Ch 7: Health insurance products

Question 1

Main types of healthcare products

Answer 1

1. Private medical insurance
2. Critical illness
3. Long-term care
4. Other products and cash benefits

Question 2

Aspects to consider in product design (Healthcare)

Answer 2

1. Customer acceptability
2. Regulatory requirements
3. Price competitiveness
4. System capabilities

Question 3

Types of underwriting for short-term contracts

Answer 3

1. Full medical underwriting
2. Moratorium underwriting
3. Medical history disregard
4. No worse terms
5. Continued personal medial exclusion

Question 4

How can medical expenses cover be limited under PMI?

Answer 4

PMI products will vary according to:
1. Overall financial limits and/or sub-limits

2. The level of the reimbursement rate for specific healthcare services
3. Whether the limit covered services to a network of healthcare providers
4. Whether to provide out-of-service hospital benefits
5. Whether to include medical savings accounts
6. Benefits required by legislation
7. Risk transfer mechanisms

Question 5

Key features of short term contracts

Answer 5

1. Cover is typically provided for a single year and can then be renewed
2. There can be multiple claims
3. Claims are generally unknown and can be volatile
4. There can be delays in reporting and settling of claims

Question 6

Key features of long-term contracts

Answer 6

1. They are long term
2. Cover usually ceases on claim
3. The claim amount may be known with certainty
4. Used for protection against ill health or death, as well as savings.
5. Group versions are typically only for 1 or 2 years, but can then be renewed

Question 7

What values need to be determined when setting premium / contribution rates?

Answer 7

1. Claims
2. Expenses
3. Commission
4. Risk transfer arrangements
5. Non-premium income
6. Reserve loading requirements

Question 8

Describe the principle of mutuality in healthcare

Answer 8

A pooled fund is created and premiums are paid into the fund by policyholders.

The premium paid by the policyholders is determined by the RISK presented by the policyholder at the time of taking out the contract.

Claims are paid out of the pooled funds in accordance with the policyholder agreement.

Question 9

What is solidarity?

Answer 9

Solidarity is similar to mutuality in that they both involve the concept of sharing losses.

However the main differences are:
1. Under solidarity principles, the premiums are not based on risk, but rather on the ability to pay, or are set equally.

2. Under solidarity principles, losses are paid according to need.

Question 10

What is the main type of reserve required in healthcare?

Answer 10

Incurred bu not yet reported (IBNR).

This is a reserve for claim events that have occurred but which the healthcare provider does not yet know about.

Question 11

What are open medical schemes?

Answer 11

Open medical schemes are obliged to accept anyone who wants to become a member at standard contribution rates, and a minimum benefit package is prescribed under legislation

Question 12

Why may short-term insurers require reinsurance?

Answer 12

1. They need to protect against large claims
2. They will be able to take on larger risks and more risks than they otherwise could, due to capital constraints.
3. They can reduce the impact of accumulations of risk and catastrophes

Question 13

Why may long-term insurers require reinsurance?

Answer 13

1. They need to cope with claims fluctuations
2. They need to finance new business strain
3. They need to obtain technical assistance and data for pricing new contracts

Question 14

List 4 entities that may be involved in the provision of healthcare services and health insurance

Answer 14

1. State provision and NHI
2. Subsidized healthcare through donor organizations
3. Mutual companies
4. Insurance companies

Question 15

List the key risks under healthcare products

Answer 15

• claim frequency, benefit amount, volatility and settlement delays
• accumulations of risk, catastrophes, and large number of large claims
• investment risks, e.g. poor or volatile returns, falls in asset values, default risk
• expenses being higher than expected
• poor persistency, i.e. high lapses and low renewals
• poor plan mix due to upgrades, downgrades and anti-selection
• underwriting risk, i.e. failure to properly disclose pre-existing conditions credit risk, i.e. failure of a counterparty such as a provider, reinsurer or a broker
• operational risks, e.g. fraud, systems failure, regulatory changes
• availability of claims data.

Question 16

List the 4 reimbursement mechanisms for healthcare costs. (Low risk to most risk transfer)

Answer 16

1. Fee for service
2. Negotiated fee for service
3. Global fee
4. Capitation

Question 17

Discuss ‘reimbursement mechanisms’

Answer 17

Fee-for-service
Providers are reimbursed for each service provided. No restrictions apply on the cost of service.

Negotiated fee-for-service
The tariff or remuneration rate for each type of service is defined – through negotiations or being defined in advance. This may lead to policyholders having to cover part of the costs through out-of-pocket payments.

Global fee
There is a fixed tariff / fee per episode of care with the service provider assuming some risk for the level of services required per patient (e.g. maternity or a knee replacement).

Capitation
A fixed amount is paid per policyholder / beneficiary who has the option to use the service. The fee is paid regardless of whether the service is used or not.

