ActEd IFE: 2019 Examinations, Chapter 9 & 10 PDF

SP1‐09: The general business environment Page 1 The general business environment Syllabus objective 1.2 Understand the operating environments in w...

SP1‐09: The general business environment Page 1 The general business environment Syllabus objective 1.2 Understand the operating environments in which health and care insurance products and services are traded: – distribution channels – regulatory and taxation regimes – professional guidance – economic and political influences. (The items in bold are covered in this chapter.) The Actuarial Education Company © IFE: 2019 Examinations  Page 2 SP1‐09: The general business environment 0 Introduction This chapter considers, for each of the main classes of business, the degree to which:  people deliberately seek to buy health and care insurance products  insurance companies have to take their products to their clients in order to market them. Some of the main regulatory, fiscal, professional, economic and political influences that may affect the way that health and care insurance companies do business are also covered. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 3 1 Propensity to buy versus need to sell In order to succeed in the business of health and care insurance, a company needs customers. This section covers the driving forces that lead to insurance policies being bought by consumers and sold by the insurance companies. 1.1 What makes a policy sell? Some elements of insurance are legally necessary (eg third party motor insurance in some territories). These insurances are bought rather than sold – although insurers advertise to raise brand awareness so that at policy renewal, motorists will ask for a quote. Other insurances are not legally necessary to buy, and consumers may not even be aware of their need – these policies therefore have to be sold. People usually decide to buy something through a feeling of need (or desire) for, the product (eg food, clothing). With health and care insurance, people will feel the need for a product if they consider that the risks that they currently face are unacceptable, and that they would rather incur the cost and inconvenience of taking out insurance, and so leave themselves with a much lower and more acceptable risk. However, many people may not be aware that they need the product (at least, not until it’s too late), and so they will not always deliberately go out and buy it. So, much health and care insurance is sold following approaches made by insurers and intermediaries to the public, rather than the other way round. This involves:  finding receptive clients  finding out about the clients’ health and care insurance needs (if any)  advising the clients about possible products to meet any needs  helping the clients to buy the product(s) that they may now wish to buy. So, part of the role of an intermediary is to make customers aware that they really do have a need for a product, and that they need it now (assuming that this is appropriate). Health and care insurance products lie somewhere in between those that are bought and those that are sold. They represent protection plans and so are designed, in some cases loosely, to meet needs. They are all to some extent in competition with State welfare benefits and so the generosity of these benefits will indicate the extent to which healthcare insurance products are a need or a luxury. At one extreme, a product that is a need is a ‘must have’. At the other extreme, a product that is a luxury is something individuals would like to have if and when they can afford it; it provides desirable benefits but they can manage without it for now. 1.2 Selling characteristics of different products Let’s consider how each of the four main health and care insurance products fit within the various extremes described above. The Actuarial Education Company © IFE: 2019 Examinations Page 4 SP1‐09: The general business environment Income protection insurance Limited term IP insurance in many territories is legally binding on employers and is a need for those who are self-employed. Longer-term protection should also be a need for all but may not be perceived as such. There are many people who have a real need for income protection, but who do not feel the necessary urge to seek out and buy the product. This is an example of where people are unaware of the need, or unaware that there is a product available to meet the need, or just don’t (currently) believe the need is important enough to buy the product. Whichever applies, the product basically has to be sold, as it is not bought. Critical illness insurance CI insurance is not directly matched to a specific financial need. Instead, it aims to provide a lump sum at a time of crisis. This sum can be used to meet financial needs (if any) or to ‘compensate’ the insured for suffering a specified critical event. There is also the attraction of a single big payout – the lottery syndrome. As a result, it is sometimes bought rather than being sold. Although CI insurance does not directly meet a specific financial need, it does give people peace of mind to know that they will have a stash of cash available should they become critically ill. After all, no‐one knows what they might need this money for. Even if they don’t end up needing the money to meet their genuine logical needs (such as paying the mortgage off or covering the cost of medical treatment), they still know that they can have a nice holiday and a big party or two, and that’s going to make them feel better if nothing else will. So this product removes worry and could even provide individuals with some luxury in what is otherwise a dire situation – and it’s something for which many people feel it is worth paying premiums. Long‐term care insurance Long-term care insurance depends directly on the perceived attitude of governments to the provision of care and individuals’ priorities on long-term funding for this purpose. There are elements of legal compulsion in some countries. The State may provide incentives to buy long‐term care insurance in the following ways:  the level of State provision may be so meagre that people develop a strong desire to achieve better provision for themselves or for their relatives  the State may require a person to use up the greater proportion of their life savings in paying for their long‐term care before the State will provide any benefits: long‐term care insurance is then seen as a way of protecting a person’s wealth, thus preserving the amount that can be inherited by their children and others. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 5 Private medical insurance If all medical expenses are the responsibility of the individual, then medical expense insurance is certainly closer to a need. If the State promises free healthcare at the point of delivery to all, PMI must be sold rather than bought. Question In the UK there is a well‐established health and care service provided by the State, which is free at the point of delivery. So why would anyone buy PMI at all? Solution The State healthcare provision, while adequate, could be improved. People buy PMI so they can be assured of shorter waiting times to treatment, more attentive care, nicer accommodation (eg private rooms), and can have more choice over where they are treated, who will treat them and in the way they are treated. In other words, to have the ‘luxury’ treatment. 1.3 Future developments There is a growing awareness in many countries that the State cannot continue to provide welfare benefits at the same level, given commitments to low taxation, ageing populations, a proportionately reducing taxable workforce and, in the case of health benefits, high treatment cost inflation due to medical advancements. This awareness is increasing the attraction of health and care insurance products. So, there is an underlying switch occurring from State‐funded to individually‐funded health and care benefits. An obvious (but not the only) means of individual funding is insurance, and so the demand for these products should be expected to grow in the future. Increasing sales regulation and disclosure in many countries are reducing an insurer’s ability to ‘create needs’ through the sales process and thus the distribution of some health insurance products may be made more difficult. Question Is the Core Reading suggesting that this is a good thing? Solution Yes – it is suggesting that the regulation will reduce sales of products where the customers’ needs have been mostly / entirely fabricated by the intermediary. Sales regulation is designed to reduce the incidence of such mis‐selling, in which case the selling will become more difficult. However, sales of genuine needs‐based products should be unaffected by the regulation. (The exception to this is the extent to which people may be put off buying: both by the process itself and as a result of the higher cost involved.) The Actuarial Education Company © IFE: 2019 Examinations Page 6 SP1‐09: The general business environment Mis-selling scandals will make some insurers wary of pushing beyond the obvious needs of the customer. Question Explain briefly how such ‘less enthusiastic’ selling might benefit an insurer. Solution Products will be more likely to be sold to meet clients’ real needs. As a result, persistency of business should improve, and so should the good name of the insurer. This in turn should feed back into more sales. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 7 2 The regulatory regime 2.1 The aim of regulation Governments may impose restrictions on the way in which insurance companies operate. The aim of such restrictions is usually stated to be the protection of the policyholder. Past experience has shown that insurance companies could not always be trusted to manage their affairs appropriately without legislative control. People who take out long‐term insurance contracts, for example, are giving large sums of money to insurance companies, often over very long periods of time, in return for a ‘promise’ by the company to pay the contractual benefit at some (often distant) future date. The public needs to have well‐founded confidence that insurance companies will still be in business and able to honour their obligations when policyholders claim. Without this confidence people will be reluctant to buy insurance, and will therefore be denied this essential financial service as a result. Taken to the extreme, the industry will fail. Countries have therefore found it necessary to regulate their insurance industries in order to ensure the security of the policyholders’ interests, thereby achieving the necessary public confidence in the industry to the benefit of both parties: the public receive a reliable service and the insurance companies attract business. Although the restrictions will usually meet this aim, they may also have the effect of either discouraging innovation or restricting the benefits that could otherwise be given to policyholders. 