EXAMINATION. 15 April 2005 (am) Subject ST1 Health and Care Specialist Technical. Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE

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1 Faculty of Actuaries Institute of Actuaries EXAMINATION 15 April 2005 (am) Subject ST1 Health and Care Specialist Technical 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 all 8 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. ST1 A2005 Faculty of Actuaries Institute of Actuaries

2 1 Describe the benefits typically available under a UK-type private medical insurance plan. [5] 2 The following events might lead to personal financial loss or hardship: A B Payment of expenses for medical care where a person s home country has poor public health facilities. The occurrence of sickness or disability after retirement age. (i) (ii) Describe the ways in which each event can lead to hardship and indicate the range of persons who may be directly, or indirectly, affected. [3] Describe, with reasons, a suitable health insurance product that may be purchased in order to alleviate or prevent the hardship arising from each event and state whether the product is likely to be traditional non-profit, unit-linked and/or inflation proofed. [4] [Total 7] 3 A leading life insurer is considering broadening its individual product range. It is considering launching income protection, critical illness, private medical insurance and long term care products. All contracts will be available only on an individual basis. Describe the main product specific risks associated with each of these contracts. [7] 4 An insurance company is considering the introduction of an immediate needs annuity for use by people entering or already in a care home. (i) (ii) Explain why such a product has an appeal to potential purchasers of the annuity. [4] Describe the main considerations that would be taken into account when determining the assumptions of the pricing basis. [8] [Total 12] ST1 A2005 2

3 5 On 1 January 2005 an insurer has 1000 lives aged 40 next birthday with accelerated critical illness policies. The average sum assured is 63,000. You are given the following extract from a mortality/morbidity table: where: Age Exact (1) (2) (3) (4) (5) (1) Incidence rate for critical illness per 1,000. (2) 28 day mortality rate following critical illness, per 1,000. (3) Mortality rate from all causes per 1,000. (4) Proportion of all deaths from critical illness events. (5) Proportion of policies lapsing per annum. All the decrements are assumed to operate uniformly over a year. You are given the following claims information: Claim amount Date of critical illness event Date of death Date of claim notification Date of settlement 1 35,000 3 Mar July Aug , Nov Jan Jan Feb ,000 7 Jun July Aug , Mar Aug Feb ,000 3 Feb Feb Mar Apr 2005 (i) Using the life table information above, calculate the expected claim cost for [5] (ii) Calculate the actual to expected claim ratio on an amounts basis for [2] (iii) (iv) Explain why the result calculated above may give an incomplete view of the claim ratio. [1] If all of the policies had been typical stand alone critical illness contracts indicate, with reasons, whether the experience would be better or worse. [5] [Total 13] ST1 A PLEASE TURN OVER

4 6 You are a consulting actuary advising a health and care insurer which is in the process of purchasing a portfolio of individual income protection business written by a competitor. (i) (ii) Discuss the methodology that you would apply to assess the profitability of the portfolio that is being purchased. You should indicate how you would assess the level of statistical risk. [7] Describe the key reasons why the future claims experience of the purchased portfolio could be very different from the future experience of the existing portfolio. [7] [Total 14] 7 You are the pricing actuary of a leading individual critical illness provider. A new director has recently been appointed and has requested information on how the company sets its premium bases. Outline the methodology by which the assumptions needed to set a premium basis would be determined, indicating the likely key sources of data available. [20] 8 An insurance company is considering entry to the group risks market for a wide range of health and care contracts. (i) (ii) (iii) (iv) Describe how medical underwriters seek to manage risk for a UK-type private medical insurance policy. [4] Describe the sources of medical information typically used in underwriting such a private medical insurance policy. [2] Describe how a moratorium clause may be used to manage risk as an alternative to medical underwriting. [4] Describe how the application of medical underwriting for health insurances differs for group policies as opposed to individual policies. [12] [Total 22] END OF PAPER ST1 A2005 4

5 Faculty of Actuaries Institute of Actuaries EXAMINATION April 2005 Subject ST1 Health and Care Specialist Technical 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