Question 18

Describe ‘negotiated fee for service’

Answer 18

The tariff or remuneration rate for each type of service is defined through negotiations or being defined in advance.

This may lead to policyholders having to cover part of the costs through out of pocket payments.

Question 19

Describe ‘Global fee’

Answer 19

There is a fixed tariff/fee per episode of care with the service provider assuming some risk for the level of services required per patient.

Question 20

Describe ‘Capitation’

Answer 20

A fixed amount is paid per policyholder / beneficiary who has the option to use the service.

The fee is paid regardless of whether the service is used or not.

This transfers the risk from the insurer to the provider of services

Question 21

Aspects of healthcare markets that distinguish it from other markets

Answer 21

1. Public good characteristic and universal access
2. Information asymmetry, over-supply and demand
3. Information about the range and quality of healthcare services relative to cost is difficult, if not impossible, for consumers to obtain.
4. Rapidly increasing costs of healthcare services
5. Importance of health insurance

Question 22

Define Private Medical Insurance (PMI)

Answer 22

PMI and related products are usually indemnity based products that seek to provide compensation for the cost of private medical treatment.

The extent of the cover will depend on the level and quality of State services offered in a specific country.

Question 23

What customer needs does PMI meet?

Answer 23

If no state-funded care exists, then PMI will usually provide for all forms of healthcare needs on an indemnity basis.

If the State provides some level of healthcare to all, then PMI is usually bought when an individual requires care such as:

1. medical attention without waiting
2. medical attention in a higher standard of accommodation
3. medical attention with a doctor of choice
4. medical attention in a local or private hospital

Question 24

Does a group version of PMI exist?

Answer 24

Yes.

Employers often use them to cover several employees.

Benefits and exclusions are generally similar between group and individual contracts.

Pre-existing conditions are more likely to be covered under group business due to a lower degree of anti-selection.

Question 25

Describe the importance of health insurance

Answer 25

There is a high level of uncertainty surrounding future health, and thus uncertainty around the timing and nature of services needed.

Healthcare needs increase with age.

Individuals can provide for these costs through savings and insurance products. They are likely to underestimate the need to plan financially.

This adds extra pressure to employer-funded or state-funded systems.

Question 26

Define Critical Illness Cover

Answer 26

known as dread disease, serious illness, crisis cash, living assurance, or critical illness cover.
a lump sum, but can be structured as regular income, payable if the policyholder suffers one of the defined conditions.
characteristics of an illness or condition:
* It is a condition perceived by the public to be serious and to occur frequently.
* Each condition covered can be defined clearly so that there is no ambiguity at the time of claim.
* There is sufficient data available to price the benefit.

Question 27

What customer need does CI cover meet?

Answer 27

NOTE: This product is not designed to indemnify the policyholder.

The needs met include:
1. To provide a source of income if unable to work
2. Can assist with repaying a loan or mortgage
3. Medical costs can be funded when surgery or expensive treatment is required
4. Could be used by business partners to buy out a partnership stake in a business when CI arisies
5. Can be used to fund a change in lifestyle that is required
6. Can provide for recuperation after illness

Question 28

Does a group version of CI cover exist?

Answer 28

Yes.

The key requirements to establish a group scheme are:
1. There is a definition of who is eligible for the benefits under the scheme

2. The benefits under the scheme are clearly defined by:
   - size
   - definition of valid claim
   - the period of the benefit

Question 29

Factors to consider in good scheme design for group products.

Answer 29

1. Applying exclusions
2. Setting free cover limits
3. Ensuring members are actively involved at work when cover begins.
4. Setting take up rates on voluntary schemes
5. Laying down take over terms when the insurer accepts a scheme previously insured elsewhere

Question 30

Difference between indemnity cover and stated benefit cover

Answer 30

Indemnity cover provides benefits related to the loss incurred on the occurrence of the health event.

For stated benefit cover, the policy document defines the benefit that is payable on the occurrence of a defined health event, regardless of the actual loss incurred.

Question 31

Define long-term care insurance

Answer 31

LTCI can be defined as all forms of continuing personal pr nursing care and associated domestic services for people who are unable to look after themselves without some degree of support, whether provided in their own homes, at a day center, or in a state-sponsored care-home setting.

Question 32

List 6 typical activities of daily living

Answer 32

WTF DMT

1. Washing
2. Dressing
3. Feeding
4. Toileting
5. Mobility
6. Transferring

Question 33

What need does LTC insurance meet?

Answer 33

Usually aims to provide financial protection when a person becomes unable to look after themselves

Question 34

Does a group version of LTCI exist?

Answer 34

Not commonly.

Question 35

What is an affinity group?

Answer 35

A group of people who share a common interest, background or goal and are linked together by being members of the same organization.

Question 36

List 4 other types of PMI-related products

Answer 36

1. Major medical expenses
2. Hospital cash plans
3. Medical shortfall (gap) cover
4. Personal accident