1 Pricing Medical Insurance Individual and Group Meeting-cum-Seminar on Preparedness Towards De-tariffing in Non-life Insurance Hyderabad, March 14, 2006

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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

Insurance Sector Reforms in India

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


Sample Variation by Age and Sex.Connecticut Premiums .

age Co. X

Male

Co. X

Female

Co. Y

Male

Co. Y

Female

60 457 432 499 320

55 346 261 349 253

45 204 207 200 186

35 145 167 127 158

25 110 146 91 120

20 110 146 77 109


M&R costs – relative costs

Male Female

60 170 200

55 150 160

45 70 100

35 55 80

25 50 70

20 50 70


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 Community Rating and Guaranteed Issue New York City monthly rates

Co. X

HMO

Co. X

POS

Co.Y

HMO

Co. Y

POS

Individual 671 809 583 1022

Husband/Wife 1341 1617 1166 2044

Parent & Child

1187 1431 1137 1993

Family 1994 2403 1749 3066


Example Guaranteed Issue premiums but vary by age and sex, Aetna New Jersey Basic & Essential Plan

Age band Male Female

Under 30 638 (542 child) 1153 (542 child)

30-34 834 1153

35-39 1030 1153

40-44 1226 1165

45-49 1423 1226

50-54 1619 1337

55 up 1815 1472


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.


Example of durational factorsPercentage of duration 5

Duration Underwritten Open enrollment with pre ex

1 65 80

2 85 160

3 95 130

4 100 110

5 100 100


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


Pie Chart Group Health 1999 data

Life-health Property-Cas.

Loss Ratio 77.84% 82.20%

Commission 5.84% 9.98

General Expense 13.68 10.87

Taxes & Fees 2.34 1.21

Combined Ratio 105.43 104.27

Earned Premium $71,151 mil $9,953 mil


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.


4. Consumer Directed Plans

Health Reimbursement Accounts (HRA)

Health Savings Accounts (HSA)

The traditional group plan was a “defined benefit” plan

The newer versions are sometimes called “defined contribution” plans


4. HSA policies

Under an HSA plan the employer gives each employee some funds which can be used to individual covers

buy wellness and diagnostic cover

buy a catastrophic plan (2500 to 5000 deductible for an individual)

fund a “health savings account” (about $2000) to cover the costs under the deductible.


4. HRA

The employer earmarks some funds for each employee

Those that do not use medical services are typically allowed to roll the excess over into future years

The HRA fund remains with the employer when the employee leaves, while the HSA and the high deductible policy belong to the employ


Indian version of HSA

A new drug program provides the poor with a passbook in which to buy drugs

The government funds the passbook each year

The person suffers if he/she is overcharged


Tax policy is important

Employer group health coverages were deductible by the corporation and not taxable to the employee

The advantage (US tax model) is about 50.3%

tax rate federal Alternative minimum = 28%

tax rate state = 7%

Social Security = 15.3%

Total 50.3%


India taxation

Employer deduction (section 36(1)(ib)

Some individual deductions 80D, 80DD, 80DDB – maximum limit from 10,000 Rs to 60,000 Rs.

Fringe benefit proxy tax applies to certain fringes, some of which have a “health benefit”.

Service tax (over 10%) on non life insurance premiums.

Documents

1 Pricing Medical Insurance Individual and Group Meeting-cum-Seminar on Preparedness Towards De-tariffing in Non-life Insurance Hyderabad, March 14, 2006