6 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report 1 Benefits typically available on a PMI plan include: Hospital costs In patient costs such as accommodation/private room, nursing care, operating theatre, diagnostic procedures, surgical dressings, drugs In-patient physiotherapy Day patient costs Accommodation/private room for parent accompanying a child Specialist fees Surgeons' and anaesthetists' fees for in-patient or day-care Physicians' fees Outpatient fees/costs such as specialist consultations, diagnostic tests (radiology, pathology), physiotherapy Radio/chemotherapy/scans Additional benefits such as private ambulance, recuperative care Cash for treatment in state system Benefits may be offered on an indemnity basis or there may be limits to payments or excesses Applies only to acute conditions The question asked for a description of the benefits typically available under a UK PMI plan, not for an explanation of the purpose of PMI, which some candidates gave. Many candidates failed to record enough points to gain many marks on this question. 2 (i) Event A may lead to the following: Loss of income and possibly capital in funding the cost of medical treatment Hardship to the individual and to persons who are financially independent Hardship/loss of income to those who have to provide personal care If extreme, the event could give rise to a catastrophic loss of capital Event B may lead to the following: A requirement for capital to fund the costs of institutional care whilst elderly, if the sickness or disability is sufficiently disabling A requirement for income over a long period. This might have been taken care of by a pension. Without insurance, assets may be depleted due to living a long time in care There may be costs involved in making adaptations to the home The individual plus any dependants would be affected together with any providers of personal care (ii) A suitable product to cover event A would be medical expenses insurance which gave the correct level of cover in the domestic context. This would provide benefits to cover all medical expenses, including primary and secondary care. This would be a traditional non-profit (short term) contract with an element of inflation-proofing since the policy provides indemnity benefits. Page 2

7 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report A suitable product to cover event B would be long term care insurance which pays care fees to elderly in an institutional care facility until death. Long term care insurance would cover the cost of long term care arising through permanent disability where individuals are unable to perform specific activities of daily living. This could have an inflation-proofing element and be either a traditional non-profit or unit-linked contract. Full inflation-proofing is unlikely because of cost. If the individual is already in failing health, a special enhanced annuity may be available taking into account the current poor state of health. This question was generally well answered, although not all candidates appreciated that hardship could apply to everyone, not just the poor or old. Few candidates mentioned loss of income from employment as a possible consequence of event A. Credit up to full marks was given where a candidate discussed one product which covered both events A and B. 3 Income Protection The main risk relates to sickness transfer probabilities in the underlying multiple state model - claim inception and claim termination rates. Other major risks include: Anti-selection risk Withdrawal risk - selective withdrawals Financial risk on withdrawals where asset share is negative Critical Illness The main risk relates to the rates of diagnosis of the critical illness specified in the contract. Other major risks include: Anti-selection risk Selective withdrawals Financial risk on withdrawals where asset share is negative Private Medical Insurance The benefit payments are generally determined by individuals over whom the company has no control (eg increases in fees, increases in cost of treatment). Claim frequency bound up in GP referrals. Where the State offers free healthcare, there may be risks arising from lack of sales and inability to cover expenses which could lead to insolvency Risk of a single large claim (eg US treatment) or a single incident leading to accumulation of claims (eg workforce) Page 3

8 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Long Term Care The main risk relates to transfer probabilities in the underlying multiple state model and to claim inception probabilities and transfer probabilities between claim states. Other major risks include: Investment risk Expense risk Withdrawal risk - selective withdrawals Financial loss from withdrawal when asset share is negative Marketing/reputation risk since policyholders expectations may not be met This question was generally well answered. 4 (i) An immediate needs annuity can be used to pay care fees on behalf of the care home/nursing home/retirement home resident. The annuity provides financial protection both for the care home/nursing home/retirement home resident if he/she lives longer than expected and the estate of the individual. It also provides financial protection to the dependants of the individual in that they will not be required to fund the care home/nursing home/retirement fees if the individual lives longer than expected. (ii) Assumptions for the pricing basis include: Mortality It is necessary to construct the likely experience of the policy. Reinsurance data might be available Underwriting criteria. The effects of changes to past and future underwriting criteria/strategy need to be considered Add prudential margin - since survival reduces profits, assume variations in mortality experience Expenses Own data are not available; so compare with existing products. Assign costs according to policy type/class, initial/ renewal, fixed and variable, whether per policy or a percentage of premiums. Include prudent inflation assumption Allowance for fixed expense contribution depends on future new business (so consider future sales volume). Interest Depends on future investment strategy (which assets are invested in and extent of matching assets and liabilities) As non-profit likely to be fixed interest assets Take a view as to likely returns from fixed interest assets Page 4

