EXAMINATION. 5 April 2005 (am) Subject SA1 Health and Care Specialist Applications. Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE

Transcription

1 Faculty of Actuaries Institute of Actuaries EXAMINATION 5 April 2005 (am) Subject SA1 Health and Care Specialist Applications Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE 1. Enter all the candidate and examination details as requested on the front of your answer booklet. 2. You have 15 minutes at the start of the examination in which to read the questions. You are strongly encouraged to use this time for reading only, but notes may be made. You then have three hours to complete the paper. 3. You must not start writing your answers in the booklet until instructed to do so by the supervisor. 4. Mark allocations are shown in brackets. 5. Attempt both questions, beginning your answer to each question on a separate sheet. 6. Candidates should show calculations where this is appropriate. AT THE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper. In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator. SA1 A2005 Faculty of Actuaries Institute of Actuaries

2 1 You are an actuary of a UK critical illness and income protection insurance company. Your company is considering launching a health and care insurance company in another country and you have been asked to provide advice to your managing director on this proposal. (i) Outline the approach that you would take in assessing the market for the launch of a health and care company. [15] The managing director has asked you to specifically focus on UK-style individual critical illness and UK-style individual income protection contracts. (ii) (iii) Describe the methodology that you would adopt in determining the assumptions required to price these contracts. [19] Assuming that the economic and demographic conditions in the other country were similar to those current in the UK, suggest values for these assumptions. [6] Your managing director has been approached by a UK company providing income protection and critical illness products, who would be interested in discussing a takeover of them by your company. (iv) (v) Discuss the factors which should be taken into consideration in assessing such a company for takeover. [11] Indicate how your answer to (iv) might differ if the local provider also offered private medical insurance. [3] [Total 54] 2 For a number of years a UK life insurance company has written three types of long term care contract: A regular premium individual contract where premiums are guaranteed for 10 years. A single premium individual contract where the insurer reserves the right to change the sum assured after 10 years. A group contract written as a renewable one year contract. Contract terms and premiums may be revised at each annual renewal. Overall volumes of business have been disappointing and some concerns have been expressed about the profitability of this business. You are aware that the market leader is currently in the process of significantly increasing premium rates both for new and existing business. SA1 A2005 2

3 You have been asked to look at the company s involvement within the long term care market and to produce a report for the senior management team. A drafting style is not required. (i) Describe the areas which should be covered in the report. [12] (ii) (iii) (iv) (v) Describe the data needed to carry out an analysis of sales expenses, persistency, claim inceptions and claim terminations, and comment on any difficulties that might be experienced in extracting data or interpreting the results of the analysis. [18] Describe how the analyses carried out for part (ii) could be used in the financial management of the company. [3] Discuss the possible implications for the company of withdrawing from the long term care market. [4] Assuming that your investigations indicate that the business is unprofitable suggest, with reasons, what actions you would recommend. [9] [Total 46] END OF PAPER SA1 A2005 3

4 Faculty of Actuaries Institute of Actuaries EXAMINATION April 2005 Subject SA1 Health and Care Specialist Applications EXAMINERS REPORT Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. M Flaherty Chairman of the Board of Examiners 28 June 2005 Faculty of Actuaries Institute of Actuaries

5 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report 1 (i) The following areas would be amongst those considered in assessing the market for the launch of a health and care company in another country: Does critical illness and income protection insurance already exist in the country? Consumer demand will customers buy in sufficient quantity to make viable? will products fit a need? are customers aware of this need? are products affordable? could carry out a survey of consumers impact of personal taxation Consumer confidence in the company/brand in the product Level of competition fit with existing products will the products be revolutionary or similar to any already existing? is there a gap in the market for this product? have there been any previous invaders from outside and, if so, have they been successful? Profitability of players if they re not making money, why should you? Availability of data are suitable data to price the contract available? are data relevant to product and target market? Availability of capital for a new product expense overruns new business strains solvency requirements Availability of capital for a new company contingency plans Potential distribution channels will you be able to sell the product? how easy is the product to sell? what research needed substitution of existing products Page 2

6 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report different potential channels sales force employed by insurer, employed by 3rd party, independent advice, direct Regulatory issues can business be authorised/written in country? solvency margin requirements reserving requirements financial reporting EU v Non-EU any restrictions on product design or investments? any regulation of distributors/sales processes? General legal issues contract law, employment law ability to repatriate profits Availability of key staff and systems administrative and claims systems key staff availability of service partners (eg disability counsellors) possibilities for outsourcing Reinsurance willingness of reinsurers to support business; availability and cost State provision what employee benefits are available? what is currently provided by the State? medical provision system of hospitals and doctors (referrals, reports) how does this product fit with this? Demographics and earnings levels demographic projections earnings levels and projected growth influence on choice of products and distribution methods Culture impact on the product claims experience Others approach, modelling and profit testing levels of corporate taxation currency considerations/volatility comparability with alternatives of company purchase, badging Page 3

