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Unit 0 Introduction to financial security systems


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Financial Security System
A financial security system is an arrangement for risk financing in which one person or institution assumes an obligation to provide benefits to offset
undesirable economic consequences that may be experienced by a second person,
in return for payment, by or on behalf of a second person of amounts called
Economic insecurity is caused by
*loss of income
*additional expensees
*insufficient income
*Uncertainty of income
Financial Insecurity is caused by economic loss, which can be caused by
* death/disability of a primary wage earner (loss of income, additional expenses)
* illness/accident (loss of income, additional medical expenses)
* retirement (loss of earned income, additional medical expenses)
* damage to property due to accident/natural peril ( repair cost)
* product failure (replacement/repair costs).
* environmental assessment resulting in significant costs to restore property.
Financial security system include
*social insurance (The base level of protection against financial insecurity is provided by social insurance, provided by the government. The plans provide income benefits at retirement, death and disability enefits, medical expense, and workers compensation)

*Group Insurance and retirement plans
(Second layer of coverage, generally provided to active employees. Include: group life insurance, medical and dental expense plans and disability benefits. Supplement benefits payable by social insurance programs.) (many employer also have private pension and retirement plans to provide income for employees after retirement.)(for individuals who are self employed or employed by a small employer with more limited benefit plans, they may be eligible for coverage through a Labor union or a Professional or Trde Association.)

* Individual insurance
(include life, disability, and health insurance, automobile and home owners insurance.)(an individual annuitey or personal savings account provides insurance in the form of retirement income.)(The business owner needs protection in the event of the death of a key person, as well as property and liability protection)
Providers of Individual insurance
Most individual insurance coverage is an insurance company.

The capital accumulation marketplace there are more products and players.
The variable accumulation annuity is a product used for retirement funding in which the policyholder invests in stock funds and shares in the stock market's performance. Accounts and mutual funds are offered by other finanical institutions such as stock brokerages and banks, in addition to insurance companies.
Providers of group insurance
* insurance companies (offer a range of life and medical coverages. The products are typically indemnity type benefits. Also offer managed care products, such as HMO and PPO)

* health care service corporations (write medical and dental coverages. In US they can't write life and disability coverages, although they sometimes have affiliated compnaies that write them. Not for profit entities. Majority of blue cross bule shield plans are health care service corporation, although many have converted to mutual or stock insurance companies.

(offer comprehensive service benefits.
cover a local service area.
have direct contact with the health care providers.
The benefits have co-payments per visit rather than coinsurance and deductibles.
Can't offer life or disability, may offer dental and vision. Not for profit or for profit companies canown HMO's. Examples of owners include insurance companies, health careproviders, and BCBS plans. Some HMO's are free standing.

(difference: PPO's don't take the insurance risk. They enter into a contract with health care providers and perform utilization review services. PPO's lease their provider contracts to insurance companies and employers. The insurance risk stays with the insurance company or employer.
Two levels of benefits are offered with higher level of benefits applied to services from the contracted providers. Benefits sometimes include vision and dental.
Like HMO, PPO is sponsored by health care providers or owned by insurance companies. The PPO provides utilization review services. Claim processing is not done by the PPO, but by the insurance company or employer's administrator.)

* Self-insured Employers
(employers self insure to 1: save money; 2: avoid having to provide mandated benefits. It gives the employer more flexibility.
They can offer medical, dental, life, and disability benefits.
Many use an insurance carrier or a third party administrator to administer claims and to contract with a managed care network.)
Defined Benefit Plan
* the plan document specifies the benefit that will be paid to the participant at retirement, termination or death.
* employer and sometimes employee contributions fund it.
* A TPA may handle the administration of benefit payments.
* employer assumes the investment risk and contributes whatever is necessay to fund the promised benefit.
* in US and Canada Defined benefit plans are highly regulated . There is generally some form of mandatory insurance that provides some relief at plan termination.
Defined Contribution Plan
*Throughout the accumulation stage, the investment risk is borne by the participant. No guarantee that a certain level of benefits can be provided.
*at retirement the accumulted funds are applied to provide income through: 1. purchase of an individual annuity or contract.(with fixd annuity, the investment and mortality risk is transferred to the insurance company issuing the contract.) 2. systematic withdrawals from the accumulated capital.
Social Insurance
* Government is the sponsor
* Benefits are financed by general tax revenue and/or payroll tax revenue (eg: an earning tax, paid by employers, employees, and self-employed persons.)
* administrative functions handled by the government or contracted with another entity, such as an insurance company or an administrative service organization.(functions include: claim processing, disbursing of funds for benefits, determining compliance, and utilization review.)
The 3 largest government medical programs
CHAMPUS: Civilian Health and Medical Program of the Uniformed Services
*for elderly and disabled persons.
*includes both service benefits and indemnity benefits.
*HMO can contract with Medicare to provide benefits directly.
*health coverage for lower income individuals.
*administered by the states and funded by both the state and federal government.
*Many Medicaid programs have contracted with HMO's and are developing managed care programs.
health coverage for dependents of active military personnel and retired military personnel and dependents.