2.2 Regulatory restrictions The following are the more common of such regulatory restrictions. 1. A restriction on the types of contract that an insurance company can offer. In Italy, there are six classes of long‐term insurance product, based on contract type. For example, unit‐linked business is one class. Companies have to be authorised separately for each class. Some companies may be authorised to write only one or two of the six classes. 2. Restrictions on the premium rates or charges that can be used for some types of contract. (See Chapter 19 for more detail.) Such restrictions have been common in many European countries and in some states in the United States. The rates themselves might be restricted, or certain elements of the premium rate basis, such as morbidity and interest, might be controlled. The Actuarial Education Company © IFE: 2019 Examinations Page 8 SP1‐09: The general business environment 3. Restrictions on rating factors that can be used to calculate premiums, for example gender or age. In Europe, insurers are no longer able to use gender as a rating factor in respect of insurance and financial products. However, insurers are still able to collect data on an applicant’s gender to allow reserves and other risk management to be carried out accurately, according to the mix of business written. 4. Requirements relating to the terms and conditions of the contracts offered, eg how paid-up policy and surrender values are to be calculated. For health and care insurance, the most important terms and conditions relate to claim definitions. So there may be regulations governing the claims that must be allowed under particular contract types. Restrictions may also exist, regarding the extent to which charges under reviewable contracts can be revised upwards, eg by specifying the maximum percentage increases and the frequency of increases allowed. 5. Restrictions on the channels through which insurance may be sold, or requirements as to the procedures to be followed or the information required to be given as part of the selling process. For example, this might involve: minimum training requirements for insurance salespeople the right of the policyholder to cancel the policy without any loss during an initial ‘cooling‐off’ period at the start of a contract the illustration of possible benefits and surrender values (where applicable), perhaps on specified or restricted bases. This last point would be appropriate for the projection of surrender values on unit‐linked contracts, for example (assuming surrender values were payable). 6. Restrictions on the ability to underwrite, for example a prohibition on the use of genetic test results or prohibition of use of past claims history or medical history. In New Zealand, anti‐discrimination law prevents insurers from refusing to insure anyone, whatever their state of health. However, insurers are allowed to charge an appropriate premium for the risk. In the UK, a code of conduct exists between insurers that prevents them from taking account of genetic test results for certain types of contract (and for benefit amounts below a certain level). The code also states that no insurer can demand a genetic test be taken as part of the underwriting process. © IFE: 2019 Examinations The Actuarial Education Company SP1‐09: The general business environment Page 9 Question A genetic test can give information about the inherited risk characteristics of an applicant for health insurance. One of the most significant risk characteristics of an individual is gender, and insurers in some countries are allowed to take this into account. So why shouldn’t insurers be able to request genetic tests in order to find out about other relevant inherited risk characteristics? Solution The reason is a matter of ethics. No‐one can fail to know what gender they are (and being male or female is not all bad, either). But we are all ignorant of most other characteristics unless a genetic test is taken. People might not want to know, for example, that they test positive for a potentially fatal genetic disorder such as Huntington’s Chorea. For a third party (like an insurance company) to require a genetic test is deemed too great an infringement of personal liberty and is therefore unethical, hence the ban. 7. An indirect constraint on the amount of business that may be written. In most countries there are regulations regarding the minimum level of mathematical reserves that must be held, often combined with minimum solvency capital requirements. This issue of capital strain is considered later in the course. These regulations have the effect of (a) limiting the capital available within a company to write new business and (b) effectively placing a minimum requirement on the finance required to write a contract. The capital that an insurance company has available to write new business is, broadly speaking, the supervisory value of its assets minus the supervisory value of its liabilities (including any solvency capital requirements (SCR)). This difference is sometimes referred to as the ‘free assets’, ‘free capital’ or ‘free reserves’ of the insurance company. If the insurance company uses up more than the amount of its free assets in writing new business, or in any other way, it will be insolvent in the supervisors’ eyes. Quite simply, the larger the value of supervisory reserves plus SCR that the insurance company has to hold to satisfy the regulators on the existing in‐force business, the smaller the free assets and hence less capital is available for writing new business. What is more, the bigger the reserves plus SCR that have to be set up for any new contract, the greater the amount of the limited capital available that will be used up when each new contract is written. The Actuarial Education Company © IFE: 2019 Examinations  Page 10 SP1‐09: The general business environment 8. Restrictions on the types of asset or the amount of any asset in which the insurance company may invest for the purpose of demonstrating solvency. Regulators might restrict the types of asset in which an insurance company can invest. Alternatively, they may allow considerable freedom over the investments, but restrict the amounts of certain assets that can be included in the asset figure used in the supervisory valuation. Question How might such restrictions protect policyholders? Solution The restrictions could prevent or limit investment in very high‐risk or volatile assets, and so reduce the risk of insolvency. They could also prevent over‐concentration in a particular: country asset class stock‐market sector individual asset which will help to reduce the risk to the policyholder. Health and care insurance company investment, including the possible effects of regulation, will be discussed in more detail later in the course. 2.3 Regulation on different institutions It is also important to consider the wider regulatory environment, for example, which institutions are allowed to transact insurance business. In practice, insurance companies are likely to have the monopoly of providing pure protection benefits, but not of providing savings benefits. Other types of organisation may be permitted to offer arrangements that can be regarded as competing with health and care insurance products. In some countries, networks of hospitals or clinics can offer ‘access packages’ that are regarded as competition to PMI, and old age care homes may offer payment structures that can meet similar needs to LTCI. An ‘access package’ is a way in which an individual can purchase private medical treatment directly from the care provider, eg fixed‐cost packages for treatment at certain hospitals / clinics. Other institutions will usually be subject to different regulatory controls from insurance companies, which can lead to a non-level playing field with regard to the terms on which such contracts can be offered. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 11 Question Why is this less of an issue for health and care insurance than for life insurance? Solution Most health and care insurance policies are essentially protection policies and so are usually sold by insurance companies (that are subject to the same regulation). However, many life insurance contracts are largely savings contracts and so compete with products offered by organisations that may be differently regulated, such as banks. The main exception is the forms of LTCI that are designed as savings products. 