Issue: June 2019 | Life | Download PDF | English By Chen Zhang, Life/Health Actuarial Analyst,
Shanghai Region: Asia
While China’s private health insurance market is
dominated by Critical Illness (CI) products, the fastest growing segment
in recent years is for “mid-range” medical cost reimbursement products. Unlike
CI that pays a lump sum on the diagnosis of certain disease conditions, these
products are designed to reimburses all medical expenses incurred during
hospitalization.
The “mid-range” refers to its target group that
is the middle class. From 2015 to 2017, China’s mid-range medical market stood
at RMB 500 million, RMB 1.2 billion and RMB 8 billion
respectively, and its market value is projected to hit RMB 20 billion in
2018, according to estimates by Zhong An Online.1
Beneath the topline figures, Gen Re worked
closely with insurers when the mid-range medical products were first introduced
and has conducted comprehensive experience analysis on various portfolios. As
the portfolios mature and grow larger, the question becomes: what factors must
be considered to achieve appropriate pricing and risk management of this
product? Before addressing this question, this article will first describe the
design and market positioning of this product.
Product design and
positioning
China’s social health insurance (SHIP) is
characterized by two main attributes: universally wide coverage and significant
burden of out-of-pocket payments (over 35%) placed on individuals.2Incomplete
protection from the public health sector – such as high co-payment
requirements, drug and treatment exclusions and hospital or ward limitations –
provides opportunities for private insurers to step in and fill the coverage
gap in social insurance.
Before the launch of the mid-range product,
medical reimbursement products fit mainly into two broad categories: the lower
end that limits coverage to the scope of social health insurance with quite low
benefits, and the high-end products that offer higher coverage with no limits
on the benefits, including choices of treatment and hospital. Right in the
middle is the emerging Chinese middle class, which is demanding medical
upgrading above the social health insurance cover but cannot afford the
high-end products.
The mid-range medical product is designed for
this group of customers. It is a yearly renewable term product that covers all
medical expenses incurred during hospitalization, including imported or more
expensive drugs and treatments that are beyond the scope of SHIP coverage. On
the other hand, it excludes treatment in private hospitals or those outside of
China. The product design allows for a relatively high deductible and/or
certain co-payment ratio to offer premiums within an affordable range. As the
product reimburses the out-of-pocket costs incurred after SHIP, and SHIP covers
around 30% to 60% of the medical costs incurred depending on the type of hospital
and treatment, the premiums differentiate by whether the life assured is
covered by SHIP or not.
A comparison of mid-range medical premiums with
CI premiums reveals that a male aged 35 can buy a one-year medical cover
worth RMB 1 million (approx. USD 150,000) with a minimum premium of
RMB 400 (USD 60), which is much lower than how much he needs to pay
per year for a CI product. One disadvantage is that a policyholder cannot renew
their policy after one year if it has been discontinued and is no longer
available to buy, though it can be renewable above age 80. (Table 1)
It is not surprising that insurers are
enthusiastically entering this market. In response to the intense competition,
providers are continuously upgrading their products. A common product design in
the market also covers doubled sum assured for CI-related treatment, as well as
outpatient expenses but limited to outpatient pre- and post-hospitalization,
outpatient surgery and specific therapy including dialysis and cancer
treatment.
The product has been sold successfully across
all distribution channels, including traditional agency, mobile app (digital)
and online. In the agency channel it is commonly packaged with a Life/CI
product and subject to full underwriting. In the online channel simplified
underwriting with a health declaration questionnaire has been used for a
seamless sales process.
Pricing considerations
The key pricing assumptions of mid-range medical
products are inpatient rate (IP), average length of stay (ALOS) and average
claim cost. These were derived from industry experience, public statistics and
consultation with doctors when we first priced this product.
Pricing challenge
In comparison with products like CI and Term
Life, which offer lump sum benefits, it is more challenging to estimate the
claim costs for reimbursement-type medical products because they cover various
cost categories and the amount of expenses net of payment by social health
insurance and a certain level of deductibles and or copayments (if any).
With many years of experience in the mid-range
medical market, Gen Re has the capability to price accurately and deliver
design support for new benefits. We go into details on the bill costs behind
claims and have detailed analysis on the breakdown of payments made to
different categories of benefits before and after SHIP payment. We are also
aware that pricing assumptions are not a static set of values; they should be
adjusted case by case to reflect the fact that experience varies largely from
company to company.
Hospital behaviour
Hospital behaviour determines the level of IP
and ALOS of a portfolio. In general terms it represents how a customer behaves
when he or she receives medical treatment in a hospital. Hospital behaviour is
affected by such factors as the target customer group, specific product
features, underwriting and claim requirements, the distribution channel, sales
mode (e.g. whether the cover is bundled with other products) and region
of issue.
For similar product features, experience differs
by company for many reasons. Gen Re’s experience has shown that companies
adopting more stringent or effective underwriting procedures have better
experience. We also see that policies bundled with long-term products with full
underwriting show better results due to the same reason. Extra loadings shall
be applied to IP or ALOS to reflect these differences.
As this product has sold well in every channel,
this factor may also contribute to the variations in experience from company to
company. Initially, we were more concerned about online channels because they
adopt simplified underwriting, which might not be able to mitigate substandard
risk as effectively as full underwriting used by agency channels. However, our
experience shows no clear worse experience for online channels as compared to
agency channels. This is probably due to online channels targeting to customers
with better hospital behaviour or implementing some risk selection model to
select better risks.
In addition to the above factors, medical claims
experience depends largely on geographical regions where the policies are
issued due to the varying control of medical practice and the degree of
economic development. More developed cities tend to have better experience due
to more effective control of medical cost and higher flux of patients. In
general, customers with higher disposable income tend to show better hospital
behaviour. As insurers are not allowed to charge different premiums according
to geographical regions, we need to be aware of the potential risk if policies
sold are concentrated in a few regions.
