Insights on Future Benefit Reserves in Health Insurance
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Rajesh Dalmia (Views presented are that of the author and his
employer Ernst & Young has no responsibility for the same)
A
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a
►
Introduction
►
Comparison of Few Product Features
►
Literature Review (GR)
►
Future Benefit Reserving
►
Re-current diseases (in claim portfolio)
►
Promised benefits triggering in future
►
Well-ness benefit
►
Conclusion
R
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r
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g
–
p
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p
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Liability – adequate – recognized premiums
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Liability adequate – unrecognized premium portion
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Liability for future claims/benefits/expenses allowing credit of future premiums
-
(accounts for any guarantees)
-
No credit is taken from future new business (except probably contribution
towards ongoing maintenance expense levels)
-
Usually premium and reserving do not talk to each other (?)
C
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H
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I
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R
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s
e
r
v
i
n
g
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Multiple waiting period for various diseases/PED (different for different
products)
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Guaranteed renewability – recurrent disease
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Different benefits for different variants (maternity, No claim bonus/discounts
etc)
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Portability – no age limit to any product
P
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–
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(
?
)
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Maternity Cover, New-born baby (incl vaccination) , ambulance
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OPD cover, Health Check-ups, immunizations, counselling, specialist/second
opinion, online facility, ayush, gym discounts
-
Restoration / Recharge, no claim bonus, deductability
-
Hospital cash, world-wide cover, co-pay, savings a/c, pre/post variation,
-
Discounted single premiums, region based co-pay,
L
i
t
e
r
a
t
u
r
e
R
e
v
i
e
w
(
G
R
)
-
Pauly, Kunreither and Hirth (1995) showed that in a simple two period model,
GR premium should be front loaded.
L
i
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e
r
a
t
u
r
e
R
e
v
i
e
w
(
G
R
)
-
Pauly and Herring (2006/3)
developed a theoretical
markov model to estimate
the cost of GR and found it
to be approximately 20% of
risk premium for females
and 30% for males (on npv
basis).
L
i
t
e
r
a
t
u
r
e
R
e
v
i
e
w
(
G
R
)
-
Frick (1998) showed that in non-perfect capital markets the front loading
would not enable young to undertake the insurance
-
Pauly and Herring (2006/3) developed a theoretical markov model to estimate
the cost of GR and found it to be approximately 20% of risk premium for
females and 30% for males (on npv basis).
-
Feyter (2008) estimated that the cost of selective lapsation for a mature health
insurance portfolio is 1-1.5% over the ultimate claim rate for every additional
year of claims.
-
Elikhis surveyed NZ insurer to find out how many keep this reserve and found
only one of them do it.
L
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e
r
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e
R
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w
(
G
R
)
P
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F
B
R
/
C
o
n
t
r
a
c
t
r
e
s
e
r
v
i
n
g
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AAA – required where present value of future benefits exceeds the present
value of future premiums (all in-force, only in claim? )
-
Not required when “rates for a particular block of contracts are determined in
such a manner that each year’s premium is intended to cover that year’s cost
with no pre-funding of future years’ costs from the current year’s premium” or
when contracts which cannot be continued after one year from issue.
-
Approaches similar to pricing but with margins in the current assumptions is
advised by AAA
F
B
R
/
C
o
n
t
r
a
c
t
r
e
s
e
r
v
i
n
g
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Do nothing approach – Only when company has shown a pattern of increasing
rates when future benefit increases
-
Benefit rider / proportional approach – each year recognize the increase and
allow that in the basis
-
New factor approach – recalcualte the reserves using the current best
estimates for future
-
Loss ratio approach – project target loss ratio based on pricing assumption for
a block of business. Use this to develop expected incurred claim amount with
margin. Reserve is difference between this and the actual claims.
C
o
n
c
l
u
s
i
o
n
s
-
R
e
s
e
r
v
i
n
g
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Assumptions between pricing and reserving will differ – due to change in
business mix – age / variant / term / zone / floater / options etc
-
Additionally, there should be some margin for prudence
-
Actual in claim status – allowing for recurrence and deterioration of portfolio
-
Claim inflation every year but premium inflation is in steps allowing for
regulatory constraints
-
Rationality assumption for policyholder
M
a
n
a
g
i
n
g
R
e
n
e
w
a
b
i
l
i
t
y
G
u
a
r
a
n
t
e
e
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Cross subsidization
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Locked in reinsurance rates (?)
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Migrating p/hs to different product (portability)
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Product closure to new business (PRE, equality)
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Health cost management by tie-ups with health service providers
-
Clumsy/discouraging renewal process (?)
-
GR reserve invested in positively correlated assets
Thank You
dalmia.rajesh@gmail.com
This text delves into the complex world of future benefit reserves in health insurance, discussing key aspects such as reserving principles, challenges, and product features. It also touches upon literature reviews in the field, providing valuable insights for those interested in the topic.
