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“Million Medical Insurance”1 (百万医疗 in Chinese) is the fastest-growing commercial health insurance product in recent years, and its experience monitoring has raised keen concerns for Chinese insurers. It is well-known that medical inflation, portfolio aging, selective lapse, and increased product knowledge are the main drivers of the claim cost trend for medical business. In addition to these, we find that continuing claims from insureds is a key driver. This article analyzes how the issue of continuing claims influences multiple aspects of the claim cost trend of an in‑force medical portfolio.
Figure 1 illustrates the development of claim rates by policy year for an in‑force high-deductible medical portfolio. For example, if the claim rate of a healthy high-deductible medical portfolio starts at around 0.5% in its first policy year, this means that less than 1% of the insureds file a claim (or at least one claim) by their first policy anniversary.
The low claim rate is mainly due to the high-deductible product design. The blue line shows that the overall claim rate rises by 30% per annum on average. This implies a noticeable change in the insureds’ hospitalization behavior in this portfolio.
We split the exposure and claims into two groups for each policy year: (i) those who claim only once in the current policy year, i.e. the newly ill insureds; and (ii) those who had been ill in their previous policy years. The claim rate of newly ill insureds (the orange line) is also growing by policy year, but at a much lower rate than that of all insureds. This growth is caused by an aging portfolio, wearing-off of the underwriting effect, and the leveraging effect of the deductible. For a no‑deductible medical portfolio, a different trend might be observed.
As illustrated by the dark blue bars of Figure 1, around 20% of insureds who have had claims in the first policy year will continue to claim in the second policy year, and this tendency continues in the third year.
A similar trend is observed for those who have had their first claim in the second policy year (the light blue bar): 15% will continue to claim in the third policy year. We are not exactly sure why the probability of continuing claims differs by when the first claim occurs, but it is probably because there is less tendency of anti-selection for insureds having their first claims in the second policy year.
Another component of the medical claim cost is the yearly claim size per capita. For the same cohort of insureds, we make similar investigations of the average claim size (amount borne by insurer) as with the claim rate. In Figure 2, the increasing trend of yearly claim size per capita (not obvious in the graph) for new claims is also slower than that for all insureds.
The trend of new claims is mainly driven by medical inflation, including the advancement of medical technology and introduction of expensive drugs and equipment such as proton and heavy ion treatment, target drugs, CAR‑T, etc. The extent of medical inflation is also exacerbated by the leveraging effect of the deductible.
As illustrated by the blue bars in Figure 2, the average claim size of continuing claims in the second policy year nearly doubles compared to that of new claims. This trend decreases in the third year but the average claim size is still 25% higher. Thus, the development of yearly claim size of all insureds is mainly driven by the much higher claim size from the continuing claims that constitute a higher percentage of claims over the years. The two components of medical claim cost show consistency in our trend analysis.
Medical products have different distributions of claim reasons with different levels of deductible. As shown in Figure 3, the high-deductible product has a much higher percentage of high-expense critical diseases such as cancer and fracture in claims, while the no‑deductible one has more minor conditions such as respiratory and digestive diseases. Deductible amount is the key factor in determining the type of diseases.
We also looked into the reasons for new and continuing claims. As illustrated in Figure 4, in new claims there is a higher proportion of accident-related diseases (e.g. fracture) and acute diseases (e.g. acute pancreatitis, acute appendicitis) than in continuing claims as these conditions are more likely to be cured within one year and no longer require further treatment.
Cancer claims take up a much higher proportion of continuing claims, as cancer treatments might last two years or more, although treatment options vary depending on the stage of the cancer and patient characteristics, according to patient information website Cancer.Net.
As the top claim reason of high-deductible products, cancer (and other critical illness) is one of the key factors that drive the claim cost trend due to the longer and more costly treatment required, especially if there is a deductible waiver benefit for cancer in the product.
The above combined effects lead to the duration development of yearly claim cost per capita.2 As illustrated in Figure 5, the percentage of continuing claims in claim cost rises over policy years and drives the trend to a large extent.
Lapses are allowed for in the exposure calculation, but changes in premiums are not. We find that selective lapse of healthy lives is not the main factor in the portfolio under study, unless there is a large-scale lapse event or a large adjustment of premium rates.
The above findings differ largely by companies with different product designs, distribution channels and target customers, underwriting and claim policies, policy retention policies, etc. For instance, if a product does not allow insureds diagnosed with critical diseases to renew, then its experience would not trend as such. Even within one company, the experience and trend might differ largely in various cohorts of policies.
These product-related factors influence how the drivers discussed would affect the experience of medical business. Therefore, it is challenging to accurately quantify these underlying drivers, but the understanding of how these drivers interact and make impacts can aid insurers to implement best practices to manage a sustainable and healthy medical business.
