Chapter 3

Health Insurance Products

3.1 Introduction

In a broad sense, the expression health insurance denotes a large set of insurance
products which provide benefits in the case of need arising from either accident or
illness, and leading to loss of income (partial or total, permanent or non-permanent),
and/or expenses (hospitalization, medical and surgery expenses, nursery, rehabilita-
tion, etc.).
Health insurance, in its turn, belongs to the area of insurances of the person, where
we find (see Fig. 3.1):
• life insurance (in a strict sense) and life annuities, which provide benefits depending
on survival and death only, i.e. on the insured’s lifetime;
• health insurance, which provides benefits depending on the health status and related
financial consequences (and depending on the lifetime as well);
• other insurances of the person, whose benefits are due depending on events such
as marriage, birth of a child, education and professional training of children, etc.
The shaded boxes in Fig. 3.1 represent insurance products commonly grouped under
the label protection.
Health insurance products are usually shared between “life” and “non-life”
branches according to national legislation and regulation.

Remark It is worth stressing that, in the insurance terminology, the meaning of

several terms is not univocally accepted. As regards the particular field we are
focussing on, a less broad meaning is frequently assigned to the expression “health
insurance”. For example, annuity-based products like those provided by disability
insurance or income protection (see Sect. 3.5), or by long-term care insurance (see
Sect. 3.6) are often excluded from the health insurance area, in which are conversely
included products such as medical expense reimbursement or hospitalization benefits
(see Sect. 3.4). !

© Springer International Publishing Switzerland 2014 29

E. Pitacco, Health Insurance, EAA Series,
DOI 10.1007/978-3-319-12235-9_3
30 3 Health Insurance Products

Insurances
of the person

Life insurance Life annuities Health insurance Other insurances

of the person

Sickness
Pure endowment insurance
insurance
Accident
insurance
Endowment
insurance
Income
Protection
Whole-life
insurance Critical
Illness ins.

Term LTC
insurance insurance

Fig. 3.1 Insurances of the person: basic products

3.2 Products and Types of Benefits

In this section a first insight into general aspects of (private) health insurance products
is provided. An in-depth analysis will be presented in Sects. 3.3–3.7.

3.2.1 Main Health Insurance Products

Accident insurance covers a range of risks which may be caused by an accident (in
particular, but not only, the risks of permanent disability and death). Various types
of benefits can be included in the policy. A benefit frequently included consists of
a lump sum paid in the case of permanent disability; the benefit amount is then
determined as a function of the sum assured and the severity of the injury (i.e. the
degree of disability). Accident insurance is described in Sect. 3.3.
Sickness insurance policies include medical expense reimbursement (that is, reim-
bursement, usually partial, of costs related to sickness or childbirth), and possibly
hospitalization benefits (which consist of periodic payments during hospitalization
periods, whose amounts are not related to actual expenses), as well as fixed-amount
benefits in the event of temporary or permanent disability. See Sect. 3.4.
3.2 Products and Types of Benefits 31

The term disability insurance denotes various types of covers, providing benefits
in case of temporary or permanent disability. In particular, income protection (briefly
IP) policies provide a periodic (usually weekly or monthly) income to an individual
if he/she is prevented from working, and hence from getting his/her usual income,
by sickness or injury. In the case of permanent disability, the benefit can consist of a
lump sum instead of a sequence of periodic amounts. The main features of disability
insurance products are described in Sect. 3.5, with special attention placed on IP
policies.
Long-term care insurance (LTCI) provides the insured with financial support,
while he/she needs nursing and/or medical care because of chronic (or long-lasting)
conditions or ailments. Usually, annuity benefits are provided. See Sect. 3.6.
Critical illness insurance (CII), or Dread disease insurance, has a very limited
extension of the coverage, which is defined via listing (rather than via exclusions).
Diseases commonly covered are: heart attack, cancer, stroke, and coronary artery
diseases requiring surgery. The benefit is a fixed lump sum. A CII cover frequently
constitutes a rider benefit to a basic life policy including death benefit (typically a
term insurance, or an endowment insurance) instead of being a stand-alone cover.
CII products are described in Sect. 3.7. Other limited-scope products are described
in Sect. 3.8.

3.2.2 The Policy Term

Health insurance may be provided by both one-year and multi-year covers, and, in
particular, lifelong covers. For example, accident insurance is typically based on one-
year policies, whereas income protection is usually provided by multi-year policies.
Durations shorter than one year apply, for instance, to policies providing coverage
of health risks related to travels and sojourns.
It is worth noting that a long-duration cover, and in particular a lifelong cover,
can improve the “quality” of the insurance product from the policyholder’s point of
view. As regards sickness insurance, for example, an arrangement based on one-year
covers (or even on longer temporary covers) does not provide the individual with any
guarantee that the insurer will extend the coverage over the whole lifespan, either
because the individual has attained a very old age, or because a very high amount
of health-related costs has been experienced by the individual and reimbursed by
the insurer (see also Sect. 1.2.2). Further, if specific underwriting requirements must
be fulfilled at the time of renewal, a higher premium may be charged because of
worsened health conditions.
Specific restrictions, which determine the actual coverage period, will be defined
in Sect. 3.2.4.
One-year covers on the one hand and multi-year covers on the other require
different actuarial structures, as we will see in Chap. 4, the latter also implying a life
insurance-like approach and related biometric assumptions.
32 3 Health Insurance Products

3.2.3 Monetary Benefits and Service Benefits

As regards the amounts of monetary benefits provided by health insurance products,

we can recognize the following types.
Reimbursement benefits are designed to meet health costs (totally or partially), for
example medical expenses. Hence, this category consists of expense-related benefits.
Limitations such as deductibles and limit values are usually included in the policy
conditions.
The amount of a predefined benefit is stated at policy issue, for example to provide
an income when the insured is prevented from working by sickness or injury. In this
category, we find both annuity benefits and lump sum benefits as well. See, for
example, disability insurance products in Sect. 3.5. As regards the amount of the
annuity or the lump sum, we have:
• fixed-amount benefits, which are independent of the severity of the health-related
event and the possible consequent costs;
• degree-related benefits (or graded benefits), whose amount is linked to the severity
of the health status expressed by some degree, e.g. the degree of disability; this
arrangement is usually adopted in accident insurance policies (see Sect. 3.3) and
in long-term care covers (see Sect. 3.6).
In the case of service benefits, a care service is provided by the insurer, relying on
an agreement between care providers (e.g. hospitals) and the insurer. A special type
of long-term care service benefit is provided in the US by the CCRCs (Continuing
Care Retirement Communities; see also Sect. 3.6.5).
Figure 3.2 shows a classification of health insurance policies providing mone-
tary benefits, which is based on the definition of the benefit amount (in particular:
predefined benefit and expense-related benefit). We note that, when the benefit has
an annuity-like structure (i.e. consisting of periodic payments), the related amount

Benefit amount

Predefined Expense-related

Fixed Degree-related

Fixed-rate
Constant
escalating
Annuity-like
benefits
Inflation Multi-year
linked covers

Fig. 3.2 Defining the amount of monetary benefits: a classification

3.2 Products and Types of Benefits 33

can be either constant over time or escalating, e.g. in geometric progression with
a fixed annual rate of increase. Further, an inflation-linked benefit can improve the
quality of multi-year covers, both in the case of annuity-like benefits and in the case
of expense-related benefits.