7 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report (ii) Morbidity Perform an analysis of own company experience over a suitable recent period 3-5 years may be suitable depending on volume of data credible but homogeneous Split analysis into major different risk groups e.g. male/female, smoker/non-smoker Adjust data for other possible influences which will affect its immediate usage e.g. past changes in underwriting standards or claims management. Compare own data with that from other sources over the same time period, in both the home market and in the overseas territory: Industry data e.g. from insurers associations Data from reinsurers Published tables based on insurance experience Population figures and government health statistics Assess the level of adjustment needed to the local data (which may be more plentiful) to make it relevant to the prospective overseas market. Ratios may be appropriate initially but margins will be needed. Assess the adjustment needed to relate any published data, which may not be underwritten, to the particular circumstances of the company, its products and target market. Analyse trends in experience by age, sex,` by smoker status. For CI, if data permits, analyse risk premiums and trends by specific diseases. For IP, analyse claim inception and claim termination rates. If data permits, investigate by occupational classes and deferred period. Investigate the availability and cost of reinsurance arrangements of various sorts e.g. risk premium, original terms. In a new territory, company may wish to reinsure a significant proportion. May base premium terms on reinsurance rates, subject to the above analyses. Need to investigate potential impact of AIDS/HIV Further adjustment needed to align different target market in the overseas territory with that underpinning the base data. Adjustment may also be needed for differences in potential size of policy. Need to include reserving basis among pricing assumptions, affecting cash flows. Will probably use adjustments to a standard table, with the adjustments derived from the above analysis. Need to allow for deterioration also. Mortality Carry out similar analysis to the above. Data needs to be interpreted with care For IP, need to split pre-claim and in-claim mortality Page 4

8 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report For CI, need to split pre-claim and post-claim (survival period) mortality. Other deaths from critical illnesses covered will be irrelevant, because a claim has already been paid. Need to avoid double counting in cases of accelerated CI. Investment Assess the level of potential investment return on the assets backing this portfolio, dependent on where the assets are held. Allow for currency differences. Include net of direct investment expenses. Expenses Start with company s most recent in-house expense analysis. Allow for trends if this is an annual exercise Allow separately for acquisition (sales, marketing and underwriting), servicing and claims costs Allow separately for IP and CI Include both head office and overseas territory costs Claims costs will be split between initial claim validation (CI and IP) and ongoing claim maintenance (IP). Split policy costs into those that are premium related and those that are per policy. Need to understand the extent to which specific one-off costs (e.g. establishment overheads) and expected additional costs (e.g. regulation) are to be costed against individual policies. Degree of detail will depend on size of company and volume of expense information Reinsurers will be able help with certain expense information e.g. cost of obtaining medical evidence and its likely impact on premium rating. Need to analyse and project the impact of inflation in the two countries. Inflation may need to be split between manpower costs, future equipment costs and others. Projected inflation may possibly be measured as difference between government fixed-interest and index-linked securities. Adopt consistency of assumptions between investment returns and expense inflation Commission Investigate levels of sales reward to be paid to the distributors in the new territory. Load directly into premium basis. May need some adjustment if there are volumerelated overrides thus dependent on new business forecasts Lapses Analyse home experience for CI and IP products Page 5

9 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report Limit scope of analysis to experience produced by the distribution channel which will sell the healthcare products abroad. Else (or as well as) obtain industry data if available for these healthcare products and this form of distribution Adjust data if target market is different from those underlying the above researches Further adjustment may be needed if past period of data collection was influenced by unusual economic circumstances, or any other abnormal historical situation Tax Make suitable assumptions as to the insurer s current and future tax position Make allowance for any tax liability in overseas territory, including premium/sales tax Profit Include company profit criteria, commensurate with underlying risk of venture risk discount rate, PVFP, pay back period Sensitivity analysis Test the sensitivity of the final premiums to adjustments in the individual assumptions and refine inputs accordingly Competitors' rates Research competitors office premium rates to assess levels of new products then adjust assumptions if deemed appropriate. Assumptions and strategy The values of the assumptions and the premiums that they produce will reflect the company s strategy in launching into the new market: An aggressive growth strategy may require assumptions stripped of margins. A slow portfolio build strategy may permit more caution in the assumptions (iii) Assumptions these may depend on mix of business and product size Mortality/Morbidity reinsurers rate with a loading of 0 to 10% Morbidity deterioration Investment returns 5% Expenses: Initial 125 Renewal 20 Critical illness claims 250 Income Protection claims 1,500 Commission 150% Lautro Expense inflation 3% say Withdrawals Year 1 15%, 2 10%, year 3 on 5% but very dependant on distribution channel Tax dependant on office s tax position Profit 10% return on capital Page 6