2.4 The effect of the regulatory regime on contract design The regulatory environment is likely to have a significant effect on the design of the contracts sold by insurance companies, as the companies will want to make the best use of any regulatory opportunities available to them. Conversely, contract design will have to take account of any constraints imposed. The Actuarial Education Company © IFE: 2019 Examinations  Page 12 SP1‐09: The general business environment 3 The taxation regime 3.1 Approaches to taxation Insurance business may be taxed in different ways. The most common methods are:  a tax on the annual profits of the business, where profits broadly means the excess of the change in the value of the assets over the change in the value of the liabilities  tax payable on investment income / gains less some or all of the operating expenses of the company. In addition, there may be a tax on premium income. One way of looking at these two approaches is that they recognise different aspects of the nature of an insurer. The ‘profits’ approach recognises that an insurer, at least if it has shareholders, is a company trying to make a profit like any other. The ‘investment income’ approach could be thought of as treating the insurer as a group of individuals pooling their resources for investment. If the investment return of individuals is taxed then it is logical that this return should be taxed if it is earned within an insurance company (provided the policy proceeds are tax‐free when they are paid to the policyholder). These two approaches are now considered in more detail. The profits approach The profits calculation described above essentially measures taxable profit as the increase in the free assets of the insurer over the year, where free assets is defined as the value of assets minus the value of liabilities. Any solvency capital requirement may or may not be added to the value of liabilities in this calculation. Define: A0 = assets at start of year A1 = assets at end of year V0 = liabilities at start of year V1 = liabilities at end of year Then profit could be stated as: 1. (A1 – A0) – (V1 – V0) ie the definition of profit given in the Core Reading above 2. (A1 – V1) – (A0 – V0) ie increase in free assets over the year © IFE: 2019 Examinations The Actuarial Education Company SP1‐09: The general business environment Page 13 Generally, the reserves used will be the value of the liabilities and solvency capital required to be held by the regulator, because this limits the insurer’s freedom to manipulate the amount of the liabilities and hence the taxable profit. It would also be unfair to the insurers to use liabilities in the tax computation that are calculated any less prudently than the regulatory basis. This is because the insurer is only likely to distribute profits that are earned in excess of the value of liabilities, so a tax assessment on profits based on smaller reserves would be asking the insurer to pay tax on profits before they have actually been earned. The use of supervisory reserves can distort the profits (and so tax payments) for rapidly expanding insurers. Its free assets may fall when new business is written due to new business strain. As a result, profit will fall, and therefore so will the tax payable. However, later in the term of the contract, profits will start to come through, as capital is released. So the effect is to redistribute the tax paid over time rather than change its total amount (assuming tax rates don’t change in the meantime). The investment income approach First, it is worth pointing out that ‘investment income’ is not always the precisely correct term, although it may frequently be used colloquially. The taxable amount may include some or all of the capital gains realised, as well as investment income. In the UK, the investment return on equities and property, for long‐term insurance business tax purposes, includes realised gains but not unrealised gains. Operating expenses are deducted and this is reasonable, because such expenses must reduce any returns actually available to policyholders or shareholders. Question How sensible would the ‘investment return less expenses’ approach be as a basis for taxing regular premium CI insurance business? Solution The funds building up under CI insurance are small, which means that very little investment return is earned. In fact, the investment return may well be smaller than expenses, depending on how much of an offset for expenses is allowed, which would mean that no tax is paid. However, the business may still be profitable, and so a basis that produces no tax might not be considered suitable, particularly for companies with shareholders. In fact, this argument is likely to be true for any contract that provides mainly protection benefits, and so will be true of most health and care insurances (the exception being LTCI, which is likely to have a significant investment component). The Actuarial Education Company © IFE: 2019 Examinations  Page 14 SP1‐09: The general business environment 3.2 Tax on different types of insurance business Within a country, different types of insurance business may be taxed by different methods. ‘Different types’ here could refer to various possible classifications of business. Possible examples include:  short‐term versus long‐term  conventional versus unit‐linked  savings versus protection. Some classes of business can also be exempt of tax. Where policyholders effectively gain the benefit of gross investment returns on their insurance policies, the benefits themselves (or some part of them) are likely to be taxed instead. Note that it is possible for policyholders’ funds to be credited with gross investment returns, while profits earned on the business by the shareholders can still be taxed. This is the system that applies generally in Continental Europe. This can mean that it is cheaper for the consumer if certain forms of benefit can be offered as one type of business rather than another. To use a life insurance example, in the UK it is possible to offer term assurance as pensions business (subject to certain limits) as well as life assurance business. Because of the tax concessions on contributions to pension funds the term assurance cover can be offered more cheaply as pensions business. Tax concessions available to individuals may make the sale of certain types of contract easier. The tax treatment of policy proceeds when they are received by policyholders can distort buying habits. In summary, the overall attractiveness of a particular health and care insurance product compared with other products depends on a combination of: 1. the taxation treatment of premiums paid, in particular whether the premiums are deductible from the individual’s taxable income in full, in part or not at all 2. the taxation of the insurer’s funds during the life of the contract 3. the taxation treatment of the eventual policy benefits. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 15 Example Taxation rules permitting, a long‐term care insurance might be written as either of the following versions: Version 1: taxed benefits  premiums are tax deductible  investment return is received gross  benefits are taxed as income Version 2: tax‐free benefits premiums are paid out of net income investment return is taxed benefits are free of tax Version 1 is likely to be more attractive to a person who is currently paying a high rate of tax, but who expects to be paying a lower rate by the time benefits might be payable. 3.3 The effect of the taxation regime on contract design As with the regulatory environment, product design will want to make the best use of any opportunities provided by the fiscal environment. On the other hand, the ability to maximise favourable taxation treatment may force constraints on product design. For example, tax authorities may be keen that pure savings business should not be ‘dressed up’ to look like health and care protection insurance in order to secure favourable tax treatment where this exists. If so, they might specify minimum levels of insurance cover necessary to secure tax concessions. This would then represent both an opportunity and a constraint. The tax concessions might allow a competitive product to be produced, but the design would have to include at least the minimum level of insurance cover. It should be noted that both the fiscal and regulatory environments are significant drivers of product design in the insurance industry. The Actuarial Education Company © IFE: 2019 Examinations  Page 16 SP1‐09: The general business environment 4 Professional guidance Actuarial associations will often issue professional guidance for actuaries advising insurance companies. These will typically give such actuaries a framework of points that they need to consider in carrying out their responsibilities to maintain professional standards. The extent to which this is considered necessary will depend on the extent to which actuaries’ scope for judgement is limited by legislation, which will vary from country to country. As such, professional guidance should not unduly restrict the actions of actuaries and may even provide protection against pressure from proprietors to agree to courses of action that may not be in the best interests of policyholders. For example, planned new business levels might require more capital than the insurer has or can raise, threatening the long‐term survival of the insurer. Actuaries would presumably be arguing for a change in the plans anyway, but the existence of relevant professional guidance may strengthen their hand in discussions with the proprietors. The guidance may typically cover areas such as the matters to consider regarding:  policy conditions  the adequacy of premium rates for new business  the value of the liabilities. Question Why are these matters particularly likely to be covered? Solution These relate to some of the key activities that actuaries working for long‐term insurance companies do. Furthermore, these areas are important in protecting solvency, ie in making sure that: the company does not sell a lot of loss‐making business reserves are not understated. In addition to the above, actuarial associations may issue professional guidance on the interpretation of government regulations. This may typically arise where the government does not want to be overly prescriptive in its requirements so as not to restrict unduly the actions of insurance companies. The government will then look to the actuarial profession to set limits on what would be acceptable behaviour. Professional guidance and regulations are both ultimately designed to generate consumer confidence and hence create a thriving insurance industry for the benefit of both consumers and providers. