P64 – Private medical insurance practice · advertising with the newage opportunities presented...

Examination Guide

P64 October 2019 EG

P64 – Private medical insurance practice Diploma in Insurance

October 2019 Examination Guide

SPECIAL NOTICE

Candidates entered for the October 2020 examination should study this Examination Guide

carefully in order to prepare themselves for the examination.

Practise in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

Examination Guide

P64 October 2019 EG 2

P64 – Private medical insurance practice Contents Important guidance for candidates 3

Examiner comments 7

Question paper 10

Test Specification 16

Model answers 17

Published February 2020 Telephone: 020 8989 8464 E-mail: [email protected]

Copyright ©2020 The Chartered Insurance Institute. All rights reserved.

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Examination Guide


IMPORTANT GUIDANCE FOR CANDIDATES

Introduction The purpose of this Examination Guide is to help you understand how examiners seek to assess the knowledge and skill of candidates. You can then use this understanding to help you demonstrate to the examiners that you meet the required levels of knowledge and skill to merit a pass in this unit. Before the examination Study the syllabus carefully This is available online at www.cii.co.uk. All the questions in the examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar with it. There are books specifically produced to support your studies that provide coverage of all the syllabus areas; however, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic, or an alternative viewpoint is sought. The reading list which can be found with the syllabus provides valuable suggestions. Read widely It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to expect that the study of a single study text will be sufficient to meet all your requirements. While books specifically produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic, or an alternative viewpoint is sought. The reading list which can be found with the syllabus provides valuable suggestions.

Make full use of the Examination Guide This Examination Guide contains a full examination paper and model answers. The model answers show the types of responses the examiners are looking for and which would achieve maximum marks. However, you should note that there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. This guide and previous Examination Guides can be treated as ‘mock’ examination papers. Attempting them under examination conditions as far as possible, and then comparing your answers to the model ones, should be seen as an essential part of your exam preparation. The examiner’s comments on candidates’ actual performance in each question provide further valuable guidance. You can obtain free copies of the most recent Examination Guides online at www.cii.co.uk.

http://www.cii.co.uk/


Examination Guide


Know the structure of the examination Assessment is by means of a three hour paper. Part 1 consists of 14 compulsory questions, worth a total of 140 marks. Part 2 consists of 2 questions selected from 3, worth a total of 60 marks. Each question part will clearly show the maximum marks which can be earned. Read the current Diploma in Insurance Information for Candidates Details of administrative arrangements and the regulations which form the basis of your examination entry are to be found in the current Qualifications Brochure, which is essential reading for all candidates. It is available online at www.cii.co.uk.


Examination Guide


In the examination The following will help: Spend your time in accordance with the allocation of marks

• The marks allocated to each question part are shown on the paper. • If a question has just two marks allocated, there are likely to be only one or two points for

which the examiner is looking, so a long answer is a waste of time. • Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate

answer. • Do not spend excessive time on any one question; if the time allocation for that question has

been used up, leave some space, go on to the next question and return to the incomplete question after you have completed the rest of the paper, if you have time.

Take great care to answer the question that has been set

• Many candidates leave the examination room confident that they have written a ‘good’ paper, only to be surprised when they receive a disappointing result. Often, the explanation for this lies in a failure to fully understand the question that has been asked before putting pen to paper.

• Highlighting key words and phrases is a technique many candidates find useful. • The model answers provided in this Examination Guide would gain full marks. Alternative

answers that cover the same points and therefore answer the question that has been asked would also gain full marks.

Tackling questions Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions which you find challenging until you have attempted the questions you are confident about. Candidates’ should avoid mixing question parts, (for example, 1(a)(i) and (ii) followed by 2(b)(ii) followed by 1(e)(i)) as this often leads to candidates unintentionally failing to fully complete the examination paper. This can make the difference between achieving a pass or a narrow fail. It is vital to label all parts of your answer correctly as many questions have multiple parts to them (for example, question 1(a) may have parts (i), (ii) and (iii)). Failure to fully distinguish between the separate question parts may mean that full credit cannot be given. It is also important to note that a full answer must be given to each question part and candidates should not include notes such as ‘refer to answer given in 1(b)(i)’. Answer format Unless the question requires you to produce an answer in a particular format, such as a letter or a report, you should use ‘bullet points’ or short paragraphs. The model answers indicate what is acceptable for the different types of question. Where you are asked to perform a calculation, it is important to show all the steps in your answer. The majority of the marks will be allocated for demonstrating the correct method of calculation. Provided handwriting is legible, candidates will not lose marks if it is ‘untidy’. Similarly, marks are not lost due to poor spelling or grammar.

Examination Guide


Calculators If you bring a calculator into the examination room, it must be a silent, battery or solar-powered, non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements.

