The Valuation of Lifetime Health Insurance Policies with Limited Coverage

• Author: Hong‐Chih Huang,Shang‐Yin Yang,Chou‐Wen Wang
• DOI: http://doi.org/10.1111/jori.12070
• Date: 01 September 2016
• Published date: 01 September 2016

THE VALUATION OF LIFETIME HEALTH INSURANCE POLICIES

WITH LIMITED COVERAGE

Shang-Yin Yang

Chou-Wen Wang

Hong-Chih Huang

ABSTRACT

In adopting a traditional actuarial view, insurance companies often use

expected values to determine the premiums for lifetime health insurance

policies with limited coverage, which can lead to serious overpricing

problems when the coverage limit is not very low or very high. To address

this overpricing problem, this article provides analytical solutions for fair

premiums of lifetime health insurance policies with limited coverage. Using

internal data provided by insurance companies, this article describes the

relationship between the level of limited coverage and excess premiums. The

premium difference between a practical pricing method and a proposed

pricing model creates a humped curve; the maximum excess premium ratio

reaches nearly 20 percent for limited coverage for younger insured people.

INTRODUCTION

The populations of many developed countries are aging significantly, due to lower

mortality and fertility rates. Continued increases in longevity contribute to rising

medical costs and greater demand in health insurance markets. Health insurance

reduces individual financial burdens in the event of an illness or injury that requires

hospitalization or results in the loss of income. For countries without National Health

Insurance (NHI), such as the United States, the private health insurance market

provides most coverage of medical expenses. The U.S. Health Insurance Portability

and Accountability Act (HIPAA) of 1996 also mandates guaranteed renewability for

Shang-Yin Yang is an Assistant Professor in the Department of Finance, Tunghai University,

Taichung, Taiwan. Chou-Wen Wang is a Professor in the Department of Finance, National

Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan and Fellow of Risk

and Insurance Research Center, College of Commerce, National Chengchi University, Taipei,

Taiwan. Hong-Chih Huang is a Professor in the Department of Risk Management and

Insurance, Fellow of Risk and Insurance Research Center, College of Commerce, National

Chengchi University, Taipei, Taiwan. The authors can be contacted via e-mail: shangyin@thu.

edu.tw, chouwenwang@gmail.com, and jerry2@nccu.edu.tw, jerryhch68@gmail.com. The

authors would like to acknowledge helpful comments from the JRI editor and two anonymous

referees.

© 2015 The Journal of Risk and Insurance. Vol. 83, No. 3, 777–800 (2016).

DOI: 10.1111/jori.12070

777

almost all individual insurance policies (Herring and Pauly, 2006; see also Cochrane,

1995; Pauly, Kunreuther, and Hirth, 1995).

In contrast, in countries with NHI, private health insurance products differ,

depending on whether they adopt partial or full NHI systems, that is, on how many

citizens join the systems. For example, Germany is a partial NHI country,

1

and

citizens choose between NHI or private health insurance systems.

2

If they choose the

latter, they receive a comprehensive plan that is similar to those provided by

insurance industries in non-NHI countries. For full NHI countries such as Japan,

Korea, and Taiwan, NHI compensates for some portion of medical costs, such as 75

percent, and commercial health insurance exists mainly to reimburse customers

whose expenses exceed these limits. Payments for these medical insurance policies

can be categorized into two types: those in excess of NHI payments and fixed

hospitalization payments. Although the former tend to invoke much smaller claim

amounts than the latter, they can grow higher than the fixed payments, such as if

patients receive new and expensive medicines or treatments not covered by NHI. A

fixed hospitalization benefit instead pays a particular amount for each day of a

hospital stay, rather than depending on the actual costs incurred. The fixed amount

can be spent freely by the insured patient, such as for extra nursing care or the family’s

everyday living expenses.

Taiwan has been ranked as one of t he healthiest countries in the world, large ly due to

its implementation of NHI in 1995. Taiwan’s NHI covers almost 10 0 percent of the

population and has attracted w orldwide attention for its low, stable costs (fr om 5.1 to

6.3 percent of gross national pr oduct over 14 years) and short patient waiting times.

The NHI’s benefit package is comp rehensive, including inpa tient and outpatient

care, dental care, traditio nal Chinese medicine, and pr escription drugs, though n ot

long-term care. National Lo ng-Term Care Insurance is poise d to be implemented.

In addition, the NHI featur es a cost-sharing system, with co-insurance and

co-payments for covered se rvices. These co-payment s, as well as income-based

individual premiums, are wai ved for some people, such as the very p oor, veterans,

and natives of the region. Out-of -pocket payments are required f or services not

covered by the NHI, such as pros thodontics, orthodonti cs, extra charges for

private and semiprivate roo ms, and special nurses. Under the current NHI plan,

patients generally pay NT$10 0–$200 (about US$3–$6) out o f pocket for a physician

visit. There is a 10 percent co-pay ment for inpatient services and 20 percent for

outpatient services. On av erage, out-of-pocket spending by households a ccounts for

25–30 percent of total hea lth care spending in Taiwan . Consequently, Taiwan’s

commercial health insuran ce market mainly serves to r eimburse customers whose

expenses exceed the NHI limits. A fixed hospitalization ben efit is particularly

popular.

1

For more information about the Gesetzliche Krankenversicherung (GKV), see http://www.

gesetzlichekrankenkassen.de/.

2

If a person’s income is below a certain value, he or she must accept NHI through the GKV. If a

person’s income is above that amount, or if he or she is self-employed or a civil servant, he or

she may apply for private health insurance but also may choose GKV.

778 THE JOURNAL OF RISK AND INSURANCE