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Future Benefit Reserves Rajesh Dalmia (Views presented are that of the author and his employer Ernst & Young has no responsibility for the same)
Agenda Introduction Comparison of Few Product Features Literature Review (GR) Future Benefit Reserving Re-current diseases (in claim portfolio) Promised benefits triggering in future Well-ness benefit Conclusion Page 2 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Reserving principles - Liability adequate recognized premiums - Liability adequate unrecognized premium portion - Liability for future claims/benefits/expenses allowing credit of future premiums - (accounts for any guarantees) - No credit is taken from future new business (except probably contribution towards ongoing maintenance expense levels) - Usually premium and reserving do not talk to each other (?) Page 3 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Challenges in Health Insurance Reserving - Multiple waiting period for various diseases/PED (different for different products) - Guaranteed renewability recurrent disease - Different benefits for different variants (maternity, No claim bonus/discounts etc) - Portability no age limit to any product Page 4 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Product Features in the market impact on reserves (?) - Maternity Cover, New-born baby (incl vaccination) , ambulance - OPD cover, Health Check-ups, immunizations, counselling, specialist/second opinion, online facility, ayush, gym discounts - Restoration / Recharge, no claim bonus, deductability - Hospital cash, world-wide cover, co-pay, savings a/c, pre/post variation, - Discounted single premiums, region based co-pay, Page 5 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Literature Review (GR) - Pauly, Kunreither and Hirth (1995) showed that in a simple two period model, GR premium should be front loaded. Claim Frequency Crude (2013 - 14) % increase in Risk Premium Age band* Risk Severity Premium 3.75% [0-5) 25,101 941 2.78% -39.37% [6-15] 20,522 571 4.20% 107.29% [16-25] 28,137 1,183 4.89% 33.60% [26-35] 32,316 1,580 8.25% 89.31% [36-45] 36,252 2,991 7.94% 3.80% [46-55] 39,105 3,105 16.61% 106.27% [56-60] 38,549 6,404 20.06% 30.11% [61-65] 41,530 8,332 24.67% 24.22% [66-70] 41,954 10,351 Page 6 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Literature Review (GR) - Pauly and Herring (2006/3) developed a theoretical markov model to estimate the cost of GR and found it to be approximately 20% of risk premium for females and 30% for males (on npv basis). Page 7 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Literature Review (GR) - Frick (1998) showed that in non-perfect capital markets the front loading would not enable young to undertake the insurance - Pauly and Herring (2006/3) developed a theoretical markov model to estimate the cost of GR and found it to be approximately 20% of risk premium for females and 30% for males (on npv basis). - Feyter (2008) estimated that the cost of selective lapsation for a mature health insurance portfolio is 1-1.5% over the ultimate claim rate for every additional year of claims. - Elikhis surveyed NZ insurer to find out how many keep this reserve and found only one of them do it. Page 8 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Literature Review (GR) Page 9 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Premium and Risk patterns Age band* % increase in Risk Premium Risk Premium Insurer A Insurer B Insurer C Insurer C [0-5) 941 -39.37% [6-15] 571 107.29% [16-25] 1,183 3,410 5,887 5,060 33.60% 0% 0% 0% [26-35] 1,580 3,410 5,887 5,060 89.31% 24% 13% 6% [36-45] 2,991 4,218 6,662 5,348 3.80% 129% 85% 144% [46-55] 3,105 9,641 12,321 13,070 106.27% 16% 29% 21% [56-60] 6,404 11,187 15,907 15,813 30.11% 58% 39% 4% [61-65] 8,332 17,651 22,089 16,503 24.22% 38% #VALUE! 39% [66-70] 10,351 24,272 N/A 23,000 Page 10 10 September 2024 Future Benefit Reserves - Health Seminar 2017
FBR / Contract reserving - AAA required where present value of future benefits exceeds the present value of future premiums (all in-force, only in claim? ) - Not required when rates for a particular block of contracts are determined in such a manner that each year s premium is intended to cover that year s cost with no pre-funding of future years costs from the current year s premium or when contracts which cannot be continued after one year from issue. - Approaches similar to pricing but with margins in the current assumptions is advised by AAA Page 11 10 September 2024 Future Benefit Reserves - Health Seminar 2017
FBR / Contract reserving - Do nothing approach Only when company has shown a pattern of increasing rates when future benefit increases - Benefit rider / proportional approach each year recognize the increase and allow that in the basis - New factor approach recalcualte the reserves using the current best estimates for future - Loss ratio approach project target loss ratio based on pricing assumption for a block of business. Use this to develop expected incurred claim amount with margin. Reserve is difference between this and the actual claims. Page 12 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Conclusions - Reserving - Assumptions between pricing and reserving will differ due to change in business mix age / variant / term / zone / floater / options etc - Additionally, there should be some margin for prudence - Actual in claim status allowing for recurrence and deterioration of portfolio - Claim inflation every year but premium inflation is in steps allowing for regulatory constraints - Rationality assumption for policyholder Page 13 10 September 2024 Future Benefit Reserves - Health Seminar 2017
Thank You dalmia.rajesh@gmail.com Page 15 10 September 2024 Future Benefit Reserves - Health Seminar 2017
