Pricing Medical Insurance Individual and Group

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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

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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

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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.

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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.

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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.

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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

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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.

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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

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If data is poor?

• Use Data on similar blocks of business
• Buy a rate manual. Both Tillinghast and MR 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.)

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Actuarial Help

• The MR 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.

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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

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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

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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

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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

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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.

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Step 3. Project past claims

• Look at
• claim trends
• policy changes
• population changes
• durational effects (for small group and
  individual)
• leveraging effect of deductibles.

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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

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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

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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)

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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

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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.

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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)

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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

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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
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MR costs relative costs
Male Female
60 170 200
55 150 160
45 70 100
35 55 80
25 50 70
20 50 70
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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

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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 dont buy policies

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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
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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
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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.

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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
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Potential rating factors

• Age
• Sex
• Area
• Medical History
• Smoker / Non smoker
• Occupation
• - be aware of the duration effects

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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

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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

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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

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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
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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.

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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

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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.

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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

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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

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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

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D. Basic Goals cont.

• Acceptable rate variations year to year
• appropriate for group
• explainable
• stable over time
• equitable
• meet legal and regulatory requirements

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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

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E. Type of Pricing

• 1. Prospective
• 2a. Retrospective
• 2b. Dividend or Bonus Plan
• 3. Administrative Services only
• 4. Defined contribution

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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

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1. Prospective Experience Rating

• The projection of future experience is based on
  the groups actual past experience
• Use to set up rates
• Past experience might be modified to remove one
  shot claims and for credibility

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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

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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

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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.

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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

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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.

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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

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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

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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

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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.