Nebraska Actuaries Club

1
Nebraska Actuaries Club

• Presentation on the Individual Rate Filing study
  at the National Association of Insurance
  Commissioners
• John Rink
• October 3, 2006
• Nebraska Department of Insurance

2
How did the study begin?

• Closed block problem
• Accident and Health Working Group (AHWG)
  determined there was a problem
• The study began in 1999
• AHWG asked AAA to study the problem

3
Some history of the problem

• Difference between medical trend and wage growth
• Many market reforms in the small employer market
  portability
• Activity in the individual market place
• Closed block problem

4
Closed Block Problem

• Companies will no longer issue a block of
  business many reasons
• Block will experience claim costs rising more
  rapidly than an open block
• If rates rise at an unequal rate many healthy
  policyholders may find less expensive coverage

5
Closed Block Problem (cont)

• Those with health conditions have no place to go
  when healthy policyholders find lower priced
  coverage and leave block
• This drives the premiums higher at a faster pace
• Existing policyholders reconsider whether they
  should keep their existing coverage

6
AHWG Study Goals

• Rate stability over time
• Consumer choice over time
• Disclosure

7
AAA Model

• A computer program was set up to model the
  individual marketplace
• Intent of model was to provide a means to compare
  the financial implications of the alternative
  solutions
• AHWG determined which methods would be modeled

8
Assumptions

• Prospective Model
• New Sales for Three Years
• Five policy eras were modeled
• Insured population was divided between standard
  and impaired
• Sales levels are assumed to change inversely with
  new business rates

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Assumptions (cont)

• Covered Claims Costs increase each year based on
  trend and deductible
• Lapse rates are adjusted based upon the level of
  rate increases
• Effective rate increases will be lower than
  requested rate increases due to regulatory limits
  and constraints

10
Key Issues

• What factors could be included in the numerator
  of the loss ratio
• If closed block solution requires an insurer to
  carry larger reserves they must be tax deductible
• Prompt review of filings would be required in any
  solution

11
Key Issues (cont)

• Consistent rules and applications
• Consistent regulations in every state
• Large rate increases have been a problem in the
  past.
• Potential Solutions will impact affordability and
  availability of the products.

12
Potential Closed Block Solutions

• Individual Medical Pooling (IMP)
• Pre-funding
• Interblock Subsidy - Durational Pooling
• Interblock Subsidy - Rate Compression

13
Re-Underwriting

• This topic was not studied
• Political decision of the National Association of
  Insurance Commissioners

14
Individual Medical Pooling

• This allows an insured who is covered by an
  individual policy, and whose rates have increased
  beyond a trigger level, to move to a separate
  state-authorized program (IMP) that offers
  policies with premiums that are limited to a
  fixed percentage above current rates

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IMP (cont)

• Eligible for the plan after a certain number of
  years
• Premium rate would be limited to a certain
  percentage above the market (eg. 150)
• Rate increases will not be based on the
  experience of the group

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IMP (cont)

• Losses of the IMP program will be funded solely
  by the individual major medical insurers in that
  state

17
Elements of Implementation (IMP)

• Eligible individuals would be notified of their
  potential eligibility to move to IMP with their
  rate increases
• Number of years before an individual could join
  the IMP would need to be determined
• IMP plan benefits would be similar to what is
  sold in the individual market

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Elements of Implementation IMP (cont)

• Any Exclusionary waivers attached to an insureds
  existing policy would be attached to the IMP
  policy
• IMP product would include variations by age,
  gender, geography, etc. in the same manner as
  allowed for other individual plans in the state

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Elements of Implementation IMP (cont)

• IMP would be administered by one entity, and
  governed by a board of directors who are elected
  by the individual carriers
• Losses for the program would be distributed back
  to the individual carriers in the state

20
Pre-funding

• This approach requires insurers to fund in
  advance some of the expected future claims at a
  later policy durations
• As modeled, within any one block, the same level
  of rate increases must be applied uniformly to
  new business and all existing policies

21
Pre-funding (cont)

• Premiums under this method would be much higher
  in the early stages of the policy

22
Elements of Implementation Pre-funding

• Approach requires the creation of reserve factors
  by duration that will be applied to the incurred
  claims per policy, or possibly to the earned
  premium, to build up a new type of contract
  reserve

23
Elements of Implementation Pre-funding (cont)

• Nonforfeiture values do not accrue, so lapses
  will not release any part of the pre-funding
  reserve directly to the individual in any form
• Pre-funding reserve is used to offset premium
  rate increases that would otherwise be needed to
  offset increases in claim cost anti-selection at
  lapse and claims increases

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Elements of Implementation Pre-funding (cont)