Examination Guide


EXAMINER COMMENTS

Question 1 For part (a), candidates needed to identify that the policy pays a fixed lump sum according to the medical procedure claimed for, rather than indemnification for the cost of treatment received, to achieve good marks. Neither question part was answered particularly well by candidates. Question 2 This question was reasonably well answered by the majority of candidates. Question 3 Answers for part (a) were generally good however, some candidates referred to switches of individually paid business although the question clearly referenced group-paid private medical insurance only. For part (b), the answers were mostly satisfactory. Question 4 Candidates correctly compared the merits of a traditional medium such as newspaper advertising with the new-age opportunities presented by telesales and social media. Although there was a little confusion over the relative costs and the reach of each medium. The question overall, was answered reasonably well. Question 5 Most candidates mentioned the positive contribution made by overseas doctors and consultants working within the National Health Service (NHS) as required in part (a). Some went on to mention that UK patients were often treated in overseas locations in order to reduce the length of NHS waiting lists. Candidates’ answers for part (b) would have benefitted from a clearer understanding on licensing and regulatory restrictions placed upon UK-based private medical insurers wishing to transact business in overseas territories. Overall, the question produced satisfactory answers. Question 6 This question was not well answered as the application of the Consumer Rights Act 2015 to private medical insurance was not well understood. Some candidates incorrectly linked the Act to issues more central to the Insurance Act 2015 and the General Data Protection Regulation. Question 7 Candidates had a good understanding of the role and objectives of an actuary within a private medical insurer. The actuary’s involvement in strategic pricing decisions was correctly stated along with achievement of short- and longer-term profitability targets. Some candidates viewed the actuary being involved in underwriting decisions at a tactical level. Overall, the question performed well. Question 8 Not all candidates correctly mentioned that the payment demanded by the transferring insurer, and its reasons for wanting to divest the book of business, would be critical considerations when answering part (a). For part (b), candidates were not always sure of this process and, whilst very few candidates made statements that were incorrect, the degree of outline offered did not produce very high marks.

Examination Guide


Question 9 The stronger candidates stated the absence of benefits more likely to be of interest to younger members when answering part (a). These same candidates also referred to the rising cost of cover as a result of the age demographic of the target audience and barriers to entry for new customers. For part (b), most candidates were comfortable with describing a four-week scheme and only a few incorrectly thought that either the policy would be of only four weeks’ duration or that the first four weeks of cover was applied as a deductible or franchise. Part (c) related to a mid-range policy and candidates’ answers went further than just stating that the range of benefits were somewhere between those offered by basic and comprehensive versions. Answers on how benefits might be extended or curtailed and the effect on the associated premiums were generally well made by candidates. Overall, this question was answered satisfactorily. Question 10 Part (a) of this question was reasonably well answered by the majority of candidates. In answering part (b), candidates commented on the positive impact of wellbeing and occupational benefits on the recruitment and retention of employees, but not all referred to the advantages associated with productivity in the workplace if staff are mentally and physically healthy. Question 11 Most candidates correctly mentioned the factors of longevity, morbidity and mortality. Fewer candidates referred to the extent of funding by governments on healthcare and the relative positioning of state funded provision alongside privately funded healthcare. Question 12 Most candidates were able to explain the way a closed and open referral operates although there were a few instances of candidates accrediting their descriptions of each to the wrong heading. Candidates’ answers for part (b) would have benefitted from mentioning how an open referral can be used to manage claims costs. Question 13 This question was reasonably well answered by the majority of candidates. Question 14 Most candidates correctly identified a finance department’s day-to-day involvement in preparation of financial statements, payment of invoices and debit and credit management. A few candidates described the strategic role of a finance director but still managed to achieve reasonable marks. Overall, the question was answered quite well. Question 15 Part (a) was answered reasonably well with many candidates discussing the effect that moratorium underwriting would have on both the applicant and the insurer. For part (b), very few candidates achieved high marks which was mainly due to time being spent explaining the premium savings that were due to the applicant by accepting a voluntary excess. This and related discussions were outside of the question’s scope.

Examination Guide


Question 16 For part (a), candidates achieved reasonably good marks with some justifiably suggesting that an active role could have advantages over one that is entirely desk-based. The focus of part (b) was on locational risk and required just an outline of how geography can affect lifestyle, the cost of private treatment and facilities available, and waiting times for healthcare. This question part was answered quite well. Candidates’ responses to part (c) included, limitations applied to available hospitals, removal of relatives or dependants, the application of increased waiting times for treatment and the application of a larger monetary excess. Some candidates omitted many of these important points and instead focused on changing insurers, opting for an affinity scheme or cancelling cover altogether. Overall, this question was not well answered. Question 17 This question was reasonably well answered by the small number of candidates who selected it. Part (a) answers provided some good reference to a typical ‘top-down’ hierarchal organisational chart. For part (b), candidates correctly selected some or all of the three ways in which insured groups and members might share the cost of premium payment. The question part which proved to be the most challenging for candidates was part (c), although overall performance on the question was not affected too much. In answering part (d), the majority of candidates demonstrated a knowledge of the capital, supervisory and reporting checks imposed. For part (e), candidates sufficiently described the benefits that the insurer might derive from reinsurance, although relatively few identified quota share as the treaty of choice for a start-up insurer. Most candidates gained a share of the five marks available for part (f) however, some answers focussed on the Access to Medical Reports Act 1988 and the Insurance Act 2015 rather than the General Data Protection Regulation.

