THE CHALLENGES OF FUNDING HEALTHCARE FOR AN AGEING POPULATION A COMPARISON OF ACTUARIAL METHODS AND BENEFIT DESIGNS

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2 THE CHALLENGES OF FUNDING HEALTHCARE FOR AN AGEING POPULATION A COMPARISON OF ACTUARIAL METHODS AND BENEFIT DESIGNS 19 th November 2013 Stephen Bishop

3 Challenges of Old Age Healthcare Provisions 1. Clinical Developments challenges for insurers 2. Typical Pricing Models (Advantages and Disadvantages) 3. Other Forms of Funding 4. Benefit changes 5. Summary Stephen Bishop Munich Re 21/11/2013 2

4 Clinical Developments Challenges for Insurers 21/11/2013 3

5 Why Is Long Term Healthcare Different From Other Forms of Insurance 1. Exposed to long term biometric risks such as morbidity and mortality 2. Exogenous changes can have an impact Provider behaviour (primary and secondary care) Medical utilisation ** Political behaviour and attitudes to private healthcare ** 3. Market risks Interest rate developments Capital requirements (e.g. Solvency 2) Lapse risk 4. Risk of Change Medical Developments (?) 5. Regulatory Change Title of presentation and name of speaker 21/11/2013 4

6 Acute Reported Sickness Rates Rise Rapidly with Age Table 7.3 Acute sickness: average number of restricted activity days per person per year due to illness or injury, by sex and age All persons Great Britain: Number of days Weighted bases (000's) =100% Unweighted sample 2 Males Females Total Males Females Total Males Females Total Age ,013 1,687 3, , ,835 3,503 7,338 1,180 1,160 2, ,353 9,559 17,911 1,990 2,490 4, ,404 7,065 13,469 2,050 2,440 4, ,377 2,596 4, ,040 2, and over ,796 2,465 4, ,590 Total ,778 26,875 51,652 7,490 8,490 15,980 1 Results for 2011 include longitudinal data (see Appendix B). 2 All unweighted bases are rounded to the nearest 10 Source: General Lifestyle Survey, Office for National Statistics Key issues Does empirical data for pricing contain these trends (sample sizes too small) 21/11/2013 5

7 Chronic Reported Sickness Levels Increase with Age Table 7.13 Chronic sickness: rate per 1,000 reporting selected long-standing condition groups, by age and sex Persons aged 16 and over Great Britain: Condition group and over All ages XIII Musculoskeletal system Men Women VII Heart and circulatory system Men Women VIII Respiratory system Men Women III Endocrine and metabolic Men Women IX Digestive system Men Women VI Nervous system Men Women Chronic Sickness levels are not covered privately in all jurisdictions. Because the treatment duration for chronic conditions is lifetime, it has been difficult to accommodate these coverages into annual premium structures. There has been a trend to pass chronic conditions to the national health service. This can have serious reputational issues for the insurer. Weighted bases (000's) =100% Men 11,820 7,605 2,527 1,867 23,819 Women 11,682 7,906 2,772 2,582 24,942 Unweighted sample 2 Men 2,880 2,440 1, ,100 Women 3,050 2,720 1, ,800 1 Results for 2011 include longitudinal data (see Appendix B). 2 All unweighted bases are rounded to the nearest 10 Source: General Lifestyle Survey, Office for National Statistics 21/11/2013 6

8 In Patient Profile Male Source: PKV Germany Inpatient Profiles -Male (source PKV) Even within a relatively short period of time the profiles of male inpatient costs has increased. These extra costs need to be passed onto existing policyholders through premium adjustments. The profile changes have not been extrapolated into the future. Clearly it is difficult to predict these profile changes and hence give advice to the client on future premium changes. 21/11/2013 7

9 In Patient Profile Female Source: PKV Germany Inpatient Profiles - Female (source PKV) The female profile changes show a less clear pattern over the time period under investigation. The volatility of the curves indicates the difficulty in predicting future morbidity profiles /11/2013 8

10 Pricing Models 21/11/2013 9

11 Risk Premium Provision Premiums paid by client increase each year with utilisation and medical inflation. Policies written as guaranteed renewable. Insurer has no requirement to build up any significant reserves. Advantages Disadvantages The base entry level premiums for the working age population are low. Insurers have low capital requirements and full premium adjustment flexibility. Assumptions can fully evolve over time and be reflected in the risk premium. Older people continue to pay higher and higher premiums with no savings component. Lapses can increase as premiums reach significant levels and hence both insurer and policyholder lose. 21/11/

