much of any gains each party should receive 4. Protection is limited - gains and losses will be dampened, but not eliminated 5. Nothing is set in stone - significant political and legal uncertainty

Question 51

Documentation needed to support the actuarial certification of compliance with small group rating methods

Answer 51

1. Materials that have been reviewed to certify compliance with requirements for rating methods and UW practices, including: a) Description of carrier's rating methods and UW practices b) Rating manual and formulas for calculating rates from the manual c) Some test calculations to verify that rates charged are in accordance with the rating manual 2. Written demonstration that the rates are in compliance with applicable regulatory reqs (should explain how classes of business, average rates, and rate increases comply with rating constraints) 3. Written demonstration supporting the determination of compliance with actuarial soundness

Question 52

Items to include in an actuarial certification of compliance with small group rating methods

Answer 52

1. Certification that all practices required to be in certification are in compliance with applicable regulatory requirements 2. Listing of practices that are covered in the certification 3. Identification of the time period covered 4. Changes in rating methods and other practices that have occurred during the time period covered that affect compliance 5. Description of any subsequent events that could materially affect current or future certifications 6. Where a qualified certification is given, any actions being taken to bring carrier into compliance 7. Where a limited certification is given, any sections of the regulatory reqs that are not addressed

Question 53

Considerations when selecting a risk adjustment model

Answer 53

1. Intended use - degree to which the model was designed to estimate what the actuary is trying to measure 2. Impact on program - whether risk adjustment system may cause changes in behavior because of underlying incentives 3. Model version 4. Population and program - consistency 5. Timing of data collection, measurement, and estimation - consider impact of timing differences between model development and application 6. Transparency 7. Predictive ability 8. Reliance on experts 9. Practical considerations - cost of model, availability

Question 54

Differences between ACA and Medicare Advantage risk-adjustment programs

Answer 54

1. ACA risk adjustment uses concurrent model, but MA is based on retrospective model which makes risk scores far more predictable 2. MA risk adjustment is performed as single national program, which is much simpler than ACA approach by state/market/risk pool 3. MA plans have relatively stable membership, unlike ACA plans which make estimation harder 4. Payment process used for MA risk adjustment allows insurers to develop relatively accurate estimates of their ultimate settlement amounts

Question 55

Elements of ACA risk adjustment that may lead to uncertainty in an insurer's financial statements

Answer 55

1. Uncertainty as to insurer's risk score (b/c of concurrent method, insurer won't have complete data by yearend for calculating risk score) 2. Uncertainty as to other insurers' risk scores 3. Uncertainty as to member exposure - difficulty b/c of 90 day premium grace period for any member receiving a premium subsidy 4. Granularity of the calculation - ACA process requires insurers to do a separate calculation for various risk adjustment cells 5. Implications of data reviews - data validation reviews could lead to payment adjustments if data is found to contain errors

Question 56

Aspects of the ACA reinsurance program that can increase uncertainty in financial statements

Answer 56

1. Accrual for reinsurance on unpaid claims - insurers may need to estimate recoveries on claims not yet paid, which is difficult 2. Magnitude of the reinsurance recovery accrual - which will be large 3. Potential valuation allowance on reinsurance recoverables - reinsurance benefits are limited by the funds in the pool, so may need to factor in an allowance in case the pool isn't sufficient 4. Potential for denied reinsurance claims