In response to this question, my first question is, “What are you referring to: Loss ratio? Claims costs?” Loss ratio experience is impacted by both sides of the ledger, premium revenue and claims. There may be issues on both sides.
My second question is, “What were you expecting?”
It’s a difficult question to answer. Often, Med Supp carriers reply, “Our claims are going through the roof!” That may be so. But what is critically important to understand is the following:
1) Too high relative to what?
2) Where are claims too high?
Without answers to these questions, a carrier is left without a clue about the source, a potential solution, or a basis for future action.
The approach I often use includes measuring historical claims experience relative to benchmark (or expected) values at a refined level and then rolling up the results in total as well as by key risk characteristics. This type of actual-to-expected (A/E) analysis does two things to answer the questions above:
1) It provides an overall claims level measure (referred to here as morbidity level) together with the variation over time as well as specific risk characteristics (which we will expand on later).
2) It can provide the inherent underlying pure claims trend experienced after adjusting the measurements for other influences such as changes in the demographic and/or geographic mix, etc.
The hypothetical case study of InsureU Insurance Company provides a simple example.
Case study: InsureU Insurance Company
InsureU’s actuary, Cliff Diver, provides his boss, CEO Wanda Profits, with quarterly experience reports of among other things the new Med Supp line of business that InsureU has been selling for the last three years in the state of Bliss. InsureU has spent significant resources and capital to enter this market in order to expand membership base and hedge its risk in the commercial Patient Protection and Affordable Care Act (ACA) market. Given the lack of expertise in-house, InsureU turned to the support of consultant Sonny Days to price the product line. Premiums were priced based on various assumptions and expected to yield initial loss ratios in the low 70s. Projected financial results look something like Figure 1.
The launch of the product line had been seen as providing mixed results at best with regard to sales targets. Original sales targets were 800 policies in the first year but only 400 were issued. Competition has been fierce in the state of Bliss but InsureU weathered the storm and, on a bright note, the financial results were fantastic! So fantastic that Wanda convinced Cliff that rates were fine where they were and no rate increase in the first year was necessary. This was in spite of the recommendation by Sonny Days to file for a nominal rate increase equal to expected claims trend.
Fast-forward to year three. As sales have grown, Cliff nervously notices the quarterly reports showing financials going in the wrong direction. See Figure 2.