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 17 5 Economic and other influences 5.1 Inflation In the design of any contract, the meeting of policyholder needs is vital. Therefore, the purpose for which the product is sold, ie the protection of individuals against some potential healthcare event and resultant need, must be met both immediately after the policy sale and into the effective lifetime of the contract. So, a claim payment made in the near future needs to be sufficient to meet the loss incurred by the insured event. In other words, when a non‐indemnity contract is sold, the policyholder’s financial needs should be appropriately assessed and covered by the chosen benefit. Furthermore, if the period of cover extends much beyond one year, there should be some means to increase the benefit payments in line with the increases in the insured loss due to inflation. The way of doing this depends upon how the policy benefits are defined. Fixed level benefits To the extent that a contract offers a fixed benefit, the policyholder should be encouraged to review the level of cover frequently and reapply if cover becomes insufficient to meet the purpose for which it was originally taken out. Question What is the risk to the policyholder of this approach? Solution Unless there are guaranteed insurability options under the original contract, the policyholder has to be re‐underwritten on every new application. An adverse change in personal or health circumstances can make it expensive, or even impossible, to increase cover at a future date. Benefits increasing at a fixed escalation rate Where cover escalates at a fixed rate, the same process should be undertaken. The danger here is that policyholders may believe that they have bought inflation protection. Question So what is the danger here? The Actuarial Education Company © IFE: 2019 Examinations Page 18 SP1‐09: The general business environment Solution The fixed escalation rate may be significantly lower than the actual inflation rate, so that the policyholder can still become under‐insured if the benefit levels are not reviewed periodically. It is also feasible for policyholders to become over‐insured with such a policy, if inflation turns out to be lower than the policy escalation rate. Benefits increasing in line with a national inflation index Some contracts have incremental increases in cover amounts that are in line with national average earnings or consumer inflation, but even here the insured should be encouraged to review provision against needs. For example, (in the case of LTCI) the increase in cost of care homes may exceed the rise in retail prices, in which case the benefits may become inadequate. It is unlikely for any published inflation index to match exactly the inflation of particular health and care costs. Benefits not fixed but indemnify actual health and care costs Where a contract indemnifies the cost of treatment, care provision or other medical expenses, the risk of covering inflation is passed to the insurer. On one-year contracts, the cost can be reappraised annually, and premiums adjusted accordingly. This would be the normal case for private medical insurance and other short‐term medical expense policies, such as dental care funding plans. On longer-term business, premiums may not be reviewable, and the insurer will need to keep the level of prospective reserves consistent with both current and future expected cost levels. The worst case scenario here could be a pre‐funded long‐term care insurance policy, with guaranteed premiums, which provides for the actual costs of long‐term care. Question Why is this ‘worst case scenario’ rather unlikely to be found in practice? Solution It is an extremely risky product for the insurer: either the insurer is risking its solvency, or it must be charging its policyholders heavily by including large margins in its premium basis (and so probably not selling much business). Therefore it would be much more inclined not to issue the product in this form at all. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 19 Question Suggest two variations of this product design that would be more likely to be found in practice. Solution (1) benefits on an indemnity basis but with a ceiling payment and regularly reviewable premiums (2) benefits fixed or index‐linked; premiums may be guaranteed (fixed or index‐linked) but more likely reviewable (though less frequently than in (1)) Inflation of expenses Inflationary pressures will also apply to the expenses of policy and claim administration. The actuary will therefore similarly need to reflect rising expenses in the amounts set aside as reserves for future policy outgo. As well as the reserves, future expenses assumed in the premium basis should also include appropriate allowance for future inflation, although index‐linking or other escalation of the actual premiums payable can help in this respect. 5.2 Business cycle In times of business optimism, there is a positive jump in demand for employer-sponsored insurances. This can arise from a need to offer an appealing employment package to attract and retain the best staff. Individuals are generally happier to renew / upgrade existing policies and initiate new covers in buoyant times. Conversely, in times of business downturn, employers may be under pressure to cut costs. They therefore may reduce benefits or change the level of employees covered to reduce numbers in an insurance scheme. 5.3 Employment security For individuals, confidence in the continuity of salaried remuneration promotes the likelihood of insurance purchase. For employees covered under an employer-sponsored scheme, lack of confidence in the longevity of one’s employment can produce an increasing tendency to claim under some products, eg PMI. It is noticeable that when there is a danger of a group PMI scheme being withdrawn or when an individual feels personally at risk of redundancy, there is an incentive to have treatment under the policy before the cover becomes unavailable. A similar thing happens under group IP policies at times when employers are trying to economise on the salary bill (though for slightly different reasons). If there is any possibility of an employee claiming for sickness benefit under the policy rather than drawing salary, then the employer is likely to encourage this. In effect, the IP scheme is being used to ‘lay off’ employees temporarily. In better times, the employer would be much keener to keep its staff in work. The Actuarial Education Company © IFE: 2019 Examinations  Page 20 SP1‐09: The general business environment Question What is the disadvantage to the employer in encouraging its employees to claim in this way? Solution Group schemes are often experience rated, so if more claims are paid now, the employer will have to pay higher premiums in the future. However, it does defer the cost, hopefully to times when finances are not quite so tight. Also, not all of the high claims experience might be passed on in increased premiums, and so it might still be seen as the preferred option. Equally there could be an increase in IP insurance claims (under both employer-sponsored and individual policies) in times of employment insecurity, through work-related stress or depression. Employees will become more anxious at work if they are worried about their job security. The increased stress can lead to more stress‐related absences from work. 5.4 Political stability Political stability can indicate national economic wellbeing. However some political parties are better disposed towards insurance and hence some political scenarios are more advantageous to the economic environment for healthcare insurances than others. This latter fact is especially true for health and care insurance products where the government’s view of these as alternatives or complements to the State welfare system can have a dramatic impact on the public’s keenness to buy. (Refer to Chapter 10 for more information on the role of the State.) The trend in many territories is towards more private health and care funding, so the political stance seems to be favouring health and care insurance business generally. In the USA, private health and care insurance has been the norm for many years, whatever the political persuasion of the time. Political stability may also mean stability of rules governing the insurance industry, ie without rapid, unpredictable changes to regulation and taxation. Furthermore, the stability of the political environment is also desirable by current and potential policyholders, as it indicates stability of the future economic value of their insurance policies. © IFE: 2019 Examinations The Actuarial Education Company SP1‐09: The general business environment Page 21 Chapter 9 Summary Propensity to buy versus need to sell Insurance can be considered as bought or sold:  it will be bought if it is a legal requirement  it will be sold where it is not legally necessary and where consumers are unaware that they have a need for the product. Healthcare insurance products may be bought or sold. Protection products are generally designed to meet needs but may be somewhere between a need and a luxury. In particular:  IP insurance should be a need but may not be perceived as such; limited term IP insurance may be legally binging on employers and is a need for the self‐employed  CI insurance provides a lump sum that can be used to meet financial needs / compensate the policyholder, and the attraction of a big payout sometimes results in it being bought rather than sold  the need for LTCI depends directly on the perceived attitude of governments to the provision of care and individuals’ priorities on long‐term funding for this purpose; there may be a legal compulsion for individuals to make some level of provision  the need for PMI depends on level of State provision. The perceived need for health and care insurance should increase with the awareness that the State cannot continue to afford to provide comprehensive welfare benefits. However, insurance companies may now be finding it more difficult to ‘create needs’ due to:  increasing sales regulation and disclosure requirements  mis‐selling scandals. The regulatory regime Governments may impose restrictions on insurance companies, including:  a restriction on the types of contract that an insurance company can offer  restrictions on the premium rates or charges used for some types of contract  restrictions on rating factors that could be used to calculate premiums  requirements relating to the terms and conditions of the contracts offered  restrictions on the channels through which insurance can be sold, on sales procedures or on information given at the point of sale  restrictions on the ability to underwrite  an indirect constraint on the amount of business that may be written, via minimum reserving or solvency capital requirements  restrictions on the types of asset or the amount of any particular asset in which the insurance company may invest for