Clarification of points (Chapter 13 &15)

[Trevor]

Hi, I am trying to understand a few points from the chapters around assumption setting:

In chapter 13, section 2.1, it says pricing assumptions are bock rated rather than experience rated.
I understand what is experience rating, the assumption depends on past experience, however,I don't quite understand "book rating".
Question: What does “book rating” mean?

Also in chapter 15, section 2.2, it says PMI benefit is not just a function of medical inflation , but includes:

1. Medical treatment protocols
2. Charging structures
3. Age profile of the portfolio

Question: I thought “medical inflation” is already an umbrella term, that already incorporates all the elements above. If I am wrong, what does medical inflation include? The glossary already defines medical inflation to include cost of medical treatment. So it looks like the bullet points are overlapping.

Regarding the 3rd point above (Age profile). As mentioned in the ActEd text, the premium already increased as age progresses (due to increased morbidity rate).
Question: Why do we add another layer of age differential to “double inflate” the benefit?
Is this point actually saying not only the morbidity rate increases, but the absolute/monetary amount of treatment costs will increase too? ie: not only probability increases, severity too.

 

[Mark Willder]

Hi, I am trying to understand a few points from the chapters around assumption setting:

In chapter 13, section 2.1, it says pricing assumptions are bock rated rather than experience rated.
I understand what is experience rating, the assumption depends on past experience, however,I don't quite understand "book rating".
Question: What does “book rating” mean?

Hi Trevor

I'll answer your questions in separate posts.

The difference between book rating and experience rating is explained further in Chapter 18 when we look at pricing group contracts. The key idea is whether the premiums are based on the experience of lots of policyholders or of a single policyholder (this policyholder might be an individual or a group such as an employer).

Experience rating looks at the past experience of the policyholder. So we might look at the sickness experience of a particular employer over the past year to calculate the burning cost. The burning cost ignores all other sources of data, eg experience from other group schemes. The book rate is the rate to charge calculated from all sources of past experience. We then calculate the group premium by giving a credibility weighting (Z) to the burning cost and weighting (1-Z) to the book rate.

For individual business we generally do not use experience rating (although things like NCD might introduce an element of experience rating to some extent). So we just use the book rate. This will have been calculated by looking at past experience of lots of people, ie we are not just looking at the sickness experience of one individual (as this wouldn't be very helpful if the policyholder had never been sick).

Best wishes

Mark

 

[Mark Willder]

Hi, I am trying to understand a few points from the chapters around assumption setting:

Also in chapter 15, section 2.2, it says PMI benefit is not just a function of medical inflation , but includes:

1. Medical treatment protocols
2. Charging structures
3. Age profile of the portfolio

Question: I thought “medical inflation” is already an umbrella term, that already incorporates all the elements above. If I am wrong, what does medical inflation include? The glossary already defines medical inflation to include cost of medical treatment. So it looks like the bullet points are overlapping.

/QUOTE]
Hi Trevor

Yes you're right that the term medical inflation is being used in two different ways. Although this is confusing, it does reflect actual usage of the term.

In it narrowest sense, medical inflation is just the increase in cost of a particular treatment.

In its broadest sense, medical inflation is the above but also includes all the things you list. So in its broadest sense, even if the treatments cost the same, a change in the medical protocols say might mean that we use a more expensive treatment than the cheaper one.

So in Chapter 15 Section 2.2, the Core Reading is using medical inflation in its narrowest sense, but most of the rest of the course uses the wider sense.

In the exam, it should be clear from the number of marks as to which version to use. Most of the time, talking about medical inflation in its broadest sense is enough. But if there are more marks, or the question is focusing on sources of claim inflation, then it's worth mentioning medical inflation in its narrow sense and adding in the list from Chapter 15 to get the extra detail.

Best wishes

Mark

 

[Mark Willder]

Hi, I am trying to understand a few points from the chapters around assumption setting:


Regarding the 3rd point above (Age profile). As mentioned in the ActEd text, the premium already increased as age progresses (due to increased morbidity rate).
Question: Why do we add another layer of age differential to “double inflate” the benefit?
Is this point actually saying not only the morbidity rate increases, but the absolute/monetary amount of treatment costs will increase too? ie: not only probability increases, severity too.

Hi Trevor

I agree that the Core Reading isn't totally clear here, but it's not suggesting any form of double counting. We just need to be aware that as people get older, their probability of claiming goes up, but claim amounts might also increase as it might cost more to treat an older person than a younger person.

Best wishes

Mark