10 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report HIV/AIDS test (iv) In assessing the company for takeover, the following are amongst the areas which should be considered: Seller why is the seller selling the business? are the other companies interested in acquiring the company? Data available and quality need more data for a health product level of detail available quality of staff Models, discounted cashflows use embedded value calculations to assess the value concerns that considerable sensitivity in results timing will be an issue Market precedents to understand the dynamics of the market Regulatory issues check with regulators what information and procedures they might require Adequacy of reserves if not adequate, what is required? certain liabilities may need to be ring-fenced. check existence of any options and guarantees Demutualisation may be an issue, which will take time Are there any synergies available? caution is required in assessing these If either company is quoted Other market timing is an issue shareholder approval may also be required Ability to service claims and administer the business Non-insurance liabilities (eg pension benefits) Monopoly considerations Tax implications of takeover Page 7

11 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report Price sought Brand name Competitive position of your company and takeover company (v) Private medical insurer May not have expertise in this business Absolute and relative size of PMI book Any synergies with UK business on PMI will be limited PMI is shorter term business Need to look into data and models for this Will probably need to get external help Potentially could sell off this element separately 2 (i) Areas that may be covered in the report include: Recap of history of long term care involvement. What was the rationale for entering the LTC market? Current and future State provision/incentives/means-testing Demographic trends Does current product design fit market needs? Projected volumes of business. Expected level of profitability Full description of the products History of product changes Current and future reinsurance availability What were the original pricing assumptions? Expected claim basis split by both inception and claim termination (recovery, death and policy expiry (if appropriate)) Lapses Expenses split by acquisition (distribution and underwriting), maintenance and cost of managing claims Expected investment return and tax assumption Assumed business mix (age, sex, size of policy, premium, any optional benefits) Basis for setting reserves and solvency capital Need to look at the actual experience since launch Page 8

12 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report Compare actual experience against the assumptions used in pricing Look at reported profits and the current embedded value of the business How sensitive are the projected profits to various future scenarios? What is the current supervisory valuation basis of the company and how does this compare with realistic reserves? What are the current expectations for market growth or changes in experience are there any social, medical or regulatory changes which are expected to impact on the market? What is the current competitive position and how are other players acting within the market? What options are available given the current product range to make changes to improve profitability? revision of premium rates changes in product design for new business changes in underwriting for new business changes in claims admittance process Other options: Abandon business and sell off Abandon business and manage run-off Purchase better positioned insurer Focus on niche (ii) The basic requirement is that there is a reasonable volume of stable, consistent data from which future experience and trends can be deduced. The data ideally needs to be divided into sufficiently homogeneous risk groups according to the relevant risk factors. However this ideal has to be balanced against the danger of creating data cells that have too little data in them to be credible. Sales expenses Note that the question only asks about sales expenses For expenses ideally want to split costs between direct expenses and overheads. In practice there is not a clear dividing line between these two categories Information may be obtained form timesheet/functional analysis, activity based costing Need to know the level of commission Non-commission expenses need to be split between initial expenses which arise at the start of the policy renewal expenses Expenses should be split according to whether the expense is proportional to: Page 9

13 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report the number of contracts written the benefit written the premium written Persistency, claims inceptions and claim terminations Lapses may be understated because of any non forfeiture provisions Lapses on single premium business unlikely if no surrender value To analyse inception, termination and lapse experience will require sufficient exposure data to enable expected decrements to be calculated. Similar information will be required for actual claims and lapses Type of contract including benefit conditions Date of birth (age) Sex Smoker status Policy commencement date (or duration from entry) Policy status inforce, lapse, claim, recovery, death Date of status change Rated information (at least sufficient to split policies in to standard and sub standard risks) Source of business/sales method Definition of disability satisfied Level of original benefit Level of current benefit Basis used to calculate current benefit Marital status at policy issue Possible difficulties in extracting data or interpreting results of analysis It is assumed that data from the period being examined is sufficiently homogenous as to enable the results to be considered as a whole Any errors in the recording of data are not so great as to invalidate any analysis It is possible that for the group contract pricing may have been based on a unit rate and individual exposure details may not be available Claim information may be incomplete because of delays in claim reporting and delays in claims acceptance and settlement There may be delays in the reporting of claim terminations On the single premium policies deaths occurring prior to any claim may not be reported and so this could lead to an overestimate of the exposed to risk The number of claims and lapses may be insufficient to give credible results particularly if the analysis considers a large number of rating factors. For claims in payment there is likely to be considerable uncertainty about the expected future duration of the claim. Page 10