the purpose of demonstrating solvency. The Actuarial Education Company © IFE: 2019 Examinations Page 22 SP1‐09: The general business environment Chapter 9 Summary continued Regulatory restrictions should help protect the policyholder, however, they may also discourage innovation and/or restrict the benefits offered. The wider regulation of different financial institutions (eg insurers vs hospital networks and care homes) also has an impact on insurance companies, the products that they sell and the terms and conditions offered, by creating a non‐level playing field. The taxation regime The most common approaches to health and care insurance company taxation are:  a tax on the annual profits of the business  tax payable on investment income / gains less some or all of the operating expenses of the company. Different tax treatment of different types of insurance contract can make it cheaper to provide some benefits as one form of business rather than another. The fiscal environment can also influence product design. In comparing the tax advantages of different products one must consider:  the tax treatment of premiums paid, eg whether the premiums are deductible from the individual’s taxable income or whether there is a premium tax  the taxation treatment of the eventual policy benefits. Professional guidance Actuarial associations will often issue professional guidance for actuaries advising insurance companies. They may also issue professional guidance on the interpretation of government regulations. Such guidance may cover policy conditions, the adequacy of premium rates for new business and the value of the liabilities. Economic and other influences Inflation Health and care policy benefits must both meet the policyholder’s current and future requirements, however, inflation will erode the value of future benefits. This is particularly a problem for fixed level benefits and benefits with fixed increases, however, there is also a risk if the benefits increase in line with a different index from the index to which the liabilities are linked. For indemnity contracts, inflation becomes a risk to the insurance company (rather than the policyholder), especially for long‐term contracts with guaranteed premiums. Inflation of expenses is also a risk to the provider that should be allowed for (in reserves and premiums). © IFE: 2019 Examinations The Actuarial Education Company SP1‐09: The general business environment Page 23 Chapter 9 Summary continued Business cycle Demand for health and care products is generally higher in times of business optimism. Employment security High job security increases demand for products, however, low security can also increase claim inception (eg IP and PMI policies). Political stability Some political regimes create a more advantageous environment of health and care insurances than others. However in general, political stability:  can indicate national economic wellbeing  can mean stability of rules governing the insurance industry  is generally desirable by policyholders as it indicates the stability of the future economic value of their insurance policies. The Actuarial Education Company © IFE: 2019 Examinations Page 24 SP1‐09: The general business environment The practice questions start on the next page so that you can keep the chapter summaries together for revision purposes. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 25 Chapter 9 Practice Questions 9.1 If policyholder protection is the aim, would you expect restrictions on premium rates for CI insurance to specify upper or lower limits for the rates? 9.2 The regulatory authorities in a particular country have just introduced a requirement for health and care insurers selling unit‐linked long‐term care insurance policies to illustrate, to prospective policyholders, the surrender values for each of the first ten years of a contract. Comment briefly on how this change may affect the contract design and the benefits paid under unit‐linked health and care insurance policies. The Actuarial Education Company © IFE: 2019 Examinations Page 26 SP1‐09: The general business environment The solutions start on the next page so that you can separate the questions and solutions. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐09: The general business environment Page 27 Chapter 9 Solutions 9.1 Theoretically, either is possible. The authorities may feel that: rates that are too low might threaten the financial security of the company and hence the security of its policyholders rates that are too high might give poor value for money. Depending on the product, the market and the distribution channel, the authorities might feel that competition could take care of the second point. On the other hand, effective competition depends on freely available information that is readily understood, and this might not be the case. 9.2 The most likely effect is that the insurance company will have to improve early surrender values, if these have been poor to date. Not to do so might discourage potential policyholders. This might mean: reducing charges early in the contract reducing any penalties applied to unit funds on surrender. All other things being equal, higher benefits paid to surrendering policies will mean lower benefits for those who don’t surrender. This would come about through a different structure of charges. Policyholders who surrender will be charged less than before, and those who don’t will be charged more. On the other hand, the desire to improve early surrender payments will be (possibly significantly) constrained by the fear of worsening selection against the remaining members of the portfolio. Any encouragement to surrender could lead to a disproportionate increase in the healthy lives that do so. The Actuarial Education Company © IFE: 2019 Examinations All study material produced by ActEd is copyright and is sold for the exclusive use of the purchaser. The copyright is owned by Institute and Faculty Education Limited, a subsidiary of the Institute and Faculty of Actuaries. Unless prior authority is granted by ActEd, you may not hire out, lend, give out, sell, store or transmit electronically or photocopy any part of the study material. You must take care of your study material to ensure that it is not used or copied by anybody else. Legal action will be taken if these terms are infringed. In addition, we may seek to take disciplinary action through the profession or through your employer. These conditions remain in force after you have finished using the course. The Actuarial Education Company © IFE: 2019 Examinations SP1‐10: State healthcare provision Page 1 State healthcare provision Syllabus objective 1.3 Explain the role of the State in the provision of alternative or complementary health and care protection: objectives of State healthcare provision methods of State healthcare provision funding approaches. The Actuarial Education Company © IFE: 2019 Examinations  Page 2 SP1‐10: State healthcare provision 0 Introduction The role of the State in the provision of healthcare to its citizens has a large influence on the market for healthcare insurance in that country. This can be particularly so, given that often the State is the provider, regulator, financier and purchaser of healthcare, all at the same time. This chapter looks at the possible roles of the State and how they influence healthcare insurance providers. You are not expected to know the State provisions of any particular country for Subject SP1, so this chapter uses the healthcare systems in various countries around the world to illustrate possible approaches to State healthcare provision. Notice that there is a subtle difference between healthcare benefits (ie provision of medical treatment) and welfare benefits (ie provision of income and other benefits such as housing allowances) given to those unable to work due to sickness or disability. The material in this chapter often refers to either or both of these types of benefits. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐10: State healthcare provision Page 3 1 Objectives of State healthcare provision 1.1 Introduction When considering a State healthcare system, the government of a particular country, be it developed or undeveloped, will have a number of questions it will want to answer:  Who should get what benefits and when?  Who pays for the cost of these benefits, when should they pay, and how much should they pay?  Who will organise the collection of the payments and the payment of the health and care providers?  How will it be decided how much of the payments collected will be spent on exactly what services, and who will make these decisions?  How will patients access the health and care services provided?  What risks are there for patients and the State once the system is in place? There is no ‘right’ answer to the provision of State healthcare benefits. Each country will have its own objectives, which in turn will depend on items such as:  its political stance  the characteristics of the population, eg its wealth and size  the quantity and quality of medical services and expertise available  the state of the country’s infrastructure  the economy  the country’s overall state of development  the existence of other State benefits  the history of State care in that country  the social and cultural stance of the country. The overall objectives of any government’s provision of healthcare might be considered under four headings:  protecting the nation’s health  subsidising the poor  balancing the budget  following social culture and/or political promises. These objectives are now considered in turn. The Actuarial Education Company © IFE: 2019 Examinations  Page 4 SP1‐10: State healthcare provision 1.2 Protecting the nation’s health One of any government’s primary objectives will be to protect the health of its population. The extent to which it can do this will depend, of course, on the nation’s wealth and the other priorities on its budget – but healthcare will always come somewhere near the top of the list. It starts with the availability of food, drinking water, nutrition and hygiene. It extends through the provision of basic medical services and education. The ultimate goal might be a thriving medical services system, which encompasses modern and efficient medical