Group & Health Specialty

Transcription

1 Learn Today. Lead Tomorrow. ACTEX Study Manual for Group & Health Specialty Fall 2016 Edition Frank G. Reynolds, FSA, FCIA, MAAA

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3 ACTEX Study Manual for Group & Health Specialty Fall 2016 Edition Frank G. Reynolds, FSA, FCIA, MAAA New Hartford, Connecticut

4 Learn Today. Lead Tomorrow. Actuarial & Financial Risk Resource Materials Since 1972 Copyright 2016,, a division of SRBooks Inc. ISBN: Printed in the United States of America. No portion of this ACTEX Study Manual may be reproduced or transmitted in any part or by any means without the permission of the publisher.

5 ACTEX is eager to provide you with helpful study material to assist you in gaining the necessary knowledge to become a successful actuary. In turn we would like your help in evaluating our manuals so we can help you meet that end. We invite you to provide us with a critique of this manual by sending this form to us at your convenience. We appreciate your time and value your input. Publication: Your Opinion is Important to Us ACTEX Group & Health Specialty Study Manual, Fall 2016 Edition I found Actex by: (Check one) A Professor School/Internship Program Employer Friend Facebook/Twitter In preparing for my exam I found this manual: (Check one) Very Good Good Satisfactory Unsatisfactory I found the following helpful: I found the following problems: (Please be specific as to area, i.e., section, specific item, and/or page number.) To improve this manual I would: Name: Address: Phone: (Please provide this information in case clarification is needed.) Send to: Stephen Camilli P.O. Box 715 New Hartford, CT Or visit our website at to complete the survey on-line. Click on the Send Us Feedback link to access the online version. You can also your comments to Support@ActexMadRiver.com.

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7 FORWARD When I first began teaching seminars for the later examinations 35 years ago, I stressed what were then two novel ideas: Be sure to get down the major points and use point form. Over the next ten years, the idea of being sure of the major points was accepted to the point where 75% of students knew substantially all the major points. Unfortunately, this meant that the examiners started having difficulty distinguishing students who should get a 4, a 5, a 6 or a 7. After one preparation session, the students and I sat around discussing the phenomenon and I realised that the major points were all that students were learning. The session also pointed out that students were misreading questions and did not know related ideas because they were working with over summarized notes. (To the point that some people s manuals were covered with more handwriting than printed material) Discussions with some examiners confirmed that these were problems they were encountering. It is unfortunate that the Society no longer publishes a perfect answer. They would enable you to see what the examiner was looking for and study better the next time. While the exams do represent a barrier to practicing, too often students lose track of the fact that the committee is an EDUCATION and Examination Committee. I have seen too many cases where a person learned only the minimum and did a poor job as a result. It hurts careers. In setting up this manual, I have tried to provide a set of notes that does give the detailed points as well as the major ones. Outline form has been used as it is what you should be using on the examination - sentences take too long. Each note has been summarized independently so you can see what related facts should be considered. Crossing duplicate areas out as you study is worthwhile but you will still see what goes with what as you prepare. I have included a long answer question with almost all papers. Some are numerical. Most are short 1 to 3 mark pieces of what may be a 15 mark examination question. The real benefit is in comparing what you can put down after studying the material with the model answer. Good Luck.

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9 INDEX Disability Income Insurance Chapter 16 A 3 Disability Income Insurance Chapter 18 A 7 Disability Income Insurance Chapter 19 A 11 Financial Enterprise Risk Management Chapter 1 B 3 Financial Enterprise Risk Management Chapter 7 B 41 Financial Enterprise Risk Management Chapter 8 B 49 Financial Enterprise Risk Management Chapter 18 B 89 Group Insurance Chapter 39 B 79 Group Insurance Chapter 42 B 15 Health Care Risk Adjustment Chapter 2 D 3 Health Care Risk Adjustment Chapter 4 D 7 Health Care Risk Adjustment Chapter 5 D 11 Health Care Risk Adjustment Chapter 6 D 19 Health Care Risk Adjustment Chapter 7 D 25 Health Care Risk Adjustment Chapter 14 D 35 Health Care Risk Adjustment Chapter 15 D 43 Individual Health Insurance Chapter 8 A 17 Individual Health Insurance Chapter 11 A 23 Embedded Value Calculation for a Life Insurance Company C 39 Health Section News August 2005 B 87 Health Section News August 2000 B 95 Health Watch January 2006 B 29 Health Watch May 2014 B 109 Long Term Care News September 2008 A 43 Milliman 2012 A 53 Risk Management August 2012 B 99 The Actuary October/November 2013 A 51 GHS A 25 GHS A 39 GHS A 33 GHS B 53 GHS B 73

10 GHS C 23 GHS C 3 GHS C 21 GHS C 29 GHS C 31 GHS B 7 GHS B 101 GHS B- 113 GHS D 49 ASOP #7 A 63 ASOP #12 D 51 ASOP #18 A 45 ASOP #19 C 47 ASOP #22 A 59 ASOP #46 B 33

