health insurance for the long term

Kim Morris | February 21, 2009

One of the often ignored and misunderstood factors of the price of health insurance is policy retention rate. When policyholders change insurance companies every year or two (as has been typical for many lines of insurance, then actuarial risk evaluations tend to accurately reflect the actual losses of the policyholders. But the longer a policyholder keeps a policy, the more likely a claim will arise. The effect is that over time, premium rates of a specific policy are based on the claims of the policyholders who couldn't find a better deal in the market. This is also known as "adverse selection". The current generation is less healthy that previous generations and are more likely to incur substantial medical bills and die at younger ages than our parents' generation. Notice this trend is different from other types of insurance, homeowners or auto, for example, whose claim rates do not significantly change over the length of the policy.

Until now, consumers changed health insurance companies every year or two, according to data reported by many sources, including the annual reports by MedSave.com. This has primarily been price driven as consumers seek a better premium rate. But now an interesting trend has developed. Increasing evidence shows that individual insurance buyers (as opposed to group health buyers) now tend to keep their policies longer than the insurance companies expected. Stability is generally good for consumers and good for the insurance industry, but this might be an exception. Here are a few examples:

Penn Treaty long term care insurance ran into financial trouble after it expected 4-5% of policies to lapse each year when the actual number turned out to by 1%. The company wound up retaining far more risk than they anticipated. In this case it was necessary for the reinsurance company stepped in to help solve the problem.

Assurant Health insurance recently sent announcements to longtime policyholders that it was replacing an old and expensive policy with liberal benefits with a newer policy form with more restricted benefits. Some of the policyholders had kept the older policy specifically for the more liberal coverage provisions and felt that the switch left them short-changed.

In the past most short term medical insurance policies expired within a year. Now with the introduction of 3 year renewability options on some short term policies, many of these policies are staying on the books for much longer and it is unclear what experience the insurance companies have for managing these longer term risks. Likewise, the recent flood of mini-med and supplemental insurance policies seem to have renewal rates longer than we might otherwise have expected. The latest blockbuster insurance product Core Health Insurance has an amazing 85%+ policyholder retention after the first six months.

The conventional wisdom is that policy stability is good for consumers and good for the insurace industry. It reduces administrative costs and reduces actuarial risk. But we are facing a new risk that previous generations did not need to consider - declining health of the overall population. If our population's health continues to decline each year while insurance policies last longer than the insurers expected then we could eventually be on course for a claims collision in life, health and disability insurance policies. We expect to see more insurance companies adapt procedures for post-issue premium adjustments based on health factors like weight, smoking and uncontrolled high blood pressure. We already see these factors having an impact in employer-sponsored health plans and it seem inevitable that they will have an impact in individual insurance as well.

Another approach is to insure the ability be be insured. United Heatlthcare (Golden Rule Insurance) recently introduced an insurance designed specifically to protect individuals from declining health by insuring their ability to buy coverage at standard rates in the future regardless of health problems that may arise. The adantage is that this option may be invoked multiple times throughout a person's life and even used for different types of insurance.

Tags : health insurance, guaranteed issue

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