facilities with a population taking direct responsibility for its own health and wellbeing. In this way, the government can safeguard a healthy and productive workforce, which in turn promotes productivity and a growing Gross Domestic Product (GDP). So, in this sense, the State healthcare policy should pay for itself. The idea here is that healthy workers are happy workers. Happy workers work hard and help to boost the GDP of the country in which they work. A country with a healthy GDP should benefit from a high level of tax revenues and so can afford to install and develop an efficient State healthcare system. This keeps workers healthy (and the government in power). And so the cycle continues … The role that the State itself will play in fostering a healthy nation will depend much on the style and culture of politics within the country. It could range from a relaxed market-focused environment to a more centrally provident system where healthcare is entirely the State’s responsibility. A State with a relaxed, market‐focused environment has the view that it should have minimal involvement in the provision of healthcare benefits and should just let economic forces take their course, with private providers and insurance competing where they desire. The USA is one example of a country that is reasonably close to this ethos. The State provides little in terms of nation‐wide benefits (although there is a minimum level of provision for everybody, particularly the poorer members of the community, and generally State involvement has been increasing) but most people who want further healthcare either have to pay for it themselves or buy healthcare insurance. Canada has a similar ethos. Other countries that have this ethos are very undeveloped countries. These countries do not have the infrastructure or medical knowledge to set up State healthcare provisions at this stage, so probably do not have an alternative viable approach. As the country develops, the State can provide services, although at first these will be under‐developed, mainly due to funding restrictions. An example of a country that has quite a different approach is France. Here, the government provides a centralised service, making public health insurance compulsory for all legal residents. Other countries have a mix, where there is both a significant State‐provided component and a significant private component. © IFE: 2019 Examinations The Actuarial Education Company SP1‐10: State healthcare provision Page 5 Providing healthcare facilities, such as doctors, surgeons and hospitals, is not the only way to protect the nation’s health. There are other ways to do this too, including educating the public and contributing to research and development. Education about general health and having a healthy lifestyle should be part of the State’s approach: from children in school to adults in the workplace and beyond. Ways to educate the public may include:  making lessons on health part of the national school curriculum  government advertising campaigns on health issues, eg via television, radio, magazines and cinema. Moreover, education on health issues could be compulsory in certain areas of work, eg catering. Advice may be in areas such as:  disease prevention  identifying diseases (eg sexually transmitted diseases) early  the dangers of unhealthy habits, such as smoking  hygiene  accident prevention. The government may aim to ensure that research and the import of the latest health technologies are not left exclusively to commercial considerations. The government will look to take a long-term view as to benefits of the latest scientific advances and find ways to sponsor their introduction to the country. Question Can you think of other ways of enhancing the nation’s health? Solution Possibilities include:  provision of screening facilities  provision of well‐man and well‐woman clinics and regular check‐ups  ensuring that health insurance is available, affordable and appropriate  making overseas operations a viable option  greater investment in sports and exercise initiatives  providing advice, eg on diet  accident prevention, eg health and safety rules for employers, drink‐drive campaigns  campaigns warning of the dangers of smoking, alcohol etc. The Actuarial Education Company © IFE: 2019 Examinations  Page 6 SP1‐10: State healthcare provision 1.3 Subsidising the poor Even where healthcare is provided commercially, the State will often maintain a role to ensure that the poorest have access to primary medical assistance (doctors and medicines) and hospitalisation where necessary. Priorities in health services are often extended also to children and the aged. Even the relatively market‐focused countries such as America feel it necessary to provide a very basic minimum benefit for members of the community who would normally find self‐funding an onerous burden. This is perfectly understandable, as nobody wants to live in a country where there is a real possibility of unhealthy poverty with no respite. The provision of healthcare in this way is seen as part of the State’s welfare package and thus an integral part of its attempts to redistribute wealth. This redistribution aims to allow all citizens to obtain sufficient health, care and other services to ensure a minimum standard of living that is (hopefully) acceptable to all citizens. The political process is used to further this aim. 1.4 Balancing the budget The provision of healthcare is part of State expenditure, whether the government provides services to all regardless of personal wealth or whether it restricts these benefits to those who could not otherwise pay. The cost of provision can be funded through specific health charges or via general taxation, or a mixture of the two. An example of a specific health charge in the UK is national insurance (NI), which is a system whereby earners are taxed an amount on their income in addition to general income tax. The tax raised in this way is earmarked for spending on State healthcare services and to pay for State benefits (eg State pensions). Since the early 2000s, 15‐20% of the funding for the UK National Health Service has been from NI contributions. Healthcare spending is an emotive issue and, via the taxation system, will always involve some redistribution of income from the healthy to the less so. The rich will always pay more than the poor when national insurance taxation systems are used to raise cash for State healthcare services, because the contribution is to an extent proportional to earnings. However, where there is an upper limit to the NI contribution this cross‐subsidy is limited, although, it does not stop the government raising other taxes on income or spending. The government is going to be aware that, with increasing technology and growing expectation of delivery from members of the public, the cost of healthcare year-on-year is likely to rise faster than the cost of consumer goods. In addition, mortality improvements are likely to result in increased morbidity and increased healthcare costs for the elderly. Question What is the implication of healthcare costs rising faster than the cost of consumer goods? © IFE: 2019 Examinations The Actuarial Education Company  SP1‐10: State healthcare provision Page 7 Solution Any means of raising money for State healthcare costs will need to rise at a rate faster than that of consumer goods, otherwise the healthcare budget will become increasingly in deficit. For example, raising the money by relying on a tax on consumer goods and services sold (known as ‘Value Added Tax’ (VAT) in some countries) will be insufficient. 1.5 Following social culture and/or political promises The government’s approach to healthcare may be determined by party political ethics; indeed, the State role in medical provision may change considerably as different political parties gain power. But the foundations of healthcare provision tend to be part of a developed national expectation and so the periodic changes of political power do not affect the basics of national medical delivery. State healthcare programmes may be part of national culture and so radical changes may be difficult to introduce, especially in the short term, because the potential loss in political capital by pushing through controversial changes is too great. Radical changes to the provision of State healthcare systems occur infrequently. In the UK, for example, the development of the current National Health Service (NHS) was driven by the large social, economic and political changes that followed the Second World War. Since then, despite many changes in political persuasion, the general ethos of providing access to free healthcare for all at the point of need has remained. The role of commercial insurance in the provision of healthcare will depend very much on the nature of State provision. Possible models of co-existence include: Models of co-existence: Health insurance and State healthcare Insurance can be The State promises a comprehensive system of medical services, but an optional insurance can provide: alternative  a higher quality of service  choice over who treats the patient  choice over place and time for treatment  possibly a significantly reduced wait for treatment. This is the approach in the UK. Some treatments on the State scheme have long waiting lists (eg hip replacement). The choice of hospital and the standard of accommodation (ie a bed in a private room rather than in a hospital ward) can be better in a private hospital. There is therefore a range of private insurance available. Insurance can be The State provides a limited range of medical services and leaves it to an optional the individual to fund the balance. complement This is generally the case in America and Canada. The Actuarial Education Company © IFE: 2019 Examinations Page 8 SP1‐10: State healthcare provision Insurance can be The State provides everything for members of the population up to a a compulsory certain salary/wealth level. Healthcare insurance is obligatory for all alternative those above this threshold. Insurance can be The State provides certain healthcare procedures ‘free’ at the point of a compulsory delivery. Insurance is mandatory for all other procedures. complement For example, Germany operates a system whereby virtually all people in gainful employment must be insured against sickness under a statutory health insurance scheme. The scheme itself is funded by national insurance contributions. However, those with large incomes can opt for a private alternative. The co-existence of insurance and the State can apply to direct medical services, the provision of long-term care, and also to the provision of income when, due to invalidity, a person is unable to work and thus unable to meet ongoing financial responsibilities. In other words, State provision may include services otherwise covered by PMI and IP cover. Example In the Republic of Ireland, the State and private healthcare systems complement each other well. State healthcare is free for the very poor, but others must contribute towards their treatment. Private medical insurance is popular, providing for both public and private treatment (depending on the level of cover purchased). This is due to:  historic tax benefits  some dissatisfaction with State‐provided healthcare and a belief that the private system is more efficient. The main PMI provider is government controlled. Tax relief is available for premiums paid for PMI and for long‐term care insurance. The insurance company grants this tax relief at source. