Pooling Charges

[sock_man]

We're in the process of developing pooling charges for our 51+ business.

Our previously developed, but not implemented, charges are only about 1/2 of the those from a handout one of our underwriters received from a seminar.

I'd like to know your thoughts on pooling charges.
For example:
1) Do you develop your pooling charges using your own company data?
2) How do your charges compare with the competition?
3) What are reasonable charges for different attachment points? ($50k, $75k, $100k, $125k, $150k, $200k, & $250k)
4) Is pooling optional to the groups? If so, do you account for antiselection?
5) What is the smallest and largest group size pooled?
6) How many group size classifications do you have?

I have concerns with the work that was done previously at my company and am inclined to rely more on the seminar (consultant's) information until I do further research of my own.

[USCanuck]

1) Yes. Do you know how to do it? It's pretty easy.
2) Never really compared
3) I don't see how you could you use "national" or "average" pooling charges because it would depend on your contracts, your medical cost management, underwriting philosophy and a million other things.
I would split your mid-size block of business into 51 - 100, 100 - 200, 200 - 400 (ee's ). This all depends on how many ee's you have in each of these ranges, so you might have to adjust to get credibility. My rule of thumb is to try to keep the pooling charge under 5% of premium, however, it's not always easy to do, and you can end up with higher attachment points for your 51 - 100 than the others, which doesn't make sense either. Have to use lots of judgement.
4) Pooling is never optional to the groups.
5) Over 400 ee's I wouldn't pool.

[sock_man]

Thanks for the feedback.

1) Yes, I know how to develop pooling charges from our company data, but it was the seminar handout (from a seminar the underwriters attended) that has me a little worried. In it, it is suggested that using a company's own data is the worst of 4 methods to use in the development of the charges.
2) I'll let you know what/if I find out.
3) Agree, a lot more "business" decisions than pure mathematical results
4) ABSOLUTELY! Our underwriters were selectively applying pooling to groups.
5) 500 is fully credible by our formula, but I see a need for pooling on some of the larger groups or a need to raise our group size for full credibility.

Thanks for the response!

[Hierophant]

Well, your initial post/question suggests a bit of confusion to me.

If you are quoting pure insured, no dividend type contracts, then the underwriter's job is to develop the best estimate of projected costs; pooling of high claims is a technique for adjusting claims and getting a better estimate. Thus, a group with a high claim is likely to revert to a lower level next year, while a group with no high claims still has some risk of a high claim. Of course, it is important for the u/w to consider whether a given claim is ongoing before making a pooling substitution in the expected claim cost development.

If you are quoting a dividend eligible type contract, then the pooling point is a generally a matter of contractual agreement with the policyholder.

As for pricing, a targeted loss ratio of 75% or so is not uncommon, and is often lower for higher deductibles. You should use company data to set your pricing level, and your cost curve at the lower deductibles should be moderately credible if you have good sized book of business. Your cost curve at the higher deductibles will not be credible, but you can use industry data sources to develop your curve there. For example, the SOA high claim study, which I believe will be updated shortly.

Finally, if developing pooling charges, don't forget the tremendous leveraging effect of trend on high deductibles.

[sock_man]

Thanks for the reply.

Just to clarify. The pooling charges being developed are for fully insured busines. There are several reasons they are being developed...
The most important is to dampen fluctuation in the rates from year to year. Much of this, in my opinion, is caused by our credibility formula.

[sock_man]

Do any of you (who responded) work in reinsurance?