Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
We have seen unprecedented challenges for health actuaries in 2020, with the still ongoing COVID-19 pandemic disrupting all facets of the healthcare system, including broader insurance and other economic aspects as well. How the pandemic affects an insurer’s financial statement will vary based on the distribution between lines of business, areas of service, and support channels. Some financial statement items won’t be affected meaningfully (or at all), whereas other values may be greatly affected, either in their expected value or in the degree of uncertainty. As chief financial officers (CFOs) and actuaries attempt to determine the pandemic’s impact on year-end financial statements, this article describes five issues that require additional attention.
For most carriers, 2021 premiums levels were determined in the spring and summer of 2020; at that time, COVID-19 was having an impact on claim levels, but there was massive uncertainty as to the ultimate severity of the pandemic, how long it would last, and what impact (if any) it would have on 2021 claims. Data on the pandemic’s impact was hard to come by (and still is), and there was pressure to not include explicit adjustments without concrete evidence. Additionally, given optically favorable financial results in 2020 due to care deferral (especially at the time of rate-setting), there may have been pressure to “give back” in the form of lower 2021 rates. Carriers with Medicaid business have, in many cases, faced pressures to reduce already agreed upon rates due to state government tax revenue shortfalls.
What happens in the future continues to be an issue when we consider the possibility of premium deficiency reserves (PDRs) at December 31. Potential considerations include:
There is little consensus on any of these questions, and if you ask 20 actuaries, you’re likely to get 30 answers. What's important is to consider all aspects, document what you considered (and how), and have a cogent narrative for why you are making the assumptions that you are making and how much uncertainty and risk you believe an insurer is facing as of the valuation date. PDRs are generally calculated using best estimates without overt conservatism, and it is not in the best interests of your organization to be overly conservative; however, it is important to ensure that you are not putting your organization at risk. The company’s auditors will be reviewing your estimate and assumptions, and they, too, will be struggling with the correct answers. An open dialogue with your auditors can be helpful here to get them comfortable with your development (and to get you comfortable as well). Talking to others within the industry can also be valuable—others may have access to data and models that you have not considered.
Actuarial Standard of Practice (ASOP) 42 requires carriers to consider the financial strength of providers with risk arrangements, particularly in cases where expected carrier receipts are material. The provider community struggled during the COVID-19 pandemic with a sudden drop in elective services and revenue (spread unevenly across regions and specialties) that has not fully returned even as of this writing. Some of these providers will have risk arrangements in place with carriers and will, as a result of depressed utilization in 2020, end up owing money back to carriers; if providers are unable to live up to their part of the deal, these costs return to the carrier. Carriers need to carefully consider who among their partners are at particular risk due to the pandemic. What is the probability they will fail to meet their obligations, and what would that mean to the carrier organization? Beyond risk arrangements, some carriers may have provided advance payments to providers to carry them through the roughest patches of 2020; these funds may be in jeopardy as the pandemic evolves.
Carriers may need to consider a reserve to cover the related risk here, and outstanding funds as of December 31 will need to be accounted for on the financial statement.
There’s a common joke that being an actuary is like driving a car down the highway, steering while looking out the rearview mirror; actuaries generally look to prior experience and emerging trends when developing incurred but not reported (IBNR) claim estimates. The COVID-19 pandemic and the resulting shutdowns are unprecedented, and the disruptions in the use of healthcare services were significant and myriad. Incurred claims were often either COVID-19-related or reflective of a life-threatening event (all at high unit cost), and all other services tailed off dramatically.
For most of the country, the height of the pandemic-associated closures occurred in March and April; during that period, most carriers saw claim payments for these months drop substantially. For those operating on a fiscal year cycle with a closing date of June 30, these conditions created a major challenge for estimating IBNR.
Since then, we have seen a gradual increase in interactions with the healthcare system as government pressures and societal concerns have relaxed. However, given the ongoing work-from-home mandates and the general reluctance of the population to move freely, claims have not universally returned to pre-pandemic levels. Increasing incidence rates in many parts of the country in the fall have created risks of heightened restrictions on operations of businesses, including medical practices and facilities. Although future pandemic waves continue to hang over us like a specter, actuaries may have a slightly easier time estimating IBNR at December 31 than did their colleagues with valuation dates six month before.
The primary task will be to have conversations with your organizational colleagues on the front lines—those processing the claims, approving preauthorization requests, and fielding member calls. Is it reasonable to assume that claims are being paid at the same rate as pre-pandemic levels or is a lower run rate appropriate? Have any issues made it difficult for claims to be processed during the last few months? Are there any internal policy changes with respect to how disputed claims are handled or to criteria for denying or pending claims? We’ve largely moved past the point of paper claim submissions (just to name one potential example), but providers may be slowing down the frequency of claim submissions to match the cadence of experienced claims, while others try to submit claims more frequently to ameliorate financial hardships on their ends. Some of these functions may be handled by external vendors, which makes the communications more difficult (but perhaps even more necessary).