14 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report It may be necessary to consider future improvements in mortality or trends in morbidity assumptions. (iii) An analysis of experience is a key part of the control cycle of the company. The analysis would enable: Refinement of assumptions used in the product pricing bases Profit testing of existing premium rates against revised assumptions to determine current profitability Analysis of any surplus/loss arising between valuations in order to identify areas of experience with poor trends Projection of profits arising in the future under different scenarios Review of the assumptions used in the supervisory valuation basis Setting of the assumptions for and calculation of the embedded value of the business Review of sales processes and commission levels Review of underwriting process Identification of target markets for concentrated efforts Assessment of capital requirements (iv) Possible implications of withdrawing from the market include: Effect on market perception. May create considerable negative customer sentiment Brand damage, particularly if viewed very negatively by media Can lead to increased lapses (which may be antiselective) from disgruntled customers Cannot cancel cover for existing contracts Can close product to new business but must consider existing business already in the pipeline May cause concern with distributors who have been trained to sell contract or who have clients to whom contract is targeted Group contract is yearly renewable and so this may cause greater distress Product is being dropped because of profitability so any replacement contract is likely to offer poorer value for money Could lose key staff Considerable expense saving and possibly insurance loss/saving also Frees up capital to be used elsewhere Impact on share price (up or down) (v) The recommended action will depend on the reason for the lack of profitability If future business volumes are expected to be insufficient a decision to withdraw from the market may be the most appropriate action Page 11

15 Subject SA1 (Health and Care Specialist Applications) April 2005-Examiners Report Assuming this is not the case alternative approaches include: Closure to new business of one or more of the existing product lines and relaunching revised contracts Change the policy wording/conditions for new business cases or introduce brand new contract. For the group contract this approach could be applied to existing business as terms are reviewable Increase premium rates for the regular premium and group contract and reduce the benefit level for the single premium contract Change the remuneration structure as a means of cutting costs or more directly to increase business Pay increased commission for business which adds most to profitability If persistency is an issue, enhancing benefits or reducing premiums may be appropriate Change mix of business between O/R, rated and declined Improve the questions asked at underwriting or reduce medical limits Introduce a computerised process for acceptance for all but the most complex applications. This may improve consistency in underwriting decisions and may reduce costs Change claims information and procedures eg increase training, more accurate and appropriate information obtained at time of claim, involve all parties (underwriters and policy developers) in claims process, check quality of information obtained Change investment policy and/or managers Change IT structure Change office personnel and competence balance Consider whether a change to the reinsurance structure can improve profitability by either risk sharing or improved capital management Reduce periods of guarantee on non-group products Concentrate on products over which the company has most control (eg yearly renewable products) Page 12

16 Faculty of Actuaries Institute of Actuaries EXAMINATION 6 September 2005 (am) Subject SA1 Health and Care Specialist Applications Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE 1. Enter all the candidate and examination details as requested on the front of your answer booklet. 2. You have 15 minutes at the start of the examination in which to read the questions. You are strongly encouraged to use this time for reading only, but notes may be made. You then have three hours to complete the paper. 3. You must not start writing your answers in the booklet until instructed to do so by the supervisor. 4. Mark allocations are shown in brackets. 5. Attempt both questions, beginning your answer to each question on a separate sheet. 6. Candidates should show calculations where this is appropriate. AT THE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper. In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator. SA1 S2005 Faculty of Actuaries Institute of Actuaries