9 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Add prudential margin: depends on extent of reinvestment income (as a proportion of total future income and profit), as this is much more uncertain Taxation Make allowance for future tax incidence at current and/or expected rates Other factors Solvency margin and reserving basis Risk discount rate and profit criteria Competitors rates Sensitivity analyses and realignments In general, this question was reasonably answered, although not all candidates appeared to have knowledge of an immediate needs annuity. In part (i) few candidates mentioned the value of a LTC policy to a nursing home providing security about future payments. 5 (i) Lives aged 40 next so require independent rate for age 39.5 exact For accelerated critical illness, claim rate = i x + (1 k x ) q x Age 39: Dependent rate = (1 -.55) * 1.1 = Independent rate = * (1-.1*.5) = Age 40: Dependent rate = (1 -.56) * 1.2 = Independent rate = * (1 -.1*.5) = Expected claim cost = ( )/2 * 63,000 = 171, (ii) Need to include claims where the first of either death or critical illness occurred within Date of notification and date of settlement are irrelevant. Hence claims amount = 35, , ,000 = 148,000 Actual/expected = 148,000/ = 86.4% (iii) Would need to allow for claims which have been incurred but not reported. (iv) For stand alone critical illness contracts the rate is i x * probability survive 28 days (stand alone contracts require a survival period, typically 28 days). Age 39: Dependent rate = 2.3 *.9 Independent rate = 2.3 *.9 *.95 Age 40: Dependent rate = 2.4 *.9 Independent rate = 2.4 *.9 *.95 Page 5

10 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Age 40 next rate = 2.35 *.9 *.95 = Expected claim cost = 63,000 * = 126,583 Actual claims to include = 35,000 Actual/Expected = 28% So result would be much better if all of the plans were stand alone CI contracts Whilst many candidates realised that lives were aged 39.5 at the start of the year, they often failed to make the appropriate adjustments to the q x values. Some candidates also missed the point concerning lapse rates and failed to convert the independent rates into dependent rates. Many candidates failed to choose the correct claims in part (ii). In part (iv), although candidates generally realised that stand alone contracts have a survival period (otherwise it is an accelerated CI plan), many did not recalculate the expected claims. Credit was given for alternative approaches to answering parts (i) and (iv), if appropriate. 6 (i) Need to choose model points that are representative of the new portfolio. May be able to use model points from a previous profitability assessment (perhaps provided by the portfolio seller) and then update this to allow for new business and exits (lapses, maturities). Need to check appropriateness of model points. May be able to do this by, for example, calculating supervisory reserves using the model portfolio and comparing this with the actual published portfolio supervisory reserves. For each model point cash flows would be projected allowing for reserving and solvency margin requirements on the basis of a set of base values for the parameters in the model. The net projected cash flows will then be discounted at a rate of interest, the risk discount rate, that allows for: the return required by the company, and the level of statistical risk attaching to the cash flows under the contract. Need to consider cost of any options and guarantees. The level of statistical risk could be assessed: in some situations analytically, by considering the variances of the individual parameter values used by using sensitivity analysis with deterministically assessed variations in the parameter values by using stochastic models for some, or all, of the parameter values Scaling up the results of each model point and totalling these will give the expected profit. Page 6

11 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report (ii) The experience will differ because of variations in the product design. In particular: the definition of disability the level of guarantees included in the contract the scope of policy exclusions the maximum replacement ratio treatment of any additional benefits maximum policy duration The new portfolio may have been underwritten using a different philosophy. Differences may include: classification by occupation class availability of deferred periods use of individual medical exclusions or application of extra premiums application of changes in disability definition maximum replacement ratio offered and the treatment of multiple policies The new portfolio may cover a different profile of lives and the mix by age, sex, occupation class, mix between employed and self employed, level of benefit, cease age, increasing/level benefits may be very different. There may be a difference in the split between personal cover (including mortgage cover) and business cover. Historic lapses and the treatment of past claims may also have an impact on the existing portfolio mix. Differences in level of expertise Premium rates may be higher resulting in greater lapses from healthy lives Any change in the ownership of a block of business may generate additional lapses which could be anti-selective. In general this question was not well answered, with candidates often failing to provide sufficient points to gain many marks. In part (ii), it was not always appreciated that if the company purchases the portfolio, there would be no differences arising from future claims handling etc since this would be carried out by the purchasing company for both portfolios. 7 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. This would be done for males and females separately. Allowance would be made for any changes in underwriting standards. Page 7