One particular challenge with establishing IBNR estimates at December 31 is the reliability of past claim payment patterns. By December 31, most actuaries are using a data-driven (triangle-driven) approach for service months as recent as November, and those months’ completion levels will be driven by the pandemic-period payment patterns. Can those payment patterns be adjusted to better reflect patterns consistent with more recent experience?
Insurers with Medicaid business face some additional challenges. The pandemic has increased Medicaid enrollment throughout 2020 due to job losses, and the health characteristics of newly enrolled members may not be known at the time 2020 year-end financial statements are prepared. Due to enrollment retroactivity rules (which are not identical across all states), carriers may not even have a full picture of enrollment at the time of preparing year-end reserve estimates; while this is always true to some extent, the reserving challenge it presents becomes more acute when the number of people eligible for Medicaid is rising quickly.
In the ACA’s individual and small group markets, risk adjustment transfers can represent a material flow of funds (either inbound or outbound). Carriers have access to their own data and by year-end can generally have a decent idea of the final values reflecting each one's own risk score, plan mix, and demographic mix. There is some uncertainty for claim run-out, but this uncertainty is not extreme by the time annual statement values are developed in February. However, the perennial challenge for actuaries developing or reviewing annual statement values is that timely information about the market parameters is not available. While this is always a challenge, COVID-19 (and the regulatory and societal responses to it) make the challenges potentially greater for (or at least different for) year-end 2020. The impacts on medical utilization described above will likely affect market-wide risk scores to some degree, although the extent of this impact will be uncertain and probably will vary by market.
Some states also opened special enrollment periods to allow people to sign up for coverage during the COVID-19 emergency, and even those states that didn’t do this could have seen changes in the enrollment make-up of the market because widespread job losses (with corresponding loss of group health coverage) created the opportunity for more people than usual to enroll through special enrollment periods. These new enrollees may look different from those who were already in the market in terms of risk score as well as in terms of demographic mix and plan selection (all of which influence the parameters in the risk adjustment transfer formula).
It is usually the case that a fairly wide range of values can be considered a reasonable estimate of a carrier’s risk adjustment transfer. For 2020, that range may be even a little wider than usual.
Statements of Actuarial Opinion for statutory financial statements are accompanied by a non-public formal memorandum that provides a narrative and technical documentation of the appointed actuary’s work. Actuarial opinions on other types of financial statements generally require some form of documentation in order to comply with applicable Actuarial Standards of Practice. Actuaries will need to be prepared to describe the ways in which the COVID-19 pandemic did and did not affect actuarial estimates on year-end financial statements.
Some considerations for documentation of actuarial items on 2020 year-end financial statements include:
All of these are points that would normally already be part of an actuarial memorandum, but each of these are areas where COVID-19 is likely to be a key part of the discussion this year.
There’s an old saying in healthcare that “if you’ve seen one market, you’ve seen one market,” and that’s particularly true with the COVID-19 pandemic. Each carrier will face different impacts from additional virus waves, government responses to emerging events, societal reactions to mitigation efforts, and potential vaccine introduction and efficacy. Beyond that, the name of the game with COVID-19 is “uncertainty,” yet financial statements require precision to the penny. Actuaries should still test a variety of appropriate scenarios before coming up with final numbers, and it’s important to get input from key stakeholders within your organization to see if your assumptions hold water (both separately and in total).
The opinions expressed in this paper are those of the authors and not Milliman’s as a whole. This paper is intended to provide an educational overview of how the COVID-19 pandemic could impact health carriers’ financial statements, and represent the authors’ best estimates of key considerations given knowledge available at the time of publication, and it is possible that we have not considered all material aspects. Due to the continued prevalence of COVID-19 in the United States and elsewhere, those responsible for completing financial statement work should carefully monitor pandemic-related items subsequent to this publication, including transmission rates local to your markets and societal and regulatory responses to the pandemic, vaccine availability and cost, and post-election changes to the health landscape. Catherine Murphy-Barron, Dan Perlman, and Doug Norris are members of the American Academy of Actuaries, and meet its qualification standards to provide this analysis.
Year-end health actuarial work: Five things to consider in light of COVID-19
As chief financial officers and actuaries attempt to determine the pandemic’s impact on year-end financial statements, this article describes five issues that require additional attention.