Pricing Medical InsuranceIndividual and Group Meeting-cum-Seminar on Preparedness Towards De-tariffing in Non-life Insurance Hyderabad, March 14, 2006 Edgar P Balbin, Senior Manager, BearingPoint
Setting Premiums for Medical Insurance • A. Overview: The rate analysis process • B. Individual Medical • C. Large Group Medical • a. Prospective • b. Retrospective • c. Administrative services only • D. Summary of Key Concepts
Overview. Rate Analysis Process • The premium rates, plus investment income earned on invested premiums, needs to generate adequate revenues to cover expenses and meet company margin requirements. • Revenue and expenses will both depend on the nature and characteristics of the population being insured. • Premium calculation must include an analysis of the claims costs plus expenses appropriate to the population to be insured.
Individual Medical Insurance • Type of Individual Medical • Community Rating (uni age, uni sex) • Guaranteed Issue (uni-health) • Underwritten. rates vary by age, sex, health condition, some applicants are rated substandard, perhaps 10-15% are turned down.
Rate Analysis Process for Individual Medical • Costs and Expenses are: • Policyholder Claims • Administration costs • Agent Broker Costs • Taxes and Fees • etc. • So in health insurance the actuary spends a lot of his/her time analyzing likely future claims costs levels for the insured population.
Rate Analysis Process – 5 step process • 1. Look at Past Experience – for claims, premiums and expenses • 2. Restate past premium to reflect expected rate levels. • 3. Project past claims into the future to reflect trends and changes in policy design. • 4. Compare projected versus desired • 5. Apply regulatory limits
Step 1. Look at Past Experience • What Happened? • Suppose 2005 results were: • Premiums earned 1.08 crore Rs • Claims incurred 1.20 crore Rs. • Loss Ratio 111% • crore = $220,000 and about $1 million purchasing power equivalent.
Always use: • Earned premium • NOT collected or paid. • Earned = Collected + change in reserve for unexpired risk (unearned premiums reserve) • Incurred Claims • NOT paid. • Incurred Claims = Paid + increase in case reserves + increase in IBNR
If data is poor? • Use Data on similar blocks of business • Buy a rate manual. Both Tillinghast and M&R have rate manuals applicable to U.S. • Miscellaneous Data sources • Government • Other vendors • Sometimes data from other countries might be helpful. (“Rate relativities” by age and sex can be useful. For example, U.S. rates for males increase 4 times between age 20 & 60, and females increase 3 times). Male rates are slightly lower than females at ages 20-55 and slightly higher at 55-64.)
Actuarial Help • The M&R and Tillinhast manuals apply to U.S. but the actuarial consulting firms have branch offices in other countries. • www.soa.org has data on health insurance. • World health organization has statistics on many countries.
Basic Actuarial Formula • Pricing on medical insurance is usually done on Rs. “per member per month” PMPM. • For individual insurance the members include family members. (Children might be estimated using 2-3 children per family policy) • Formula: Annual Cost for 1000 members = # procedures per 1000 members x average charge per service • PMPM = annual cost for 1000 members / 12,000
Example of computation. • 1000 people average 224 hospital inpatient days per year • Cost per day 2500 Rs. • PMPM = 224 * 2500 Rs / 12,000 = 46.67 Rs • 1000 people average 8750 prescriptions per year • Cost per prescription 280 Rs • PMPM = 8750 * 280 Rs / 12000 = 204.20 Rs PMPM
“Utilization” needs to be defined • If you have 1000 members and someone tells you their utilization is 58, what does this mean? • 58 members had surgery • 58 surgical procedures were performed • 58 members submitted their claim • 58 claims received
Definition of Benefit Amount • Some benefits are fixed – so many Rs per day in a hospital • Some benefits are tied to charges • billed charges • allowed charges • sometimes another carrier is primary • certain individuals are not covered • some fees are in excess of the negotiated price
Step 2. Restate premium to current level • Suppose: • average annual premium = 1080 Rs • average claim = 1200 Rs • average expense = 200 Rs. • desired profit = 50 Rs • We are short 370 Rs. • But 1st six months average premium 480 Rs and 2nd six months average premium 600 • Versus the 1200 annualized premium we are short only 250 Rs.
Step 3. Project past claims • Look at • claim trends • policy changes • population changes • durational effects (for small group and individual) • “leveraging effect” of deductibles.
Step 3. Applying Trend • Suppose Claims in Year 2004 are 1000 Rs /policy • Suppose claim costs increase at 10%. • We want to project claims to Year 2006. • From midpoint to midpoint we have 2 years • Projected Cost increase = 1.10 ^ 2 = 1.21 or 1210 Rs /policy
Step 3. Leveraging effect of deductibles • Suppose claim before deductible of 100 Rs was 1000 Rs. • After two years claim before deductible is 1221. • Suppose deductible remains at 100 Rs. • Then costs increase from 900 Rs to 1121 Rs which is 24.55% not 21.1%
Duration of a policy • Newly underwritten policies are “select” • Claim costs increase by duration for same attained age • Durational effects very important on life insurance and important on health insurance • (Life Insurance: selection last 15-25 years. 1st year select rates could be 30-40% of “ultimate” rates)
Loss Ratios are affected by the durational effects • Suppose premium = 1000 Rs • First year claims = 650 Rs • Second year claims = 850 Rs • Third year claims = 950 Rs. • Fourth year claims = 1000 Rs. • The loss ratio first year is 65%, but the company needs to charge 1000 Rs to cover 4th & later claims
Step 4. Compare projected versus desired • Once rates are determined one can apply them to the existing inforce to see if they cover past claims and projected future claims.