Examination Guide


P64

Diploma in Insurance Unit P64 – Private medical insurance practice October 2019 examination Instructions • Three hours are allowed for this paper. • Do not begin writing until the invigilator instructs you to.

• Read the instructions on page 3 carefully before answering any questions. • Provide the information requested on the answer book and form B.

• You are allowed to write on the inside pages of this question paper, but you must NOT write

your name, candidate number, PIN or any other identification anywhere on this question paper.

• The answer book and this question paper must both be handed in personally by you to the invigilator before you leave the examination room. Failure to comply with this regulation will result in your paper not being marked and you may be prevented from entering this examination in the future.

Examination Guide


Unit P64 – Private medical insurance practice Instructions to candidates Read the instructions below before answering any questions • Three hours are allowed for this paper which carries a total of 200 marks, as follows:

Part I 14 compulsory questions 140 marks Part II 2 questions selected from 3 60 marks

• You should answer all questions in Part I and two out of the three questions in Part II.

• You are advised to spend no more than two hours on Part I.

• Read carefully all questions and information provided before starting to answer. Your answer

will be marked strictly in accordance with the question set.

• The number of marks allocated to each question part is given next to the question and you should spend your time in accordance with that allocation.

• You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet.

• It is important to show each step in any calculation, even if you have used a calculator.

• If you bring a calculator into the examination room, it must be a silent, battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements.

• Answer each question on a new page. If a question has more than one part, leave six lines blank after each part.

Examination Guide


PART I

Answer ALL questions in Part I

Note form is acceptable where this conveys all the necessary information

1. (a) Explain briefly the features of hospital treatment insurance. (5) (b) Outline three ways that surgeons’ and anaesthetists’ fees may be paid by

private medical insurance. (6) 2. (a) State eight reasons why an employer would consider providing its staff with

company-paid private medical insurance (PMI). (8) (b) Identify six ways an employer could vary the company-paid PMI benefits it

offers to different categories of staff. (6) 3. (a) Explain briefly what is meant by continued personal medical exclusions

(CPME) and its application to group private medical insurance underwriting. (5) (b) State seven factors that would affect an insurer’s decision to offer CPME

terms. (7) 4. Describe briefly three features of each of the following types of direct product

promotion used by private medical insurers. (a) Newspaper advertising. (3) (b) Telesales. (3) (c) The insurer’s website. (3) (d) Worksite marketing. (3) (e) Social media. (3)

Examination Guide


5. (a) State three ways in which overseas healthcare providers and professionals

interact with the National Health Service (NHS). (3) (b) Outline how regulations applying in some overseas countries can affect the

operations of UK-based private medical insurers in those territories. (3) 6. State the purpose of the Consumer Rights Act 2015 and its application to private

medical insurance. (5) 7. Explain briefly four actuarial objectives of a private medical insurer when managing

its risk portfolio. (8) 8. Insurer A is considering adding a book of private medical insurance (PMI) business

which is being offered by Insurer B to Insurer A’s current PMI portfolio. (a) Describe briefly the factors Insurer A would consider when deciding whether

to accept the transfer. (6) (b) Outline three ways in which the transfer could be accepted by Insurer A. (6) 9. Describe briefly the proposition that a private medical insurer would typically offer

its customers under a: (a) senior policy; (4) (b) four-week scheme; (4) (c) mid-range policy. (4)

Examination Guide


10. In connection with group-paid private medical insurance: (a) list five examples of the services that employees can access under an

arrangement providing wellbeing and occupational benefits; (5) (b) explain briefly why an employer would purchase wellbeing and occupational

benefits. (5) 11. List six factors that can be used to compare the effectiveness of healthcare systems

internationally. (6) 12. Explain briefly, in relation to a private medical insurer’s managed care principles,

what is meant by: (a) a closed referral; (4) (b) an open referral. (4) 13. (a) Explain briefly the role of a third party administrator (TPA). (2) (b) Outline three advantages and three disadvantages to a private medical

insurer when using the services of a TPA. (6) (c) List seven functions that could be performed by a TPA on behalf of the

insurer. (7) 14. Identify six responsibilities typically undertaken by a private medical insurer’s

finance department. (6)

Examination Guide


PART II

Answer TWO of the following THREE questions

Each question is worth 30 marks 15. Philip is considering buying comprehensive private medical insurance (PMI) from

an insurer that offers cover subject to moratoria. He is in good health and would like to know whether moratorium underwriting is best for him. The insurer’s offer of cover would be subject to a policy excess.

(a) Discuss moratorium underwriting and its likely effect on both Philip and the

insurer. (22) (b) Describe how the application of an excess can be used by the insurer as a

way of reducing the incidence and cost of losses under Philip’s PMI policy. (8) 16. Susan has informed her private medical insurer that she is leaving her job in

telesales and relocating to a different part of the UK to become a care home assistant.