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐10: State healthcare provision Page 9 2 Methods of State healthcare support This section discusses the ways that the State can provide health benefits, including the provision of monetary benefits. 2.1 Means testing The State’s role in meeting the cost of healthcare or offsetting the financial loss due to ill-health will vary from nation to nation. It may be the sole provider of healthcare from inception to recovery, or it may only pay fully for healthcare in cases of financial hardship. In the latter case, State benefits would be ‘means tested’. The means test assesses the proportion of the total benefit that the State judges the individual should be able to provide from their own income and savings. Means‐tested benefits are provided either to people who earn less than a certain amount, or to those who have accumulated less than a certain level of wealth, or sometimes only to those who meet both of these criteria. 2.2 Direct provision The State may provide its own medical establishments that perform the necessary treatments. Some of these costs may be charged subsequently to the patient. Alternatively, the commercial healthcare system may provide the services and the government may reimburse the expenditure, either partially or fully. If the State provides its own medical establishments, it can keep a close eye on cost and claim control at these facilities. This should lead to lower costs, all other things being equal, as it will not need to pay towards the profits of a commercial establishment. However, using commercial establishments can also have advantages. The State may benefit from their expertise, experience and economies of scale. It should also be able to transfer much of the administration to the commercial providers. Commercial businesses may be more responsive to customer needs, and so customer experience may be enhanced. If there are several providers within the market, they will compete for the State’s business, which should reduce costs and improve experience for customers. 2.3 Cash benefits There are various ways in which the benefits for healthcare can be provided, eg they may:  be a lump sum cash payment or regular income  depend on the lifestage of the recipient. Lump sum cash payment Other methods of illness subsidy arise with a cash payment in the event of health breakdown or other medical need. This would be deemed appropriate if the onset of disability called for capital expenditure (eg to redesign a house in the light of restricted mobility or to pay for a specially adapted car). The Actuarial Education Company © IFE: 2019 Examinations  Page 10 SP1‐10: State healthcare provision When the help provided is specific, eg buying a car adapted for a particular disability, the benefit is often provided on an indemnity basis. Here, the State pays for the actual costs of the help. Regular income The State may also recognise the need to provide an income for as long as disability continues, where the disabled person is unable to work. As with commercial insurance, this may be subject to periodic reassessments to ensure continuing disability. Amount of benefit The amount of State benefit to be paid may take into consideration a variety of circumstances, including:  a salary-related benefit to ‘reward’ those who have contributed more through taxation and to reflect their likely higher financial responsibilities  a flat benefit, to provide an incentive to return to work to minimise the cost on the State and to encourage self-provision through insurance. Income benefits often increase in payment in line with some form of consumer price index. A flat‐rate benefit would ensure a minimum standard of benefits for the low paid and unpaid, but the level of the benefit may be unrelated to living standards prior to ill health. However, a flat‐rate benefit is simple for recipients to understand, and for the State to administer. The cost of administration will be smaller than that for a means‐tested benefit, and the take‐up is likely to be greater because the process of applying for the benefit will be much simpler than that for a means‐tested benefit. Many countries use a combination of these approaches. Differentiation The benefit level (either expressed as a proportion of earnings if salary-related, or amount of flat benefit) may depend on the severity of the disability. However, the State may also see itself as having different responsibilities towards different members of the population. For example, its willingness to pay a benefit may differ if the patient is unemployed, in full-time education, retired, a widow / widower or a war veteran. The aim is to try to align benefit with need and not just degree of disability. 2.4 Simple funding methods Another decision the State needs to make is how to fund the benefits provided. The State may fund its welfare expenditure in one (or a combination) of two broad methods. © IFE: 2019 Examinations The Actuarial Education Company SP1‐10: State healthcare provision Page 11 Pay‐as‐you‐go systems It may use ‘pay-as-you-go’ systems. The basic idea behind a pay‐as‐you‐go (PAYG) system is that the current working population effectively pays the total costs for those currently needing benefits. If there is a shortfall in any budget year (ie if the cost of providing cover is in excess of the contributions collected from the working population), then the State will fund the difference from general tax revenues. In order to work out whether this is necessary the State must: 1. Establish the degree of State subsidy. The State must work out how much it is going to pay towards the benefits needed, and how much individual recipients should be expected to pay. This will determine the contribution rates paid by individuals in the working population. 2. Estimate coming year’s outgo. It will do this by projecting likely benefits and expense costs based on past experience. 3. Estimate coming year’s tax revenue. This will enable it to work out how much income the State needs in order to pay the projected benefits. 4. Adjust this so as to incorporate healthcare outgo. It should change the tax structure (if appropriate). The structure of general taxation is adjusted so that the welfare budget balances, ie the general taxation revenue equals the difference between the contributions from individuals and the expected welfare outgo. Question What could be a danger with a PAYG method? Solution If, as in most developed countries, the population is changing such that the number of pensioners is increasing relative to the working population, then the contributions and tax income from earners will become more and more insufficient to pay for welfare costs. The Actuarial Education Company © IFE: 2019 Examinations  Page 12 SP1‐10: State healthcare provision Forward funding It may utilise a system of forward funding. The alternative to PAYG is to take a longer‐term view, so as to anticipate future welfare costs and build up a provision for these costs before they arise. This process works as follows: 1. Take a view on some future period, eg 5 years, 20 years. A cynic might say that the government would only take into account a period related to its expected future term of office. So instead of planning to balance the welfare budget each year, it could plan to make it balance over the chosen period. 2. Analyse the level of State provision at this point. This would be an estimate of State subsidy provided at this future point in time. 3. Produce a model of State outgo at this and intervening years. This would give an expected flow of cash outgo in the future. 4. Estimate population and workforce trends. 5. Forecast taxation revenues accordingly. These last two points will give an expected flow of cash income. 6. Calculate a specific healthcare fund such that earmarked taxation will, over the period, meet the intended State healthcare provision. In other words, work out what extra is needed (if any), and create a fund that will build up the difference in the meantime. Intermediate methods (which are part modelled and part paid yearly) are often found, especially when forecasts indicate a likely reduction in workforce in future relative to the number of beneficiaries. This is the case in the UK, and in most developed countries. 2.5 Incentives for self‐provision Whether to promote the interests of the insurance system or merely to limit the potential outgo, the government is often keen that some level of self-provision of healthcare funding is in place. These ‘incentives’ can take numerous forms, such as:  The State can offer tax relief on premiums for appropriate insurances. This is the case in the Republic of Ireland, where tax relief to varying extents is given for PMI, dental insurance and LTCI.  The State can exclude some or all the population from certain aspects of the national welfare scheme. For example, in England and Wales, most, but not all, people have to pay for eye tests and glasses. In contrast, eye tests are free for everyone in Scotland. © IFE: 2019 Examinations The Actuarial Education Company SP1‐10: State healthcare provision Page 13  The State can offer a reduction in general taxation where appropriate insurance is in place.  