3.2.4 Policy Conditions

Several policy conditions are strictly related to the type of benefits provided by
the health insurance products (for example: underwriting requirements, amount of
deductible, allocation of the policy reserve in the case of early termination of the
contract, etc.), and will then be analyzed while dealing with the various types of
cover and the related actuarial models.
In this section we only address duration-related conditions, i.e. policy conditions
which either define the coverage period (and relate to various health insurance covers)
or the benefit payment period following the claim (and hence relate to annuity-like
benefits, consisting in sequences of periodic payments). Some important duration-
related conditions are represented in Fig. 3.3, where a generic disability claim in a
multi-year cover is referred to.
The insured period (or coverage period) is the time interval during which the
insurance cover operates, in the sense that a benefit is payable only if the claim time
belongs to this interval. In principle, the insured period begins at policy issue, say at
time 0, and ends at policy termination, say at time m. However some restrictions to
the insured period may follow from specific policy conditions.
In particular, the waiting period is the period following the policy issue during
which the insurance cover is not yet operating for sickness-related claims. Different
waiting periods can be applied according to the category of sickness. The waiting

disability inception disability termination

disability spell

maximum benefit period

0 c t t+q t+f t+s m time

waiting qualification
period
deferred period

insured period

Fig. 3.3 Some policy conditions

34 3 Health Insurance Products

period aims at limiting the effects of adverse selection. It is worth noting that, although
the term waiting period is widely adopted, this time interval is sometimes called the
“probationary” period (for instance in the US), while the term waiting period is used
synonymously with “deferred” or “elimination” period (see below).
In many policies the benefit is not payable until the disability due to sickness or
accident has lasted a certain minimum period called the deferred period. In sickness
and accident covers the deferred period is usually rather short, mainly aiming at
reducing the cost and hence the premium of the insurance products. Conversely,
disability covers providing annuities are usually bought to supplement the (short-
term) sickness benefits available from an employer or from the state, and hence the
deferred period tends to reflect the length of the period after which these benefits
reduce or cease. The deferred period is also called the (benefit-) elimination period
(for example in the US). Note that if a deferred period f is included in a policy written
to expire at time m, the insured period actually ends at policy duration m − f . Further,
if the waiting period is c and the deferred period is f , the actual duration of the insured
period is m − c − f , as regards sickness-related claims.
When a lump sum benefit is paid in case of permanent disability, a qualification
period is commonly required by the insurer in order to ascertain the permanent
character of the disability; the length of the qualification period would be chosen in
such a way that recovery would be practically impossible after that period.
The maximum benefit period is the upper limit placed on the period for which
benefits are payable (regardless of the actual duration of the sickness or the disability).
In sickness insurance products providing daily benefits the maximum benefit period
can be rather short, whereas it can be much longer in disability insurance covers,
where the maximum number of years of annuity benefit payment may range from,
say, one year to a lifetime. Different maximum benefit periods can be applied to
accident disability and sickness disability. Note that if a long maximum benefit
period operates, the benefit payment may last well beyond the insured period.
Another restriction to benefit payment may follow from the stopping time (from
policy issue) of annuity payment. In disability annuities, the stopping time often
coincides with the retirement age. Hence, denoting by x the age of the insured at
policy issue and by ξ the retirement age, the stopping time r (from policy issue) is
given by r = ξ − x.
When conditions such as the deferred period or a maximum benefit period are
included in the policy, in case of recurrent disabilities within a short time interval
it is necessary to decide whether the recurrences have to be considered as a single
disability claim or not. The term continuous period is used to denote a sequence
of disability spells, due to the same or related causes, within a stated period (for
example six months). So, the claim administrator has to determine, according to all
relevant conditions and facts, whether a disability is related to a previous claim and
constitutes a recurrence or has to be considered as a new claim.
3.3 Accident Insurance 35

3.3 Accident Insurance

Accident is usually meant as an “unintended, unforeseen, and/or violent event, which

directly causes bodily injuries”. Accident insurance is also referred to as personal
accident insurance.

3.3.1 Types of Benefits

Various benefits can be provided by accident insurance policies. We focus on the

following.
Death benefit consists of a lump sum paid in the case the insured dies as a result
of an accident. Clearly, this benefit is a fixed-amount benefit.
Permanent disability benefit consists of a lump sum paid in the case of dismember-
ment. Usually this is a degree-related benefit, because the amount paid is determined
according to a benefit schedule. The benefit schedule first associates a disability
degree to the severity of injury; then, the amount of the benefit is expressed as a
percentage of the sum insured.
Figure 3.4 shows some examples of benefit grading, so that the benefit amount
is a function of the severity of the injury. A franchise deductible is applied in case
(b), a deductible with “adjustment” determines the benefit in case (c), whereas no
deductible is applied in case (a).
Reimbursement of medical expenses can be provided by an accident insurance
policy, in the case the expenses are related to a covered accident. Some related
policy conditions are described in Sect. 3.4.2.
A daily benefit during disability spells can be paid as a fixed-amount benefit in
the case of temporary disability caused by a covered accident. Usually the maximum
benefit period ranges, according to policy conditions, from some months to one year.

(a) (b) (c)

100 100 100
graded benefit (%)

graded benefit (%)

graded benefit (%)

0 100 0 100 0 100

degree of disability (%) degree of disability (%) degree of disability (%)

Fig. 3.4 Graded benefit as a function of the disability degree

36 3 Health Insurance Products

3.3.2 Other Features

Accident insurance policies usually provide a one-year cover (but in the case the
accident cover is a rider to a multi-year life insurance policy).
Among the policy conditions, it should be noted that a qualification period is
usually applied in the case of permanent disability benefit.
Several exclusions can be stated in the policy conditions, which limit the range
of covered accidents. Typically war-related accidents as well accidents related to
illegal activities are not covered (unless otherwise specified in the policy). In some
countries, the case of homicide as an accident is excluded from basic accident covers
(while it can be explicitly added as a supplementary cover).
Special insurance plans are designed to cover specific types of needs. For exam-
ple, travel accident insurance only covers accidents occurred while the insured is
traveling. Student accident insurance covers accidents occurring while the student
is engaged in school activities.

3.4 Sickness Insurance

Sickness insurance policies provide benefits in the event the insured becomes sick.
The benefits provided by sickness insurance vary according to the type and the
extension of the insurance policy. We focus on the most common benefits.

3.4.1 Types of Benefits

Reimbursement of medical expenses is the most important benefit provided by a

sickness insurance policy. The benefit package can include various items:
• hospital inpatient cover includes all the services provided while the insured is
hospitalized, including surgery, lab tests, drugs, etc.;
• outpatient cover relates to services provided in a physician’s office and hospital
outpatient setting, including minor surgery;
• further coverage includes the reimbursement of expenses related to lab tests, to
physician-prescribed drugs, etc.
The hospitalization benefit consists of a fixed-amount daily benefit paid during
hospital stays. This benefit is not expense-related.
A daily benefit during sickness spells can be provided as a fixed-amount benefit in
the case of temporary disability caused by a covered sickness. Usually, the maximum
benefit period ranges, according to policy conditions, from some months to one year.
Permanent disability benefit consists of a lump sum paid in the event of permanent
disability caused by sickness.
3.4 Sickness Insurance 37

3.4.2 Some Policy Conditions

In this section we only refer to sickness insurance policies providing reimbursement

of medical expenses.
The deductible (also called flat deductible, or fixed-amount deductible) is a pre-
defined amount that the insured has to pay out-of-pocket before the insurer will
(partially) cover the remaining eligible expenses. Depending on the insurance prod-
uct, the deductible can either refer to each single claim (sickness or injury), or to the
policy period (e.g. the policy year). The deductible works as a disincentive for the
insured to incur unnecessary medical expenses. Of course, the higher the deductible
the lower the premium.
The proportional deductible (also called fixed-percentage deductible, or coinsur-
ance) is the fraction of eligible medical expenses that the insured has to pay, after
having met the flat deductible.
The stop-loss is the maximum amount the insured will pay out-of-pocket for
medical expenses. It can be referred either to each single claim or to the policy
period.
Once the above policy conditions have been stated, medical expenses are conse-
quently shared between insured and insurer. The sharing can formally be described
as follows. Assume that the policy conditions refer to each claim. We adopt the
following notation:
x = generic expense amount;
D = flat deductible;
α = proportional deductible;
S L = stop-loss;
M = amount which depends on D, α, S L (see Eq. (3.4.3));
u = out-of-pocket payment;
y = reimbursement benefit paid by the insurer.
Of course u + y = x. We have, for 0 < α ≤ 1:
⎧
⎨x
⎪ if x < D,
u = α (x − D) + D if D ≤ x < M, (3.4.1)
⎪
⎩
SL if x ≥ M,
⎧
⎨0
⎪ if x < D,
y = (1 − α) (x − D) if D ≤ x < M, (3.4.2)
⎪
⎩
x − SL if x ≥ M,

where
1% &
M= S L − (1 − α) D . (3.4.3)
α
1
Of course, M = S L if α = 1, and M = S L if D = 0 and 0 < α ≤ 1.
α
38 3 Health Insurance Products

The solid lines in Figs. 3.5 and 3.6 show the expense sharing, as defined by
Eqs. (3.4.1) and (3.4.2) respectively.

