Health insurance underwriting: How coverage costs are derived
• The prospective policyholder or group of policyholders, and
• The type of health coverage an insurance policy would offer.
The process of deciding an insurance policy’s price is known as underwriting. This is done by the actuaries hired by insurance providers. Terms such as ‘underwriting’, ‘rate’ and ‘price’ have a similar meaning that is used by the insurance companies during price evaluations of their policies.
Insurance companies use two determinants when calculating the price of their policy’s coverage. These are primary and secondary factors.
Primary factor
Actuaries, as already discussed, evaluate the cost of an insurance policy. These actuaries study the payment history or losses of the insurance company made to meet the claims of the policyholders. The payment history is compared against the kind of claimants. The information extracted out of such comparison serves as the main determinant of all coverage pricing formulas. Therefore, an insurance company’s payment history is the ‘primary’ factor in deriving the costs of its policy’s coverage.
Secondary factor
The prospective policyholder is taken as the secondary factor when deciding the price of coverage. There can be a single person or a group of policyholders. A policyholder’s group may be employed with a particular company. Insurance companies follow a standard requirement schedule or secondary factors to grant or reject an individual’s insurance application. Some of the secondary factors have been mentioned below:
Height and weight of the applicant.
His age
His residential address
His blood pressure
His credit history
His addictions (for example, alcohol and any other drug abuse)
His pre medical conditions (like genetic disorders and chronic ailments)
Secondary factors do not have a major effect on the price of health insurance policies purchased by people through their employers or any other group. However, these secondary factors do play a minor role in deciding the monthly premium, deductibles and additional charges levied on an insurance policy. On the contrary, these secondary factors hold a great deal of importance when it is a single purchaser. Secondary factors determine the insurability of an individual.
Process of underwriting health insurance policy
Insurance companies keep both the primary and secondary factors ready for price evaluation of their health insurance policies. First of all, they ask for all the medical reports of an applicant and evaluate them on the basis of their predetermined secondary factors.
After one meets all the criteria of insurability, the actuaries allot points on each of the secondary factors based on the company’s formula. The actuaries come up with a sum of all the points allotted in the secondary factors. This sum or value stands somewhere between 2.0- -0.5. This value is converted into a secondary rating factor that is multiplied to get a tentative or working premium amount.
Several extra charges like profit percentage, government-backed monetary fund payments, etc. are added onto the tentative premium that increases its overall amount. After arriving at a definite working premium, insurance companies compare that with premiums paid by its existing clients. If the premium is too low or too high, then they adjust it with deductibles, extra charges and/ or coverage limits.
Finally, after all these modifications, health insurance companies quote a specific premium on their policies, which payable by the policyholders.