(a) Explain the view Susan’s insurer might take on her change in occupational

risk. (7) (b) Outline how Susan’s relocation might impact her premium. (5) (c) Explain how Susan’s premium could be made more affordable without any

significant loss of cover. (18) 17. A company plans to form a start-up insurer to exclusively transact group-paid

private medical insurance in the UK. (a) Outline the ownership structure and aims of the insurer. (4) (b) Describe briefly three ways in which insured groups and members might

share the cost of premium payment. (6) (c) Summarise three commercial elements that contribute to the insurer’s

process of pricing group-paid private medical insurance. (6) (d) State how the insurer will be impacted by Solvency II regulations. (4) (e) Describe briefly how the insurer can benefit from the use of reinsurance in

its early years of trading. (5) (f) Outline the effect of the General Data Protection Regulation (GDPR) on the

insurer’s operations. (5)

Examination Guide


TEST SPECIFICATION

October 2019 Examination – P64 Private medical insurance practice Question Syllabus learning outcome(s) being examined 1 2 – Understand private medical insurance products and principles

4 – Understand the application of claims and policy administration 2 2 – Understand private medical insurance products and principles 3 2 – Understand private medical insurance products and principles

3 – Understand the application of pricing and underwriting for private medical insurance 4 – Understand the application of claims and policy administration

4 6 – Understand the distribution of private medical insurance 5 1 – Understand the relationship between public and private medical provision

2 – Understand private medical insurance products and principles 5 – Understand legislation and regulation in relation to private medical insurance

6 5 – Understand legislation and regulation in relation to private medical insurance 7 3 – Understand the application of pricing and underwriting for private medical insurance

5 – Understand legislation and regulation in relation to private medical insurance 6 – Understand the distribution of private medical insurance

8 3 – Understand the application of pricing and underwriting for private medical insurance 4 – Understand the application of claims and policy administration

9 2 – Understand private medical insurance products and principles 10 2 – Understand private medical insurance products and principles 11 1 – Understand the relationship between public and private medical provision 12 2 – Understand private medical insurance products and principles

4 – Understand the application of claims and policy administration 13 4 – Understand the application of claims and policy administration

6 – Understand the distribution of private medical insurance 14 6 – Understand the distribution of private medical insurance 15 2 – Understand private medical insurance products and principles

3 – Understand the application of pricing and underwriting for private medical insurance 4 – Understand the application of claims and policy administration

16 1 – Understand the relationship between public and private medical provision 2 – Understand private medical insurance products and principles 3 – Understand the application of pricing and underwriting for private medical insurance

17 2 – Understand private medical insurance products and principles 3 – Understand the application of pricing and underwriting for private medical insurance 5 – Understand legislation and regulation in relation to private medical insurance 6 – Understand the distribution of private medical insurance

Examination Guide


NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/)

indicates an equally acceptable alternative answer.

Model answer for Question 1 (a) Hospital treatment insurance pays a fixed cash sum for specified surgical and major

medical procedures rather than indemnifying all costs associated with the medical treatment. The cash sum will depend on the cost band of the procedure required. Additional benefits can be added which may bring the limited cover available more in line with conventional private medical insurance.

The insured can keep the balance if the policy benefit exceeds the cost of treatment.

Some insurers assist insureds in locating the least expensive, but most appropriate source of surgery to assist in achieving this aim.

Outpatient cover may be included or excluded. If included, there may be a relatively low

annual or per item limit. (b) Any three of the following: • A full refund of all fees, without qualification. This is the widest form of cover and

would only be available under top-of-the-range policies. • A full refund of all ‘reasonable and customary’ fees. The insurer pays in full if the fees

are within its usual range. • Specified combined fees for the surgeon and anaesthetist. The combined cost is

usually split in favour of the surgeon unless special circumstances apply. • Specified individual fees for the surgeon and anaesthetist. There could be a difference

between fees paid if there is a variance in the complexity of the role of each. • A combined fee is paid to the hospital. The hospital then separately pays the surgeon

and anaesthetist.

Examination Guide


Model answer for Question 2 (a) Any eight of the following: • To improve the health and welfare of staff. • To improve productivity. • To return employees to work as soon as possible following periods of sickness. • To improve employee engagement. • To be seen as a caring employer. • To improve staff morale. • To reduce workplace stress. • To prevent future health issues for staff. • To improve staff retention. • To control staff-related costs. • To improve recruitment by matching benefits offered by competitors. • To provide greater information on staff illness. • To reduce the cost of group income protection insurance. • To reduce the effect on the employer of employees’ musculoskeletal problems or

similar. (b) Any six of the following: • The company’s senior managers and directors may be provided with a comprehensive

range of benefits and services. • The company’s junior managers may qualify for a reduced level of cover offering basic

benefits and services. • Members of staff below managerial level could be offered a completely different

lower standard of cover such as a budget policy. • Further discrimination could be based on the number of years’ service each member

of staff has completed. • Certain categories of employee could be offered cover for their dependants. • Hospital bands could be varied. • Senior staff could be offered continuous cover post-retirement.

