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Study Sheet - Exam 2

Terms in this set (71)

Major Prohibitions and Restrictions from ACA
- Lifetime and Annual Limits on Coverage Prohibited
- Pre-Existing Condition Exclusions Prohibited
- Rescission of Insurance Policies Prohibited
- Retention of Coverage until Age 26
- Medical Loss Ratios (80/20 Rule or Medical Loss Ratio Rule)
Lifetime and Annual Limits on Coverage Prohibited
Dollar limits on coverage prohibited
Pre-Existing Condition Exclusions Prohibited
Insurers are prohibited from denying claims or excluding coverage based on pre-existing conditions
Rescission (Cancellation) of Insurance Policies Prohibited
Prohibits retroactive cancelation of policy due to unintentional error (except in cases of fraud or material misrepresentation)
Retention of Coverage until Age 26
ACA allows young adults to remain on parents policy until age 26
Medical Loss Ratios (80/20 Rule or Medical Loss Ratio Rule)
- Insurers are required to meet minimum loss ratio (MLR) of 80% for individual and small group market and 85% for large group market
- MLR refers to the percentage (share) of premiums paid for health insurance coverage that is used to pay claims and activities that improve quality of care
How the ACA is Funded
- Savings in Medicare/Medicaid by reducing fraud, abuses and unnecessary treatments
- New annual fees on pharmaceutical companies and medical devices
- Penalties on people/employers who do not purchase coverage
- 40% tax on "Cadillac" health insurance plan starting 2018
ACA Online Exchanges
- People/small business can comparison shop for standard insurance plans
- Facilitate enrollment and administer health insurance premium credits so people of all incomes can purchase coverage
Types of ACA Plans Available
Coverage is based on actuarial values of plans (i.e. expected share of healthcare expenses the plan will pay for)
- Platinum (90% coverage)
- Gold (80% coverage)
- Silver (70% coverage)
- Bronze (60% coverage)
"Catastrophic Plans" Coverage
- Available only to people under 30 or to those with a "hardship exemption" (homeless, death of close family member, etc.)
- Low monthly premiums but deductibles/co-payments are high
Single-Payer System (Medicare for All)
- System where single public or quasi-public agency organized health care financing, but delivery of care is in private hands
- All US residents are eligible
- Covers: all medically necessary services
- Funding: "savings" from replacing today's multiple insurance payers with single streamlined, nonprofit, public payer and new taxes
Single-Payer System Pros/Cons
- Federal spending would have to increase by trillions
- Employer based plans would be terminated
- No co-pays/deductibles
- Expansion of benefits
- Medicare isn't purely a government plan
Medicare
US social insurance program covering elderly (defined at 65+)
- Financed by payroll tax, shared equally by employers and workers
4 Benefit Plans Under Medicare
Part A
Part B
Part C
Part D
Part A Under Medicare
- Applies to all participants
- Covers hospital and nursing home care facility charges
- Pays for hospital stay of up to 90 days subject to cost-sharing provisions
- Pays for up to 100 days in skilled nursing facility
- No coverage for non-institutional care in the home or on outpatient basis
Part B Under Medicare
- Optional
- Pays for physician, nursing and testing services and durable medical equipment
Part C Under Medicare
- Provides option of receiving Medicare benefits under private insurance plans which are available to people with both Medicare A and B coverage
Part D Under Medicare
- Pays for prescription drug benefits
- Sold as stand-alone plans distinct from Parts A, B and C
- Sold only by private insurers
- Provides basic and catastrophic coverage
Medicaid
- Jointly funded by federal/state insurance program for certain low-income and needy people
- Largest of all government funded health care programs for low-income people (includes low income adults, their people and people with disabilities)
- Federal government's funding share is inversely proportion to state's poverty rate
Disability Income Insurance
- Provides periodic income payments when insured is unable to work because of sickness or injury
- Amount you can purchase is related to income
- To prevent over-insurance, moral hazard, and malingering, insurers limit coverage to 60-70% of earnings
Total Disability
- Inability to perform material and substantial duties of your regular occupation (and are not engaged in any other occupation)
- Inability to perform the duties of any occupation
Partial Disability
You can perform some but not all of the duties of your occupation
Residual Disability
You are gainfully employed and not totally disabled, but solely because of your sickness/injury your loss of income is at least xx% of your prior income
Benefit Period
Choice between 5 or 10 years or until age 65 or 70
Elimination Period
Period before benefits can be paid before policy goes into effect
Waiver of Premium
If insured becomes totally disabled for 90 days, future premium waived for the length of the disability
Social Security Disability
- Federal disability program
- Pays benefits to individuals and possibly family members if eligibility requirements are met
- Only pays for total disability
Social Security Disability Eligibility
Need to have earned a certain number of "credits" (which correspond to earnings) during your working career