17 1 A leading bank has a long-term insurance subsidiary which offers investment and life assurance products to its customers. The bank does not offer any other insurers products. The subsidiary does not currently offer any income protection or critical illness products. The bank is considering its options for expanding the product range to its customers. (i) (ii) (iii) (iv) (v) (vi) (vii) Describe how income protection and critical illness products could be used to meet the needs of the bank s customers. [8] The subsidiary is considering seeking reinsurance for these products. Discuss, with reasons, the reinsurance arrangements that are most likely to meet the subsidiary s requirements and any other practical assistance that the reinsurer could offer the subsidiary in managing these lines of business. [7] An alternative approach has been proposed where the subsidiary provides the policy to the bank s customers but a specialist health and care insurer issues the policy and undertakes all policy processing and claims administration, payments and administration. Discuss the advantages and disadvantages of this approach to the subsidiary. [5] The bank has asked for information regarding how these contracts would generally be priced. Describe the investigations usually used for pricing own product business, highlighting the differences in approach between critical illness and income protection. [22] If the subsidiary also offers with profits contracts, describe the potential impact on its profits distribution of also offering income protection or critical illness products. [6] A health services provider has recommended that the subsidiary implements a claims management process for its income protection business where health professionals are used after a claim is notified to the subsidiary to treat the claimants and help them back to work. Discuss the advantages and disadvantages of this approach to the subsidiary. [6] A director of the bank has raised concerns over income protection business. He is aware of other companies having had very poor claims experience on this line of business. Discuss the possible reasons that could have given rise to this poor experience. [6] [Total 60] SA1 S2005 2

18 2 A UK Health Insurer currently sells in the UK both individual and corporate private medical insurance through a range of intermediaries and direct to customers. Over the last three years there has been a significant reduction in the volume of new individual PMI business sold through intermediaries. (i) Discuss the possible reasons for this reduction in new business sales. [10] (ii) (iii) (iv) (v) Describe how you would monitor individual PMI claims experience. List the additional claims factors to be considered if this claims analysis were to be part of a pricing calculation. [5] It has been suggested that, to halt the decline of sales in this sector, a new, PMI style plan, offering coverage for acupuncture is developed. You have been asked to price this product but only have limited data. Outline how you would reduce the risk associated with this lack of data. [5] An alternative suggestion is that the definitions of benefit covered will be tightened to reduce the level of claims outgo. This saving will then be passed onto the customer by way of a reduced new business premium. In addition, it is suggested that this approach is extended to existing customers to minimise increases in premium at renewal. Your existing PMI policy has a guaranteed renewability clause. Outline for new and existing business the considerations associated with this proposal. [11] Describe how the introduction of genetic testing may impact in the future on your portfolio and the proposals suggested in parts (iii) and (iv) above. [9] [Total 40] END OF PAPER SA1 S2005 3

19 Faculty of Actuaries Institute of Actuaries EXAMINATION September 2005 Subject SA1 Health and Care Specialist Applications EXAMINERS REPORT Faculty of Actuaries Institute of Actuaries

20 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report 1 (i) Bank customers include mortgage customers, individuals deposit holders, small businesses. IP and CI products could meet following needs: To meet specific needs Repay loans CI lump sum IP meet repayments Replace income - IP Key person cover Compensation for loss of profits To pay for a replacement To provide cash CI lump sum More than cost of immediate concern CI provides cash to repay loans whilst p/holder is still alive For a change in lifestyle IP income stream Proportional benefit if part time work To allay fears Provide financial comfort Help prevent financial hardship for dependents Pay for domestic help To pay for medical fees Other Home modification Recuperation benefits For employers, as an employee benefit, to attract staff For employers, limit own payouts on ill-health Partnership dissolution on CI (ii) Reinsurance arrangements Insurer looking to limit its exposure to adverse fluctuations in experience Shareholders require stable results Probably use quota share on original terms Written under treaty on an obligatory basis An experience refund to manage the claims experience better Portfolio stop loss/catastrophe reinsurance Other practical assistance Assistance with product design and marketing strategy Assistance with setting the premium rates - lack of previous experience - set using risk rates loaded up to allow for insurer's cost of capital, expenses and profit. Staff training Systems and policy documentation Page 2

21 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Medical underwriting Claims Market information Financing Access to market research Low retention initially, then build up Possible tax advantages (iii) Badging Advantages Benefit from professionals expertise in all areas Particularly relevant for IP claims Medical underwriting expertise No current experience so can benefit from all of this Historically poor income protection experience Potentially cheaper for them to do than the insurer Can concentrate on distribution Can be a speedier installation than own product or subsidiary Additional profit sharing Cross-selling of life products, may be bank products to H&C insurer Disadvantages Lack of synergies with internal operating procedures Linking to the 3rd party systems etc Loss of control over policy process and claims administration with possible resulting reputational risk May be less profitable in long run Loss of economies of scale Skill needed in drafting service level agreements, other contract issues No involvement means no expertise derived - difficult to reclaim longer term Loss of link between sales staff and u/w Actuarial control cycle more difficult to apply Counterparty risk (iv) Investigations for pricing own product business include: Morbidity / Mortality Analysis of the company's experience over a 3-5 year period Long enough to have reliable data and short enough to be homogeneous Stand-alone, acc Make allowance for any changes in underwriting standards In addition, and particularly if the company has insufficient data Industry data (such as CMI reports in the UK) Data from reinsurer Published tables Page 3