Example 3.4.1 Assume: D = 100, α = 0.25, S L = 500. We find (see Eq. (3.4.3)):
M = 1 700. Table 3.1 shows some examples of sharing according to Eqs. (3.4.1)
and (3.4.2). "

Fig. 3.5 The out-of-pocket

Out-of-pocket
payment

SL

D M Expense
amount

Fig. 3.6 The reimbursement

Reimbursement

benefit
benefit

SL

D M Expense
amount

Table 3.1 Sharing medical Expense amount x Out-of-pocket u Reimbursement benefit y

expenses
50 50 0
300 150 150
900 300 600
1 800 500 1 300
3.4 Sickness Insurance 39

3.4.3 Other Features

Underwriting requirements are usually applied in order to assess the individual health
status at policy issue. The underwriting process may result in higher premium rates
for substandard risks, that is, when poor health conditions are ascertained.
Guaranteed issue products are sickness insurance products which can be sold
with little or no underwriting requirements. In this case, a higher premium is usually
charged against the risk of adverse selection.
Waiting periods are commonly applied to limit possible adverse selection. A
qualification period is also applied when a lump sum benefit in the event of permanent
disability is paid.
A sickness insurance product can provide coverage to more individuals, in par-
ticular all the members of a family.

3.5 Disability Insurance

As noted in Sect. 3.2.1, the term disability insurance denotes various types of covers,
providing benefits in case of temporary or permanent disability. Income protection
(briefly IP) policies in particular pay a periodic (usually weekly or monthly) income
to an individual if he/she is prevented by sickness or injury from working and hence
from getting the usual income. In the event of permanent disability, the benefit can
consist of a lump sum (instead of a sequence of periodic amounts).
Disability benefits can be paid by individual disability insurance, group insurance
or pension plans. In the first case, the disability cover may be a stand-alone cover
or it may constitute a rider benefit in a life insurance policy, such as an endowment
policy or a Universal Life product. A more detailed description of benefits provided
by disability insurance is given in the following sections.
Various names are actually used to denote disability insurance products, in par-
ticular providing income protection, and can be taken as synonyms. The following
list is rather comprehensive: disability insurance, permanent health insurance (the
old British name), income protection insurance (the present British name), loss-of-
income insurance, loss-of-time insurance (often used in the US), long-term sick-
ness insurance, disability income insurance, permanent sickness insurance, non-
cancelable sickness insurance, long-term health insurance (the last two terms are
frequently used in Sweden).

3.5.1 Type of Benefits in Individual Policies

In individual disability insurance policies, permanent or not-necessarily permanent

disability is considered according to the product design. Moreover, some disability
policies only allow for total disability, whereas other policies also allow for partial
disability. We describe the most important types of disability benefits.
40 3 Health Insurance Products

The disability income benefit is a fixed-amount annuity benefit providing income

protection in the case of total disability.
Various definitions of total disability are used. Some examples are as follows:
• the insured is unable to engage in his/her own occupation;
• the insured is unable to engage in his/her own occupation or carry out another
activity consistent with his/her training and experience;
• the insured is unable to engage in any gainful occupation.
When one of the above definitions is met to a certain degree only, partial disability
occurs.
Some policies provide a lump sum benefit in the case of permanent (and total)
disability. The cover may be a stand-alone cover or it may be a rider to a basic life
insurance policy, say an endowment insurance. It must be pointed out that moral
hazard is present in this type of product design, which involves the payment of a
lump sum to an individual who may subsequently recover (partially or fully), so that
the benefit is irrecoverable in this event. A qualification period is commonly applied
to limit the moral hazard.
The waiver-of-premium benefit is a rider benefit in a basic life insurance policy
(e.g. an endowment, a whole-life assurance, etc.). The benefit consists of the waiver
of life insurance premiums during periods of disability.

3.5.2 Types of Benefits in Group Insurance and Pension Plans

Disability group insurance may represent an important part of an employee benefit

package (see also Sect. 3.10). There are two main types of benefits provided by
disability group insurance:
• the short-term disability (STD) benefit protects against loss of income during short
disability spells;
• the long-term disability (LTD) benefit protects against long-term (and possibly
permanent or lasting to retirement age) disabilities.
The two fundamental types of disability benefits which can be included in a
pension plan are as follows:
• a benefit consisting of an annuity to a disabled employee;
• a benefit consisting of a deferred annuity to a (permanently) disabled employee,
beginning at retirement age.
The second type of benefit is usually found when a LTD group insurance operates
(outside the pension scheme), providing disability benefits up to the retirement age.
3.5 Disability Insurance 41

3.5.3 Benefit Amount and Policy Conditions

Disability insurance should be distinguished from other products, within the area
of health insurance. In particular, (short-term) sickness insurance usually provides
reimbursement of medical expenses and hospitalization benefits, i.e. a daily bene-
fit during hospital stays (see Sect. 3.4). Long-term care insurance provides income
support for the insured, who needs nursing and/or medical care because of chronic
or long-lasting conditions or ailments (see Sect. 3.6). A Critical illness (or Dread
disease) policy provides the policyholder with a lump sum in case of a dread disease,
i.e. when he/she is diagnosed as having a serious illness included in a set of diseases
specified by the policy conditions; the benefit is paid on diagnosis of a specified
condition, rather than on disablement (see Sect. 3.7). Note that in all these products
the payment of benefits is not directly related to a loss of income suffered by the
insured, whereas a strict relation between benefit payment and working inability
characterizes the disability annuity products providing income protection.
In this chapter (as well as in Chap. 6) we mainly focus on individual policies
providing disability annuities. Nevertheless, a number of definitions in respect of
individual disability products also apply to group insurance and pension plans as
well.
In individual disability insurance the size of the insured benefit needs to be care-
fully considered by the underwriter at the time of application, in order to limit the
effects of moral hazard. In particular, the applicant’s current earnings and the amount
of benefits expected from other sources (social security, pension plans, etc.) in the
event of disablement must be considered. When the insurance policy also allows
for partial disability, the amount of the benefit is scaled according to the degree of
disability, hence a graded benefit is paid.
In disability group insurance, benefits while paid are related to pre-disability
earnings, typically being equal to a defined percentage (e.g. 70 %) of the salary. In
pension plans the benefit payable upon disability is commonly calculated using a
given benefit formula, normally related to the formula for the basic benefit provided
by the pension plan.
Some disability covers pay a benefit of a constant amount while others provide
a benefit which varies in some way. In particular, the benefit may increase in order
to (partially) protect the policyholder from the effects of inflation. There are various
methods by which increases in benefits are determined and financed. In any case,
policies are usually designed so that increasing benefits are matched by increasing
premiums. Benefits and premiums are often linked to some index, say an inflation
rate, in the context of an indexation mechanism.
Another feature in disability policy design consists in the decreasing annuity
benefit. In this case, the benefit amount reduces as the past duration of the disability
claim increases. Such a mechanism is designed in order to encourage a return to
gainful work.
Individual disability policies include a number of conditions, in particular con-
cerning the payment of the insured benefits. Conditions which aim at defining the
42 3 Health Insurance Products

time interval during which benefits can be paid have been described in Sect. 3.2.4.
These policy conditions have a special importance from an actuarial point of view,
when calculating premiums and reserves. Examples will be provided in Sects. 6.7
and 6.11.

