Cherie Ng

A Flexible Group Benefits Framework for Pricing Deposit Rates

Currently, most flexible group benefit plans are designed and priced based on deterministic assumptions about the plan members’ option selections. This can cause the adverse selection spiral, threatening the sustainability of the plan. We therefore propose a comprehensive framework with a novel pricing formula that incorporates both a model for claims and a model for plan members’ enrollment decisions to prevent adverse selection. With our framework, we study the evolution of flex plans over time and find that our proposed pricing formula outperforms the traditional pricing practice by keeping the flex plans sustainable over time. In addition to calculating sound deposit rates, our framework also serves as a tool to evaluate the impact of other parameters such as changes in plan designs, health costs, and member decision.


Keywords: group insurance; flexible benefits; stochastic modelling; adverse selection