Examination Guide


Model answer for Question 3 (a) Continued personal medical exclusions (CPME) apply when an employer transfers its

group private medical insurance scheme from one insurer to another. CPME terms are a means of attracting new business at a time when there is intense competition among insurers. The new insurer agrees to accept the scheme on the same, or better, medical underwriting terms when compared to the previous insurer. The new policy will not impose any more exclusions than the previous one, provided a short list of questions can be answered satisfactorily. Members having pre-existing conditions will be covered for those conditions if they were not previously excluded. All previous exclusions will be carried forward. The benefits may not be like for like.

(b) Any seven of the following: • The size of the scheme because those that involve a very small number of employees

may not be eligible. • The largest schemes could instead qualify for ‘medical history disregarded’

underwriting. • Type of industry or occupations involved because some trades are prone to the latent

development of injury or disease. • The geographical location of employees. • The ages of the employees. • When the scheme was last underwritten by the previous insurer. • How the scheme was previously underwritten and what terms were applied. • The loss ratio of the previous insurer, if known. • Whether the benefits required by the scheme on transfer are different from, or

superior to, those previously provided. • Whether the categories of employees to be covered have altered. • If the new insurer is likely to be exposed to conditions where treatment is already

being given or a medical condition is just starting to emerge. • The terms and conditions will always be set at levels that the insurer believes will

maintain profitability.

Examination Guide


Model answer for Question 4 (a) Any three of the following: • Leads are generated through newspaper advertising that can be followed up by a

salesperson. • A newspaper advertisement could include a full application form. • The cost of buying advertising space can be expensive. • The needs of customers must be considered before committing to cover. (b) Any three of the following: • The latest technology can be used to assist the sales process. • Calls can be recorded to ensure quality and for training purposes. • Salespeople will be well-trained and have excellent product knowledge. • Calls can be targeted at defined market segments. • Sales can be completed over the telephone or an appointment made for a

salesperson to visit a prospective customer. (c) Any three of the following: • An insurer’s website could be used to generate leads. • A menu of information is provided so that the prospective customer can access as

much information as needed. • An application form, medical declaration and direct debit mandate can be completed

online. • This form of product promotion can be inexpensive. • Insurers can receive ‘click-through’ and complete the sales process immediately and

assume risk in a paper-free environment. • A wet signature on a signed declaration may be needed once a policy has gone on

risk. (d) Any three of the following: • Worksite marketing is a useful way to meet employees seeking cover under voluntary

group schemes. • Employees can be met at their place of work. • Media includes the employer’s intranet, one-to-one meetings, group meetings or

clinics. • Large numbers of employees can be seen at any one time. • Time investment and travelling costs are reduced. (e) Any three of the following: • Satisfied customers can positively reinforce the insurer’s brand. • Complaints can be quickly resolved to minimise negativity towards the insurer’s

products. • Postings can be studied carefully, and the insurer’s message adjusted to achieve the

best returns. • The insurer can influence the medium by actively participating in discourse. • Insurers should avoid artificially boosting positive feedback by purporting to be

satisfied customers.

Examination Guide


Model answer for Question 5 (a) Any three of the following: • Joint ventures outside of the UK have been established with the National Health

Service (NHS). • These joint ventures generate income for participating parties who benefit from

knowledge, facilities and technology available in other countries. • Overseas locations receive patients from the NHS for routine treatments in order to

reduce waiting times and to achieve cost-effective outcomes. • Medical staff from overseas are recruited heavily by the NHS. • UK citizens needing medical treatment whilst travelling overseas may be able to

benefit from reciprocal arrangements with local providers. (b) A growing number of countries require UK nationals working in their countries to have

approved international private medical insurance (IPMI) cover. Each territory may also have specific cover requirements before an IPMI policy is approved. In some cases, IPMI can only be sold by a UK insurer, if the insurer is authorised in the country in which its customer resides or works. Some UK insurers are obliged to partner with local insurers in order to comply with regulations. Any breach of such codes or regulations can result in severe penalties for the insurer.

Model answer for Question 6 The Consumer Rights Act 2015 sets out to reform and consolidate consumer law in the UK. The four key aspects of the Act which relate to insurance are: • Existing legislation on unfair contract terms is clarified. In particular, exclusions must be

transparent and prominent within the policy terms and conditions. • Policy literature and renewals must be written in plain and intelligible language. • Digital content must be accessible, fit for purpose and of a satisfactory quality. • Services must be provided within a reasonable time.

The aims of the Act are supported by the Association of British Insurers Code of Practice.

Examination Guide


Model answer for Question 7 Any four of the following: • The pricing strategy and tactics need to be linked to the overall vision and objectives of the

insurer. • To achieve current year and longer-term profitability targets. • To decide whether to cross-subsidise between different markets, products, ages of

members or underwriting years. • Whether to introduce segmentation when setting the price to be charged to individual

members. • To establish the relationship between underwriting and pricing. • To assess the desirability, availability and cost of purchasing different types and levels of

reinsurance. • To assess the impact of projected business volumes on fixed and variable expenses. • To ensure that the insurer meets its solvency requirements including its obligations under

Solvency II. • To compare the insurer’s pricing with those of competitors. • To match price to risk as this is important in determining whether the insurer will attract

better or poorer risks. • To be able to continue writing private medical insurance business. • To avoid pricing the portfolio at less than cost over a sustained period.

