01 - Overview of benefits provision Flashcards
What are some challenges in the provision of benefits?
Challenges include demographic issues, new technologies, information asymmetry, behavioural biases and limited resources.
Explain how demographic changes and new technologies create challenges in benefits provision.
Demographic changes like increased longevity lead to a higher demand for benefits, especially health benefits.
New technologies, particularly in healthcare, increase costs and create uncertainty about future benefit requirements.
Name some of the different entities that provide benefits.
Benefits are provided by governments, employers, and other entities such as the World Health Organization (WHO) and the International Labour Organization (ILO).
How do the roles of governments, employers, and other organisations differ in the provision of benefits?
Governments often act as direct benefit providers or oversee the provision of benefits.
Employers may offer benefits to employees either on a group basis or via individual arrangements.
Organisations like the WHO and ILO provide advice.
What is Private Medical Insurance (PMI)?
PMI is an indemnity-based product that provides compensation for the cost of private medical treatment.
What are some common features of PMI, health cash plans and major medical expense plans?
They are usually short-term, can be reviewed, make provision for multiple claims and claims can be unpredictable.
What is Critical Illness (CI) insurance?
CI insurance provides benefits if the policyholder suffers specific conditions covered by the policy.
What is the difference between an indemnity-based product and other types of health coverage?
An indemnity-based product like PMI provides compensation for the cost of private medical treatment, while other types of health coverage may provide a fixed sum or pay directly for medical services.
How do short-term insurance products differ from long-term insurance products, like LTCI?
Short-term products like PMI and health cash plans typically offer coverage for 1-2 years and can be reviewed.
Long-term care insurance (LTCI) is designed to cover costs of long-term care for individuals who are likely to need it in the future, sometimes on an immediate-needs basis.
Describe how the principles of mutuality, solidarity, and equity apply in benefit arrangements.
Mutuality: Members of a group self-insure by pooling their risks. Participation is voluntary.
Solidarity: Contributions are shared based on need or equally, rather than on individual risk. Participation is typically mandatory.
Equity: Refers to fairness and justice; it does not always imply that everyone is treated equally. For instance, intentional cross-subsidies from higher-income earners to lower-income earners can be seen as equitable.
What is the significance of “community rating,” and how does it relate to the principle of solidarity?
Community rating involves charging all policyholders the same premium rate regardless of individual factors, such as age, gender, or medical history. This relates to solidarity, where contributions are shared equally, as it promotes equal access to benefits, despite individual differences in risk.
What are some key objectives when setting up benefit arrangements?
Benefit arrangements should provide benefits that are appropriate to beneficiaries’ needs, be affordable, and be consistent with the sponsor’s objectives.
What are the key differences between defined contribution (DC) and defined benefit (DB) retirement funds?
DC funds: Benefits are dependent on the accumulated contributions and investment returns. The benefit amount is unknown until payment is made.
DB funds: Benefits are determined by a formula, often based on factors like salary and years of service. The pension amount is defined.
What is “information asymmetry” in the context of benefits, and how does it affect decision-making?
Information asymmetry refers to the inherent uncertainty in terms of current and future benefits. Individuals may struggle to make informed decisions because they lack complete knowledge, relying on healthcare providers for guidance.
Explain why “adverse selection” can be a problem in benefit schemes.
Failure to differentiate between premiums or contributions based on the risk of the beneficiary can result in adverse selection. This may lead to an unsustainable pool and requires the use of other product design features.