• Because of substantial reserves involved, the
  Pre-funding model incorporates three additional
  financial assumptions
• (1) a reserve discount rate
• (2) an assumed level of investment earnings on
  reserves
• (3) a required reserve margin

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Elements of Implementation Pre-funding (cont)

• The reserve discount rate was set at 3.5
• The assumed rate of investment earnings on
  reserves was set at 5

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Inter-block SubsidyDurational Pooling

• Durational pooling is a method in which the
  computation of renewal business rates requires a
  carrier to pool the experience of its policies
  after they reach a chosen duration, across all
  blocks within the applicable business segment
• Premium increases will be the same percentage
  increase for all policies in the pool

27
Inter-block SubsidyDurational Pooling (cont)

• This causes some policy premiums to be lower than
  they otherwise would have been, and others to be
  higher

28
Elements of Implementation Durational Pooling

• Prior to duration N, renewal business rate
  increases are calculated as in the Current Market
  Model, where each block is rated on its own
  experience
• For each issue year within a block of policies
  upon reaching duration N, the experience must be
  pooled with all other forms and blocks defined to
  be included in the pool for duration N or greater

29
Elements of Implementation Durational Pooling
(cont)

• If there is no experience base in the first two
  years of the pool, anticipated trend can be used
  for pooled rate increases
• Definitions would have to be developed for what
  forms and blocks within segments would have to be
  pooled
• Pooling should only occur among forms and blocks
  with broad yet somewhat homogenous risk
  characteristics

30
Inter-block SubsidyRate Compression

• Rate compression is a method in which premium
  rates for individuals with comparable
  demographics, geographic location and benefits
  must be within a specified high-to-low range
• Comparison is made for all policy forms within a
  specified segment of forms to which the rate
  compression requirement applies

31
Inter-block SubsidyRate Compression (cont)

• Effect of this is to cause rate increases on some
  policy forms to be artificially adjusted from
  their true experience levels so that the
  resulting rates stay within the specified
  high-to-low range

32
Elements of Implementation Rate Compression

• Renewal business rate increases would initially
  be calculated based upon actual experience
• After that, premium rates for persons of like
  demographics, area and benefits would be compared
  between forms within that segment

33
Elements of Implementation Rate Compression
(cont)

• These assumptions would require some rates to be
  raised and some to be lowered
• It is hoped these adjustments would still allow a
  company to maintain its calendar year profit
  objective
• Definitions would have to be put together to
  determine which forms and blocks would be subject
  to rate compression

34
Elements of Implementation Rate Compression
(cont)

• An annual filing of a certificate of compliance
  may be required, similar to what is done under
  many small group insurance laws
• This would allow regulators to have a signed
  statement of compliance for their records
• A new model would need to be developed

35
Analysis of Methods

• IMP
• Pre-funding
• Durational Pooling
• Rate Compression

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Individual Medical Pooling

• No initial effect on the current marketplace
  since cannot move into the pool until rates
  exceeds the IMP premium and have kept the product
  for N years
• As people move into the pool, the program will
  generate losses
• Companies will begin to be assessed for the
  losses and these assessments will be reflected in
  the rates

37
Individual Medical Pooling (cont)

• The model was tested using aggressive rating
  practices
• In testing this scenario there is a greater
  number of individuals going into the pool and the
  assessments doubled
• This would increase premiums in the individual
  market

38
Individual Medical Pooling (cont)

• Higher assessments would raise premiums in the
  future
• Proposed assessments could be based on two
  factors
• (1) Participation in the marketplace
• (2) Number of former policyholders in the IMP

39
Individual Medical Pooling (cont)

• One last thing not tested by this model was the
  affect of funding the IMP through a premium tax
  assessment mechanism similar to the Nebraska
  Comprehensive Health Insurance Pool

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Pre-funding

• This was the most stable but had some potential
  problems
• Higher initial rates that would cause lower
  initial sales
• Rate increases would be limited to trend plus two
  percent

41
Durational Pooling

• In general, fewer lives are covered than under
  the current market
• Lapse vary by cohort/block
• Older blocks have fewer lapses and more covered
  lives than current model because of subsidized
  rate increases

42
Durational Pooling (cont)

• Newer blocks show fewer covered lives and
  increased lapse because they are subsidizing
  older blocks and rate increases are higher

43
Rate Compression

• Tested at 21 ratio
• This is similar to what is in most states Small
  Employer health insurance laws

44
Rate Compression (cont)

• Three main observations
• (1) Total lives covered in the market are
  slightly down but about the same as compared to
  the Current Market Model
• (2) Rate increases are almost the same as Current
  Model
• (3) Profitability is almost the same as in the
  Current Market, just slightly higher

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Where is the AHWG today?
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Questions?