Model answer for Question 8 (a) Insurer A would consider: • the reasons why Insurer B is offering the book of business for transfer; • the value of adding new customers to its current market share; • the customer demographic; • how many of the customers offered are likely to accept the transfer; • how profitable the business offered is likely to be; • the costs attached to integrating the offered business; • the terms that Insurer B is demanding in order to allow the transfer to take effect; • whether any existing third party administration arrangements would continue beyond

the proposed transfer. (b) Insurer A: Any three of the following: • may acquire the name of Insurer B and take over all of its responsibilities and

liabilities; • could offer terms that are identical, at the same or a different premium; • could offer ‘no worse terms’ or similar, based on an equivalent but not identical

policy; • may offer a switch but apply new underwriting terms.

Examination Guide


Model answer for Question 9 (a) • Senior policies are aimed at elderly people as this population segment is more likely

to need medical treatment. • The benefits associated with a younger demographic will probably be excluded. • The policy cover will focus on cancers and treatment for acute age-related conditions. • Senior policies could be used as an encouragement for retiring group scheme

members to retain cover on an individual basis. • Cover could be unavailable for new entrants over a specified age although insurers

may not refuse to renew existing policies on the grounds of age. • The cost of purchasing cover can be expensive. • The premiums increase with age to reflect extra costs and increased claims. (b) • A four-week scheme is a form of basic policy providing cover at low premium. • The cover for eligible conditions only becomes available when the waiting list is

longer than four weeks for National Health Service (NHS) treatment. • Waiting lists are defined by the average waiting time according to NHS England data. • Alternatively, the customer can decide to wait for free treatment as an NHS patient in

return for payment of a cash benefit. • The customer needs to be aware that waiting times can vary according to region,

individual hospital or consultant. • The customer must also understand that due to the low-cost nature of the policy

there is no automatic cover for all private medical treatment. (c) • A mid-range policy offers many of the benefits available under comprehensive

policies. However, some benefits are reduced or excluded completely. • It is a means of containing treatment costs and reducing premiums. • The customer may be obliged to accept treatment in a pre-specified hospital. • Outpatient benefits are usually capped. • Peripheral benefits, such as repatriation, ambulance services and optical care are

usually excluded.

Examination Guide


Model answer for Question 10 (a) Any five of the following: • Health screens. • Helplines. • Counselling. • Employee assistance programmes. • Information services. • Sickness absence management. • Private general practitioners. (b) Employers have a vested interest in the mental and physical health of their staff. This is

because of the positive effect such characteristics have on productivity and the reduction in absenteeism. Staff that eat healthily and are fit will be less likely to have lifestyle-related illnesses and conditions which require time off work.

Purchasing wellbeing and occupational benefits represents a ‘before the event’ solution

that prevents the occurrence of avoidable events that have a negative impact on attendance. Such a programme signifies a consistent return on investment for the employer, compared to the modest cost of purchase, and a competitive advantage is given over other employers.

Model answer for Question 11 Any six of the following: • How long people live on average. • Recent improvements in longevity. • Infant mortality. • The number of practicing physicians per 1,000 of the population. • The proportion of gross domestic product spent on healthcare. • The split between publicly funded and privately funded healthcare. • The split between publicly provided and privately provided healthcare. • The proportion of the population covered by healthcare insurance. • How equitable systems are, and their availability to all regardless of wealth and education. • Customer satisfaction surveys. • World Health Organization research and findings.

Examination Guide


Model answer for Question 12 (a) A closed referral is where a claimant’s general practitioner (GP) makes a referral to a

named specialist for treatment. The GP is aware of all treatment options and as a result the GP can carefully choose an appropriate specialist. The GP chooses a specialist based upon the required treatment outcome. The recommendation may involve fees that are above those paid by the claimant’s insurer or the GP may not have sufficient information to choose the best specialist.

(b) An open referral is where the GP’s referral of the claimant does not specify a specialist,

consultant or hospital. Instead the insurer decides where, and with whom, treatment of the claimant should take place. The claimant will only be referred to treatment providers who regularly undertake the relevant procedure. A better outcome could result for the claimant than an inappropriate recommendation from the GP. The insurer will endeavour to choose a treatment provider situated within a reasonable distance of the claimant’s home or place of work. Open referrals can be an effective way for the insurer to manage claims costs whilst at the same time leading to a favourable conclusion for the claimant.

Examination Guide


Model answer for Question 13 (a) A third party administrator (TPA) will handle contact with policyholders in the name of

the insurer. The TPA offers administrative back-up for more than one insurer. The TPA may have delegated powers to underwrite and settle claims in accordance with the terms of its service level agreement. Some insurers provide services in the guise of a TPA themselves.