11 Long Duration Health Contracts

12 INDEX Section A Disability Income Insurance Chapter 16 A 3 Disability Income Insurance Chapter 18 A 7 Disability Income Insurance Chapter 19 A 11 Individual Health Insurance Chapter 8 A 17 Individual Health Insurance Chapter 11 A 23 GHS A 25 GHS A 33 GHS A 39 Long Term Care News September 2008 A 43 ASOP #18 A 45 The Actuary October/November 2013 A 51 Milliman 2012 A 53 ASOP #22 A 59 ASOP #7 A 63

13 Disability Income Insurance Chapter 16 A - 3 Soule Disability Income Insurance Chapter 16 Actuarial 1 I. Available Morbidity Data A Commissioner s Disability Table (CDT) was developed on 1950 data and is dated for 1. average length of benefit period 2. average elimination period 3. amount all of which have increased B Commissioner s Individual Disability Tables (CIDA and CIDB) replaced the 64 CDT 2 1. based on data from the 1970 s 2. monitor to ensure appropriateness 3. need reliable tables based on sex, occupation class, benefit period, elimination period, and amount C. Social Security Administration data 1. social characteristics make it unreliable for insurance purposes 2. large volume D. Society studies 1. few and perhaps over used 2. one study found a correlation between replacement ratios over 50% and morbidity 3. individual companies have found that morbidity increases by amount a. effect of rapidly increasing amounts has made interpretation difficult II. Variable Factors A. motivation and stability have an effect on the work ethic but are subjective and vary with 1. age 2. income 3. occupation class 4. gender 5. marital status 6. physical health B. these factors are changing C. the major recession in the 1970s caused 1. longer elimination periods 2. large rate increases for lower occupation classes which were related to changes in work ethic and over insurance due to Social Security increases D. own occupation and presumptive disability came into being 1. as no data was available, actuaries used best judgment and common sense E. for professional risks (particularly physicians and dentists) changes in income, group practice and malpractice risks increased morbidity 1 This text was on the syllabus many years ago but has not been on recently. It is badly dated in some ways but has excellent ideas. 2 New tables are just about ready for proclamation in November 2013 Group/Health Specialty

14 A - 4 Disability Income Insurance Chapter 16 III. Pricing Challenges A. fine tuning and quick reaction to social and economic change are needed B. business cyclical C. long term social trends affect results D. need experienced personnel who can resist over-reaction to economy E. industry tends to over react to good and bad times by changing contract language, underwriting and rates due to a. lack of data b. inexperienced personnel assigned when experienced ones are needed as product line is small c. immature product F. an example of problems was recovery benefits 1. little data 2. what data there is is for periods of 6 months or less 3. new benefits have long recovery periods which coordinate with residual or partial disability benefits 4. benefit depends on the reduction in the insured s earnings 5. results will be known in 10 to 20 years IV. Disability Reserves A. The active life reserve is based on a level premium for increasing morbidity 1. usually no cash values 2. varies by a. age b. occupation class c. elimination period d. amount e. benefit period 3. projecting interest rates presents a problem B. The disabled life reserve 1. based on the 1985 Commissioners individual Disability Table a. can vary based on demonstrated experience b. increases in amount and benefit period have increased the reserve considerably c. total disabled reserves are subject to large swings as individual claims often exceed $1,000,000. Reinsurance can be used to lessen the swings V. Experience Studies A. in the past loss ratios were used but these do not give results by all the variables B. actual to expected studies becoming more common C. industry data 2 decades old 3 D. changes in contract definitions and benefits means judgment is necessary E. female morbidity exceeds male till the mid-50s and then drops below male morbidity. New York conducted a study on the differences and enacted regulations covering permissible differentials F. author believes at least five years of experience are needed to evaluate the profitability of a contract 3 This assertion was still true in 2013 but applied to different tables. Group/Health Specialty

15 Disability Income Insurance Chapter 16 A - 5 VI. Pricing Factors A. persistency is important. Poor persistency associated with 1. lower occupation classes 2. lower incomes 3. younger ages 4. small premiums 5. quarterly premiums 6. shorter benefit periods 7. shorter elimination periods B. expense rates depend on the allocation of expenses especially overhead C. taxes D. interest rate assumptions E. premium size 4 (which varies by occupation, age, benefit, etc) VII. Company Philosophy A. quality and experience of the underwriters B. competiveness of the marketplace C. claims philosophy D. liberality of the interpretation of contract language E. quality and experience of the sales people, particularly in field se3lection F. is there periodic and consistent evaluation of results G. hope is that in the aggregate assumptions will prove adequate H. the contingency margin should vary with the risk 4 Normally this is handled by a policy fee or a band method of calculating the individual premium Group/Health Specialty