3.6 Long-Term Care Insurance

Long-term care insurance (LTCI) provides the insured with financial support, while
he/she needs nursing and/or medical care because of chronic (or long-lasting) con-
ditions or ailments.
Several types of benefits can be provided (fixed-amount annuities, care expense
reimbursement, etc.; see Sect. 3.6.2). The benefit trigger is usually given either by
claiming for nursing and/or medical assistance (together with a sanitary ascertain-
ment), or by assessment of individual disability, according to some predefined metrics
(e.g. the ADL method, see the next section).

Remark LTCI products deserve an extensive presentation for various reasons. On

the one hand, LTCI provides benefits of remarkable interest in the current demo-
graphic and social context. On the other hand, LTCI covers are “difficult” insurance
products both from the insurer’s and the individual perspective. We note, in particular,
the following aspects.
• In many countries, the elderly population is rapidly growing because of increasing
life expectancy and low fertility rates.
• Household size is progressively reducing, with a consequent lack of assistance and
care services provided to old members of the family inside the family itself.
• LTCI products are rather recent (especially if compared to other insurance products
in the framework of health insurance, e.g. personal accident insurance and sickness
insurance). As a consequence, senescent disability data are scanty, so that pricing
difficulties arise.
• High premiums (for instance, because of a significant safety loading) can be an
obstacle to the diffusion of these products. Further, it should be stressed that, in its
stand-alone format, the LTCI product only provides “protection”, excluding other
types of benefits (e.g. a straight life annuity or a death benefit). As we will see in
Sect. 3.6.3, appropriate packaging of LTCI benefits together with lifetime-related
benefits can enhance the clients’ propensity to purchase LTCI products. !

3.6.1 Measuring the Severity of Disability

According to the ADL (Activities of Daily Living) method, the activities and functions
considered are, for example, the following:
3.6 Long-Term Care Insurance 43

1. eating
2. bathing
3. dressing
4. moving around
5. personal hygiene
6. going to the toilet
The simplest implementation of the ADL method is as follows. For each activity
or function, the individual ability is tested. The total disability level (or LTC score)
is given by the number of activities or functions the insured is not able to perform,
and, finally, it is expressed in terms of LTC state. See Table 3.2, where an example
of graded LTCI benefit is also given.
More complex implementations of the ADL method rely on the degrees of ability
to perform the various activities (see Example 3.6.1).
The IADL (Instrumental Activities of Daily Living) method, also known as the
PADL (Performance Activities of Daily Living) method, is based on the individual
ability to perform “relation” activities; for example: ability to use a telephone, shop-
ping, food preparation, housekeeping, etc.
The Barthel index and the OPCS index constitute two important examples of
methods for assessing the disability severity, that is, the level of functional depen-
dence. The interested reader can refer to Sect. 3.13 for bibliographical suggestions.
As regards the OPCS index, see Example 3.6.1.
Example 3.6.1 The OPCS index is based on the degree of functional dependence
in performing 13 activities (among which are mobility, eating, drinking, etc.). The
index quantifying the overall disability of a generic individual is calculated according
to the following procedure:
1. the degree p j is assessed for each activity j, j = 1, 2, . . . , 13;
2. let p (1) , p (2) , p (3) denote the three highest values among the p j ’s
( p (1) ≥ p (2) ≥ p (3) );
3. the overall degree, p, is determined as follows, that is, via a weighting formula:

p = p (1) + 0.4 p (2) + 0.3 p (3) ; (3.6.1)

4. the value of p determines the “category” and the “level” of disability (which are
also used in various statistical reports); see Table 3.3. "

Table 3.2 Benefit as a ADL score; LTC state Graded benefit

function of the LTC state
unable to perform: (% of the insured benefit)
3 Activities I 40
4 or 5 Activities II 70
6 Activities III 100
44 3 Health Insurance Products

Table 3.3 Disability p Category Level

categories and levels
according to OPCS index 0.5–2.95 1 –
3.0–4.95 2 –
5.0–6.95 3 –
7.0–8.95 4 –
9.0–10.95 5 –
11.0–12.95 6 I
13.0–14.95 7 I
15.0–16.95 8 I
17.0–18.95 9 II
19.0–21.40 10 II

Remark It has been stressed that a weak point of disability assessment via ADL
(or IADL) can be found in possible significant correlations among an individual’s
ability to perform the various activities. The consequence is a likely concentration
of insureds in the “extreme” categories, i.e. those with either a very low or a very
high disability degree. !

3.6.2 LTCI Products: A Classification

Long-term care insurance products can be classified as follows:

• products which pay out benefits with a predefined amount (usually, a lifelong
annuity benefit); in particular
– a fixed-amount benefit;
– a degree-related (or graded) benefit, i.e. a benefit whose amount is graded
according to the degree of disability, that is, the severity of the disability itself
(for example, see Table 3.2);
• products which provide reimbursement (usually partial) of nursery and medical
expenses, i.e. expense-related benefits;
• care service benefits (for example, provided by the Continuing Care Retirement
Communities, briefly CCRCs); see Sect. 3.6.5.

3.6.3 Fixed-Amount and Degree-Related Benefits

A classification of LTCI products which pay out benefits with a predefined amount
is proposed in Fig. 3.7.
Immediate care plans, or care annuities, relate to individuals already affected by
severe disability (that is, in “point of need”), and then consist of:
3.6 Long-Term Care Insurance 45

LTC Insurance

predefined benefits

Immediate care plans

Pre-funded plans
("point-of-need" plans)

Care annuities
Combined Stand alone
products

LTC + lifetime- Life care pensions

related benefits

LTC rider to a Enhanced pension

IP + LTC
whole-life assurance

Fig. 3.7 A classification of LTC insurance products providing predefined benefits

• the payment of a single premium;

• an immediate life annuity, whose annual benefit may be graded according to the
disability severity.
Hence, care annuities are aimed at seriously impaired individuals, in particular per-
sons who have already started to incur long-term care costs. The premium calculation
is based on assumptions of short life expectancy. However, the insurer may limit the
individual longevity risk by offering a limited term annuity, i.e. a temporary life
annuity.
Remark Care annuities belong to the class of special-rate annuities, also called
underwritten annuities, because of the ascertainment of higher mortality assumptions
via the underwriting requirements. The following special-rate annuities are sold in
several markets.
1. The underwriting of a lifestyle annuity takes into account smoking and drinking
habits, marital status, occupation, height and weight, blood pressure and choles-
terol levels.
2. The enhanced annuity pays out an income to a person with a slightly reduced life
expectancy, in particular because of a personal history of medical conditions. Of
course, the “enhancement” in the annuity payment (compared to a standard life
annuity, same premium) comes, in particular for this type of annuity, from the
use of a higher mortality assumption.
3. The impaired-life annuity pays out a higher income than an enhanced annuity, as
a result of medical conditions which significantly shorten the life expectancy of
the annuitant (e.g. diabetes, chronic asthma, cancer, etc.).
46 3 Health Insurance Products

4. Finally, care annuities are aimed at individuals, usually beyond age 75, with very
serious impairments or individuals who are already in a LTC state.
Thus, moving from type 1 to type 4 results in progressively higher mortality assump-
tions, shorter life expectancy, and hence, for a given single premium amount, in higher
annuity incomes. In particular, as regards annuities of types 3 and 4, the underwriting
process must result in classifying the applicant as a substandard risk. !