Step 5. Apply regulatory constraints • Regulatory constraints include • Guaranteed renewability • Sometimes mandated benefits • Most individual health premium are “risk rated” premiums vary by age, sex and health • Sometimes Community rated (uni-age, uni-sex) • Sometimes Guaranteed Issue (uni health; take the sick)
Underwritten Policies or “risk rating” • Premiums vary by age, sex and health condition. • Premium vary by area and family composition (as in community rating) • Many individual health policies are “guaranteed renewable” – price may go up with attained age and medical inflation but the insurer cannot cancel
Community Rating • Rates are same by age and sex. • Those over 65 are excluded – covered by other insurance. • Rates vary by area • Rates vary by family composition: • single, 2 adults, 1 adult + children, family
Guaranteed Issue • Policy must be issued to all that apply. • Typically pre-existing conditions are covered after 6-12 months. • May have greater effect on increasing rates than than community rating • Community Rating and Guaranteed issue was employed by some Blue Cross plans in 1930s 1940s • Community rating and guaranteed issue do not work well in voluntary markets • Younger and healthier just don’t buy policies
Example Guaranteed Issue premiums but vary by age and sex, Aetna New Jersey Basic & Essential Plan
More Details on Pricing Underwritten Policies • For each sex separately determine the claim cost for each age group • Interpolate between the various ages • For example, suppose average claim rates are: • male, age group 40-49 = 204 Rs /month • male, age group 30-39 = 145 Rs/month • male, age group 20-29 = 110 Rs /month • For age 45 use 204 Rs; age 35 use 145 Rs; age 25 use 110 Rs; • For other ages use a linear or quadratic interpolation method.
Potential rating factors • Age • Sex • Area • Medical History • Smoker / Non smoker • Occupation • - be aware of the duration effects
Rating • Individual medical - usually by attained age • Individual disability income – usually by issue age • Community rate (uni age, uni sex) • younger persons may drop out • Guaranteed Issue (uni – health) • healthier and younger persons may drop out
Substitutional Effectsfrom community rating and guaranteed issue • younger persons might migrate to HMO which have gate keepers. • younger persons might go for a higher deductible • healthier persons may for “association groups”
LARGE Group • Sometimes defined as more than 100 employees and sometimes more than 50 employees • If families are covered, the number of members might be double the number of employees • Usually the employer subsidizes the employee – to encourage participation
Investment Income • Investment income was about 4-5% -- which meant the companies broke even on group health • The group health includes group LTD, dental, vision, as well as group medical.
Definitions and Goals • A. Group Insurance Characteristics • B. Key Principles • C. Large Group • D. Basic Goals for premium rating • E. Alternative methods for premium rating
A. Group Insurance Characteristics • Insurance sold to a group covering its members • Most groups are employer groups • Rules are established to determine • Eligible members to be covered • Amounts of coverage • The group is intended and expected to produce a cross section of risks • Some are very healthy, others are not • Employers often screen new employees for health risks.
B. Key Purpose of Group Insurance • The group was formed for purposes other than insurance • A large proportion of the eligibles are enrolled • Cost of insurance to each member is low relative to the value • Employer groups usually subsidize the cost • Transaction costs are minimized
C. Large Group Characteristics • Groups is of sufficient size that individual medical underwriting is not needed or used. • Rating often considers the actual experience (claim cost) of the group. • Definition of large group • current (US) over 50 employees
D. Basic Goals for Pricing the Group • Have adequate premium to cover • claim cost • operating expenses (commissions, enrollment, loss adjustment, taxes) • profit Margin • Stable rates and predictable gains • new lives stabilize the experience • Competitive
D. Basic Goals con’t. • Acceptable rate variations year to year • appropriate for group • explainable • stable over time • equitable • meet legal and regulatory requirements
E. Pricing the Group • The initial price set by the insurance company might be based on a census by age, sex, area, even smoking class • Renewal rates might be based on experience • Very large groups often “self insure” most or all of the risk
E. Type of Pricing • 1. Prospective • 2a. Retrospective • 2b. “Dividend” or Bonus Plan • 3. Administrative Services only • 4. “Defined contribution”
E. Pricing – seldom used • Community rating (uni age, uni sex) • Only variations by • benefit levels • geographic areas • family composition (single, 2 adults, 1 adult and children, family) • Problem: anti-selection
1. Prospective Experience Rating • The projection of future experience is based on the group’s actual past experience • Use to set up rates • Past experience might be modified to remove “one shot” claims and for “credibility”
2a. Retrospective Rating • The employer is charged • a basic premium plus say 120% of claims subject to a minimum and maximum charge • Certain claims might be excluded • The 20% of claims covers loss adjustment expenses • The basic premium covers the cost of the maximum premium charge plus the cost of excluding certain claims
2b. “Dividend Plan” • The insurance company charges a premium up front • If experience is very good, then the group receives a bonus – also called an “experience refund” or a “dividend” • Sometimes the dividend is discretionary with the company • Dividend plans are common on workers compensation and sometimes used on group health
3. Administrative Services Only • Very large groups might self insure and pay almost 100% of their own claims • ASO may be provided by a health insurance carrier • Sometimes ASO agreements carrier XL cover and/or provide “catastrophe” to the self-insured employer plan.