16 A - 6 Disability Income Insurance Chapter 16 Group/Health Specialty

17 Disability Income Insurance Chapter 18 A - 7 Soule Disability Income Insurance Chapter 18 Product Development Process 5 I. Basics A. the marketplace is very product sensitive B. the product cycle is expected to shorten and competition increase C. products are related to a person s income and occupation and so must respond to changes in society, particularly the work ethic, new occupations, medical advances, changes in lifespan, new avocations, and even space travel II. Factors Affecting Product Changes A. Responding to the competition 1. quick response needed particularly in the professional and independent business markets 2. salespeople apply pressure because of the high premium and because it is only a part of coverages provided B. Consumer demands 1. changes due to greater consumer interest include a. increased amounts b. longer benefit periods c. definition of disability liberalized d. added guaranteed insurability options e. added cost of living benefits f. added inflation indexing g. added products to cover specific business needs and risks 2. biggest changes in the business and professional classes 3. future challenges include advances in consumer travel, longer working life spans and continued inflation C. Claims experience 1. claim trends and experience take 10 years to clearly emerge 2. to compensate for the original pricing errors product language and rates must be changed 3. underwriting procedures must be refined a. investigation b. treatment of impaired risks c. identification of groups causing problems D. Governmental influence 1. expansion of Social Security, state cash sickness plans and Workers Compensation meant that integration was necessary a. a particular problem for non-cancellable contracts 6 2. states expanded regulations for minimum standards and discrimination necessitating changes in contract language and underwriting a. compliance was costly b. many companies moved to unisex premiums 5 This text was on the syllabus many years ago but has not been on recently. It is badly dated. 6 Inflation offset mush of the problem over 5 to 10 year periods Group/Health Specialty

18 A - 8 Disability Income Insurance Chapter courts liberally interpreted contract language and awarded punitive damages (particularly in California). This affected product design, underwriting, pricing, and claim handling 4. tax changes can affect both insurers and insureds III. Innovation Versus Reaction A. Developing the ideal product 1. could be defined as one that provides 100% income replacement on disability regardless of changes in income 2. continual innovation and creativity is needed to move towards the ideal product B. Risks of product development 1. companies with large blocks are best able to innovate 2. careful analysis of the risks is needed 3. new products first tested in stable and dependable markets C. Listening to the consumer 1. there is a need to use market research to learn the needs and wants of the consumer and to design products to meet these desires (while safeguarding the insurers interests) 2. volatility and numerous unknowns make disability income a particularly challenging market 3. must constantly look for new markets and changes in existing ones D. Responding to economic change 1. hard to make timely changes in underwriting and rates and avoid a cycle of gains and losses. 2. companies also tend to overreact and exaggerate the cycle IV. Determining the Markets A. for a new entrant to the market, the first step is to analyze and determine where its markets are 1. often the pressure for product and underwriting change comes from a vocal minority of the sales force 2. often agents serving the professional and business markets are the most demanding. Their markets are also the most competitive. But their share of sales may be small, suggesting concentration on the remainder of the market may be a better choice. B. to find the potential disability markets for a new entrant consider the firm s life insurance markets as this is where the agents will sell. Look at 1. average size 2. average income 3. occupations 4. average age 5. competitors offerings 6. company s marketing strengths C. know your market and your competition V. Who Participates in the Process? A. Sales and marketing personnel 1. close to consumer and competition 2. tends to be reactive rather than innovative Group/Health Specialty

19 Disability Income Insurance Chapter 18 A - 9 B. Other home office disciplines 1. involve once the product has been generally defined and accepted as desirable 2. actuaries are involved in the pricing and determines needed safeguards 3. underwriter involved to determine if new underwriting approaches needed, how to handle the product s additional risks and needed safeguards 4. claim department involved to determine new risks involved 5. all must be involved to produce a saleable, profitable product C. Data processing and systems personnel 1. must involve early as extensive program changes may be needed 7 2. the costs of needed changes may not be justified 3. the time needed to modify the systems can delay release of the product 4. the systems department can sometimes suggest small product changes that cut costs immensely 5. early involvement also helps data processing in its scheduling D. Law department 8 1. early involvement helps in drafting the language 2. special regulatory problems can be identified early E. Investment department 9 1. needed to ensure proper investments held VI. Training, Education and Promotion A. Basics 1. agent training and education and promotion are needed 2. often the complexity of the product is poorly understood by management B. Training the field force 1. sales force must know its products and those of the competition 2. competition often centers on contract language so technical knowledge is required for the definition of disability, definition of accident and sickness and reoccurrence clauses C. Sales support 1. insurer must train the agents, provide sales support and promote the product a. need sales brochures and ideas b. material must stress the product s strengths c. proposal capability must be designed for each sub-market 2. where the disability line is small, agents are not fully trained so support for individual sales is critical 7 I saw one case where the policy fee was changed without consulting systems. It was three months before the policies could be entered into the system, meaning they were valued manually that year end 8 I am amazed to see comments like this. usually either the actuary writes the contract or the lawyer does and the actuary rewrites it. I still remember the 20 pay group life policy one lawyer wrote which had benefits paid on death but premiums paid for 20 years whether or not the person lived 9 Asset liability matching, today, requires such involvement. Group/Health Specialty

20 A - 10 Disability Income Insurance Chapter 18 VII. Motivation for Product Development A. a serious mistake is to provide the product to accommodate the field force commitment is usually lacking and shows in inadequate training support and promotion Group/Health Specialty