Group Critical Illness Pricing Challenges
In our December 2012 blog on Critical Illness Pricing 101, we discussed some of the steps needed to develop population incidence rates for initial claim cost and the consequent adjustments made, based on underwriting and benefit trigger definitions. For this entry we have leveraged the experience John Palascak is accruing in our CI Pricing area and outline the additional challenges associated with pricing a Group Critical Illness offering.
The key components of any pricing exercise are:
- Claim cost
- Adjustments to claim costs
- Profit margin
Claim cost and profit margin are generally pre-established and do not vary by group. However, adjustments to claim cost and expenses may vary considerably with the unique characteristics and enrollment aspects of each group. This blog focuses on some of the adjustments to claim cost that should be considered when pricing a specific group.
Adjustments to Claim Costs
- Underwriting: There are generally reliable population statistics for the core critical Illness benefit triggers of cancer, heart attack, stroke, kidney failure and major organ transplant. The population at large includes those with a past history of a critical illness, uncontrolled hypertension and diabetes, as well as the morbidly obese, among others. The actively employed population of an employer group is generally considered in better health than the overall population of the country, based on the merits of employment and the presumption of access to preventative healthcare.
Simplified underwriting can help screen out additional high risk candidates, thus allowing for a greater discount from general population. Guarantee issue, on the other hand, is available with no more of a requirement than active full time employment.
- Participation: For voluntary guarantee issue cases, the pricing must factor in varying degrees of anti-selection as outlined in our March 2013 blog on Guarantee Issue and the Law of Large Numbers. The presumption is that high risk individuals understand the value of CI insurance more often than low-risk people and are more likely to purchase it. For instance, individuals with a prior history, or even a strong family history, of cancer likely understand their increased risk of cancer. They also have experience with the economic strain often associated with a critical illness.
This high risk cohort of the population exists in any group, but the actuary and underwriter should assess the group and estimate the likely prevalence of such individuals and the participation level needed to balance the risk back to (or better than) population levels. A group with higher participation is less impacted by anti-selective participation of predisposed individuals and would have a lower expected claim cost per person.
- Rate Guarantees: It is not uncommon for a group to request a rate guarantee. This presents a challenge in the voluntary market where participation is a key risk factor as noted above. If the insurer prices for 20% participation, but only achieves 15%, then the initial pricing assumption was likely incorrect. This further deteriorates as voluntary lapses begin, since anti-selection is likely there, too.
Additionally, few groups are large enough to be fully credible, and the particulars of the group, such as industry, average age, gender, and geographic location, may present results that are better or worse than assumed in pricing. As such, the insurer is likely accepting greater risk than originally priced for and may want to consider an additional load for this risk. The longer the rate guarantee period, the greater the load that should be considered.
- Portability: This is the ability of an employee to retain, or “port,” their coverage when they leave a group. This is generally done without additional underwriting at the time that the coverage is ported. Porting is presumed to include a high proportion of anti-selective behavior. For example, the cohort of individuals that leave employment without new positions will have less financial resources available and one would expect them to allocate those to core needs rather than some of the supplemental products such as CI insurance. This also links back to participation rates since a higher percentage of predisposed individuals will elect to port their policy.
Those that do port would normally be assessed an additional load for the added risk. This load may be applied to the ported lives only at the time the policy is ported, across all lives for providing them with the option to port, or a mixed approach may be used. The length of time that the coverage may be ported may also vary with longer periods requiring a higher load than shorter periods.
These items represent some important adjustments often made to claim cost when pricing a specific group. When developing a group pricing manual, it is important to include these and other adjustments in order to provide the producers and employers with the flexibility desired, while maintaining a thorough understanding of how these variations are likely to impact the underlying risk.