David Dror explains how to approach micro health insurance packages in a way that maximises success
When actuaries discuss their role in health insurance, they often flag what they should do to retain a privileged position over non-actuaries when advising the enormous and growing health industry. Consider, however, another reason, just as compelling: the huge growth potential of health insurance coverage among the currently uninsured - some four to five-and-a-half billion people. The uninsured are mainly in low- and middle-income countries (LMIC), work primarily in the 'informal sector' (small-scale, self-employed activities, typically unrecorded, unregistered and conducted without proper recognition from the authorities), reside mostly in rural communities and have no experience with insurance. Here are some issues that actuaries should bear in mind when insurance firms consider developing suitable micro health insurance (MHI).
First, evidence shows that, in the context of poverty and informality, the population is particularly keen on the welfare gains they obtain in exchange for their payment. Reducing coverage to make products 'cheap' has the opposite effect. Early attempts by first-movers to roll out MHI were essentially cheap versions of existing products ('micro' here referring to the characteristics of the product). We now know better than to assume the poor buy things only, or mainly, because they are cheap. Where 'cheap' involves low welfare gains, such MHI fails to sell. Therefore, actuaries should design dedicated products whose reduced premiums originate from decreases in various loadings (assuming lower error margins, lower intermediation costs, and perhaps also lower profit margins).
Moreover, decisions are generally taken by groups, rather than by individuals, and the prime consideration is welfare gains for the group, rather than individual payouts. Actuaries should consequently base their risk estimates on aggregating entire groups, rather than considering what each individual adds to the overall risk pool. The relevant unit with which to estimate the expected payouts should be the group, rather than individuals. The premiums would also be more relevant when community rated, rather than individually risk rated.
Another definition of 'micro' has been to refer to the target population, that is, poor and rural, and to assume 'beggars can't be choosers'. In fact, it is easy to understand why people are unlikely to buy an unknown product from an unknown agent - and this general pattern of behaviour applies in rural and informal settings, too. Thus we understand why it has been impossible to gain ground by assuming illiterate, innumerate and poor people would trust insurance agents who did not take the time and trouble to create trust. The obvious risk of selling a uniform product as a 'take-it-or-leave-it' option was rejection. The remedy is to engage the target group in setting the priorities that they want to insure and pay for. We know most people are interested in insuring expensive care, rather than only rare care. And people perceive as expensive the aggregate costs of repeat events, like cold and cough or chronic care, rather than considering only the unique costly episode, like hospitalisation. Most people prefer to insure frequent illnesses, even when each episode is inexpensive but the number of episodes large, over very rare events.
A new approach
The context of MHI imposes a departure from the habitual framework of the actuary's work: no access to large datasets, no reliance on 'mandating' in LMIC (governments requiring individuals to enrol), no employment-based group policies and no reliance on premium subsidies. In MHI, national data cannot yield accurate location-specific morbidity data, because locations differ significantly in terms of type and number of illness episodes, supply and cost of healthcare, and willingness to pay for health insurance. It is therefore imperative to obtain information locally. Package design and pricing require three pieces of information: estimates of morbidity and healthcare utilisation; estimates of willingness to pay; and the distributions of the costs of healthcare utilisation. Morbidity and utilisation data must be acquired either by conducting surveys or with faster and cheaper alternative methods such as 'illness mapping'.
As MHI uptake is voluntary and contributory, it requires a different business process to commercial or social insurance. This applies primarily to designing new insurance products, forecasting expected rates of loss, setting premium rates, calculating the liabilities of an insurer to policyholders, investments and reinsurance. It is imperative to ensure that the premium is low enough to be perceived as affordable, but high enough to offer an attractive partial benefits package. When the limiting factor is price, the price determines the package - the opposite to the prevailing industry practice, where the coverage determines the price. Having an estimate of willingness to pay is therefore the only way to determine the income of a scheme before its launch, as well as the sustainability of its operations. The actuary's concern is that actual payments should not fall short of the estimates.
Actuaries are aware of the impact of thresholds (the minimal amount below which claims are not reimbursable) or caps (the maximum amount considered for reimbursement) when they design a package. When it comes to MHI, however, this information has often been ignored. Every benefits package is invariably an exercise in rationing. It is self-explanatory that the lower the cap, the lower the insurance cover will be - which could lead to the perception that even people with insurance will not get adequate protection. It is thus important to involve groups of clients in priority setting and rationing decisions.
Finally, MHI, like any other insurance business, requires some capital at inception to ensure payment of claims when the ratio is high, and admin when the income is low. The need for capital is particularly acute in the early years after new schemes are launched, when enrolment is still low or accumulated surpluses are minimal. The calculation of capital loading is one of the actuary's tasks when developing or reviewing insurance activities. Up until now, this consideration was also ignored in MHI.
Actuaries who wish to develop MHI products need to be aware that the likely way to achieve high enrolment is to engage people in a discussion of the welfare gains of insuring risk before dealing with transactional aspects. Can the clients trust the insurance agency? Can they trust that the process will be transparent and fair? By understanding that 'micro' refers to a different business process, and by applying the guidelines and methods discussed in this article, actuaries can develop microinsurance packages that are affordable to consumers and that demonstrate welfare gains for the insured.
David Dror, PhD, DBA is chairman of the Micro Insurance Academy, New Delhi