* HMO's and Insurance companies can interact with government programs as an administrator to process claims or they can contract with the government to provide benefits directly.(eg: HMO)

* National health care in Canada is defined under the Canada Health Act. A complete range of medical services is provided. Health care is the responsiblity of the provincial government and is financied by both the provincial and federal government.
Workers compensation
*includes medicl care, disability income, death benefits, and rehabilitation services.
*in Canada, it is administered by a Workers Compensation Board controlled by the provincial government.
*in US, an employer can satify the compulsory workers compensation law by obtaining proviate insurance (mostly common method), by self-insurance, or by use of the state workers compensation fund.
Social insurance - retirement benefits
* In US, provided by the Old Age Survivors Disability Insurance (OASDI) system, commonly called Social Security. Benefits are provided upon retirement, death, or disability.
*Benefits are progressive - benefits in relation to pay are larger for low-income recipients than for high-income recipients.
*funded by payroll taxes paid by employers and employees.

*In Canada, the Canada/Quebec Pension Plan, Old Age Security, and Guaranteed Income Supplement programs provide retirement benefits.
Distribution channels of Financial Security System
*Captive agents or career agents
*independent agents or brokers
*direct marketing
*fee for service
*debit agents
*employer sponsored
Distribution channels for property casualty insurance
*captive agents or career agents
*independent agents or brokers
*direct marketing
Employer groups by size
*small groups 2-50
*pooled groups 51-200
*experience-related groups 201-1000
*large groups over 1000 employees
product development
the process of bringing a new or revised contract to the marketplace. (The end result may be a new group insurance product, such as a major medical or dental product or a new individual product, such as a Universal Life product)
Plan design
the proecess of developing a benefits program for a group. (this includes employer sponsored programs, social insurance programs, and covers life insurance, medical, and retirement benefits. Plan design encompasses the tailored, comprehensive program for a large corporation as well as the programs for the small employer. Benefits and actuarial consultants along with those providing lega, investment, and administrative expertise perform the plan design work.)
Generic steps used in both product development and plan design
*evaluation of internal and external factors
*market research
*preliminary product/plan design
*final product/plan design
*product/plan management
Evaluation of internal and external factors in product development and plan design.
Internal factors:
1.mission, vision and corporate strategy of the entity developing the product. Target market must be alighed with the company's mission, vision, strategy, culture, and strenghths. The company needs to develop nd understand the implications of expanding into a new market.
2.administrative capabilities (necessary information system or the resources to build or buy the systerms, sufficient claims processing resources, requirements places on customer service, the capabilities of the sales force)

*Plan Design
plan design consultants must consider area of expertise. A decision must be made about whether the firm or individual consultant wants to expand its focus. Any limitations must be considered as well.

*External factors:
1. economy: impacts the assumptions used in product and plan design.
2. government regulation: the entities providing benefits or coverage are subject to regulation, largely of a solvency nature. There is a great deal of regulation with respect to the products and policies, rates, coverage, marketing, licensing of producers, advertising etc.)

3. taxation: often there are tax advantages to encourage the establishment of programs. A thorough understanding of the impact of tax law and a continual review of changes to the law is essential in the product development and plan design process.

4. competition: from product standpoint the question is what are other companies doing in a similar market. from group benefits plan design perspective, the question is what are other employers packaging for their employees.
the objectives a company hopes to achieve through market research on product development
*to gain better understanding of target market and to identify needs of the customer.
*to gain insight into what the competitors are doing, including changes to rates/premiums, introduction of a new product, changes to product features, and new sales tools.
*to gain an insight into other potential target markets.
Market research on plan design
1. assess what the competition is offering to groups in the target marketplace.
2. knows the industry trends, reveal plan holders' needs.
Preliminary product design
*purpose: develop a consensus on the product features and marketing strategies.
*make sure the product features are consistent with costomer needs, market research results, company's strategy and trget markets.
*the external and internal factors should be reviewed again including regulatory issues and administrative requirements.
*preliminary pricing: assumptions must be established and profit margins determined for a limited number of cells.
*The cost and benefits of developing the product must be weighed and quantified in order to reach a decision to go forward or cancel the product.
Preliminary plan design
*purpose: same with product design: to develop a consensus on the plan features.
*an initial meeting to discuss what the client wants. the benefits consultant must educate the client about the choices he or she has with respect to level of benefits and the impact of regulation. a important question for the initial meeting: how much can the client afford.
*several preliminary plan options showing client a range of features and cost estimates.
Key steps for final product design
*review prliminary desin correcting errors and inconsistencies
*reach agreement on design features
*develop final detailed pricing assumptions
*Profit testing on 1:changes to profit margin due to more refined assumptions; 2: more comprehensive combinations, and 3:sensitivity.
Key steps for final plan design
* review preliminary desin options for errors or inconsistencies.
*reach agreement on the design features
*develop complete detailed assumptions.
*develop contribution rates and cost estimates
Product implementation
*the product implementation team meets to identify and resolve issues as the product is being developed. It is a cooperative effort from computer systems, investments, law, underwriting and issue, policy filing, customer service, marketing, and sales. Software for illustrations, advertising and marketing materials, and training program need to be prepared.
Plan design implementation
*same with product development, the plan implementation coincides with the final plan design.
*plan documents - finalized
administrative details in place
enrollment procedures estabilished
employee communications and sales materials for all employees prepared.
presentations with illustrations for new particpants prepared.
Purpose of product management
*ensuring the product's performance
*ensuring saled are in line with expected goals
*developing pricing data the next genearation of products.
Plan management for group market
*plan management is more important than the pre-issue plan design.
*the plan management step: experience monitoring, rerating, maintaining provider relations..
it is a continual marketing process apllied to the benefits and plan provisions for a block of business rather than a policy form.
Plan management for retirement plans
* it is the administration of the plan
*for pension plans: annual valuation requirements, reporting required by regulators, and monitoring investment performance.

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