12 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Although a market leader in CI, the company is unlikely to have sufficient data to rely solely on its own experience. In addition to own data, could look at: industry data (such as CMI reports in the UK) data from reinsurer published tables data from overseas 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 available, may analyse by specific disease 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 may be a different situation from the type of policy the data were collected from. 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 Investment returns This should reflect the expected return on the underlying investments (net of expenses) 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 Page 8

13 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report 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 Assumptions about new business may be needed for spreading fixed costs 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 Analysis by duration 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 Other factors Page 9

14 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Competitors rate should also be considered Best estimate assumptions or slightly prudent Reserving bases Premium bases may be affected by regulation Profile of business This question, which contains quite a lot of bookwork, was generally well answered although candidates did not always provide sufficient points to gain reasonable marks. 8 (i) Protect company from anti-selection Protect company from seriously impaired lives where it is impossible to assess risk accurately Identify substandard lives to offer special terms Identify most suitable approach for substandard lives Identify most suitable premium for substandard lives Accurate risk classification to ensure fair rating Try to ensure experience does not deviate from that assumed in pricing of contracts (ii) (iii) Question on the proposal form completed by the applicant Reports from medical doctor that the applicant has consulted Medical examination carried out at the request of the insurer Specialist medical test carried out on the applicant Policyholder offered immediate cover No formal underwriting at point of acceptance Blanket exclusion on pre-existing conditions - usually defined as conditions that have received treatment for a specified period prior to application (often 5 years) Exclusions are waived after a period of time, usually 2 3 years, if policyholder receives no treatment for condition during that time Past medical history is examined at the time of claim (iv) Group policies will often have free cover limits - certain level of benefits available without individual underwriting. Those looking for benefits above the limit provide medical information or attend tests Typically insurer will request that all insured members are actively at work on the day cover commences or a moratorium is applied, where no claim is paid for short period after start of cover for new entrant Page 10

15 Subject ST1 (Health and Care Specialist Technical) April 2005 Examiners Report Limited insured information. The following data are often not available: Numbers of lives Individual ages Sex Benefits Often the insurer requests a deposit premium. This is adjusted at the end of period when details are available. Reduction in anti-selection effect as schemes get larger Premiums charged may be based on the experience of the group as a whole rather than as a result of individual medical underwriting this would depend on the size and credibility of the scheme For the largest schemes medical history may be disregarded completely Flex schemes have similar anti-selective characteristics as individual policies, so may underwrite increases in cover or apply strict limits Need to consider how to treat new-comers Need to consider influence of the intermediary. Increased potential for anti selection and limited supply of information due to increased purchaser knowledge Dependants underwritten differently Level of underwriting may depend on assumed take-up rates Differences may be function of distribution methods Since it was not clear from the wording of the question whether the initial parts were meant to relate to individual or group PMI, credit was given for answers which assumed either. For part (ii), full credit was given if the candidate stated that for group business don't usually underwrite but apply pre-existing exclusions or moratorium. In general parts (i) and (ii) were very well answered. In part (iii), not all candidates understood how moratorium clauses work. Part (iv) was generally poorly answered. Page 11

16 Faculty of Actuaries Institute of Actuaries EXAMINATION 16 September 2005 (am) Subject ST1 Health and Care Specialist Technical 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 all 9 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. ST1 S2005 Faculty of Actuaries Institute of Actuaries

17 1 For income protection insurance: (i) Define with examples the term deferred period. [1] (ii) Explain with examples the definition of incapacity. [2] (iii) Define the term activities of daily living. [1] (iv) Explain the term replacement ratio. [2] (v) Explain the concept of rehabilitation/partial benefit. [1] [Total 7] 2 You are the actuary of a leading critical illness insurance provider. Your marketing director has suggested that the critical illness definitions used should be amended to differentiate your products from those offered in the market by other companies. Discuss the marketing issues implied by this suggestion and indicate how they might be mitigated if such a strategy were followed. [5] 3 The country of Actuaria has no state healthcare provision for the population. A scheme has been proposed under which an earmarked increase in income tax will be applied to all citizens of Actuaria to fund a national health system to ensure that all citizens have access to free medical care. (i) Outline reasons for implementing such a scheme. [4] (ii) The finance minister wishes to contain the cost of the scheme by maintaining an element of self-provision. Describe possible means of doing this. [3] [Total 7] 4 For a typical non-profit hospital cash (health cash) insurance contract: (a) (b) Discuss the various criteria which must be met in order for claim benefits to become payable under the contract. Describe the ways in which the amount of benefit is determined in the event of a claim becoming payable under the contract. (c) State the guarantees which might be provided. [7] ST1 S2005 2

