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  #1  
Old 02-08-2018, 01:47 PM
zzhang zzhang is offline
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Default Questions about Effectiveness

Hi,

When projecting further premium for health plans, I find the following factors:
Rate Increase, Effective Date, Effectiveness, Effective Rate Factor, Aging and Combined.
Combined=Effective Rate Factor * Aging

So my question is what is effectiveness and how to calculate it?
My guess is that the portion of the year before or after the rate increasing?
After finding the effectiveness, what is the formula for effective rate factor?

Thanks,
Tony
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  #2  
Old 02-08-2018, 02:08 PM
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I don't know anything about health. However, I would suggest that:
ERF=RI*E
And I have no idea how your actuaries define effectiveness, let alone how they calculate it. Are these rate factors located somewhere in an Excel spreadsheet?

Also, why haven't you asked your manager about these things?
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  #3  
Old 02-08-2018, 04:54 PM
YetAnotherCareerChanger YetAnotherCareerChanger is offline
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Quote:
Originally Posted by zzhang View Post
Hi,

When projecting further premium for health plans, I find the following factors:
Rate Increase, Effective Date, Effectiveness, Effective Rate Factor, Aging and Combined.
Combined=Effective Rate Factor * Aging

So my question is what is effectiveness and how to calculate it?
My guess is that the portion of the year before or after the rate increasing?
After finding the effectiveness, what is the formula for effective rate factor?

Thanks,
Tony
Preface: I'm not in health anymore and was never in health pricing at wherever you work.

My intuition says the Effectiveness is a measure of book mix change, where your rating has changed across classes of covered individuals and you don't expect your book to look the same due to those increases. So you may expect a rate increase of 5% but some of that will be washed out by the mix of business change. You may lose more of the insureds who will take on the most rate, or something to that effect. In health it's probably a bit different than P&C in that you may also lose some of your low rate members that are healthy and more price sensitive.

If you're looking at things retrospectively in aggregate you can look at your renewal book and see what your average rate change ended up being versus what was your filed expectation was. If you're looking prospectively then you can probably use retrospective data some and then actuarial judgement depending on the retro information you have.

I also agree with JMO that you should really be talking to someone at your company about your specific questions.
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  #4  
Old 02-09-2018, 12:00 AM
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"Fudge Factor"
Whereis DTNF when you need 'em?
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  #5  
Old 02-09-2018, 06:47 AM
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when you need 'em?
Does not compute.
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  #6  
Old 02-12-2018, 03:35 PM
cincinnatikid cincinnatikid is offline
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I've typically seen effectiveness used with respect to groups based on scattered renewal dates throughout the year.

For example, say you have exactly 2 equal sized groups - one that renews on 1/1 and one that renews on 7/1, and you put in a rate increase on 1/1/XX. The group that renews on 1/1/XX would receive the rate for the full year, whereas the group that renews on 7/1/XX would only receive the rate for the 2nd half of the year. Thus you would have an effectiveness of .75 for year XX; i.e., a 1% rate increase would generate an additional 0.75% of revenue for year XX.
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  #7  
Old 02-12-2018, 05:40 PM
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Quote:
Originally Posted by LICENSED TO ILL View Post
"Fudge Factor"
Where is DTNF when you need 'em?
Sorry, I looked at this and did not know what the terms meant, so stayed silent.
I think YACC nails it, though, if I had to guess.
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  #8  
Old 02-13-2018, 02:25 PM
zzhang zzhang is offline
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Quote:
Originally Posted by cincinnatikid View Post
I've typically seen effectiveness used with respect to groups based on scattered renewal dates throughout the year.

For example, say you have exactly 2 equal sized groups - one that renews on 1/1 and one that renews on 7/1, and you put in a rate increase on 1/1/XX. The group that renews on 1/1/XX would receive the rate for the full year, whereas the group that renews on 7/1/XX would only receive the rate for the 2nd half of the year. Thus you would have an effectiveness of .75 for year XX; i.e., a 1% rate increase would generate an additional 0.75% of revenue for year XX.
Hi,
I think you are right, but another question comes up:
Here is the situation,

rate increased 5% in 2017, with an effectiveness of 0.75; Proposed rate increases 7% with assume effectiveness of 0.6. So how to project the earned premium in 2018 (not consider other factors)

P(2018)=P(2017)/(1+5%*0.75)*(1+5%)*(1+7%*0.6)
i.e.
Step 1: P(2017) / (1+5%*0.75) :Earned premium in 2017 if no rate changed;
Step 2: *1.05 : Rate level in 2018 after 5% increase in 2017;
Step 3: (1+7%*0.6) : Actual Earned Prem in 2018 after applying effectiveness.

or something else?

Thanks
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  #9  
Old 02-13-2018, 02:48 PM
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Quote:
Originally Posted by zzhang View Post
Hi,
I think you are right, but another question comes up:
Here is the situation,

rate increased 5% in 2017, with an effectiveness of 0.75; Proposed rate increases 7% with assume effectiveness of 0.6. So how to project the earned premium in 2018 (not consider other factors)

P(2018)=P(2017)/(1+5%*0.75)*(1+5%)*(1+7%*0.6)
i.e.
Step 1: P(2017) / (1+5%*0.75) :Earned premium in 2017 if no rate changed;
Step 2: *1.05 : Rate level in 2018 after 5% increase in 2017;
Step 3: (1+7%*0.6) : Actual Earned Prem in 2018 after applying effectiveness.

or something else?

Thanks
One can model this in a spreadsheet without much effort to test your answer. You should probably do this.

I'll just add that this an extremely simple model in that it doesn't account for lapses, deaths, maturities, new business, plan changes or possible attained age premium rate changes.
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  #10  
Old 02-13-2018, 03:09 PM
zzhang zzhang is offline
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Quote:
Originally Posted by echo View Post
One can model this in a spreadsheet without much effort to test your answer. You should probably do this.

I'll just add that this an extremely simple model in that it doesn't account for lapses, deaths, maturities, new business, plan changes or possible attained age premium rate changes.
Yes, This is only one factor of the model. The final result should compound the other factors.

I am working on my own spreadsheet and not sure how to use effectiveness to project earned prem in the next year.

So I was hoping someone can help me find the proper formula.
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