Underwriting in the Health Insurance Business

This interview was first published in the IIB Bulletin, Vol 1, Issue 4
https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q4%202014-15.pdf

Dhanasar (Danny) Ramjit is the Chief Executive Officer of MediGuide America, which provides remote Medical Second Opinions to its Members and their local treating physicians. Danny is a seasoned Insurance Executive and Actuary with experience in diversified areas- Life, Accident & Health and in companies like AXIS Global Accident & Health, American Life Insurance Company, New York Life Insurance Company, Manulife Financial and Cigna, in various capacities.

With a bachelor’s degree in Physics and Mathematics, Danny believes that everyone should study Physics as it is principles based and makes logic and reasoning a habit. Originally from Guyana, Danny moved to the United States of America in 1980 and studied Actuarial Science. He is a Fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA). In addition, Danny became a Fellow of the Institute of Actuaries of India (FIAI) in 1999 and he is also a Fellow of the Actuarial Institute of Taiwan. In a career spanning more than 25 years, Danny has worked in the USA, Latin America, India, China, Japan, South Korea, South East Asia, the UK, Central and Eastern Europe, Western Europe and the Middle East.

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Danny talks about Underwriting in the Health Insurance Business.

What are the factors that an Underwriter should look at before deciding to write a particular risk?

Is there a need to cover the particular risk and is it estimable? Can the risk have a catastrophic financial impact on people? To be insurable, either the “timing” or “Severity” must be beyond the control of the Insured.

In the Health Insurance space, do you see any major gaps in terms of the products being offered?

In India, Health Insurance plans generally only cover “In-Hospital” treatment. At this point, the person is already sick. With healthcare costs spiraling out of control globally and medicine extending lives, there is a very great need for “preventative coverage”. Keep people healthy rather than trying to cure them when they are sick. Outpatient care is therefore as huge gap in the health coverages available in India.

What type of statistics would help a Health Insurance Underwriter?

One must understand the cost drivers. Important statistics include Medical Trend (utilization and Medical cost Inflation), geographical variations (Urban vs. Rural) and other good data to support the rate table structure (Age Groupings, Sums Insured, Gender variations). In the end, the Pure Premium for any given “Age, Sum Insured, Gender” cell must be supported by credible estimates of “average claims costs” for each such cell.

It is important that the data must be for the “benefits covered” by the policy. If a new benefit is being added or an existing benefit is being enhanced, then the necessary research must be done to find credible estimates of the additional costs. For provider networks, it must be made sure that the right cost differentials are taken into account in setting cost sharing parameters.

There is increasing concern regarding the Individual Health Premiums being more expensive than the Group Health Premiums. What do you think are the reasons for it?

Group Policies bring together large numbers participants under a single policy. Participants in the group subsidize each other and if the group is large enough and homogenous enough by occupation and Industry, then it can be treated as a “self-contained or 100% Credible” group for rating purposes. Individual anti-selection is removed if participation is 100%.

For Individual health plans, it is almost impossible to screen out “anti-selection” and so the “average claims cost per Individual” can be higher than that for a group. So, assuming that all health policies are priced to produce combined ratios not to exceed 100%, an Individual Plan can be expected to cost more than that for a large group.

On the expense side, “bulking of administrative” costs in Group policies and differences in “Commissions and other acquisition expenses” can result in lower expenses per participant in a group vis-à-vis an Individual plan.

As per the IRDAI Annual Report 2013-14, the Net Incurred Claims Ratio for individuals is 83% and group is 110%. If expenses are accounted for, both the categories would not be profitable. Why do you think is this happening?

I am glad you chose to look at “loss ratios” here. The only answer is that competition is driving group pricing below the so-called appropriate “Burning costs”. If loss ratios are at 110%, think of how high the combined ratios must be!

Underwriting in the Group Health Business is considered a black box of sorts. How can this scenario be changed? How is risk assessment done in other countries for Group Health Business?

This should not be. In an efficient marketplace, groups would be rated using a combination of that group’s own experience history and the “universe of all similar groups”. A credibility weighted actuarial approach is used which blends each group’s own experience and that of its “universe”.

The least result that can be expected from such an approach would be combined ratios of less than 100% for the group industry as a whole, while still maintaining some balance between “pure actuarial equity” and “100% social equity”.

Of course, one can charge all groups the same rate per participant (100% social) and this rate can be calculated in such a way that a combined ratio of less than 100% is arrived at.

If you were to import a key learning from your experience globally in Health Insurance, to India, what would that be?

Products should be priced and underwritten to pricing parameters using the sound actuarial principles espoused by the Institute of Actuaries of India and Global Actuarial and Insurance standards. This requires good data capturing and analysis by companies. The IIB can serve a very good role here by publishing Industry averages in broad terms (so as not to violate confidentiality of contributing companies) as benchmarks.  IIB should also publish Medical trend even if it’s a simplistic “Crude analysis” of the historical data.