18 5 A proprietary life insurance company writes individual long term care business. (i) (ii) Describe the investigations you would undertake to determine an appropriate investment strategy. [8] The regulatory framework may limit what a company may do in terms of investment. List the types of restriction that may apply. [3] [Total 11] 6 A proprietary long term insurance company writes individual critical illness contracts which have reviewable rates. (i) (ii) (iii) List four reasons why the company would wish to monitor claims experience. [2] List the data items you would ideally require to make a full claims experience analysis. You should include all of the rating factors that are likely to be used for setting premium rates. [6] Describe the other factors you would consider before deciding to change premium rates for existing business. [4] [Total 12] 7 A long term insurance company writing individual income protection business is about to calculate its supervisory reserves for active life business using a gross premium valuation method. (i) State the principles that should be used for setting the bases for each of the following: (a) (b) (c) (d) Interest rate Mortality Morbidity Expenses [12] (ii) Discuss how the basis might relate to that used to price the product. [2] [Total 14] ST1 S PLEASE TURN OVER

19 8 XYZ is a country which does not provide any medical or other healthcare benefits for its citizens. Some of the population receive and pay for medical treatment in other countries, the remainder are treated by private doctors or in privately owned hospitals in XYZ. You are the pricing actuary for the XYZ State Life Insurance Company. This is the only insurance company that is allowed to offer life and health insurance products to XYZ citizens. The company has decided to launch a new conventional non-profit medical expense insurance policy, under which premiums and benefits are not guaranteed for the duration of the contract. The company has never before issued conventional medical expense insurance policies. (i) List the data sources normally available for pricing this line of business (e.g. in a developed market) and indicate those which would and would not be available in the circumstances mentioned above. [5] (ii) Describe any adjustments that you might make for local use. [4] (iii) (iv) Recent research has shown that the incidence of cigarette smoking in XYZ is 10% of the level in the territory from which the statistics are drawn. Comment on how you would allow for this factor in the pricing for each of the sources of data quoted in answer to part (i). [3] It has been suggested that the medical expense insurance contract should only pay benefits to policyholders who receive medical treatment in XYZ. Comment on the advantages and disadvantages of such a policy provision. [4] [Total 16] 9 You are the pricing actuary for a well-established long term insurance office that has been writing income protection business for some years. Your sales director, who has recently joined the organisation from another industry, has sent you an in which he expresses concern at the cost of income protection. Describe typical means of reducing the premium for income protection and the risks associated with each. [21] END OF PAPER ST1 S2005 4

20 Faculty of Actuaries Institute of Actuaries EXAMINATION September 2005 Subject ST1 Health and Care Specialist Technical EXAMINERS REPORT Faculty of Actuaries Institute of Actuaries

21 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report 1 (i) Deferred periods the period of incapacity before any benefit is paid The standard deferred periods 4, 13, 26 and 52 weeks For certain occupations, minimum deferred periods will be applied (ii) (iii) (iv) (v) Definition of incapacity The condition that must be satisfied to enable a claim to be paid, typically totally unable through sickness or accident to follow own occupation and not following any other for profit or reward Normally applied throughout the duration of the contract Switch definitions amend the definition of incapacity after a certain elapsed claim period (2 years). Reserve the right to apply an alternative definition depending upon the occupation of the insured. Some use different definitions of incapacity when cover is offered to housepersons and where cover is maintained on a restricted basis during a period of unemployment Activities of daily living a number of functional tests against which disability can be measured e.g. eating, washing etc Replacement ratio The ratio of net (in benefit) income to net pre-disability income A value significantly less than one is desirable from the insurer s viewpoint, to provide a financial incentive for the claimant s return to work, especially given that expenses in disability may be less than those in normal (working) health Rehabilitation/partial benefit IP benefit payable when a claimant is no longer totally unable to follow his or her original occupation and returns to it in a reduced capacity The amount of benefit is usually reduced in proportion to the relationship that the gross earnings from the new job bear to those from the occupation against which disability was being claimed. This question, which is mainly bookwork, was generally well answered. 2 If different definitions are used from those in the market, the following risks could arise: The customer may not understand the product that they are buying; therefore may not be meeting their reasonable expectations The distributor may not understand the product. Any change in conditions to reduce the premium will mean that the coverage is less comprehensive and therefore claims will not be paid that previously would have been. Page 2

