Canadian Handbook of Flexible Benefits

TammyTomczyk, ASA

OVERVIEW OF THE MANUAL

When I sat for the SOA Course 8M exam, I found that no one had yet developed a thorough, comprehensive study guide. As a result, I had to create my own detailed set of notes. Having an infant daughter and a 2 ½ year old son, I knew that my study time would be limited. Therefore, I summarized all of the material so that I would be able thoroughly review the entire syllabus several times.

As part of my exam preparation, I also created a set of integrated lists, comparative tables, and developed several practice problems. Those notes that helped me pass the exam formed the basis for this study guide. I hope that they will benefit you as much as they did me. Below is a description of what you will find in the manual.

Detailed Outline of the Core Readings

This section outlines each chapter and study note included on the syllabus. The material within each chapter is presented in the same order as it appears in the original readings, which makes it easy to look something up when you need to refer back to the source for greater detail. The objective was to provide enough detail here so that reference back to the readings them selves would be minimal (that Managed Care Handbook is heavy to carry around). At the same time, I confined my notes to the material as presented, including extra detail only where it was needed to clarify a complex topic.

Condensed Outline

This section mirrors the detailed outline with respect to the order that the material is presented. Subject matter remains grouped by the chapter that it was presented, however all of the supporting detailed explanations have been excluded, leaving only the major points from each chapter. This section is great for memorization.

Integrated Lists

This section takes list type information that overlaps between multiple readings and combines it. For example, rather than memorize a list of characteristic for underwriting groups and another list of characteristics for underwriting individuals, I created one list of underwriting characteristics since the two separate lists have many items in common. Then, at exam time if a question is asked only about group underwriting, I could pick from that list the items that apply to groups. The condensed outline is good for determining which list items apply in each case.

Summary Comparison Tables

This section contains a group of tables for topics where a “Compare the advantages and disadvantages of ……” question could be asked. It includes only the major points and is great for memorizing. There are also tables that compare different methods or models. For example, a table that compares characteristic of case management with disease management.

Practice Problems

While there are no real complex formulas to memorize for this exam, there are quite a few exam points allocated to math problems. Most of the material implicitly, rather than explicitly, leads to the potential for math type questions. This section is a group of practice problems that I created for myself when studying. With reservation, I have included suggested solutions, however they are based on my interpretation of the readings as many of the them do not present actual problems, but rather the background needed to solve a problems.

Canadian Handbook of Flexible Benefits

Chapter 2 – Elements of Flexible Benefits

A flexible benefit plan allows employees to decide among types of benefits, levels of coverage, and forms of compensation.

Design Approaches

Opt-Up-or-Down

Employer pays for specified level of benefits
Opt-down and receive credits
Opt-up and pay with payroll deduction or credits from opting down elsewhere

Core + Options + Credits

Choose from a range of options with the lowest being the core (needed from a public relations standpoint)
Pay for options with employer credits or payroll deductions

Health Care Expense Account

Added to a flex plan
Employer funds in Canada; in US employee can contribute too
Used for unreimbursed health care expenses
Provides benefits on a tax free basis

Combination

Core + options + credits + health care expense account

Advantages of Flex Plans to Employers

Allows for management of costs
Meets the diverse needs of employees
Allows offering a greater variety of benefits
Perceived value added
Tax advantages

Sources of Funds for Choice Making System

Rearrangement of Existing Dollars

Allows employees to increase/decrease benefits in specific areas
Opt-up-or-down approach

Canadian Handbook of Flexible Benefits

Chapter 2 – Elements of Flexible Benefits

Cutback From Existing Level

Core + option + credit approach
Used when current benefits exceed employee, needs or cannot be afforded
Core benefits are offered along with additional credits to buy new benefits

Introduction of New Money

Employee money through payroll deduction
Employer money as a flat dollar, percent of salary, or profit related

Pre-tax vs. After Tax Deductions

Pre-tax credits are more powerful
Credits are taxed based upon how they are spent
Credits used to purchase life insurance are taxable income to the employee

Areas of Choice

Medical

Benefits are fairly constant with choice among deductible, coinsurance, managed care, and maximums

Term Life

Options can vary by age/gender or be a flat rate
Employee contributions can be pre-tax or post-tax

Disability

Choices include employee vs. employer contributions and tax implications, pay replacement levels, and waiver

Vacation Time

buying and selling vacation days
Some employers only allow one or the other

Special Considerations

1. Adverse Selection

Employees choose options that provide the most coverage at the least cost, based upon their anticipated use
Can be controlled through the design of a flexible program

Canadian Handbook of Flexible Benefits

Chapter 2 – Elements of Flexible Benefits

Methods to Control Antiselection

Restrict drastic changes in coverage from year to year
Subsidize cost to encourage broad participation for some coverages
Credit less than full value for waivers
Group coverages with predictable expense with those that are less predictable
Use health care expense accounts for predictable expenses