22 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Published data will probably need adjustment for the particular circumstances of the company and its products. Need to consider trends in experience especially for morbidity For critical illness, would reconsider illnesses and conditions covered. If sufficient data may analyse by specific disease. For income protection, consider claims inceptions and claim terminations experience Look at partial recoveries Claims data would be subdivided as follows : Age at inception Sex Smoker status If sufficient data, may analyse by: Current age (or elapsed duration of policy) Duration of claim Policy term Deferred period Occupational group Ratio of benefit to income Type of sickness and injury Date of termination of claim Reason for termination of claim Sales channel Geographic location Because of doubts over morbidity rates the company is likely to reassure a larger proportion of this business. Rates included in reassurance terms would probably be followed. AIDS projections are available, but only as industry-wide data. Data needs to be interpreted with care. Deaths from critical illnesses covered will be irrelevant, because a claim will already have been paid. Other deaths release reserves as no benefit is paid. This is a different situation from the type of policy the data were collected from. Assess credibility of data in each cell and group accordingly Exposure and claims data must be collected and subdivided consistently. Comparison of the proposed target market and that in the data is important Almost certainly likely to use the experience to generate an adjustment to a standard table. Page 4

23 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Investment returns This should reflect the expected return on the underlying investments Expenses The company should have an analysis of expenses over recent years. A series of analysis helps to identify trends to use in assessing future rates. Expenses should be split into acquisition, maintenance and claims, and between contract types. For income protection, the expenses may also be split between claims inception and claims maintenance. The level of detail will depend on the size of the company. Need to allow for any specific one-off costs and any expected additional costs (e.g. regulations). Expenses might also be analysed into those which are contract size related and those that are policy related. If the company's expense investigation does not provide credible data down to the particular contract type, broader averages may have to be adjusted. Probably with input from reassurers. Inflation needs to be allowed for from the date of investigation up to the date the rates will be used and allowance made for any expected trends in future inflation assumptions. Launch expenses Commission The rates and structure that the company intends to pay can be loaded directly into the basis. Expense inflation National data on inflation of prices and earnings. Expected future rates of inflation - possibly measured by the difference in returns on government fixed interest and index-linked securities. The expense inflation rate will be chosen to be consistent with the investment return assumption. Withdrawals The company should have an analysis of experience available relating either to this contract or to broadly similar contracts. Limited industry aggregate data may be available but will have to be adjusted to meet the particular contract and target market The analysis may need to be adjusted because it has been affected by unusual economic circumstances over the period the data were collected. Adjustments may also be needed if the intended target market or sales channel are different from those in the data analysed. Analyse lapses by duration, product, sum assured, age, sex Page 5

24 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Tax Suitable assumptions will need to be made taking into account the company's current and future tax position. Profit Risk discount rate / profit criteria set according to the company's requirements. Wider margin for risk as first time and inherently more risky than life and investment Market Rates Analysis would also be made with competitors products and rates. Other Mix of business Margins in rates generally (v) Actuary needs to understand how the with-profit distribution operates in the company under consideration Do any health and care products share in the distribution; if so, how? In a UK context, this is very unlikely. To what extent do the with-profit policyholders share in the profits of the health and care operation? The actuary will be particularly careful where the size of the health and care book is significant in its contribution to distributional surplus Policyholders Reasonable Expectations - Profits from a health and care operation do not emerge on a smooth basis; the actuary should be cautious in promulgating any profit expectations from the health and care area. Smoothing - The distribution of any surpluses from the health and care operation will be volatile; the actuary will determine such profit as does emerge on a smoothed cautious basis. Reversionary or terminal - Any profits arising from the health and care operation are likely to be small in relation to other component parts of the insurance business. The impact on bonus distribution will therefore be less significant and may be only a small addition to the bonus rate. It is usually perceived that terminal bonus is used to take up the slack from more volatile past contributions to surplus when allocated to a class of maturing policies. This might be the case with the none-too-regular profits from health and care insurance but their relative size would normally suggest distribution on a reversionary basis. With-profit guide Principles and practice of financial management (PPFM) Treating customers fairly (TCF) Page 6