(b) Advantages Any three of the following: • TPAs achieve cost savings for the insurer. • Insurers may typically want to focus on one or more specific functions of its core

business leaving other aspects in the care of a TPA. • TPAs offer benchmarking services allowing comparisons to be made by contracted

insurers between their own products and services, and those offered by competitors. • Members can be offered products that are more competitively priced. • TPAs set out to provide a better level of service than the insurer can offer in-house. Disadvantages • The relationship between the TPA and the insurer will not necessarily be transparent

so far as the member is concerned. • The insurer may lose control or ownership of the member. • There could be a conflict of interest on the part of the TPA that works to the

detriment of the insurer. (c) Any seven of the following: • Underwriting. • Claims. • Customer service. • Product design. • Price negotiations with hospitals. • Helplines. • Reinsurance. • Management information. • Market feedback. • Administration of a health trust. Model answer for Question 14 Any six of the following: • Banking of premiums and other income. • Payment of invoices. • Debit and credit management. • Ensuring systems are robust and secure to minimise fraud. • Maintenance of revenue accounts. • Preparation and forecasting of financial reports for management. • Preparation of year end accounts.

Examination Guide


Model answer for Question 15 (a) The moratorium method of underwriting would involve Philip completing a short

application form. This application form will require confirmation of Philip’s name, address and date of birth.

No details of Philip’s past medical history are requested to confirm his current state of

health, although the insurer will reserve the right to do so if a claim should occur. Such an arrangement allows any initial medical declaration to be avoided. This makes the application process quick and easy for both insurer and Philip, especially if he has been in poor health in the past.

Moratorium underwriting is often referred to as ‘point of claim’ underwriting because

conditions are assessed for cover when a claim is presented for pre-authorisation rather than at the point that the policy is sold. Only at this stage can Philip be certain that a condition is covered because this is when the insurer assesses his medical history. He may find that a condition that he believed to be covered is, in fact, excluded. Policies underwritten in this way are based on the blanket exclusion of medical symptoms, treatments or conditions experienced during the period up to the policy inception date, often five years. It is not important whether or not a general practitioner has been consulted in connection with the condition. Any condition becomes covered, other than a standard policy exclusion, once it has been treatment free, often for a period of two years, following the policy inception date. This has a marked effect on the number of losses the insurer has to deal with during the first two years of the policy’s life. Any new conditions that arise after the date on which his policy comes into force are covered unless they relate to a pre-existing condition.

Under a ‘rolling’ moratorium, if treatment of a pre-existing condition is received during

this two-year period, a further treatment-free period of two years must elapse before cover becomes available. The moratorium is effectively renewed for a further two years and a condition receiving regular treatment will never fall out of the moratorium.

A ‘fixed’ moratorium works differently. After a specified two-year period excluded

conditions automatically become eligible for benefit without the requirement that they are free of symptoms or treatment. A fixed moratorium may be easier for Philip to understand but presents considerably more risk for the insurer. As a result, if the insurer is offering a fixed moratorium it is likely to screen Philip by using filter questions before accepting his application for cover.

Insurers transacting business on a moratorium basis must also offer the alternative of

cover subject to full underwriting. Insurers are required to explain clearly how a moratorium operates so that any restrictions of cover are understood.

Moratoria helps to avoid anti-selection by ensuring that Philip and all other new

applicants are insured on an equal footing whereby unforeseen medical conditions are covered but pre-existing conditions are not. In the event that Philip has a history of illnesses he may be better off considering full medical underwriting rather than cover subject to moratoria.

Examination Guide


(b) When an excess is applied to a policy it acts as a form of self-insurance. The excess

controls the severity of claims. Low treatment costs will not become claims if costs are less than the amount of the excess. The cost to the insurer of a claim exceeding the excess will be reduced by the amount of the excess. Large excesses may act as a disincentive to claim altogether and are often referred to as deductibles. Excesses and deductibles may be absolute aggregate sums that are subtracted from the total cost of treatment. They can also be a percentage deduction that may or may not be subject to an annual maximum.

Excesses are often applied per claim submitted or per policy year for each medical

condition.

Examination Guide


Model answer for Question 16 (a) Insurers often differentiate between people working in different occupations. Claims

experience can be influenced by the type of work that an insured person is engaged in. Those engaged in clerical work pose less of an occupational risk than those working manually.

Susan may be exchanging a sedentary role for one that is more active. She could be

involved in extensive caring and lifting of patients which increases the risk of injury whilst at work.

There is a counter-argument that those involved in active work pose less of a risk. The

new role could result in no change to the insurer’s view of the occupational risk. Alternatively, Susan could incur an occupational loading.

(b) Geographical location can affect the possibility of a claim being made. As a result, the

insurer may differentiate its standard premium. According to area, the most expensive premiums may be double the least expensive.

Locational cost is influenced by the size of the population in a given area, National Health

Service (NHS) facilities per head of population and, accordingly, the length of NHS waiting lists. The cost of private treatment locally is however the key factor.

(c) • Cover can be restricted by exclusions tailored according to Susan’s individual

circumstances. • Removal of ‘hotel’ facilities by restricting access to hospitals having limited facilities. • Placing limitations on available cover for specified ailments. • A substantial excess could be applied to each claim. The excess could also be defined

by policy year, calendar year, rolling year or for each course of treatment. • In the event that Susan has included any relatives or dependants in the plan they

could be treated individually, rather than collectively, for the purpose of applying the excess.