The State can reduce the cost of private purchase of healthcare services by direct subsidy to the providers. Most countries use at least one of the above methods in their State healthcare provision, although the last two methods are rarely used in practice. The Actuarial Education Company © IFE: 2019 Examinations  Page 14 SP1‐10: State healthcare provision 3 The role of insurance As outlined above, any national healthcare system is a complex web of:  historically evolved cultures and expectations  budget constraints  differing perceived priorities to differing population segments  the approach taken to funding and self-provision. It is necessary to study these elements to understand the role of insurance within a market and develop an appropriate strategy. The role of specific State health welfare programmes will be examined in more detail at the Specialist Advanced level. Example The healthcare system of Australia gives an indication of how complex the State provision of healthcare can be. In summary:  The Commonwealth collects the taxes but the individual states deliver the healthcare services, albeit with subsidies provided by the Commonwealth.  There is a large private medical sector – participation is voluntary, but encouraged by the government (and about half the eligible population have it).  A national system of care provides health benefits to everybody, regardless of wealth. This is financed through a combination of general taxation and a compulsory health tax levy on income although the contribution is dependent on income levels.  Benefits are limited to those on a schedule – some are unlimited and some are capped. If private treatment is taken, there can be some financial help from the government.  Although benefits are available, waiting lists can be lengthy.  Medical practitioners can either bill the government or the patient, and the fee schedules are not fixed. The patient may have to contribute to the costs.  Payments to healthcare providers are complex: some are paid retrospectively some are paid prospectively some are regulated, some are not some are paid on a daily basis. © IFE: 2019 Examinations The Actuarial Education Company SP1‐10: State healthcare provision Page 15 Chapter 10 Summary Objectives of State healthcare provision Protecting the nation’s health A healthy and productive workforce should promote productivity and a growing GDP. Protecting the nation’s health may involve ensuring:  the availability of food, drinking water, nutrition and hygiene  basic medical services and education about healthy living  a comprehensive medical services system encompassing modern and efficient medical facilities. The State’s role will depend on the style and culture of politics within the country. It may also include aiding research and the import of the latest health technologies. The extent to which it can achieve its objectives depends on:  the nation’s wealth  other priorities in the budget. Subsidising the poor The State will often maintain a role to ensure that the poorest have access to primary medical assistance (doctors and medicines) and hospitalisation where necessary. Children and the aged are usually priorities. This is usually an integral part of a government’s attempts to redistribute wealth. Balancing the budget The cost of provision can be funded through specific health charges, or general taxation, or a mixture between the two. Use of general taxation will always involve some redistribution of income from the healthy to the less so. The cost of healthcare is likely to rise faster than the cost of consumer goods due to:  improvements in technology  a growing expectation of delivery from the public  mortality improvements, leading to increased morbidity and increased health and care costs for the elderly. Following social culture and political promises The State role in medical provision may change considerably as different political parties gain power. However, State programmes may be part of national culture, so radical changes of political power do not affect the basics of national medical delivery. The Actuarial Education Company © IFE: 2019 Examinations Page 16 SP1‐10: State healthcare provision Chapter 10 Summary continued The co‐existence of insurance and the State can apply to direct medical services and also to the provision of income when, due to invalidity, a person is unable to work and thus unable to meet ongoing financial responsibilities. Methods of State healthcare support The State provisions may be:  provided to all or means tested (ie only paid in cases of financial hardship)  provided directly by its own medical establishments or provided by commercial establishments (that are subsequently reimbursed)  lump sum (if the onset of disability requires capital expenditure) or regular income (if an income is required, eg when the disabled person is unable to work)  flat‐rated (to provide an incentive to return to work and encourage self provision) or earnings‐related (to reward those who have contributed more and to reflect their likely higher financial responsibilities)  linked to some form of consumer price inflation  different for different stages of disability  different for different lifestages / circumstances. Funding Simple funding methods for State healthcare outgoes are:  ‘pay as you go’ systems, which involve establishing the degree of State subsidy, estimating the coming year’s tax revenue and outgo and adjusting to incorporate healthcare outgo  forward funding, which involves analysing the level of State provision and producing a model of State outgo over a future period, estimating population and workforce trends and forecasting tax revenues, and calculating a specific healthcare fund such that earmarked taxation will meet the intended State healthcare provision  a combination of the two. © IFE: 2019 Examinations The Actuarial Education Company SP1‐10: State healthcare provision Page 17 Chapter 10 Summary continued Self‐provision The State may offer incentives for self‐provision of healthcare benefits to promote insurance and/or to limit potential outgo. In particular, it might offer:  tax relief on healthcare insurance premiums  exclusions from State benefits  reduced general taxes where insurance is taken out  subsidies to providers of healthcare services to reduce the cost of healthcare premiums. The role of insurance The role of the national healthcare system and hence insurance will depend on:  historically evolved cultures and expectations  budget constraints  differing priorities to differing population segments  the approach taken to funding and self‐provision. The Actuarial Education Company © IFE: 2019 Examinations Page 18 SP1‐10: State healthcare provision This page has been left blank so that you can keep the chapter summaries together for revision purposes. © IFE: 2019 Examinations The Actuarial Education Company  SP1‐10: State healthcare provision Page 19 Chapter 10 Practice Questions 10.1 List the advantages and disadvantages of:  a market‐focused approach  means‐tested State health benefits  forward funding. 10.2 Explain how the circumstances of each of the following categories of person might be expected to affect the welfare benefits they are offered by the State:  employed  unemployed  student  pensioner  widow(er)  war veteran. 10.3 Explain how the pay as you go (PAYG) system of funding State healthcare and welfare operates Exam style and depends on the trust between successive generations in the community. 10.4 The government of a developed country is considering the ways in which it can provide health and Exam style care benefits (ie direct medical services) and welfare benefits (ie financial benefits when unable to work due to illness). Outline the objectives that the government may have in this regard, the rationale behind each one and any limitations there might be on its ability to meet these objectives. 10.5 A government is planning to provide State‐funded income benefits for those who are unable to Exam style earn a living as the result of sickness or injury. State the advantages and disadvantages of each of the following proposals: (a) A flat benefit equal to 40% of national average earnings. The benefit will be increased each year as the latest data become available. (b) A benefit of 70% of the individual’s average weekly earnings in the last thirteen weeks of employment. This will be paid for the first 26 weeks of sickness. The subsequent benefit is 40% of national average earnings with annual increases. The Actuarial Education Company © IFE: 2019 Examinations  Page 20 SP1‐10: State healthcare provision 10.6 In Country A all health and care is free at the point of use. Exam style A fundamental principle of health and care funding in Country B is the element of personal contribution. The level of cover provided by the State is a fixed percentage of the published tariff for the care received. However, providers are free to charge consumers more than the tariff price. Some examples of the percentages of the costs of care met by the State are: Treatment Rate of reimbursement Major Surgery 95% Minor Surgery 80% Pregnancy & Childbirth 95% to 100% Prescribed Medicines 35% to 65% X Rays 70% GP/Specialist Visits 70% (i) Describe the advantages and disadvantages to the State of each system. (ii) Describe how each system might influence the market for private medical insurance in that country. [Total 15] 10.7 In the past, a State has provided free medical care to all its citizens. Every individual is required to Exam style register with a doctor approved by the State. Those requiring medical care (apart from care as the result of an accident or an emergency) must consult the doctor with whom they are registered, who then manages the medical care that is required. In recent years, patients have found it increasingly difficult to access medical care because demands on doctors’ time have risen dramatically. The government is proposing to ask patients to pay a fee for each consultation with a registered doctor. The fee would rise with price inflation each year and would be approximately equal to 5% of the average weekly wage. Patients would be