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April 2021 Q1 (v)

D

Dane

Member
Hi All,
I am working through the above question and the examiner report and had a few questions about the examiner report solution I was hoping to get some insight on.

The question asks about possible actions a government can take to address concerns of health & care insurers for a new government imposed PMI product with the following design:

"Option 2 is to change the basis on which health and care insurance companies can
charge for PMI in Country A. Under Option 2, PMI premiums will only be allowed to
vary by age, geographical location, marital status and smoker status. In addition:
 the extent to which premiums can vary by age will be limited such that the
premium for the highest age cannot be more than three times the premium for the
lowest age.
 gender can no longer be used as a rating factor.
 medical underwriting can no longer be used in the premium rating process."

Here are parts of the solution and my questions:

"The government could set up a reinsurance fund which could meet the cost of individual claim amounts above a certain level."
Q1: This answer wasn't that obvious to me. Is this common? Why is it appropriate for this question? Would the insurer not just use their reinsurer?

"The government could provide aggregate stop loss insurance for insurers."
Q2: This answer wasn't that obvious to me. Is this common? Why is it appropriate for this question? Would the insurer not just use their reinsurer?

"The government could require all individuals to purchase Private Medical Insurance."
Q3: I understand that making PMI compulsory for all would increase premium volumes and reduce anti selection risk. What are other concerns would be alleviated for the insurers of Country A because of this change?

"The government could introduce risk equalisation within the PMI insurance market, where risk is shared across insurers."
Q4: What is risk equalisation within a market and how does it work?

"The profits / losses on the identified riskier policies are pooled and then shared among the insurers involved to ensure that they all have the same average experience. This avoids the risk of one insurer taking on more risky policies (e.g. by writing cover for older lives) than others in the market, leading to uncompetitive premiums."
Q5: Is this common?

"Health and care insurers could be subsidised directly based on the level of risk they are accepting. The more risk accepted, the larger the subsidy."
Q6: Is this common?



 
Dane said:
Hi All,
I am working through the above question and the examiner report and had a few questions about the examiner report solution I was hoping to get some insight on.

The question asks about possible actions a government can take to address concerns of health & care insurers for a new government imposed PMI product with the following design:

"Option 2 is to change the basis on which health and care insurance companies can
charge for PMI in Country A. Under Option 2, PMI premiums will only be allowed to
vary by age, geographical location, marital status and smoker status. In addition:
 the extent to which premiums can vary by age will be limited such that the
premium for the highest age cannot be more than three times the premium for the
lowest age.
 gender can no longer be used as a rating factor.
 medical underwriting can no longer be used in the premium rating process."

Here are parts of the solution and my questions:

"The government could set up a reinsurance fund which could meet the cost of individual claim amounts above a certain level."
Q1: This answer wasn't that obvious to me. Is this common? Why is it appropriate for this question? Would the insurer not just use their reinsurer?

"The government could provide aggregate stop loss insurance for insurers."
Q2: This answer wasn't that obvious to me. Is this common? Why is it appropriate for this question? Would the insurer not just use their reinsurer?

"The government could require all individuals to purchase Private Medical Insurance."
Q3: I understand that making PMI compulsory for all would increase premium volumes and reduce anti selection risk. What are other concerns would be alleviated for the insurers of Country A because of this change?

"The government could introduce risk equalisation within the PMI insurance market, where risk is shared across insurers."
Q4: What is risk equalisation within a market and how does it work?

"The profits / losses on the identified riskier policies are pooled and then shared among the insurers involved to ensure that they all have the same average experience. This avoids the risk of one insurer taking on more risky policies (e.g. by writing cover for older lives) than others in the market, leading to uncompetitive premiums."
Q5: Is this common?

"Health and care insurers could be subsidised directly based on the level of risk they are accepting. The more risk accepted, the larger the subsidy."
Q6: Is this common?


Click to expand...
Hi Dane

It is quite common in the SA1 exam to be asked questions on unusual situations that therefore require non-standard solutions. So we shouldn't be surprised if the solution includes suggestions that would be uncommon in the country we work. Given the need for unusual answers, the solution gives a score of 8.5 compared to the required marks of 5 - so we wouldn't need to make all these points to score well.

The solution to part (iii) mentioned problems with obtaining reinsurance due to the new government restrictions. So it makes sense to suggest that the government might step in to provide this reinsurance required to make the new product work. Governments have been known to act as reinsurer of last resort.

I agree, making PMI compulsory would reduce the anti-selection risk. This is particularly important for the new product given the restrictions on pricing.

Some markets have introduced risk equalisation. Part (iv) mentioned the risk that some insurers could take the young healthy lives. A risk equalisation approach would involve the government analysing the age/gender profile of each insurer and requiring that the insurers with the less expensive risks transfer a payment to the insurers with the more expensive risks.

Government subsidies are quite common. Making them dependant on the risk is a good way to target the problems raised in part (iv).

Best wishes

Mark
 
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