Another trend is that medical claims experience
deteriorated by calendar year in terms of the overall level of IP and ALOS,
which can be explained by the unfavorable change in hospital behaviour as well.
In consideration of this, the product is offered on a yearly renewable term
(YRT) basis in the market. It is important to let policyholders understand
premium is not guaranteed.
Possible range of
costs
While IP and ALOS determine the frequency of
claims, medical cost is another vital variable in our pricing. It is subject to
high uncertainty in that different types of hospitals and undefined lists of
diseases can lead to a wide possible range of costs that do not consider the
high rate of medical inflation. Hence, product design is a powerful risk
control tool to keep claim cost within a certain level.
Range of hospitals is strictly limited to
Tier 2 and Tier 3 public hospitals in China because these
SHIP-recognized hospitals are more relevant to the inpatient benefit. By
contrast, Tier 1 hospitals are ranked lower due to lower capability for
inpatient treatment and normally have worse control over medical cost and
length of hospital stay. Most products in the market cover normal hospital ward
stays only (mass market version) while some products extend to VIP wards of
public hospitals (VIP version). The latter would incur higher cost, but our
experience shows low utility of VIP wards for the VIP plan; hence, the actual
cost difference between mass market and VIP plans is lower than expected.
A relatively high deductible (typically
RMB 10,000 per annum) can reduce the number of claims to a large extent,
according to the claim analysis of our medical portfolio, as shown in
Figure 1. The size of claims before deductible/copayment is skewed to
the left.
Other product features, such as the co-payment
ratio and restriction in renewability if life assured is diagnosed with CI, are
commonly used by insurers for risk management purposes.
Importance and
challenges in medical business experience monitoring
Without timely monitoring of experience, we run
the risk of not being able to catch deterioration in time. The chance of
deterioration is very real due to the possible wearing off of selection effect,
unfavorable change of business mix (e.g. more sales in regions with poor
hospital behaviour), medical inflation and increasing familiarity
with products.
As experience accumulates, a richer experience
study will be conducted, whether it’s a high-level loss ratio analysis or
detailed multivariate analysis would depend on the time span and data quality
of various portfolios.
One of the prominent challenges in medical
experience monitoring is to estimate the amount of incurred but not reported
claims (IBNR). The chain ladder (or Bornhuetter-Ferguson) method is often
used to estimate IBNR of short-term medical business. However, we normally have
observed longer delays in claim reports because policyholders generally do not
feel the urgency of reporting small-sized claims. Based on our study, a maximum
of two years is required for us to see the full amount of ultimate claims from
a policy. The good experience shown during the first half-year can be quite
misleading to our clients if they overlook the uneven claim development pattern
that develops later.
This is more of a problem for high deductible
plans because policyholders tend to wait longer to report their claim, which
extends the waiting period effect. We should always keep close attention to claim
development to make sure we run a healthy portfolio.
Figure 2 shows the claim development
pattern by month within the first policy year for high deductible policies and
no deductible policies. Only claims from policies issued at least two years
before are analyzed to make sure all claims have developed fully to the
ultimate number. For the no-deductible policies, the proportions of claims
incurred in each month to the total ultimate claims are roughly at the same
level. This implies that after the waiting period, claims of the no-deductible
policies develop evenly with time. Meanwhile, for high-deductible policies,
claims incurred are not as evenly distributed as for no-deductible policies.
Exposure analysis is as important as claims
analysis to maintain the sustainability of medical business. We pay close
attention to the persistency of the portfolio. If the persistency is very low,
there might be high risk of selective lapse. Through close monitoring, an
unfavorable change of business mix can be identified promptly, which will allow
insurers to adjust their strategies more quickly.
Monitoring the change of business mix further
allows us to examine whether the product has effectively targeted the
“expected” group of customers and whether its customer retention and engagement
has been effectively implemented over time. Considering the rapid rise of
online channels, our entire medical portfolio is shifting towards a more
digital-savvy mix. In the portfolios from online channels, we see higher
proportion of the younger generation in the age group of 20-30, who are new to
health insurance, contributing to about 30% of the total sales. The post-80s
and post-90s have gradually become the main force of buying this product.
Insurers need to be aware that this group of customers has a very different
perception of what an insurance product could be, and simply using a mobile
channel does not guarantee engagement of the younger target group.
What does the future
hold?
As the momentum of growth remains strong, we
have seen intensive upgrades in terms of product features and services in the
mid-range medical market. For instance, benefits have been extended to CI
treatment (e.g. proton and heavy ion therapy for cancer) as well as substandard
risk. To provide truly comprehensive health solutions, insurers are keen to
cooperate with health service providers and add services to their products.
Services like emergency assistance and referral to best doctors have become a
standard option to have.
All products are easily replicable. What is the
future competitive landscape of mid-range medical products? Advancements of
digital technology have brought disruptions to the traditional insurance model
with a surge of new players, products and services in the market. Market
players have explored new digital distribution channels and focused on
customizing products using big data analytics. Nowadays insurance is more customer-centric,
which involves the use of mobile devices to create multiple touchpoints for
better customer engagement and the application of predictive analytics for
faster risk selection. In addition to these changes, insurers and big tech
companies will no doubt continue to explore the potential of InsurTech in China
as well.
Endnotes
1.
Hexun Insurance.
(2018, 4 14). Zhong An Insurance outlines the footprint of future
development of mid range medical market. Retrieved from Hexun Insurance: http://insurance.hexun.com/2018-04-14/192831941.html.
2.
MOHRSS. (n.d.).
Retrieved from Ministry of Human Resources and Social Security of PRC: http://www.mohrss.gov.cn/.
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