22 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report The claimant may therefore have a real need and expectation of payment but the benefit will not be paid. If changes in conditions result in an increase in premiums, will product still be affordable/seem attractive Local regulations may require standard set of definitions to be used. If the product is very different from others in the market, then it may not be sold as it is a more difficult sale. The salesmen would be required to explain the differences between this product and others in the market. Could add conditions that seem to be worth having but in practice have little cost. Can the risk be priced? Will the amended product be seen as good value by potential customers? How can these mitigated? The changes in policy conditions must be made clear in the policy literature and the sales process The conditions chosen to be excluded should be those for less severe conditions where there is less likely to be a need for cover. Conditions may be restricted with resultant impact on premium Consultation with reinsurers over suggested changes Undertake market research on what customers want in/out of the coverage list Move from guaranteed premiums to reviewable This question was generally not very well answered, with candidates often discussing aspects which were not really marketing issues. 3 (i) Protecting the nations health Safeguard healthy workforce Improve productivity and GDP Ensure that research is directed so that it benefits the country rather than leaving it to commercial pressures Redistribution of wealth Ensure that the poorest members of society have access to medical care. Ensure adequate provision of services to the elderly and for children Political considerations / social culture Health provision is an emotive issue and likely to be politicised Government may have made electoral promises Reasons for earmarked tax levy Equity: higher earners pay more Ensure that high costs of healthcare provision are borne by whole economy rather than those in need. Page 3

23 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report (ii) Introduce mandatory private provision For certain types of procedure/health provision For those above a certain income threshold Incentivise private provision Restrict public provision and encourage a private healthcare market to act as a top up Offer tax incentives for effecting private healthcare eg to individuals, employers Provide a subsidy to private healthcare providers Require part payment This question was usually reasonably answered. 4 Non-profit Hospital Cash (Health Cash) A claim will become payable if: Claimant requires medical treatment or services due to sickness or disability Payment is dependent on the medical treatment or services being included in the contract, and falling within the definition used Medical treatment or services has to be medically certified Policy must have been in force for at least the waiting period before the claim event occurs Medical treatment or services must not fall under a policy exclusion Must not exceed annual maxima Might not be paid for pre-existing condition Amount of benefit payable under the contract may be: a fixed amount e.g. B p.a. the care fees other payments specified by the contract The amount paid will depend upon the medical expenses claimed, and the internal limits in the contract The following may be guaranteed: benefit level care level premium level reviewable or renewable Many candidates failed to note the conditions under which a benefit might be payable and tended to list the types of benefit often found under Hospital cash plan contracts, which was not what the question was asking for. Page 4

24 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report 5 (i) Key principles: Investments should be appropriate to nature, term and currency of liabilities Want to maximise overall return subject to level of risk Need model to project assets and liabilities for a given investment strategy and level of free capital Best estimate assumptions Consider sensitivity Assets: stochastic model, project income and changes in capital values Expenses: inflation model Liabilities: could be linked to investment conditions Look at difference (assets - liabilities) at each year end using supervisory basis Need to be 'sufficient'; sufficiency depends on Investment strategy being considered Regulatory requirements Nature of business Rating agencies/competitors Extend to stochastic investment model to produce statistical distribution of amounts to cover level of solvency capital Calculate probability of insolvency for a particular investment strategy For proprietary company, extend to look at shareholder earnings Other factors that may be investigated: Liquidity requirements Effect on product development and pricing Method used for asset valuation Policyholders' reasonable expectations (PRE (ii) Type of assets that a company may invest in. Currency of asset Amount of any particular type of asset that can be taken into account for the purpose of demonstration solvency. The extent to which mismatching is allowed Custodianship Method of valuation Most candidates made a reasonable attempt at this question, especially part (ii). 6 (i) Update assumptions as to future experience for existing business Monitor changed trends in experience so as to take corrective action. Provide management information. Make more informed pricing assumptions for future business Identify anti-selection Check effectiveness of underwriting procedures Page 5