12 Policies with Ageing Reserves German Healthcare System (also in Belgium and Austria) Level Premium paid by client and the premiums increase each year with medical inflation. Policies written as long term business (Similar to Life). Insurer has the requirement to build up significant ageing reserves. Advantages Disadvantages The policyholder is protected from utilisation increases. Usually the national systems have created a legal framework which promotes fairness. Assumption changes are passed on in a controlled environment. Medical inflation increases still have to be passed on and in a uncontrolled cost environment the increases can be large. Under Solvency 2 or internal models the insurer has to hold a significant amount of market risk capital. * Applies to Substitutive Healthcare structures 21/11/

13 Risk Premium vs Ageing Reserve Premium Structure in a Zero Inflationary Environment 21/11/

14 Risk Premium vs Ageing Reserve Premium Structure in a Moderate Inflationary Environment 21/11/

15 Risk Premium vs Ageing Reserve Premium Structure in a High Inflationary Environment 21/11/

16 Risk Premium Provision Insurance Company Perspective Contract Boundary Even under S2 or new IFRS directive, the contract boundaries should be one year if sufficient freedom to change premiums is given. Contract wording should be flexible enough to allow the business to be characterised as a one year structure. Risk Capital requirements Under proposed Solvency 2 regulation for this type of business the key risks identified are: Premium risk (risk of price being insufficient) Reserving risk (risk of reserve levels being insufficient) Lapse risk (risk of good risks leaving the portfolio) Overall the capital pricing costs will be in the order of 2% to 3%. 21/11/

17 Ageing Reserve Provision Insurance Company Perspective Contract Boundary Under S2 or new IFRS directive, the contract boundaries will be lifetime due to limitations on passing on experience or assumption changes. Risk Capital requirements Under proposed Solvency 2 regulation for this type of business the key risks identified are: Morbidity (risk of Healthcare costs changing) Mortality risk (risk of mortality improving) Lapse risk (risk of good risks leaving) Expense, Revision risks Market Risk (Spread and Interest Rate risk) Overall the capital pricing costs will be in the order of 7% to 9% (including market risk). 21/11/

18 Other Forms of Funding 21/11/

19 Health Savings Funds Identifiable Funds Allocated to Individuals Premiums paid by client into a fund, from which claims are paid. The fund is owned by the client, it is not a collective system. Insurer can also provide stop loss protection to avoid large claims depleting the fund. Advantages Disadvantages The policyholder is fully aware of healthcare costs and can choose what benefits to cover. Information provision is key to the individual decision making. Assumption changes are implicitly passed on via funding recommendations. Medical inflation increases still exist although the individual has the information to shop around. The fund may be exhausted due to medical reasons before death and hence top-ups are required. 21/11/

20 Health Savings Funds Insurance Company Perspective For an insurance company the key structural issue is the design of the savings account. Is the account external to the insurance company with e.g. a bank. Is the account internal to the insurance company (unit linked or just a cash account). Are interest rate guarantees provided by the bank or the insurer. 21/11/

21 Other Possible Funding Structures Local solutions between insurers and providers on a capitated or community rated basis. Similar to an accountable care organisation in the US. However, difficult to develop a nationwide solution. Provision of annuity products via a single premium providing a fixed premium reduction at retirement. However, these products have interest rate guarantees and are capital intensive. The premium reductions cannot match the future expected medical inflation changes. 21/11/

22 Other Wider Funding Issues Integration with national pensions systems and benefit systems has been hard to achieve, because: Means testing is necessary to assess the financial net worth of the individual before considering whether premium support is required. This still does not work particularly well in the Long-Term Care industry. In some countries property is a significant asset but it is not actively used to support healthcare or nursing costs. It is still seen as an asset class to pass on to beneficiaries. The practice of passing complex healthcare cases from the private sector to the public e.g. complex cancer cases still imply a funding transfer from the private to the public sector e.g. Spain and the UK. 21/11/

23 Benefit Changes 21/11/

24 Benefit Additions or Claims Support It is clear from data within the US environment that certain services can reduce overall insurance healthcare claim costs Home support Directed prevention regimes Well organised post acute care with good rehabilitation services Strong gatekeeper regimes with primary care physicians Specialist support for mental health, diabetes, kidney dialysis BUT how many insurance companies provide these services or use external vendors outside of the US. The processes need to be strongly interventionist and not optional. 21/11/

25 Benefit Changes Within Europe it can be difficult to enforce compulsory programs this can be done only via a secondary processes: Enrolment in the process directly reduces the premium paid. Enrolment enhances other benefits. However Limited range of national providers who can offer these services. In some countries it could be seen as a parallel system to the National Health Services. 21/11/

26 Summary There are a wide range of funding mechanisms but without government subsidy they simply redefine the lifetime payment patterns. Some funding mechanisms provide for pooling of risks across age groups but not all. Medical cost control is fundamental to all schemes, however in many markets the advantages of private healthcare are unlimited choice and ease of access. Ultimately in mixed systems it is important to get a strong link between public and private provision. Use of specialist services to control costs for the elderly is under-developed in Europe because the system is not co-ordinated. 21/11/