25 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report (vi) Advantages Some claimants should return to work sooner Should improve claims terminations Claims notified during deferred period may also return to work sooner Improving claims inceptions May also discourage borderline claimants from claiming Could provide positive PR for company Disadvantages Professionals are expensive Average benefit levels may be low and so the benefits of doing this may not be worthwhile doing May be seen as trying to say no to valid claims Note these are customers of the bank Health professionals, if not employed directly, may advise people to stay off work who would otherwise have returned to work In general, only worthwhile for large claims due to the expenses (vii) Products price too high so only attracting those customers who would be rated by other companies Medical underwriting standards may be worse than competitors Financial underwriting standards may be worse than competitors Claims admissions rules more generous than average Non-identification of fraud/non-disclosure Claims management - less active than average The replacement ratio (benefit relative to income) may be higher than average less incentive to return to work. Customer segment poor Policy design encouraging anti-selection e.g. high replacement ratio Weak disability definition Pricing wrong - e.g. no occupational rating Distribution channel - anti selection high risk for IFAs Inflation higher than allowed for in the premium rates. Economic factors may have led to higher claims Threat of redundancies Directors information could be wrong Random fluctuation Over conservative reserving Concentration of risk Medical advances may prolong claim (instead of death) Change in attitude to claim Anti-selective lapses Page 7

26 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report 2 (i) May be part of a reduction in volume of all individual PMI business sold May be overall intermediary market reduction or may be a reduction in market share Reduction in volume of all individual PMI business sold Overall number of PMI purchasers has reduced (Overall market size in premium terms has increased, fuelled by premium inflation) Market premiums too high (premiums typically higher than for corporate schemes) Reduced customer need (eg NHS improvements, reduction in waiting lists) General improvement in welfare benefits Economic climate, job insecurity Possible changes in premium tax or tax on benefits Overall intermediary market reduction Alternative distribution channels may be substituting for intermediary business Increase in regulation may deter intermediaries from selling Intermediaries focused on corporate business (higher premiums and commissions) Reduction in market share New entrants into market Premiums too high relative to competitors Benefits not competitive (eg competitor product design may have moved forwards) Commission levels uncompetitive (eg competitor levels may have increased) Difficult to do business with Late payment of commission Arduous process for intermediary (eg for quotation) Poor company reputation relative to rest of market Perception of poor customer service Perception of reduction in credit rating Perception of strict claims philosophy (high profile non-payment of claims) Poor relationship between intermediaries and other parts of the company Other product types deemed to be better value (ii) Normally assess in yearly cohorts But may undertake quarterly for up to date position Check costs by provider (for heavy chargers) Check preferred providers, service level agreements Changes in practices at u/w, claims stages Changes in distribution methods Changes in terms and conditions Key indices are: Rate of claims incidence No of claims / exposed to risk Split by procedure/benefit types Compare actual v expected Page 8

27 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Split by occupation or other rating factors Check cost of 'family' claims against assumptions Average cost per claim Total incurred claims / no of separate claims Claims expenses Loss ratio Total incurred cost of claims / relevant earned premium Calculated for cohort of business under review Consider cohort by duration in light of selection effect But depends on type/extent of medical underwriting at outset Incurred claims includes: Claims paid to date Reported but not paid Incurred but not reported Additional claims factors which might be considered if claims analysis were to be used as part of a pricing calculation might include: Trends in costs of procedures, drugs and dressings Overall private hospital capacity, current and projected Competitors' rates movements where these are caused by their own claims experience (iii) Use data from other sources Professional/governmental bodies Other countries Reinsurers Own claims data is likely to be more relevant but may not be available as this is a new product Implement benefit caps to limit claims per case and hence maximum liability Benchmark premiums against any similar plans already in the market Build margins into pricing and reserving to reflect the uncertainty Avoid guarantees, both for premium and benefit Write product on a short-term basis without guaranteed renewability Reinsure appropriately to limit retained risk Ensure adequate capital is in place to meet uncertain claims outgo Collect relevant data from policies written to accumulate own experience as quickly as possible Delay product launch until better data is available Tight benefit conditions Claims preauthorisation Monitor claims experience Excesses Preferred provider acupuncturists Do not adopt the plan Introduce NCDs Offer cash benefit, not indemnity Page 9