• Cover could be reliant on NHS waiting times exceeding defined periods of time. • A longer waiting period could be applied to specific parts of the policy cover. • Susan’s choice of treatment providers could be limited by subscribing to a restricted

network of approved hospitals. • Susan’s insurer could offer a no claim discount scale where each claim-free year earns

entitlement to a premium reduction on an increasing scale to be applied to the following year’s renewal premium.

• A step-back arrangement could be applied so that after a valid claim has been lodged, not all of the entitlement is lost.

• A ‘low’ claims discount could be allowed. • A co-insurance or shared cost variation could be applied where a pre-determined

portion of treatment costs are paid by Susan, or as a shared percentage of each claim. • The contribution could be capped at an agreed upper limit. • Susan could agree to a fixed option arrangement if she agrees to renew her policy for

more than one consecutive year allowing premiums to be frozen for the period of the agreement.

Examination Guide


• The level of premium will initially be more expensive but cheaper subsequently. This

would offer protection from annual premium increases due to age or poor claims experience.

• Loyalty discounts could be offered that are not dependent on claims experience but provide an incentive to renew.

• At next renewal, a discount may be available if Susan agrees to auto renew by direct debit as the insurer will recognise that their administration costs are lowered if she agrees to automatically renew.

• Susan could also be eligible for an online discount if the policy is renewed using the insurer’s website facility.

• A reward could be offered if Susan is able to introduce friends or relatives to the insurer as new customers.

• A discount could be offered if Susan has stopped smoking since purchasing the plan. • Other positive lifestyle indicators could lead to a further discount.

Examination Guide


Model answer for Question 17 (a) The start-up insurer is owned by shareholders who provide the capital needed by the

company in order to trade. It is a ‘for profit’ organisation that rewards shareholders in the form of dividends. Shareholders hope that, over time, the company’s share price will rise. The company will have a hierarchal structure headed by a chief executive, or similar, overseeing the operations of a number of functional departments.

(b) • Company – part employee paid. The employer pays the premium for basic benefits

only and the employee pays for any additional benefits. • Company – employee pays for dependants only. The employer pays for the

employee’s benefits while the employee pays for cover in respect of spouse/partner/children.

• Company – employer paid. The company pays for the whole premium or subscription. (c) • Business strategy – takes into account market trends, competitor influence and

distribution. The business strategy also includes the insurer’s anticipated profit margins and annual operating plans.

• Pure pricing model – involves continual investigation of risk factors and making any necessary adjustments to cost allocation methods and pricing tables. This allows for incentives that benefit the customer, sales force or intermediary.

• Managing the process – makes ongoing adjustments to the business strategy and the pure pricing model. It links into limits of authority and any discretion allowed with pricing.

(d) As private medical insurance is regarded as ‘short tail’ business, solvency requirements

tend to be lighter than for other ‘long tail’ classes. Nevertheless, the insurer must meet its obligations under Solvency II at all times. Solvency II sets out to minimise the risk of the insurer becoming insolvent by the introduction of three pillars.

• Pillar 1 – sets out minimum capital requirements. • Pillar 2 – provides a supervisory review process to see if additional capital is needed

for risks inadequately modelled under Pillar 1. • Pillar 3 – introduces a disclosure and supervisory reporting regime ensuring

transparency with the regulators and the public. (e) Reinsurance provides additional capital in the form of commission. By transferring risk to

a reinsurer, the insurer can use the reinsurer’s capital to help satisfy its obligations under Solvency II. A quota share arrangement assists a newly formed insurer in achieving these objectives.

In addition, reinsurance enables the insurer to gain: • security in the removal of some of the uncertainty of loss; • stability by avoiding fluctuations in claims costs; • capacity to increase the financial limit applying to the size of risk it can accept; • relief from the possibility of a catastrophic loss affecting its trading results; • access to the reinsurer’s experience and expertise; • a greater spread of risk.

Examination Guide


(f) The General Data Protection Regulation (GDPR) introduces a wide range of compliance

requirements for insurers handling personal data. Much of the personal data held about individuals is sensitive in nature – particularly information about a person’s health or medical treatment. Personal data cannot be processed unless the individual has given explicit consent to that processing.

GDPR also introduces new restrictions on direct marketing. The most significant of these

is that ‘opt-out’ mechanisms, such as pre-ticked boxes, are no longer a valid method of obtaining consent from individuals.

If personal data is being processed on the basis of the controller’s ‘legitimate interests’,

those legitimate interests must be described. GDPR provides that notices must be in clear and plain language, concise, transparent and

easily accessible. The GDPR creates some new rights for individuals and strengthens some of those that

existed under the Data Protection Act. • The right for the individual to request that their data be deleted (the so-called ‘right

to be forgotten’). • The right to object to processing. • The right to data portability so that on request, the data subject must be provided

with a copy of their personal data in a structured, commonly used and machine-readable format.

• Individuals must be informed about any automated decision-making processes in the insurer’s privacy notice.

• Individuals will also have the right to object to automated decision making, so the insurer must have a non-automated alternative.

• The existing right for individuals to seek access to or correction of their personal data remains.

P64 – Private medical insurance practice · advertising with the newage opportunities presented...

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