Pre-funded plans consist of:

• the accumulation phase, during which periodic premiums are paid; the accumula-
tion can degenerate in a single premium;
• the payout period, during which LTC benefits (usually consisting of a life annuity)
are paid in the case of LTC need.
Several products belong to the class of pre-funded plans. A stand-alone LTC cover
provides an annuity benefit, possibly graded according to an ADL or IADL score.
This cover can be financed by a single premium, by temporary periodic premiums, or
lifelong periodic premiums. Of course, premiums are waived in the case of an LTC
claim. This insurance product only provides a “risk cover”, as there is, of course, no
certainty in future LTC need and the consequent payment of benefits.
Two possible individual stories are considered in Fig. 3.8, one of which leads to
the LTC benefit payment.
A number of combined products have been designed, mainly aiming at reducing
the relative weight of the risk component by introducing a “saving” component, or by
adding the LTC benefits to an insurance product with a significant saving component.
Some examples follow.
LTC benefits can be added as a rider to a whole-life assurance policy. For example,
a monthly benefit of, say, 2 % of the sum assured is paid in the case of an LTC claim,
for 50 months at most. The death benefit is consequently reduced, and disappears
if all the 50 monthly benefits are paid. Thus, the (temporary) LTC annuity benefit
consists in an acceleration of the death benefit. The LTC cover can be complemented
by an additional deferred LTC annuity (financed by an appropriate premium increase)

no LTC claim

x age at
death

LTC annuity
with LTC claim

x age at age at
LTC claim death

Fig. 3.8 LTC stand-alone annuity benefit: possible outcomes

3.6 Long-Term Care Insurance 47

which will start immediately after the possible exhaustion of the sum assured (that
is, if the LTC claim lasts for more than 50 months) and will terminate at the insured’s
death.
Three possible individual stories are considered in Fig. 3.9, namely: no LTC claim,
“long” LTC claim (implying exhaustion of the sum assured), “short” LTC claim. In
the case of a long LTC claim, the possibility of an additional LTC annuity is also
considered.
An insurance package can include LTC benefits combined with lifetime-related
benefits, i.e. benefits only depending on insured’s survival and death; more precisely:
1. a lifelong LTC annuity (from the LTC claim on);
2. a deferred life annuity (e.g. from age 80), while the insured is not in LTC disability
state;
3. a lump sum benefit on death, which can alternatively be given by:
a. a fixed amount, stated in the policy;
b. the difference (if positive) between a stated amount and the amount paid as
benefit 1 and/or benefit 2.
Four possible individual stories and the consequent outcomes in terms of benefits
are shown in Fig. 3.10.

lump sum

no LTC claim

x age at
death

temporary
LTC annuity
with LTC claim

x age at exhaustion age at

LTC claim of the sum death

temporary additional
LTC annuity LTC annuity
with LTC claim

x age at exhaustion age at

LTC claim of the sum death
residual lump sum
temporary
LTC annuity
with LTC claim

x age at age at
LTC claim death

Fig. 3.9 LTC (temporary) annuity as an acceleration benefit in a whole-life assurance: possible
outcomes
48 3 Health Insurance Products

(possible) lump sum

annuity
no LTC claim

x 80 age at
death

lump sum

no LTC claim

x age at 80
death
(possible) lump sum

annuity LTC annuity

with LTC claim

x 80 age at age at
LTC claim death
(possible) lump sum

LTC annuity
with LTC claim

x age at 80 age at
LTC claim death

Fig. 3.10 Insurance package including LTC annuity and lifetime-related benefits: possible out-
comes

Life care pensions (also called life care annuities) are life annuity products in
which the LTC benefit is defined in terms of an uplift with respect to the basic
pension. The basic pension b is paid out from retirement onwards, and is replaced
by the LTC annuity benefit b[LTC] (b[LTC] > b) in the case of an LTC claim. The
uplift can be financed during the whole accumulation period by premiums higher
than those needed to purchase the basic pension b.
The enhanced pension is a particular life care pension in which the uplift is
financed by a reduction (with respect to the basic pension b) of the benefit paid while
the policyholder is healthy. Thus, the reduced benefit b[healthy] is paid out as long as
the retiree is healthy, while the uplifted benefit b[LTC] will be paid in the case of an
LTC claim (of course, b[healthy] < b < b[LTC] ).
Two possible individual stories and the consequent outcomes in terms of benefits
are shown in Fig. 3.11, which can be referred to the life care pension scheme (accord-
ing to which the basic pension benefit b is paid while the retiree is healthy) and the
enhanced pension scheme (which implies, while the retiree is healthy, a reduced
pension benefit b[healthy] ).
The pension benefits and the LTC benefit are illustrated in Fig. 3.12 (a higher
premium is implicitly assumed to finance the uplift) and Fig. 3.13 (which shows the
reduction of the pension benefit to finance the uplift).
3.6 Long-Term Care Insurance 49

(basic or reduced) pension

no LTC claim

x age at age at
retirement death

(basic or
reduced)
pension LTC annuity
with LTC claim

x age at age at age at

retirement LTC claim death

Fig. 3.11 Life care pension and enhanced pension: possible outcomes

b[LTC]

basic pension LTC benefit

time

retirement LTC claim

Fig. 3.12 Benefits provided by a life care pension product

b[LTC]
LTC benefit =
basic pension enhanced pension

b
b[healthy]
reduced pension

time

retirement LTC claim

Fig. 3.13 Benefits provided by an enhanced pension product

50 3 Health Insurance Products

Finally, a lifelong disability cover can include:

• an income protection cover (briefly, IP; see Sect. 3.5.1) during the working period,
that is, during the accumulation period related to LTC benefits;
• an LTC cover during the retirement period.

3.6.4 Expense-Related Benefits

This category includes LTCI products which provide expense reimbursement. Two
basic types of products can be recognized.
Stand-alone LTC cover, whose benefits consist in (partial) reimbursement of
expenses related to LTC needs, in particular nursery, medical expenses,
physiotherapy, etc. Usually, there are limitations on eligible expenses; further,
deductibles as well as limit values are stated in the policy conditions.
LTC benefits can also be provided by an LTC cover as a rider to sickness
insurance. The resulting product is a lifelong sickness insurance. In order to cover
LTC needs, eligible expenses are extended, so to include, for example, nursing home
expenses. Further, a fixed-amount daily benefit can be provided for expenses without
documentary evidence.

3.6.5 Service Benefits

The LTCI products providing care service benefits usually rely on an agreement
between an insurance company and an institution which acts as the care provider.
An interesting alternative is given by the Continuing Care Retirement Communi-
ties, briefly CCRCs, which have become established in the US. CCRCs offer housing
and a range of other services, including long-term care. The cost is usually met by
a combination of entrance charge plus periodic fees (that is, upfront premium plus
monthly premiums).

3.7 Critical Illness Insurance

A Critical Illness Insurance (CII), or Dread Disease (DD), policy provides the
policyholder with a lump sum in case of a severe illness, i.e. when he/she is diagnosed
as having an illness included in a set of diseases specified by the policy conditions.
The most commonly covered diseases are heart attack, coronary artery disease requir-
ing surgery, cancer and stroke. However, CII products have a very limited extension
of coverage, defined via listing (rather than via exclusions).
3.7 Critical Illness Insurance 51

