subject: Why is Health Insurance So Expensive [print this page] Why is Health Insurance So Expensive
Persistency: The persistency rate for a group of policies is defined as the ratio of the number of policies that continue coverage on a premium-due date to the number of policies that were in force as of the preceding due-date. Thus, if out of 100 policies, 75 policies are in force on the fist policy anniversary, the first-year annual persistency rate is 75 percent. The persistency rate usually improves with policy duration, and for some types of coverage the annual persistency rate will be 95 percent or higher after the fifth policy year. Naturally, other factors affect persistency rates. In general, persistency rates usually are higher at the older issue ages and better for the less hazardous occupations. Persistency usually is better in connection with major medical expense and disability income coverage than on basic hospital expense coverage. Persistency is important in health insurance rating for two reasons. First, expenses are higher during the first year than in subsequent years because of the typically higher first year commission rate. Also, claim rates under health insurance tend to increase as the age of the insured increases. In view of these factors, which vary by age at issue and policy duration, the premium-rate level will depend on the rate of lapse.
Interest: When a level premium is used, the insurer will have, after the first few policy years, an accumulation of funds arising from the excess of premium income over the amounts paid for claims and expenses. As in level premium life insurance, the funds accumulated during the early policy years will be needed in the later policy years, when the premium income is not sufficient to pay claims and expenses. In computing premium rates, therefore it is necessary to assume a suitable interest rate to reflect the investment earnings on these accumulations. Interest rates are of less significance in the calculation of medical expense premiums than in calculating life insurance premiums. The ratio of claims to premiums under health insurance during the early policy years is substantially greater than under level premium life insurance. Accordingly, more of the premium is used for claim payments soon after it is received by the insurance company, and it is, therefore not available for investment, as is the case of level premium life insurance. It is important to consider interest in measuring the average claim cost under long term disability income and long term care coverage. The value of the disability annuity can be significantly reduced because of the interest discount.
Profit and Contingency Margins: As with life insurance premium rates, it is necessary to introduce a margin for contingencies and profit into the premium-rate calculation. One method of doing so is to calculate a premium on the basis of most probable assumptions and then increase the premium by a percentage to provide some margin for contingencies and profit. Another method is to introduce conservative morbidity, expense, persistency, and interest assumptions and determine a premium on that basis. Still another would be to develop a gross premium that is consistent with a specific minimum required internal rate of return.
If you would like more details of the process involved in pricing premiums or would like to receive a no hassle quote, please feel free to visit our website at http://www.health-insurance-buyer.com for more information.
Carlos Diez is a senior benefits consultant for Health Insurance Buyer a referral service that refers consumers to the insurance carriers that can best fit their wants and needs. He holds life, health, and annuity licenses in 48 states and is appointed with over 88 carriers. For contact information please reach him at http://www.health-insurance-buyer.com
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