Need to meet the following definition of disability
- You cannot do work that you did before
- Social Security decides the you cannot adjust to other work because of your medical condition
- Your disability has lasted or is expected to last for at least one year or to result in death
Long-Term Care (LTC) Insurance
- Type of coverage that pays a daily/monthly benefit for medical or custodial care received in a nursing facility, hospital or home
- Medicaid/Medicare provides limited coverage
- Can be triggered by severe cognitive impairment
- Premiums are tax deductible
3 Types of Long-Term Care Policies
- Expense-Incurred Policies (aka Reimbursement Policies)
- Indemnity Policies (Per Diem Policies)
- Hybrid Policies
Expense-Incurred Policies (aka Reimbursement Policies)
- Most common type
- Pay daily/monthly benefit limit for covered expenses up to policy limit
- Policies have caps paid over the course of the policy
Indemnity Policies (Per Diem Policies)
Pay flat dollar amount per day regardless of actual expenses in nursing facilities
Hybrid Policies
Some life insurance and deferred annuity policies include coverage for certain LTC policies
Covered Services of Long-Term Care
- Nursing home care
- Home healthcare
- Hospice care
- Adult care
Elimination Period (Long-Term Care)
Waiting period where benefits are not paid (typically 20-90 days)
Eligibility for Benefits (Long-Term Care)
Tax-qualified policies have benefit triggers that determine if the insured is chronically ill and eligible for benefits
Meet 1 of the following triggers
1) Inability to perform a certain number of Activities of Daily Livings (ADLs) (Eating, bathing, dressing)
2) Insureds must need substantial supervision to be protected against threat to health and safety because of severe cognitive impairment
Workers Compensation
- Employers are required to provide benefits to employees for losses resulting from work-related injuries
- Focus is on return to work
- "No-fault" system: no determination of negligence is needed to trigger benefits
Workers Compensation Rates Are Based on
- Frequency and severity of workers compensation claims (function of employer's individual loss record, industry employer is in, employment mix within a company)
- Rate of each "hazard class" (occupation) is multiplied times the payroll for each class
- Total premium paid by employer is the rate * payroll for each type of employment
Explained Impact of Long-Lived Nature of Life Insurer Liabilities on Asset/Portfolio Compensation
Life insurance policies are a long term investment that will eventually pay out. Insureds usually invest premiums so that when the time comes for payout they can make a profit off of insured's payments.
Leading Categories of Assets Held by Life Insurers
- Bonds
- Mortgages and Collateralized Mortgage Obligations (CMOs)
- Policy (Contract Loans)
- Risk Management Assets
Bonds
- Most important asset class for life insurance
- About 75% of assets
- Well suited to funding general account liabilities because of low default rate and predictable, regular income
Mortgages and Collateralized Mortgage Obligations (CMOs)
- About 10% of assets
- Suitable because they pay bond-like fixed income payments
Policy (Contract) Loans
Loans that policyholders take out
- Strong assets for insurers since loan can never exceed policy cash value and because unpaid principal may be deducted from death proceeds or surrender values
Risk Management Assets
Assets that are acquired to minimize asset/liability risks of insurer
Life Insurer's General Account
Fund guaranteed fixed dollar benefits (like death benefits on term or whole life insurance policies), include policy loan as an asset
Life Insurer's Separate Account
Fund liabilities for investment-risk products (variable annuities, variable life insurance and private pension benefits)
5 Major Categories of Risk Faced by Life Insurance
- Underwriting Risk
- Market Risk
- Credit Rik
- Liquidity Risk
- Operational Risk
Underwriting Risk
Results from inadequate pricing arising from assumptions made with respect to claims and expenses and to policyholder behavior like persistency (lapse, surrender) and loan activity
Market Risk
Results from volatile values and uncertainty in financial markets that can affect expected cash flows
Credit Risk
Results in the possibility that obligations due to a life insurer may not be paid as due (or at all)
Liquidity Risk
Results because policyowners may make unexpected payments/withdrawals in response to changing interest rates
Operational Risk
Results from an internal or external failure of people, process or systems to function as intended
Life Insurer Rating and Classification Categories
- Health
- Lifestyle
- Financial
Health
Correlation with mortality so assessment is important but also complex, time consuming and costly