2. Waivers of Coverage

May be limited to certain areas
May not be allowed below a core level

Health Care Expense Accounts

Employee directs credits into their account each year
Changes throughout the year are not allowed unless there is a family status change
Eligible expenses are submitted by the employee for reimbursement and paid from the account
In Canada, Contributions cannot come from employee payroll deductions and maintain tax favorable status
In the US, unused deposits at the end of the year are forfeited
In Canada, unused deposits at the end of the year may be forfeited or carried forward

If election is made to carry forward unused deposits, unused deposits can be carried forward one year and offset against expenses from the next year
If election is made to carry forward expenses, unused deposits are forfeited at the end of the year but expenses in excess of deposits can be carried forward one year to be offset against deposits from the next year

Sources of Funds

Employer contributions
Credits from tradeoffs
Salary reductions (U.S. only)

Types of Benefits

Deductibles
Coinsurance
Vision care
Orthodontia

Canadian Handbook of Flexible Benefits

Chapter 2 – Elements of Flexible Benefits

Health Care Expense Accounts are Popular Because:

Allows expansion of benefits offered to employees with little or no additional cost to the employer
Encourages employees to self-insure predictable expenses, thus reducing adverse selection
Tax benefits

Actuarial Standards of Practice #18

Long Term Care Insurance

Purpose – standard for designing, pricing, funding or evaluating LTC

Scope – individual and group, riders, self insured plans

Select Definitions

Activities of Daily Living (ADLs)

Basic functions used to measure personal functionality (eating, toileting, bathing)

Long Term Care

A range of health services including:

Adult Day Care

Social and health services provided in a group setting outside the home

Custodial Care

Care to help a person perform ADLs provided by people without professional medical skills
Performed in many settings (home, nursing home, assisted living facilities

Home Care

Skilled nursing or therapy received in the home

Hospice Care

Care for terminally ill people and counseling for their families

Intermediate Nursing Care

Daily, but not 24-hour nursing care
Often involves a lot of custodial care

Respite Care

Temporary care that allows volunteers and family members a break from care

Skilled Nursing Care

Care provided by nurses and therapists, but generally not in a hospital

Coverage and Plan Features

Consider eligibility, covered services, benefit amounts, and payment duration

Plan features needing special attention

Acceleration of benefits under a life policy
Other product providing LTC benefits
Other programs providing LTC benefits such as HMOs, PPOs, EPOs, etc.
Services provided by retirement communities

Actuarial Standards of Practice #18

Long Term Care Insurance

Assumption Setting

Consider experience data and adjust for expected changes
Consider appropriate provisions for adverse deviation

Morbidity

Should be consistent with plan features
Consider incidence, termination, and benefits when estimating claim costs

Considerations for setting claims costs:

Cost varies by type of benefit (nursing home, home care, etc.)
There is a substitution effect among benefits
Demand increases when there is insurance
Consider benefits available from other programs
The availability of LTC services impacts utilization and therefore cost
Selection
Mortality

Mortality

Consider selection and classification
Select an appropriate mortality table

Voluntary Lapse

Consider the method of marketing, product and premium competitiveness, premium mode, payment method, nonforfeiture benefits

Expenses

Should be consistent with the business plan and method of delivery

Taxes

Be consistent with the tax reserve basis of the plan
Consider all types (premium tax, income tax, etc)

Investment Income

Be consistent with the return on the assets that support the products

Mix-of-Business

Reflect the age, gender, marital status, distribution system, underwriting class, and plan options of anticipated distribution

Actuarial Standards of Practice #18

Long Term Care Insurance

Change-Over-Time Assumptions

Reflect expected changes in the assumptions

Premium Rate Recommendations

Required reserves include:Premium Reserves

Contract Reserves

Claim Reserves

Can use the same method as health insurance

Sensitivity Testing

Do prior to finalizing the assumptions
Do more testing for less credible assumptions

Cash Flow Testing

Important because of the long term nature of benefits

Experience Monitoring

Compare the prior assumptions with emerging experience
Assess implications of any differences
If industry data are used, apply new data in a timely fashion

Communication and Disclosure

Documentation

Assumptions, processes used and data sources

Disclosure

Disclose the sensitivity of actuarial work to variations in assumptions

Actuarial Opinion

This ASOP doesn’t require an actuarial opinion

Reasons LTC Work is Challenging

Data is limited
Benefits change rapidly
New financing approaches
UW, marketing, and claim payment practices vary under different LTC plans

Actuarial Standards of Practice #18

Long Term Care Insurance

Changes in consumer behavior

Changes in utilization as more insurance in available
Control of nursing home beds
Medical advances
Attitudes toward nursing homes
Divorce rates
Government funding
New LTC services

Provisions in LTC Plans

Eligibility

An elimination period may have to be satisfied
Must show medical necessity
Must use covered services

Covered Services

May be integrated into one lifetime maximum

Benefit Amount

Can be fixed or related to cost

Benefit Duration

Consecutive days
Benefit days covered
Maximum dollar benefit

Other Features Affecting the Cost

Alternative plan of care provision (covers substitutes)
Shortened benefit periods from a non-forfeiture option
Restoration of benefits
Provider discounts