3.7.1 Types of Benefits

It is important to stress that the benefit is paid on diagnosis of a specified condition,

rather than on disablement. Hence, a CII policy differs in its objectives from other
policies discussed in this chapter. In particular, the CII cover:
• does not indemnify the insured against any specific loss due to medical expenses
(whereas medical expense reimbursement is provided by sickness insurance; see
Sect. 3.4.1);
• does not meet any specific income need, arising from loss of earnings (which is
conversely met by an income protection policy; see Sect. 3.5.1).
Of course, the CII benefit can help in covering medical expenses and providing
protection against possible loss of income.
Policies are usually for a fixed term (say, 5 or 10 years), and include a waiting
period (starting at policy issue) so that the CII benefit will not be payed if the diagnosis
falls in the waiting period itself; the waiting period aims at reducing possible adverse
selection.
The following benefit arrangements can be recognized.
1. A stand-alone cover only includes a CII benefit; the insurance policy ceases
immediately after the payment of the sum assured.
2. A CII benefit can constitute a rider benefit for a life insurance cover, in particular
a term insurance providing a benefit in the case of death. A CII rider benefit takes
either of the two following forms.
• Additional benefit: According to this arrangement, the insurance policy
includes two separate covers (possibly with different sum assured), one paying
the sum assured in the case of death, and the other paying the sum assured in
the case of critical illness. After the payment of the CII benefit, only the term
insurance providing the death benefit remains in force.
• Acceleration benefit: The arrangement is defined as follows. Let S denote the
sum assured in the life insurance cover; the amount λ S (with λ stated in the
policy conditions, 0 < λ ≤ 1) is payable on critical illness diagnosis, while the
remaining amount (1 − λ)S is payable on death, if this occurs within the policy
term. Note that, if λ = 1 the whole insurance cover ceases after the payment
of the CII benefit.
In the case of an additional benefit, it is important to avoid a possible situation of
“overpayment” (which implies higher expected costs and hence higher premiums),
that could take place when death occurs within a very short period after disease
inception. A solution is achieved by replacing the single cash payment with a series
of payments (for example, three or four semestral or annual payments), each payment
being conditional on the survival of the insured.
It is reasonable to assume that the (periodic) premiums are payable while the
insured is healthy, even if the CII benefit is a rider to a life insurance policy, so that
the life cover does not cease at the critical illness diagnosis.
52 3 Health Insurance Products

3.7.2 Multiple Critical Illness Benefits

The classical CII product, in its stand-alone version, terminates after the (first) claim
and the payment of the related benefit. In other words, it can be labelled as a single-
payment insurance product. However, the need for protection against further possible
serious illnesses can last beyond the claim. Therefore, insurance products providing
coverage extended to more than one critical illness claim can offer a more complete
protection. We also note that, thanks to medical advances in recent decades, the
life expectancy after some critical events has increased, so that the need for further
protection extends over a period longer than in the past.
Two alternative approaches can be adopted to the construction of a CII product
which provides possible multiple benefits.

1. Multiple CII benefits can be paid by a buy-back CII product, that is, a classical CII
product with a “buy-back” option as a rider which gives the right to reinstate the
CII cover after the first claim; the (second) CII cover is then sold without medical
assessment and without change in the premium rates, after a waiting period (1
year, say) following the first claim. The option must be chosen at policy issue.
Usually, the same or related type of illness is excluded from the second coverage.
2. A specific multiple CII cover can be designed (usually as a stand-alone cover)
in order to provide multiple CII benefits. The “grouping approach” is usually
adopted in order to classify the diseases and determine appropriate exclusions. In
general, after a claim due to a disease belonging to a given group, all the diseases
included in that group (and hence highly correlated) are excluded from further
coverage.

3.8 Other Limited-Coverage Products

CII products are typical examples of limited-coverage health insurance products, as

only diseases belonging to a well defined set are covered. Other limited-coverage
products have been recently launched in some insurance markets. Here we focus on
cancer insurance policies and surgery cash plans.
A cancer insurance policy can be shaped in several different ways, also depending
on the specific insurance market. There are essentially two main types of benefit.
The lump sum benefit consists of a single payment upon the diagnosis of a cancer.
This fixed-amount benefit can be used in any way, not necessarily related to the
medical expenses the insured incurs (for example: ground and air transportation,
private nursing, etc.).
The other type of benefit, usually called an expense benefit plan, consists of a
set of payments, each payment being related to a specific expense item, typically:
medical tests, hospital stay, surgery, radiation, chemotherapy, etc. The amount of
each payment is predefined in the policy, so that this type of benefit can also be
3.8 Other Limited-Coverage Products 53

classified as a fixed-amount benefit, although the total amount paid-out depends on

the specific needs.
Underwriting requirements are applied. To qualify, the applicant should not have
any pre-existing conditions related to cancer.
A surgery cash plan provides the insured with a cash benefit if he/she requires any
type of medically necessary in-patient or day surgery. A waiting period is commonly
applied to avoid adverse selection, whereas no particular underwriting requirements
are usually applied, at least for given age ranges at policy issue (in this case, a surgery
cash plan is a guaranteed-issue product).
The basic benefit is a lump sum benefit. The amount paid out depends on the sum
insured, and then varies according to the severity of the operation and the recovery
period required. Hence, it can be considered as a graded benefit. We note that:
• the cash benefit is not a reimbursement benefit;
• the insured can use the cash amount for any purpose, including post-surgery care,
physiotherapy, etc.
As a supplementary benefit, a fixed-amount daily benefit could be added to the
policy. This benefit is payable during the hospital stay.

3.9 Combining Health and Life Benefits

It is worth noting that, from the insurer’s perspective, a combined product can be
profitable even if one of its components is not profitable. Further, from a specific
risk management perspective, packaging several insurance covers into one policy
leads to a total amount of policy reserve which can constitute a policy “cushion” for
facing poor experience inherent in one of the package components, provided that
some degree of flexibility in using available resources is allowed.
Conversely, from the client’s perspective, purchasing a combined product can
be less expensive than purchasing each single component, in particular thanks to a
reduction of the acquisition costs charged to the policyholder.

3.9.1 Health Covers as Riders to Life Insurance

The simplest and most traditional way to combine benefits, in the framework of the
insurances of the person, is to define a health-related benefit (or a cause-of-death-
related benefit) as a rider to a life insurance policy (viz a term insurance, a whole-life
insurance, an endowment insurance, etc.).
Several examples have already been mentioned in previous sections (see
Sects. 3.3–3.7). Further details follow. The reader can also refer to Fig. 3.14 for some
examples.
54 3 Health Insurance Products

Insurances
of the person

Other insurances
Life insurance Life annuities Health insurance
of the person

Sickness
Pure endowment insurance
insurance
Accident 6
insurance
Endowment
insurance
5 Income
Protection
Whole-life
insurance Critical
4
Illness ins.

Term LTC
insurance insurance
3
2

Fig. 3.14 Combining health and life benefits

Accident insurance benefits (see Sect. 3.3.1) can constitute riders to a life insurance
policy which includes a death benefit, e.g. a term insurance (see link 1 in Fig. 3.14). In
particular, the sum insured as the death benefit can be paid in the event of permanent
disability. Another type of rider provides, in the case of accidental death, an amount
higher than the sum insured as the (basic) death benefit.
Critical illness benefit (see Sect. 3.7.1) can be provided as a rider to a term insur-
ance (see link 2 in Fig. 3.14); in this case the CII benefit is an acceleration benefit.
Waiver of premiums is a frequent rider benefit in several life insurance policies:
premiums are waived in the event of (total) disability, over the whole disability spell
(see Sect. 3.5.1).

3.9.2 Health Covers in Insurance Packages

Combining LTCI benefits with lifetime-related benefits leads to complex insurance

packages (rather than simple rider benefits).
3.9 Combining Health and Life Benefits 55

As seen in Sect. 3.6.3, various products integrate LTC guarantees into the saving
process (as is the case for whole-life insurance, see link 3), or in the pension payout
phase (see link 5).
Moreover, LTCI benefits can be packaged with other health-related benefits,
for example with income protection (link 4), or with lifelong sickness insurance
(link 6).
Universal Life (UL) policies are typical products in the US market, which can
be designed either as participating or unit-linked policies. Their main features con-
sist in a high flexibility available to the policyholder in deciding year by year: the
amount of premium, to make a partial withdrawal, the type of investment backing
the reserve, and so on. Further, similarly to a bank account, the policyholder receives
a periodic statement, showing the costs (acquisition costs, management fees, fees
for rider benefits, etc.) that have been charged to his/her policy account. If the pol-
icy is designed on a unit-linked basis, the current value of the fund is reported in
the statement; if a participating arrangement is designed, the statement reports the
annual adjustment which has been credited to the fund. The structure of a UL policy
is shown in Fig. 3.15.
The underlying contractual form is a whole-life assurance. This way, the contract
has no specified maturity; the contract terminates either because of death or full
withdrawal. The death benefit is defined so that the sum at risk (that is, the difference
between the death benefit and the fund) is positive.
Given the wide range of benefits which can be included, the UL policy can be
regarded as an insurance package in the context of the insurances of the person.
Beyond the death benefit, many health-related benefits can be included; for example:
lump sum in the case of permanent disability, daily benefit in the case of temporary
disability, medical expense reimbursement, etc. All these benefits (and the death
benefit as well) can be financed, withdrawing the related annual (or periodic) cost
from the fund, i.e. according to a natural premium-based arrangement (see Fig. 3.15).