Insurers typically consider
- Physical condition
- Mental condition
- Health history
- Family history
Lifestyle
Includes range of factors that can influence mortality
- Alcohol and drugs
- Occupation
- Military service
Financial
Purpose of using financial characteristics is to ensure that the motivation for the purchase is sound and that the amount purchased is reasonably relative to person's insurable value
Asset-Liability Risk
Arises because insurers face investment risks associated with their assets but simultaneously face actual risk associated with their liabilities and because the same external sources can affect the value of assets/liabilities simultaneously and disproportionally
Factors the Influence Asset-Liability Risk
- Interest Rates (most important) because increases affect asset and decreases affect liabilities

Market Risks Impacting Assets
- Interest rate risk
- Credit risk
- Equity market risk
Underwriting Risks
- Morbidity
- Mortality
- Longevity
- Catastrophes
Disintermediation Risk
When interest rates rise, policyowners are incentivized to surrender policies, make withdrawals or take out policy loans to take advantage of other investment opportunities that offer higher returns
(increases insurer's cash outflows)
Reinvestment Risk
Arises because when interest rates fall policyholders will repay loans (because the interest rate on the loan will now be higher relative to market interest rates) and increase flexible premiums paid to the insurer because the interest rate paid by the insurer often pays more than what is available on alternative investments
Describe the inherent tension between key stakeholders in life insurance
- Differences in tolerance of insolvency risk of key stakeholders
- Shareholders are risk tolerant (they prefer to invest less capital in order to produce higher ROEs, insolvency risk from individual equity investment can be diversified in a portfolio)
- Policyowners (and regulators) are risk averse (less able to diversify insolvency risk and prefer that more capital be invested to minimize risk of insolvency)
Different Categories of Capital Held by Life Insurers
- Operating Capital
- Reserve Capital
- Risk Capital
Operating Capital
Amount invested and accumulated non financial assets, intangibles and liquid working capital require to do business but not pay claims
- Generally the only type of capital a non financial firm needs
Reserve Capital
Amount of financial assets held by an insurer to pay its expected claims
(Amount set aside to pay known claims)
Risk Capital
Amount of financial assets held by an insurer to pay unexpected claims
- Like a rainy day fund
- Necessary to provide confidence to policyowners, regulators, and rating agencies that the insurer will remain solvent even under reasonably extreme conditions
Economic Capital
Amount of capital required to absorb max expected loss occurring with specific probability over specified period of time
Stock Insurers
Incorporated insurance companies that are owned by investors who purchased stock (equity) of the company
- Stockholders elect board of directors who appoint executive officers to manage company
Mutual Insurers
Insurer that's owned by its policyholders
- No stockholders
- Policyholders elect board of directors who appoint executive officers to manage company
- Can give out dividends
- Can raise capital via issuance of surplus notes, issuance of stock, and through accumulation of policyholder surplus
Purpose and Benefits Associated with the Use of Reinsurance by Life Insurers
- Reinsurance: insurance for insurance companies
- Life insurer cedes share of premium to reinsurer in exchange for becoming responsible for a share of the risk
- Primary Objective: increase stability of financial performance
Net Single Premium Calculation
1) Find mortality stats in table
(# of people expected to die)/(# of people alive at beginning of year) = Prob of death

2) Determine un-discounted claim payout
(Face value of policy)*(# of deaths)

3) Determine discounted claim amount
1/(1+Assumed interest rate)*(claim payout) = PV of claim

4) Determine rate (NPS) that should be paid per individual
(PV of claim)/(# lives in pool at start of period) = NSP
Numerical Method of Risk Classification
Underwriting decisions based on system of debts (negative factors) and credits (positive factors) that influence mortality
- Average mortality = 100
- Debits: increase score based on adverse rating info
- Credit: reduce score based on favorable rating info
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