Actuarial Views About Health Risk Underwriting

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Actuarial Views About Health Risk Underwriting
Mary van der Heijde, ASA, MAAA
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Overview of Discussion

• What is Health Risk Underwriting?
• Adverse Selection and the Importance of Good Risk
  Measurement
• Examples of Condition Patterns
• Tools Available for Underwriting
• Application of Tools and Ideas

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What is Health Risk Underwriting?

• Health Risk Underwriting
• When an insurance company issues an insurance
  policy, what information is used to calculate the
  expected costs of the group
• Underwriting is the process of pricing and
  selling insurance policies
• The information each insurer may use to make
  decisions is different
• Examples

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What Information is Used to Calculate Expected
Costs?

• Age of applicant
• Gender of applicant
• Medical history of applicant
• Habits of applicant
• Size of the group applying

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What is The Actuarys Role?

• Health Risk Underwriting
• Calculate the costs by age and gender
• Calculate the costs of smoking
• Calculate the costs of height and weight
• Calculate the cost of conditions
• Predict costs for next year
• Predict medical costs for the future
• Trending of costs to future periods
• Review competitors, predict impact of adverse
  selection

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Distribution of Claim Costs

• 80 of costs comes from 15 of people
• Important to find and predict costs for these
  people

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Adverse Selection

• What is adverse selection?
• People know more than an insurance company about
  their own medical costs
• They benefit by not telling all of their costs
• They want to choose the cheaper coverage
• What does this mean in Brazil?
• Sick applicants will prefer to pay agravo
• Health applicants will prefer to take Cobertura
  Parcial Temporaria

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Why is Adverse Selection Important?

• EXAMPLE 1
• 40 year old woman
• Knows that she needs surgery soon
• CHOICES
• 1. Agravo of extra 10
• 2. Cobertura Parcial Temporaria
• WHAT DOES SHE CHOOSE?

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Why is Adverse Selection Important?

• EXAMPLE 2
• 40 year old woman
• Very healthy
• Her doctor suggests surgery, but she will not
  have it
• CHOICES
• 1. Agravo of extra 10
• 2. Cobertura Parcial Temporaria
• WHAT DOES SHE CHOOSE?

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Why is Adverse Selection Important?

• What happens to the insurance company?
• Example 1
• Needs surgery, pays agravo
• Company receives small additional premium
• Company must pay for expensive surgery
• Example 2
• No surgery, Cobertura Parcial Temporaria
• Company receives no savings

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How Does Adverse Selection Affect Competitiveness?

• Example 3
• 50 year old man has condition which will cost
  R5.000 next year
• Better Insurer
• Good tools, predicts R5.000
• Offers agravo extra 100
• Worse Insurer
• Bad tools, misunderstands risk, predicts R2.000
• Offers agravo extra 30
• What does this man choose?

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How Does Adverse Selection Affect Competitiveness?

• Example 4
• 50 year old man has condition which will cost
  R1.000 next year
• Better Insurer
• Good tools, predicts R800
• Offers agravo extra 10
• Worse Insurer
• Bad tools, misunderstands risk, predicts R2.000
• Offers agravo extra 80
• What does this man choose?

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Examples Milliman Medical Underwriting
Guidelines
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What are common problems?

• Using judgment instead of data
• Not knowing true value of agravo
• Not knowing true value of Cobertura Parcial
  Temporaria
• Using life insurance guidelines or information
• Using outdated information or guidelines
• Using another countrys guidelines without
  adaptation

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What can you do to improve your predictions of
medical costs?

• Improve your ability to measure costs
• Focus development efforts on improving
  predictions
• Understand competitors
• In a market with difficult regulations like
  Brazil, even more important to have good tools
  and be more competitive

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What can you do to improve your predictions of
medical costs?

• How to improve predictions?
• Gather better information
• Gather more information
• Understand what the information means
• What tools are available?
• Studies of historical costs
• Experience and judgment
• Medical Underwriting Guidelines

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Mary van der Heijde, ASA, MAAAMilliman Denver,
Colorado, USAmary.vanderheijde_at_milliman.com
1.303.299.9400