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IHI Chpt 4 Individual Health Ins. Premiums


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(Considerations In Setting Gross Premium)
The Rating Classes (Underwriting Factors)
 Quote “General–Rating Factors”

Organization of the Rating Classes
ï‚Ÿ Choose quinquennial cells and interpolate

The Policy Provisions
ï‚Ÿ Renewability and Premium Guarantees
 prems & margins must be higher
 structural, attained-age-related rate changes vs. overall rate schedule changes.

 Conditionally Renewable – prem rates changeable. Only a class of policies can be canceled.
 Guaranteed Renewable – prem rates changeable. No cancellations.
 Noncancelable and Guaranteed Renewable – prem rates cannot change from initial schedule. No cancellations.

ï‚Ÿ Exclusions (pre-existing condition; experimental treatment; suicide)
 Def’n of Disability
ï‚Ÿ Riders (WoP, RoP)
The Elements of Premium Calculations (aka Pricing Assumptions or Pricing Components)
Morbidity (level of claim costs)
ï‚Ÿ For DI, Claim Cost = periodic payment * duration

Morbidity depends on:
ï‚Ÿ Marketing
 ph’s other covg
ï‚Ÿ Underwriting level (guar issue or questionnaire or medical exam)
ï‚Ÿ Duration (UW wearoff; CAST)
ï‚Ÿ demographics (age, sex, health, industry, and location)
ï‚Ÿ Antiselection
 plan richness
 number of options
ï‚Ÿ Interest Assumptions are used in:
 Asset Shares profit-measuring
 reserving

Interest Assumptions Depend On:
ï‚Ÿ Type of analysis:
 pricing or reserving (GAAP / Stat / tax) or profit-measuring (ROI vs ROE)
Lapses ( = 1 – persistency)
Lapses Depend On:
ï‚Ÿ Age
ï‚Ÿ Duration (1st year highest)
ï‚Ÿ Premium increases
ï‚Ÿ Mode (monthly)
ï‚Ÿ Product Type
ï‚Ÿ % of Gross Prem, % of claims, per policy, or per benefit unit
ï‚Ÿ Types of Expenses:
 Acquisition
 Administrative
 Marketing
 Commissions
 Overhead
Mnemonic: AAMCO (the filling station) is Expensive.
 Premium Taxes

ï‚Ÿ First Year > Renewal Year.
ï‚Ÿ Expense Charges and the Expense Allocation Method:
 agg. expense charges s/equal agg. expenses incurred
 fair and equitable among rating classes
 competitive.
Mortality (part of lapses)
The following factors will affect the premiums to be charged:
ï‚Ÿ Political pressure
ï‚Ÿ Competition
ï‚Ÿ future outlook
ï‚Ÿ the Relative Importances of the assumptions
 find out by sensitivity testing
 Interactions between the pricing components (Expenses ↑  Lapses ↑ too)
ï‚Ÿ Length of forecast
ï‚Ÿ Reinsurance costs and recoveries
ï‚Ÿ Implicit (bad) or Explicit ( = realistic + margin) (good)
Margins depend on:
ï‚Ÿ Profit Goal
ï‚Ÿ dividend philosophy
ï‚Ÿ risk level (esp. guarantees)
The Experience Data Used For Developing Premiums
see below
Source of Data
 Cpy’s own data for a similar product (best)
ï‚Ÿ Industry studies (SOA)
ï‚Ÿ Government studies
 state
 national (worst)

 Small or New cpy’s need to use the extenal data
Data Appropriateness / Quality Issues
ï‚Ÿ See General-Data Quality and General-Data Adjustments
The Profitability (Loss Ratio) Regulations
ï‚Ÿ Min and Max LR regulations
ï‚Ÿ Min LR must be met for lifetime and after each new rate schedule
 Can’t raise premiums to recover losses
ï‚Ÿ IF LR < expected, premiums must be lowered.
 Risky Products are allowed lower LR’s
ï‚Ÿ Ultimate credible LR must be used
Used to determine the appropriate premium.
Asset Share Model method
ï‚Ÿ Follows hypothetical group of policies; analyzes it in detail
Its Uses:
ï‚Ÿ can start with a test premium = competition, and vary by trial-and-error
ï‚Ÿ sensitivity testing

Choices in the Asset Share Model
ï‚Ÿ The representative cells
ï‚Ÿ Policy Year (simple) or Calendar year (more useful)
ï‚Ÿ The Profit Measure (ROI or Profit as a % of Premium)

Assumptions Required
Essentially, run through the MILE MOM mnemonic.
ï‚Ÿ Morbidity
ï‚Ÿ Interest/discount rates (and Tax Rate)
ï‚Ÿ Lapse rate
ï‚Ÿ Expenses
ï‚Ÿ Others particular to measuring profitability
 premium and claims timing (assume uniform through year)
 claim size
 reserves held
Formula methods and Loss Ratio Method
ï‚Ÿ simple and cheap, but:
ï‚Ÿ limited to flat %-of-premium assumptions for profits and expenses
Cash Flow method – used by HMO’s
ï‚Ÿ only a 1-2 year projection
ï‚Ÿ assumes future periods will cover costs from this period.
Reasonable, b/c:
 HMO’s receive statutory advantages, since in public interest.
 steady stream of new customers

ï‚Ÿ Project:
 claims,
 expenses, and
 enrollment;
ï‚Ÿ compute claim cost PMPM
ï‚Ÿ add loadings
Experience Monitoring for Purposes Of Renewal Rating – Considerations in Designing MIS’s
ï‚Ÿ must show A vs. E
 LR’s
 Enrollment
 Expenses

ï‚Ÿ A and E must be on the same basis:
 same mix of business
 same rating classes
 same Stat or GAAP or Pricing or Reserving basis

ï‚Ÿ Difficult to get them on the same basis, b/c:
 original pricing reserves no longer available
 current reserves are on FPT basis.

ï‚Ÿ Should Monitor gain/loss:
 in each assumption individually
 as frequently as possible, given available cpy resources
Methods Available To Determine The Rate Increase
(same as for profitability calcs)
Asset Shares method
ï‚Ÿ Recalculate using the updated assumptions
ï‚Ÿ Problem: Current Block of Business different from original:
 different MILE MOM statistics now
 mix of business changed
 durations vary now
Loss Ratio method – most commonly used for renewal rating
ï‚Ÿ Compare A-E LR
 project future LR’s
 Recalculate premium rates to meet the “target loss ratio”
ï‚Ÿ (Must adjust all premiums to a common rate schedule)
ï‚Ÿ original rating classes must be preserved.
Implementation of the Increase
ï‚Ÿ file rate schedule with all states.
ï‚Ÿ implementation occurs at different times.


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