Pricing Private Health Insurance Products in China

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1 Pricing Private Health Insurance Products in China by Dr. Chen Tao from Southwestern University of Finance and Economics, Chengdu, P. R. China Dresden, April 26, 2004

2 Content Products and market of private health insurance in China Data resource and actuarial assumptions of pricing Actuarial model and pricing process in practice Actuarial regulation of pricing private health insurance business in China Future of private health insurance and health actuary in China April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 2

3 Introduction of Chinese Urban Worker s Basic Medical Insurance System (UBMS) 100 million urban workers covered in 2002-CMLSS Contribution rate: 6% and 2% of wages Risk pooled fund/medical saving account Personal saving account for out-patient service fee Mutual fund reimburse for hospital service expense deductible of Yuan RMB and coinsurance 20%-30% yearly reimbursement maximum: Yuan RMB April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 3

4 The role and potential market of private health insurance in China The role in Chinese national health insurance system Supplementary to the limitation and maximum of UBMS A good replacement for whom not covered by UBMS The potential/actual market 300 billion Yuan RMB /22.27 billion Yuan RMB The challenges in market developing Lack of professional and experience No effective regulations in health service market April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 4

5 The actual market: providers and products 29 life and 8 property insurance companies provide over 300 health insurance products in 2002 Most are medical insurance products, no really long-term care and disability income products Three predominant products Critical illness insurance/cancer insurance Hospital indemnity insurance/hospital daily allowance Supplemental major medical insurance April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 5

6 Data resource The internal data is very limited due to short history Health actuaries have to rely on external data Twice National Investigation of Health Service (1993,1998) 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 April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 6

7 Actuarial assumptions in pricing yearly renewed products Morbidity Using external data to form the morbidity and continuance table contingency Margin 30% to 200% of the risk premium Expense Can not divided expense into every health insurance product 35% in individual business and 25% of group business Profit and tax April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 7

8 Morbidity table Table 2.1: Hospitalization rate in China ( ) Age Urban resident rural resident Men women man women Hospitalization rate in China ( ) Urban resident Men Urban resident women rural resident man rural resident women April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 8

9 Continuance table Table 2.2: Average hospital stay of inpatient in China (days) Average hospital stay of inpatient in China (days) Age 0-5- Urban inpatient Rural inpatient Urban inpatient Rural inpatient April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 9

10 Additional actuarial assumptions in long term or life long products Mortality The three annuity table, CL4-CL6 ( ) Interest Technical rate of interest not exceed 2.5% Lapses rate Usually can not get enough experience data to make it Trend factor Yearly rising rate of medical expense is 10-15% April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 10

11 hospitalization rates are relatively steady The trend of hospital ization rate i n Chi na (%) Urban/ men Urban/ women Rural /men Rural/women April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 11

12 Average days of hospital stay is decreasing Average days per hospi tal St ay April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 12

13 Hospitalization expense is rising Average expense per hospi tal St ay ( Yuan RMB) April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 13

14 Outpatient expense is rising 120 Average expense per out pat ient visit(yuan RMB) April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 14

15 The principles of pricing Adequacy A very conservative premium rate Reasonableness Health actuary gives less attention to this Competitiveness Not higher than that from other insurers Equity Get the help from the health underwriter April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 15

16 Pricing process of individual products Yearly renewable products Annual claim cost=the risk premium Net premium = risk premium + safety loading Gross premium = expense + net premium Long-term products Pricing critical illness insurance is similar with life insurance Few opportunity to calculate level premium Pacific-Anta Life Insurance Company/life long hospital daily allowance product in Shanghai April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 16

17 Pricing process of group products most are yearly renewable medical expense insurance three kinds of models: manual rating, experience rating and blended rating At the beginning, only manual rating methods were used due to regulation reasons In 1998, experience and blended rating methods were used to group supplemental major medical insurance April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 17

18 re-rating Initial rate guaranteed for 12 months in current market Monitor the development of the claims and identify significant changes Insurer in China stop sell the old products need a rate increase and replace it with a new one April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 18

19 Actuarial regulation of pricing The Insurance Law of 1996 and the 2002 revised version Contract/premium table/calculating process must submit to regulator for review and approval Actuarial Regulation of Health Insurance -CIRC,1999 Pricing process is regulated strictly but not professionally April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 19

20 Other aspects involved with pricing The management of anti-selection and moral hazard Uncertainty and risk aversion The demand for health insurance Marketing channel Regulation restrict April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 20

21 Future of private health insurance in China The chance to make money Industry is changing dramatically The ability to handle the risk of operation, the ability to make profit April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 21

22 health actuaries in China: today Less than 30 in Mainland China, employed by life insurance company Work part-timer in health business and responsible for price process Pricing health insurance is the most difficult among all insurance business In China it is impossible because of insufficient data, unsound regulation and changing environment April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 22

23 health actuaries in China: future 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 April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 23

24 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, , P. R. China Tel: (H), Fax: April 26, 2004 Dr. Chen Tao, School of Insurance, SWUFE 24

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