25 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report Assess need for reinsurance Calculate profit share entitlement under an existing reinsurance treaty (ii) For all records Type of contract including benefit conditions (accelerated or stand alone) Policy number or other unique identifier Date of birth (age) Sex Smoker status Occupation Single or joint life first event Policy commencement date (or duration from entry) Policy status in force, lapse, accepted claim, pending claim. Date of status change Rated information (at least sufficient to divide policies between standard and sub standard risks) Source of business Level of and type of original benefit (lump sum or annuity) Level of current benefit Basis used to calculate current benefit (indexation/rundown). Territory/geography/address For claim record Cause of claim at least split critical illness or death, ideally by all causes. Date of claim notification. Date of acceptance Date of claim settlement Date of event Policy or claim number to link to in force record (Last date items required to estimate IBNR) (iii) PRE what has happened at previous reviews? PRE what does the policy literature suggest? Policy wordings (contractual restraint) Impact on market reputation and market position Need to consider other premium factors: Interest rate Lapse experience Expenses Capital requirements Credibility of available data Future experience expectations, durational effects Possibility of anti-selective lapses. Regulatory constraints Action of competitors Impact on profits Impact on reinsurance arrangements This question was generally well answered. Page 6

26 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report 7 A prudent basis, rather than best estimate should be used with appropriate margins for adverse deviations. Regulatory requirements need to be taken into account Interest rate Take account of currency Regard to yields on existing assets Regard to yield on sums to be invested in the future Credit/default risk Term of the liabilities A low rate is prudent Mortality Need to consider mortality both pre and post claim. Pre claim Take account of sex and age Underwriting policy Territory of insurance A low rate of mortality is prudent. Post claim Factors as above: Take account of sex and age Definition of disability Duration of claim (note this is for active lives) NB: Cause not required as this is for active lives Source of data eg published statistics A low rate of mortality is prudent Morbidity Need to consider both probability of claim and claim recovery rate Pre claim As for mortality Take account of sex and age Underwriting policy Territory of insurance Occupation class A high rate of incidence is prudent. Post claim As for pre claim Take account of sex and age Definition of disability Page 7

27 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report Occupation class Duration of claim (note this is for active lives) NB: Cause not required as this is for active lives Source of data eg published statistics A low rate of recovery is prudent Expenses Gross valuation so would look to allow for expenses in line with best estimate plus margin Allow for: Product design features Territory Claim costs Administration costs Commission Need to allow for future expense inflation. Should be based on analysis of recent experience (ii) In some countries it is standard practice to price using prudent assumptions and then to use the same assumption for supervisory purposes. In other countries, it is standard practice to calculate premiums using assumptions that broadly reflect future experience, with the risks to the company being allowed for mainly through the risk discount rate. In this case, it would not be appropriate for the same assumptions to be used for both pricing and reserving. Pricing basis will include an allowance for initial expenses (including commission) This question was reasonably answered, although many candidates simply stated that the mortality or morbidity rates should be set prudently without defining what this meant (eg a high or a low rate). Also, candidates often did not mention the difference between pre-and post-claim mortality and morbidity. 8 (i) Availability of data As it is a new contract the following items would not be available for use: Internal own price Claims experience Competitors prices Company accounts Regulatory returns Local published insurance statistics Items available for use: Data on claims incidence and on treatment costs may be available from separate sources Page 8