28 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report (iv) Legality Difficulties in worsening the terms of contracts Guaranteed renewability. Customers have the right to renew. Exact legal implications will depend on the wording of the contracts Expect greater difficulty for long-term contracts Regulator's approach/views Market perception Need care that approach is not out of line with market. May be a strong competitive disadvantage Strong reputational risk Especially if in-force claims are denied which would previous have been paid Changes are likely to need to be significant to have a really material impact Projected volumes Need to consider the positive volume impact of reduced premium Against the potential negative impact of market perception, PRE Both on new business and retention All will be based on assumptions with little data to support What are competitors already doing and how will they react? Selective lapses PRE/Treating customers fairly Difficult to gauge for short-term policy Depends on policy wordings And strength of sales message at point of sale Implications if approach has changed significantly from point of sale message Administration Would need to be able to run two claims processes in parallel Before renewal approach and Post renewal approach Likely to result in practical difficulties Will add to costs of processing May be contamination of old and new approaches Problem is less acute than for long-term policies where many cohorts of business may apply IFA training Reinsurance Changes to the treatment of existing business will need to be discussed with the reinsurer (v) Currently a Moratorium on genetic testing until 2006 Not allowed to used genetic testing in determining Availability of insurance or Terms of insurance Page 10

29 Subject SA1 (Health and Care Specialist Applications) September 2005 Examiners Report Disability Discrimination Act 1995 May decline or impose special terms But must be based on information or data relevant to the assessment of the risk Anti selection Individuals may have information not available to insurers Particularly with moratorium in place More likely to insure Change claims frequency of portfolio Or may insure for more on average Increase average cost of claim Lack of affordability Premiums might be loaded for extra risk But for some disorders premiums might be unaffordable Individuals may become uninsurable More common to exclude certain conditions within PMI context Availability and cheapness of tests If tests become sufficiently cheap may enable much better targeting of premium to risk Could use in the underwriting process Depends on the costs saved in terms of claims cost against the cost of the tests Impact on pricing Anti selection likely to result in increased premiums Other For PMI, generally acute cases, so possibly little impact. However, may allow earlier diagnosis, which may mean treatment is cheaper Relatively little impact on group cover. END OF EXAMINERS REPORT Page 11

30 Faculty of Actuaries Institute of Actuaries EXAMINATION 3 April 2006 (am) Subject SA1 Health and Care Specialist Applications Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE 1. Enter all the candidate and examination details as requested on the front of your answer booklet. 2. You have 15 minutes at the start of the examination in which to read the questions. You are strongly encouraged to use this time for reading only, but notes may be made. You then have three hours to complete the paper. 3. You must not start writing your answers in the booklet until instructed to do so by the supervisor. 4. Mark allocations are shown in brackets. 5. Attempt both questions, beginning your answer to each question on a separate sheet. 6. Candidates should show calculations where this is appropriate. AT THE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper. In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator. SA1 A2006 Faculty of Actuaries Institute of Actuaries

31 1 A UK company (Positive Pickles PP) has recently completed a takeover of another company manufacturing similar but not identical products (Fantastic Spices FS). The combined company will trade as Positive Fantastic Pickles (PFP). There are currently two separate health benefit arrangements for employees. Both schemes are non-contributory and insured. The details are as follows: Positive Pickles scheme Fantastic Spices scheme Members 1,500 2,500 PMI scheme Members and dependants Full coverage for acute conditions No excess No scheme Hospital cash scheme No scheme Typical scheme in UK market 50% excess with low benefit limits Critical illness benefits No scheme 2 times scheme salary Income protection Scheme salary 50% of scheme salary 26 week deferred period Expiry age 65 th birthday No increases to benefits in payment Total taxable earnings in previous tax year No scheme Basic salary at 1 January Long term care benefits No scheme Care home fees paid for member, spouse, parents and children The combined company has decided to merge its health benefit arrangements for employees. It is proposed that all members of the Fantastic Spices scheme will be transferred to the Positive Pickles scheme and receive the Positive Pickles scheme benefits. (i) (ii) Discuss the advantages and disadvantages to the employer of merging the employee health benefit schemes. [6] Discuss the advantages and disadvantages to a member in the Fantastic Spices scheme of merging the employee health benefit schemes. [3] It has been agreed that the insurers of the current PMI, Hospital cash, IP, CI and LTC schemes may quote for the merged PMI and IP schemes for Positive Fantastic Pickles at renewal. (iii) Discuss the areas which insurers should consider in providing: (a) (b) a generic pricing basis for group IP and group PMI products a scheme specific quotation for the merged PMI and IP schemes for Positive Fantastic Pickles at renewal [15] SA1 A2006 2