www.the-actuary.org.uk
Where options are material, the reserving
methodology and assumptions need to be
reviewed at least annually.
PMI and health cash plans (HCPs)
The PMI survey elicited a range of responses
from direct writers and reinsurers on their
reserving practices. In general, the methods
cited for reserving short-term health business
tend to be relatively unsophisticated, using
straightforward applications of general
insurance techniques, such as chain ladder/
link ratio methods, with some limited
credibility methodologies. Surprisingly, very
few deterministic scenario modelling or
stochastic modelling techniques were being
employed to try and quantify uncertainty
around the reserves, despite the vast amount
of work done on this topic by general
insurance actuaries in the last few years.
PMI and HCP claim trends and patterns
are influenced strongly by changes in the
underlying business models and external
sociological behaviour patterns. Changes in
perceptions of the NHS, therefore, as well
as advances in medical technology and
underlying health status, drive the propensity
to claim and claim frequency trends. Changes
in provider reimbursement and contracting
models drive significant trends in average
costs. Several respondents allow for various
underlying trends in their methodologies, but
this was not universal. The most common
factors allowed for explicitly were:
n Seasonality
n Changes in the underlying mix of business
n Trends in claims frequency.
A few respondents stated they were making
explicit adjustments for medical advances
in technology and high-cost claims, such as
cancer, but this was not widespread.
Most respondents held explicit
reserves for unearned premiums and
claims expenses in their statutory and
management accounts. No respondent
held explicit reserves for guarantees or
options, although several companies stated
they gave various types of guarantees and
options on their products.
Overall, the reserving survey highlighted
that reserving for short-term health products
is an area that has received limited attention
in the last few years and techniques
have not moved forward. However, with
Solvency II looming on the horizon, PMI
and HCP actuaries are going to have to
invest considerable time understanding the
underlying risks in their health portfolios,
the key contributors to medical inflation
and, ultimately, in developing much more
sophisticated techniques to model health
insurance reserves.
Additional reserves
Figure 1 shows the proportion of respondents
that incorporate reserves for risks that should
be considered by the reserving actuary, split
by CI, IP and PMI. It is a useful indication of
current market practice and a handy checklist
for additional reserves.
Conclusion
Perhaps the profession should be doing
more to co-ordinate approaches to
measuring the risks in health and care
insurance as Solvency II draws nearer.
If you have ideas for improving TEAM
performance, the Profession's Health
and Care Committee would like to hear
from you.
To comment on this article please e-mail editor@the-
actuary.org.uk
HealthcareReserving
October 2008 33
CIBT93 is a standard table used for Critical
Illness experience assumptions, which was
developed as part of the UK 2000 Critical
Review by the Critical Illness Healthcare
Study Group (a body associated with the
Institute of Actuaries and SIAS in London).
The study group's original purpose
was to produce tables on the basis of an
insured lives experience. The study group
found that available data was too sparse to
enable fulfilment of this objective. Thus, the
objective was modified to one of producing
a Critical Illness Base Table (CIBT93) on the
basis of population experience in the UK.
CIBT93
2005 saw the introduction of new rules
defining the capital requirements insurers
have to meet. At the heart of these reforms
is the new Individual Capital Assessment
process, where a firm must conduct its own
comprehensive assessment of the risks
faced in the business and in turn quantify
the amount and composition of capital
the firm needs to hold to mitigate these
risks to an agreed level of confidence of
survival. This is typically defined as 99.5%
confidence of remaining solvent over one
year. In other words, the firm should have
sufficient capital to survive all adverse
circumstances, other than a 1-in-200 year
event or worse.
This process puts the onus on the firm
to identify its risks and the appropriate
mitigation tools -- not only capital
but also reinsurance, risk-sharing and
`management action' such as changing
prices and adjusting the terms of policies
sold to react to changing circumstances.
This is reviewed by the Financial Services
Authority, who then issue Individual
Capital Guidance, which confirms or
amends the firm's own assessment.
Individual Capital Assessment

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