Interest

FUND
Balance

Payments
(premiums) Natural
Expenses
premiums
(initial Withdrawals
(death benefit,
and
periodic)
health covers,

…)

Fig. 3.15 Financing health insurance covers within a UL product

56 3 Health Insurance Products

3.10 Group Insurance in the Health Area

Many health insurance products can be designed and sold on a group basis. The
products are then referred to as health group plans, and provide coverage to a select
group of people. The group typically consists of the employees of a firm, possibly
extended to their dependents.
The usual benefit package first includes medical expense reimbursement (see
Sect. 3.4.1), and in this case dependents may be included. Another component of the
package may be income protection insurance (see Sect. 3.5.2).
Health group insurance provided to the employees of a firm may be either com-
pulsory or voluntary. In the former case, all the employees are members of the health
plan, whereas in the latter all eligible employees may decide to opt for the group
cover. Adverse selection does not affect health plans with compulsory membership,
and hence the underwriting requirements (if any) are very weak; conversely, under-
writing requirements are appropriate in the case of voluntary membership.
Whatever the membership arrangement, moral hazard can be limited by adopting
appropriate deductibles.
Premium calculation can be organized either on an individual basis or on a group
basis. The latter arrangement is typically applied when the membership is compulsory
and the health cover is sponsored by the employer. In this case, premiums are usually
calculated on a one-year basis taking into account the current structure of the insured
group.
Health group plans can be placed in the framework of employee benefit plans.
An employer can provide its employees with benefits other than the salary, among
which we can find the following insurance-related benefits:
• death benefits, paid to the employee’s dependents in the event of death during the
working period;
• pensions, i.e. post-retirement benefits;
• health insurance covers.
In traditional health group plans, the benefit package and the related limitations
(exclusions, deductibles, etc.) are defined in the group insurance policy. An alter-
native structure, implemented in the US in particular, can be found in the Defined
Contribution Health Plans (briefly, DCHPs).
Following the shift from “defined benefit pension plans” to “defined contribu-
tion pension plans”, a DCHP relies on the same logic as regards the employer’s
contributions. Instead of paying premiums which depend on a defined package of
health-related benefits, the employer pays a defined amount (that is, a contribution)
to each employee. The employees can then purchase individual health policies on
the insurance market, according to his/her needs and preferences.
A DCHP can be implemented in different ways. The structure described above
implements the so-called “pure” DCHP, or “individual market model of DCHP”. An
alternative model is the “decision support model”, according to which the employer’s
defined contributions fund for each employee a health-savings account (see Sect. 1.3)
3.10 Group Insurance in the Health Area 57

and a health insurance cover (usually with high deductibles) within a health group
policy. This way, difficulties in the choice of individual policies are eliminated, while
the employees retain, to some extent, the possibility of choosing an appropriate health
insurance cover.

3.11 Public and Private Health Insurance

Health insurance products sold by (private) insurance companies constitute the

main topic we are addressing. However, it is worth noting that a large variety of
health insurance arrangements can be found in different countries. In particular,
mixed systems of health care funding, which rely on both public health insurance
and private health insurance, are rather common.
Public health insurance is mainly financed through income-related taxation or
contributions, whereas private health insurance basically relies on insurance prod-
ucts financed through premiums whose amount depends on the value of the benefit
package, e.g the expected present value calculated according to actuarial principles.
Private insurance premiums can be calculated either on an individual basis or on a
group basis (for example in health group insurance; see Sect. 3.10).
Various “interactions” between public and private health insurance can be observed
in different countries, as a result of the local legislation. For instance, participation
into the public health insurance scheme can be mandatory either for the whole pop-
ulation or for eligible groups only, while it may be voluntary for specific population
groups. Private health insurance is voluntary in most countries, while a basic health
coverage is mandatory in some countries.
As private health insurance is the object of this book, it is interesting to focus on
a classification of the main functions of health insurance products.1
1. Primary private health insurance is the health insurance that represents the only
available access to basic coverage for individuals who do not have public health
insurance, either because there is no public health insurance, or because individ-
uals are not eligible to coverage under public health insurance (see (a) below), or
they are entitled for public coverage but have chosen to opt out of such coverage
(see (b)); in particular:
(a) principal private insurance represents the only available access to health
coverage for individuals where a public insurance scheme does not apply;
(b) substitute private insurance replaces health coverage which would otherwise
be available from a public insurance scheme.
2. Private insurance can offer duplicate covers, i.e. coverage for health services
which are already provided by public health insurance. Duplicate covers also

1 The following classification has been proposed by OECD (2004b).

58 3 Health Insurance Products

offer access to different providers or levels of service; it does not exempt

individuals from contributing to public health insurance.
3. Complementary covers complement coverage of publicly insured services or ser-
vices within principal/substitute health insurance (which pays only a proportion
of qualifying care costs) by covering all or part of the residual costs not otherwise
reimbursed.
4. Supplementary covers provide coverage for additional health services not cov-
ered by the public insurance scheme. Its extension depends on the local public
health legislation, and may then include luxury care, long-term care, dental care,
rehabilitation, alternative medicine, etc.

3.12 Microinsurance in the Health Area

A basic concept, which helps in understanding the meaning and the role of
microinsurance, is that of “excluded population”, that is, a population without par-
ticipation or with inadequate participation in social life, or without a place in the
consumer society. Examples are given, in several countries, by people active in the
informal economy in urban areas and most of the households in rural areas, employ-
ees in small workplaces, self-employed and migrant workers. Exposure to accident
and illness risks may be particularly significant among those people.
In general, socio-economic inequalities within populations of the same country
can imply significant differences in health conditions. Exclusion from existing health
insurance schemes, either public or private, has, as likely consequences, a more severe
impact of morbidity, a higher mortality, and a lower life expectancy.2
The basic problem is then making health insurance widely accessible. How to
provide health insurance is a government choice. In most cases the choice has been
to rely on the insurance market to extend the health insurance coverage to individuals
with no access to existent public insurance schemes, or to provide the coverage in the
case of non-existent public insurance scheme. A discussion on the ability of private
insurance to fill the gap is beyond the scope of this section (the interested reader can
refer to the papers and technical reports cited in Sect. 3.13). We focus on some basic
aspects of health microinsurance arrangements.

Remark The term “micro” can be interpreted in several ways. In particular, it can
denote the limited extension of the covered population, which constitute only a part
of a national population. An alternative interpretation refers to the small amount of
each financial transaction generated within a microinsurance arrangement, mostly
because of the low income of people who constitute the target of microinsurance
initiatives. !