28 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report Reinsurer s data, knowledge Data from actuarial and other consultants Data from other countries such as USA, UK, other European countries Other local experience e.g. data from the XYZ hospital sector Publicly collected Healthcare experience (ii) (iii) In all cases, may need to adjust for the known differences between XYZ and the data source. These might include: Adjust for different lives insured compared to base data Adjust for different coverages (exclusions, limits, procedures etc.) Adjust for different propensity to claim (e.g. more prone to do so in US) Allow for trends Adjust for any pricing basis or to other unadjusted rates, to include possible margin for prudence If available by ratings factors, may need to adjust to proposed ratings factors Adjust for whether data underwritten or not Different market conditions e.g. state provision, market definitions, claim acceptance criteria (in the case of reinsurers data Reinsurer's data, knowledge Data likely to come from major insurance markets; ascertain smoking prevalence in these territories Split data in risk segments to identify those most affected by smoking, eg medical treatment, cost of nursing/doctor care, cost of accommodation, cost of initial consultation, recuperation/outpatient needs Adjust the cost to allow for the lower impact of smoking Apply adjustments to both incidence and severity Data from other consultants, if available Data from similar sources to reinsurers May also have population and case study information; preponderance of smokers should not be difficult to research; follow same procedures as for reinsurance data Overseas countries National statistics should indicate proportion of smokers May need ot be age-related in order to link to cost of treatment Apply as for last 3 points for reinsurance data Hospital information from XYZ May not know if smoker, but this is own country statistics, so no smoker adjustment needed Population healthcare statistics May need some age adjustment if smoking prevalence varies by age and insurance does not cover all ages Adjust data for age differential (frequency and severity separately) Page 9

29 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report Research/Charities/Journals This is assumed to be XYZ based; as long as underlying population is representative, no further adjustment needed If population is representative of all XYZ inhabitants, then adjust as per public health statistics above Data may be available separately for smokers and non-smokers, in which case no adjustments need to be made (iv) Advantages Caters for the existing hospitals Claim control easier with local claims Single currency only No additional transport costs No language/interpretation problems Different medical protocols possibly abroad Overseas may be higher tech and more expensive Disadvantages Does not cater for the requirements of some likely policyholders Treatment may be more cost effective in other countries Introduction of restriction may lose customers, so self insure Not clear on status of consultations abroad Disadvantages to providers abroad In part (i) candidates often provided a list of sources of data availability but dud not then state which were likely to be available or not. Parts (ii) and (iii) were generally poorly answered with few points being made about how the data might be adjusted. Part (iv) was often well answered. 9 Premium reduction mechanism General point reducing premiums will reduce profit per case unless accompanied by actual change in practice of company Change rating structure/target lower risk business Age / sex / geography / lifestyle / class of product (stand alone / rider etc) / distribution source / occupation class / anti-selection mortgage purchase Will complicate and lengthen sales processes despite cheaper premiums for better risks. Will lose business for which rates rise may reduce new business sales Implement more stringent underwriting procedures May increase decline rates and lengthen sales processes. Increased cost of underwriting may outweigh benefits of better risk targeting Reduce anti selection effect / over-insurance May not meet customers needs cap replacement ratio Page 10

30 Subject ST1 (Health and Care Specialist Technical) September 2005 Examiners Report Reduce anti selection effect multiple policies Reduce over insurance effect regular policy reviews Introduces additional costs into process costs may outweigh benefits Better training of sales teams to reduce anti selection effects / over insurance Reduce claims outgo Reduce claims incidence for a given risk Increase exclusions applied Implement more stringent claims control processes Change basis of claims payment from own occupation to own/suited or to any occupation Decline more claims Reputational risk PRE considerations if claims philosophy not in line with policyholders expectations Reduce claims severity Increase deferred period Introduce linked claims clause to encourage return to work Offer lower expiry age / term Reduce escalation of claims paid Limit duration of claims payment Implement rehabilitation services to help claimants back to work Implement an early notification scheme to allow early claims intervention Offer long-term claimants with high reserves a lump sum in lieu of a regular income Reduce expense loadings Streamline processes Redistribute expenses between policies (e.g. apply using percentage of premium basis so that higher value policies carry higher expenses). Mismatch of incidence of expenses and allocation between policy sizes. (e.g. risk that larger number of smaller premium policies sold and expenses not covered). Reduce profitability loading Expectation of increased volumes offsetting reduced profit per case Elasticity of demand not accurately understood. Increases in volume not as expected. Competitor response to lowering premiums results in volumes not increasing as expected. Enhance retention and reduce lapse assumption Implement a no claims discount High lapse rates following claims Pay less commission Insufficient commission to incentivise sales Increase proportion of commission successfully clawed back Increased administration costs associated with increasing level of clawback may outweigh the benefits of doing so Investment income Increase investment income from held funds Investment return mismatch risk if deviate from fixed interest securities Page 11