Existing Practice

Reliance on noninsured data and emerging experience for pricing
Much sensitivity testing is done due to long term nature of benefits
There is a sensitivity to cash flow requirements and investment strategies

SN 8GM – 206 - 00

Variation by Duration in Small Group Medical Claims

Overview

Study measures variation in small group costs by duration
Claims costs vary by duration since issue as a result of underwriting and pre-existing condition limitations
Claims were adjusted to remove differences due to benefits, area, time period and demographics

Study Results:- Claim costs rise for 4-6 years and then level out

- Guarantee issue business has higher claims cost than underwritten business

- Highest claims were for the smallest and largest groups (claims cost by size exhibit a U-shaped pattern)

- Absence of pre-ex results in higher costs later on

Methodology

Participating Companies

7 companies in small group market
data from 1988 and 1989 with runout through early 1991

Data Collection Guidelines

Data was collected by month for the first 3 years, then by year for years 4-6, then grouped 7+
Separated by underwriting method, group size, and pre-ex limitation

only groups size 1 – 25 were studied
major medical plans with deductibles <= $500
incurred claims before reinsurance were used
duration is number of months since issue
exposure was broken into single vs. other categories
pre-ex grouped by # of months of required coverage before pre-existing conditions are covered

SN 8GM – 206 - 00

Variation by Duration in Small Group Medical Claims

Data Adjustments

Benefits

52 broad categories of adjustment factors were developed

Area

3 digit zip code adjustment factors were used

Trend

13% annually

Demographics

Age, sex, family status

Data Credibility and Limitations

Short form underwriting includes no pre-ex
All guarantee issue has 12 month pre-ex
Some newly underwritten employees are included at each duration

Exposure

70% was short form underwritten
1/3 was size 2-4, 1/3 was size 5-9
92% had 12 month pre-ex

SN 8GM – 206 - 00

Variation by Duration in Small Group Medical Claims

Results

Driven by underwriting method, size, and pre-existing limitations that are applied

Composite of single and family costs were used

Underwriting Method

Durational Adjustment

Long and short forms are steep in the first two years, then level off. (About a 30% lower claim cost in the first year vs. the second year)
Guarantee issue doubles in the second year and then levels off at its ultimate claim level

Claim Cost

Guarantee issue has significantly higher claim costs in the first three years, but ultimate runs at about the same level as underwritten business

SN 8GM – 206 - 00

Variation by Duration in Small Group Medical Claims

Size

Durational Adjustment

The same general durational pattern applies for all sizes, given the underwriting method is the same
Small groups have a somewhat steeper slope in the early years

Claim Cost

Claim costs exhibit a U-shaped pattern by group size
Groups size 5 – 9 have the lowest claim cost

SN 8GM – 206 - 00

Variation by Duration in Small Group Medical Claims

Pre-Existing Condition Limitation

Durational Adjustment

The durational slope for groups with no pre-ex limitation is steeper than for those that have a 12 month pre-ex limitation

Claim Cost

Consistency in the first 2 years between no pre-ex and 12 month pre-ex
No pre-ex policies have significantly higher costs in the later years

TSAXXXIV

Cumulative Anti-Selection Theory

The study assumes that a large group of people are all underwritten at time zero. Due to underwriting, all people included are healthy at time zero. As time passes people’s health deteriorates.

The Classical Model assumes that individual’s claims follow a durational curve, with low claims immediately after being underwritten, and increasing as time passes.

The Cumulative Antiselection (CAST) Model assumes that people are either select (healthy) or impaired (unhealthy). Everyone is select at the time of underwriting. Over time, people move from healthy to impaired, impaired to healthy, or merely lapse from the group. This model assumes that as time passes and some people begin to become unhealthy, more of the healthy people lapse as a result of rate increase.

Reasons loss ratios on mature health blocks begin to decay:

Insured are more able to quantify the probability of a health claim than a life claim
Lapse rates are higher and impaired lives remain covered

Definitions and Assumptions

Separate the block into two groups, healthy and unhealthy lives

Assume the select period is the duration of the policy
Total claims are an increasing function of duration
Claim costs for healthy and impaired groups are only a function of attained age

Active Lives

alx = number of active healthy lives

ilx = number of active impaired lives

lx = alx + ilx = total number of lives

il[x] = 0 as a result of underwriting

Claim Costs

aS[x] + t = claims cost in year t for the al[x] + t people in the active healthy population

iS[x] + t = claims cost in year t for the il[x] + t people in the active impaired population

iS[x] + t = k2 * aS[x] + t

k2 is the ratio of impaired claim costs to healthy claim costs (e.g. if an impaired person generates 2.5 times as many claims as a healthy person, then k2 would be 2.5)

TSAXXXIV

Cumulative Anti-Selection Theory

k2does not vary with [x] and t

The antiselect period is the period during which the claim costs exceed the “ultimate” claims costs