Urban Customized Commercial Medical Insurance: Part 2

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Chinese Version

In Part 1 of this article series, the origin of urban customized commercial medical insurance was explained. Here in Part 2, we will investigate pricing considerations and the future development of customized urban commercial medical insurance.

Key Features of Urban Customized Commercial Medical Insurance

To enact regional customization of an assurance program for one city, commercial insurance companies need to make calculations and estimates based on relevant data about basic medical insurance and critical illness. Insurance companies assume the main responsibility to operate urban customized commercial medical insurance. To achieve sustainable business development, they need to issue authorization letters and actuarial and legal opinions to the branch undertaking insurance.

The plan design needs to consider the connection to basic medical insurance coverage and the necessary payments and claims. Some regions allow individuals to pay the insurance premiums for the whole family by using the balance from basic medical insurance personal accounts. And some regions offer a one-stop program of basic medical insurance and commercial insurance, while others use basic medical insurance data to enhance claim settlement efficiency and cost savings.

High Insurance Coverage, Low Price

The coverage liability mainly covers hospitalization and specialty drug liability. Providing high coverage at low prices mainly is achieved by setting a higher deductible standard of 20,000 yuan. Multiparty participation creates synergy. The participants include local governments, insurance companies, third-party platforms or drug service companies, as well as the insured.

In the government-led model of customized commercial medical insurance in Shenzhen and Shanghai, for example, the government mainly is involved in product design, product promotion and policy support for medical insurance personal accounts. Promotion of the urban customized commercial medical insurance business also is carried out by third-party platforms, such as drug service companies and technology companies.

One major pricing challenge for this type of program is using a group product underwriting model with a flat rate while allowing for voluntary individual choices. This is demonstrated by the disconnect between the insurer’s use of experience data to set prices versus the results of empirical pricing due to changes in policyholders’ health care behavior after purchasing insurance. As experience does not represent future reality, the contradiction between the two means we must look for a better way to set pricing and predict customer behavior.

More challenges exist when we try to balance expectations such as past illness insurable and compensable benefit estimates; no waiting period, health notifications or screenings; and the general business logic of commercial health insurance. Local business plans require a certain level of claims coverage and a loss ratio of 90% or more. How can commercial insurance companies avoid deficits and guarantee at least minimal profitability?

Principles for Pricing Urban Customized Commercial Medical Insurance

According to the assurance program, matching data is used for pricing. The pricing is carried out according to the responsibility of different groups of people, which reflects the matching of pricing, responsibility and fairness. There are two principles that guide this effort:

1. Rely on the database—the urban customized commercial medical insurance model is designed for one city and one policy, and the program’s pricing is closely related to the local medical consumption level, medical costs and population characteristics. More detailed data is needed to better design the plan and determine the premium.
2. Make a reasonable estimate of claim costs and expenses—a good estimate takes the inflation rate, adverse selection rate, cost of impaired individuals and expenses into account.

Pricing Process of Urban Customized Commercial Medical Insurance

The steps involved in the urban customized commercial medical insurance pricing process to determine the final plan are as follows:

• Data acquisition—negotiate with the local medical insurance bureau to obtain medical data that matches the insured population, write the data requirements when extracting the data and project forward when writing the requirements. Because the liability setting of urban customized commercial medical insurance should be related to the availability of basic medical insurance, it is necessary to focus on strengthening the understanding of basic medical insurance policies and the relationship between liability setting and medical insurance data.
• Data test—after the data is obtained, it is necessary to check and verify the proportion of null values, the period during which the data occurred, the rationality of the hook relationship of the data and the integrity and uniqueness of the data.
• Plan design—the plan’s design mainly considers the scope of protection, payment ratio, deductible, insurance amount, hospital level and so on. Based on the available data, multiple plans are designed for selection.
• Plan measurement—the plan measurement mainly focuses on the participation rate estimate, the selection of the medical cost inflation rate and inverse selection risk factor, the structure of medical costs for different populations, the level of medical expenses and the estimation of other risks.
• Plan determination—the final plan is determined by taking the projected rates and the relationship between coverage responsibilities and basic medical insurance into account.

Future Development of Urban Customized Commercial Medical Insurance

With the support of multiple parties, the mode of integrating products between government and commerce may continue to develop. This can be achieved through a joint effort among the medical insurance bureau, the banking and insurance regulatory bureau, pharmaceutical companies, health management companies, platform companies and commercial insurance companies to promote the continued development of the urban customized commercial medical insurance business.

Because of continued reforms of the medical insurance system, urban customized commercial medical insurance will become a necessary supplement to basic medical insurance. Commercial insurance companies will provide insurance coverage and claims service, the government will provide policy support, the banking and insurance regulatory bureau will supervise the orderly development of the insurance industry, pharmaceutical companies will provide drugs and pharmaceutical services, and health insurance and health management companies will provide health management service platforms to jointly promote the development of urban customized commercial medical insurance.

The market likely will select the coinsurance model of commercial insurance companies. In my opinion, the coinsurance model can effectively prevent vicious competition, fully integrate the resource advantages of multiple insurance institutions, reach customers at a low cost and facilitate the improvement of bargaining power with other partners.

As it currently stands, the plan is being optimized and will be constantly evolving toward refinement and longevity. As the plan matures and operational experience is accumulated, the pricing data and model will be further verified and optimized. The plan and price should tend to be in a reasonable range with continuous fluctuations.

Based on the basic coverage of urban customized commercial medical insurance, the long-term customized solution for healthy individuals will be a new standard. The operational requirements of urban customized commercial medical insurance, along with the government’s requirement on loss ratio and the need to maintain a sustainable operation that guarantees a small profit, should result in the supplementary plan for healthy groups in the basic guarantee contributing to the overall profitability of the commercial insurance company.

Commercial Insurance Payment Coverage Outside the Scope of Payment of Medical Insurance Funds—A Potential Outcome

With the development of newly researched drugs, the addition of specialized drugs and services outside the scope of the medical insurance payment in the urban customized commercial medical insurance program will become a mandatory option, and this responsibility will continue to adjust and expand with the basic medical insurance directory. Basic medical insurance mainly is promoted according to the drug catalog, the medical treatment catalog and service facilities, and it can control costs effectively. However, the customized commercial medical insurance business undertakes responsibility beyond the payment scope of basic medical insurance and cannot be managed in the same way. To improve the operational capacity, risk management and control capabilities of urban customized commercial medical insurance, commercial insurance companies gradually will promote the establishment of a commercial insurance payment catalog, which is conducive to clarifying coverage responsibilities and controlling risks.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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