2 This approach to health microinsurance has been suggested by Dror and Jacquier (1999); see also
the references therein.
3.12 Microinsurance in the Health Area 59

Health microinsurance can provide people with coverage of several health-

related risks, in particular: illness and possible consequent hospitalization, injury and
possible related disability. Further, coverage can be extended to the financial
consequences of early death (although the death risk can constitute an object of
life microinsurance).
Several parties are involved in the implementation of a microinsurance pro-
gramme, and different models can be recognized. In what follows we briefly describe
some basic models that underly existing health microinsurance programmes.
Various models (denoted, in what follows, as arrangements 1 to 3) rely on a health
microinsurance scheme (briefly HMIS), i.e. an institution which provides insurance
covers to individuals. The range of tasks assumed by the HMIS and hence the degree
of its involvement in the delivery and management of the insurance covers, as well
as the role of other possible parties, vary according to the arrangement adopted for
implementing the health microinsurance programme.
The ultimate target in most microinsurance arrangements is the unit, which con-
sists of individuals sharing a common activity and/or living in a well-defined geo-
graphic area. A microinsurance arrangement can involve several units, so that an
improvement in the diversification via pooling can be gained.
We first focus on the following arrangements and the relevant parties involved.
1. This arrangement relies on a partnership which involves, besides the HMIS, an
insurance company and an institution acting as the health provider.
• The HMIS is responsible for:
– the marketing of the health insurance products (see below);
– the delivery of the products to the clients in the units.
• The insurance company is responsible for:
– the design of the insurance products (although the appropriate types of prod-
ucts should be suggested by the HMIS);
– the management of risks transferred by the individuals belonging to the units.
• The health care provider delivers services such as hospitalization, surgery, etc.
See Fig. 3.16. The weak point of this arrangement is the limited involvement of
the HMIS in the development of the products, which are ultimately shaped by the
insurance company. Conversely, the transfer of risks to the insurer constitutes an
advantage for the HMIS.
2. The partnership only involves (besides the HMIS) a health care provider; then:
• The HMIS is responsible for:
– the design of the health insurance products;
– the marketing of the products;
– the delivery of the products to the clients in the units;
– the management of the pool of risks.
• The health care provider delivers services such as hospitalization, surgery, etc.
60 3 Health Insurance Products

HMIS Unit 1
Responsible for:
Unit 2 HEALTH
- marketing
INSURER - product delivery CARE
Unit 3 PROVIDER

Fig. 3.16 HMIS-based health microinsurance arrangement (1)

HMIS Unit 1
Responsible for:
Unit 2 HEALTH
- product design
- marketing CARE
- product delivery Unit 3 PROVIDER
- managing risks

Fig. 3.17 HMIS-based health microinsurance arrangement (2)

HMIS Unit 1
Responsible for:
- product design Unit 2
- marketing
- product delivery Unit 3
- managing risks
- providing health care

Fig. 3.18 HMIS-based health microinsurance arrangement (3)

See Fig. 3.17. The stronger involvement of the HMIS is a point in favor of this
arrangement. A disadvantage is given by the risk taken by the HMIS as a conse-
quence of the pool management.
3. The arrangement relies on the HMIS only, which also acts as the health care
provider (being, at the same time, responsible for all the operations listed under
arrangement 2). See Fig. 3.18. According to this arrangement, the HMIS has
complete control of all the phases of the microinsurance process, of course bearing
all the relevant risks.
A different approach to the implementation of a health microinsurance programme
is adopted in the following arrangement.
4. This arrangement relies on a mutual organization. The individuals who constitute
the community are, at the same time, insured and involved in all the operations.
An external institution acts as the health care provider. See Fig. 3.19. While an
3.12 Microinsurance in the Health Area 61

Fig. 3.19 Community-based

health microinsurance MUTUAL
ORGANIZATION
arrangement
HEALTH
CARE
Insured PROVIDER
Community

advantage is given by the full control on all the relevant operations, a weak
point might be the possibly small size of the community and hence the poor
diversification effect via risk pooling.
Finally, we note that any health microinsurance programme obviously implies an
insurance activity, and can then be affected by all the problems concerning ordinary
insurance. An example is given by the adverse selection effect: joining a microin-
surance programme is usually not mandatory, and hence people heavily exposed to
health-related risks might predominate in the membership.

3.13 Suggestions for Further Reading

Remark As already noted in Sect. 3.1, in the health insurance terminology the
meaning of several terms is not univocally accepted. It follows that terms like “health
insurance”, “sickness insurance”, “disability insurance” can have different mean-
ings, which, to a large extent, depend on local traditions and market practice. This
fact also reflects on the titles of books, papers, technical reports, etc. The following
references are obviously chosen looking at the contents of the bibliographic material,
disregarding to some extent the specific titles. !
We first cite papers, books and technical reports which focus on (private) health
insurance products. We note that, in several cases, actuarial issues are also addressed;
these bibliographic items will also be cited in other chapters, in particular in Sects. 5.6
and 6.18.
Black and Skipper (2000), Bartleson (1968) and O’Grady (1988) deal with health
insurance products in general, ranging from accident insurance to sickness insurance
and disability annuities. A classification of health insurance products is proposed in
OECD (2004b). Conversely, the following papers, reports and books refer to specific
classes of health insurance products.
• Accident insurance: Alsina et al. (2003), and Jean (2004).
• Sickness insurance: Bernet and Getzen (2004), Fürhaupter and Brechtmann
(2002), Milbrodt (2005), Newsom and Fernandez (2010), Orros and Webber
(1988), and Szuch (2004).
• Disability insurance (in particular income protection): CMI (2006), Gregorius
(1993), Haberman and Pitacco (1999), Mackay (1993), Pitacco (2004a), Sanders
and Silby (1988), and Zayatz (2005).
62 3 Health Insurance Products

• Long-term care insurance (LTCI): American Academy of Actuaries (1999),

Dullaway and Elliott (1998), Gatenby (1991), and Jones (2004); in particular,
– LTCI as a specific arrangement for the payout phase in life annuities and
pension products: Brown and Warshawsky (2013), Murtaugh et al. (2001),
Pitacco (2013), Warshawsky (2007), and Zhou-Richter and Gründl (2011);
– Specific disability annuities: Ainslie (2000), and Rickayzen (2007);
– Disability among the elderly and severity assessment (e.g. via ADL or IADL):
Lawton and Brody (1969), Lafortune and Balestat (2004), Martin and Elliot
(1992), and McDowell (2006).
– Continuing Care Retirement Communities (LTC service benefits): Brecht et al.
(2009), Jones (1995, 1996, 1997a,b), and Winklevoss and Powell (1984).
– The economics and finance of LTC: Chen (1994), Costa-Font and Courbage
(2012), Elliott et al. (2014), Gleckman (2010), Merlis (2004), Nuttall et al.
(1994), Whynes (1996), and Zweifel (1996).
• Critical Illness Insurance (CII) (or Dread Disease insurance (DD)): de Braaf
(2013), Brink (2010), Dash and Grimshaw (1993), Fabrizio and Gratton (1994),
and Werth and Mannion (1998).
An overview on underwritten annuities (or special-rate annuities) is provided by
Ridsdale (2012), specifically addressing the UK market. For information about other
markets, see references therein.
Group insurance (and, in particular, health group insurance) is dealt with by Bluhm
(1992), while Christianson et al. (2002) and Cucuta (2002) focus on Defined Con-
tribution Health Plans.
As mentioned in Sect. 3.11, a large variety of health insurance arrangements can
be found by looking at different countries, among which “mixed systems”, relying
on both public health insurance and private health insurance, are rather common.
The literature devoted to the economics and finance of health insurance systems is
very extensive. Cichon et al. (1999) provides a comprehensive view on financing
public and private health care systems, and related modelling problems. Health care
systems in European countries are analyzed in Jakubowski et al. (1998), Thomson
and Mossialos (2009), Wendt (2009) and Wismar et al. (2011), whereas Colombo
and Tapay (2004) and OECD (2004a, 2013) focus on OECD countries.
For more information on Health Microinsurance, the reader can refer to the follow-
ing papers and reports: Dror and Jacquier (1999), Kimball et al. (2013), Leatherman
et al. (2010), Le Roy and Holtz (2011), and Pott and Holtz (2013).