Risk & Reinsurance in a Community Rating Environment

2. Risk & Reinsurance in a Community Rating Environment Brent Walker

3. SOMMAIRE/ SUMMARY • Risk & Reinsurance in a Community Rating Environment • This paper explores the use of risk and claims equalisation in the Australain environment. • It takes a scientific approach using the claims frequency distribution functions as a starting point. • Political reqirements, though, have to be considered in any theoretical approach.

4. Friday Session

5. The design of reinsurance arrangements in a community rated environment should take account of: The statistical distribution functions of the claims The objectives of the community as interpreted by Government The reliability of the data. Introduction

6. Mean Benefits per Exposed to Risk

7. Mean Costs per Exposed to Risk

8. Mean Costs vs Mean Benefits • The data looks similar but is it? • Appearances can be deceiving. • This suggests bigger gaps at younger ages than older ages due to the influence of copays and deductibles chosen by younger risk takers.

9. Cost/Benefit Analysis by Insurer 2 insurers paid 100% of costs 6 insurers paid between 99% and 100% 20 insurers paid between 95% and 99% 6 insurers paid between 90% and 95% 1 insurer paid between 85% and 90% 1 insurer paid between 70% and 75% 4 insurers paid less than 70% But one of the last 4 had more than 20% of the market! In a market that is very sensitive to large out of pocket costs guess which insurers have submitted bad cost data? Conclusion:- industry cost data is not reliable! Cost Veracity Checks

10. Claiming Dynamics • In one year nearly 10% of insureds’ claim and 90% don’t claim. • But in 10 years only around 30% claim and in 25 years around 50% claim. • So the good risks get to know who they are!

11. Because good risks get to know who they are, voluntary health insurance needs incentives to keep the good risks covered by insurance. Tax incentives Insurer incentives Leaving and re-entry penalties Persistency Is the Major Issue

12. Claims Frequency Distribution

13. Distribution Statistics • 1 Year and cumulative 3 Year Stats • Excess benefits are those paid that are over the threshold

14. Claim Rates

15. Objectives: Enhance community rating Reduce insurer moral hazard Reduce volatility First idea Benefits to population mean – 100% risk Benefits from population mean to Mean + 4 standard deviations – on risk but risk equalised Benefits above 4 standard deviations from mean – claims equalised Possible Reinsurance Arrangement

16. 1st Reinsurance Proposal - Males

17. 1st reinsurance Proposal - Females

18. But There is a Problem

19. Changes in % Population Insured

20. Solution – Equalise Pregnancy Costs • Could be done by risk or claims equalisation