Pricing Private Health Insurance Products in China

Pricing Private Health Insurance Products in China

by Dr. Chen Taofrom Southwestern University of Finance and Economics,

Chengdu, P. R. China

Dresden, April 26, 2004

April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 2

Content

n Products and market of private health insurance in China

n Data resource and actuarial assumptions of pricing

n Actuarial model and pricing process in practice

n Actuarial regulation of pricing private health insurance business

in China

n Future of private health insurance and health actuary in China


Introduction of Chinese Urban Worker’s Basic Medical Insurance System (UBMS)

n 100 million urban workers covered in 2002-CMLSS

n Contribution rate: 6% and 2% of wages

n Risk pooled fund/medical saving account

n Personal saving account for out-patient service fee

n Mutual fund reimburse for hospital service expense

n deductible of 500-1000 Yuan RMB and coinsurance 20%-30%

n yearly reimbursement maximum: 40000-70000 Yuan RMB


The role and potential market of private health insurance in China

n The role in Chinese national health insurance system

n Supplementary to the limitation and maximum of UBMS

n A good replacement for whom not covered by UBMS

n The potential/actual market

n 300 billion Yuan RMB /22.27 billion Yuan RMB

n The challenges in market developing

n Lack of professional and experience

n No effective regulations in health service market


The actual market: providers and products

n 29 life and 8 property insurance companies provide over 300 health insurance products in 2002

n Most are medical insurance products, no really long-term care and disability income products

n Three predominant products

n Critical illness insurance/cancer insurance

n Hospital indemnity insurance/hospital daily allowance

n Supplemental major medical insurance


Data resource

n The internal data is very limited due to short history

n Health actuaries have to rely on external data

n Twice National Investigation of Health Service (1993,1998)

n Lacking of professionals and IT system to accumulate and

analyze the real claim record, health actuaries have to relying

on the above external data in the near future


Actuarial assumptions in pricing yearly renewed products

n Morbidity

n Using external data to form the morbidity and continuance table

n contingency Margin

n 30% to 200% of the risk premium

n Expense

n Can not divided expense into every health insurance product

n 35% in individual business and 25% of group business

n Profit and tax


Hospi ta l i za t ion ra te in China (‰)

60.69

22.7816.75

24.3331.24

40.79

67.67

111

51.96

26.73

12.96

79.55

50.18 49.68

77.93

64.8

51.4

20.9917.26 20.24

26.0430.61

38.43

50.31

33.97

12.39 11.52

47.48

35.04 36.67

48.0542.37

0

20

40

60

80

100

120

0- 5 - 10- 20- 30- 40- 50- 60-

Urban resident MenUrban resident womenrural resident manrural resident women

Morbidity table

42.3750.3164.811160-

48.0538.4377.9367.6750-

36.6730.6149.6840.7940-

35.0426.0450.1831.2430-

47.4820.2479.5524.3320-

11.5217.2612.9616.7510-

12.3920.9926.7322.785-

33.9751.451.9660.690-

womenmanwomenMen

rural residentUrban residentAge

Table 2.1: Hospitalization rate in China (‰)


Average hospital stay of inpatient in China (days)

12.38

17.26 18.3720.48

33.49 34.08 35.51

43.4

7.42

12.44 12.7514.32

16.318.92

17.27 15.93

0

5101520

2530

354045

50

0- 5- 10- 20- 30- 40- 50- 6 0 -

Urban inpat ient

Rura l inpa t ien t

Continuance table

15.9343.460-

17.2735.5150-

18.9234.0840-

16.333.4930-

14.3220.4820-

12.7518.3710-

12.4417.265-

7.4212.380-

Rural inpatientUrban inpatientAge

Table 2.2: Average hospital stay ofinpatient in China (days)


Additional actuarial assumptions in long term or life long products

n Mortality

n The three annuity table, CL4-CL6 (1990-1993)

n Interest

n Technical rate of interest not exceed 2.5%

n Lapses rate

n Usually can not get enough experience data to make it

n Trend factor

n Yearly rising rate of medical expense is 10-15%


The t r end of hospi t al i zat i on r at e i n Chi na( %)

4. 71 4. 94

2. 793. 44

4. 62

5. 45

2. 873. 25

0

1

2

3

4

5

6

Ur ban/ men Urban/ women Rur al / men Rura l / women

19981993

hospitalization rates are relatively steady


Aver age days per hospi t al St ay

1 3 . 31 2 . 8

1 2 . 31 1 . 7 1 1 . 4

1 1 . 0 1 0 . 71 0 . 1

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002

Average days of hospital stay is decreasing


Average expense per hospi t al St ay ( Yuan RMB)

1668

2189. 62384. 3

2596. 8

2891. 13 0 8 3 . 7

3245. 5

3597. 7

0

500

1000

1500

2000

2500

3000

3500

4000

1995 1996 1997 1998 1999 2000 2001 2002

Hospitalization expense is rising


Average expense per out pat i ent v i s i t ( Yuan RMB)

3 9 . 9

5 2 . 5

6 1 . 66 8 . 8

798 5 . 8

9 3 . 699. 6

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002

Outpatient expense is rising


The principles of pricing

n Adequacy

n A very conservative premium rate

n Reasonableness

n Health actuary gives less attention to this

n Competitiveness

n Not higher than that from other insurers

n Equity

n Get the help from the health underwriter


Pricing process of individual products

n Yearly renewable products

n Annual claim cost=the risk premium

n Net premium = risk premium + safety loading

n Gross premium = expense + net premium

n Long-term products

n Pricing critical illness insurance is similar with life insurance

n Few opportunity to calculate level premium

n Pacific-Anta Life Insurance Company/life long hospital daily allowance product in Shanghai


Pricing process of group products

n most are yearly renewable medical expense insurance

n three kinds of models: manual rating, experience rating and

blended rating

n At the beginning, only manual rating methods were used due

to regulation reasons

n In 1998, experience and blended rating methods were used to

group supplemental major medical insurance


re-rating

n Initial rate guaranteed for 12 months in current market

n Monitor the development of the claims and identify significant

changes

n Insurer in China stop sell the old products need a rate

increase and replace it with a new one


Actuarial regulation of pricing

n The Insurance Law of 1996 and the 2002 revised version

n Contract/premium table/calculating process must submit to

regulator for review and approval

n Actuarial Regulation of Health Insurance -CIRC,1999

n Pricing process is regulated strictly but not professionally


Other aspects involved with pricing

n The management of anti-selection and moral hazard

n Uncertainty and risk aversion

n The demand for health insurance

n Marketing channel

n Regulation restrict


Future of private health insurance in China

n The chance to make money

n Industry is changing dramatically

n The ability to handle the risk of operation, the ability to make

profit


health actuaries in China: today

n Less than 30 in Mainland China, employed by life insurance company

n Work part-timer in health business and responsible for price process

n Pricing health insurance is the most difficult among all insurance business

n In China it is impossible because of insufficient data, unsound regulation and changing environment


health actuaries in China: future

n The Chinese health actuaries are still young, just like the

private health insurance industry in China, but the emerging

market also offers many natural experiments to aid of the

progress of these young health actuaries


For further information you can contact me with the following address

Dr. Chen Tao

School of Insurance

Southwestern University of Finances and Economics

No 55, Guan Hua Cun Street, Cheng du, 610074, P. R. China

Tel: 86-28-87356220(H), Fax: 86-28-87352029

E-mail: [email protected]

Pricing Private Health Insurance Products in China

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