Actuaries don’t possess a crystal ball, but they can use data to infer probabilities. Taking medical insurance as an example, an actuary will calculate the premium according to the following steps:
- The probability that the insured will suffer from an illness (such as cancer, heart disease, pneumonia, etc.) or injury (such as being in an accident).
- The likelihood of requiring hospitalization or day surgery due to the listed illness or injury.
- Corresponding medical expenses, which depend on various factors, including length of stay, room type (e.g., ward, semi-private, or private), diagnostic testing involvement (e.g., labs, X-rays, CT scans, etc.), and all necessary treatments (such as surgery, drugs, etc.).
Some publicly available sources of health statistics include reports published by the Hong Kong Hospital Authority and Department of Health. In addition to these sources, we also rely on our claims experience to derive the relevant probabilities and average costs for our pricing.
For instance, as per the Health Facts of Hong Kong 2023 Edition, the top 10 disease classifications causing hospitalization are:
| Disease Classification | Number of Attendances | % |
| Diseases of the genitourinary system | 331,989 | 15.3 |
| Neoplasms | 322,174 | 14.9 |
| Diseases of the digestive system | 229,404 | 10.6 |
| Diseases of the circulatory system | 172,313 | 7.9 |
| Factors influencing health status and contact with health services | 125,197 | 5.8 |
| Injury, poisoning and certain other consequences of external causes | 117,180 | 5.4 |
| Diseases of the respiratory system | 108,647 | 5.0 |
| Diseases of the musculoskeletal system and connective tissue | 95,010 | 4.4 |
| Pregnancy, childbirth and the puerperium | 77,661 | 3.6 |
| Endocrine, nutritional and metabolic diseases | 56,100 | 2.6 |
In addition to smoking habits, VHIS premiums are also adjusted based on age and gender. This is because the likelihood of disease or injury varies with age and gender. For example, certain common female diseases do not affect men, and vice versa. Additionally, fractures are more prevalent in older individuals than in younger ones.
What distinguishes the pricing of full coverage products (such as Bowtie Pink) from sub-limit products (such as Bowtie VHIS Standard Plan)?
The pricing methodology is fundamentally similar, but given that most benefit items in full coverage products have no maximum coverage limits*, insurance companies must closely monitor medical inflation and claims. If there are only a few clients under a full coverage product, the annual claims amount for the product may exhibit greater volatility. This poses a challenge for insurance companies when determining pricing.
*Subject to annual and lifetime limits.
The primary considerations revolve around the adequacy of the core benefits and the reasonableness of the premium.
The core benefits typically encompass room and board, specialist fees, surgeon fees, operating room fees, pre- and post-confinement/ day case procedure outpatient care, and more. To assess the sufficiency of the coverage, a straightforward approach is to compare it against the charges of private hospitals, estimating whether the medical insurance will offer ample coverage. However, private hospital fees in Hong Kong vary significantly. Therefore, one may choose a private hospital that is most convenient as a reference point.
In evaluating the reasonableness of medical insurance premiums, it is crucial to compare the coverage and premiums with market benchmarks to ascertain whether the value for money is reasonable and if the coverage aligns with one’s needs. Additionally, it’s important to consider whether the insurance company has enhanced coverage in the past (to keep up with medical inflation), as well as the magnitude and frequency of past adjustments.
It’s important to note that attention should also be given to insurance companies’ premium levels for the elderly (e.g. 60 years or older). If the product’s premium significantly exceeds the market benchmark, but the coverage is not particularly robust, this should serve as a warning sign. This is because as one gets older and has extensive medical records, it becomes challenging to switch to another medical insurance, and there’s a risk of being declined for insurance application. Even if one manages to secure insurance, there may still be exclusions to contend with.
The geographical limitation plays a pivotal role in the design and pricing of medical insurance. Some medical insurance geographical limitations exclude the United States due to the significantly higher medical costs in the country compared to other parts of the world. According to OECD figures, per capita medical expenses in the United States in 2022 are 129% higher than those in the United Kingdom and 99% higher than those in Canada. Consequently, if an insurance company includes the United States as a covered area, medical insurance premiums may escalate by 20% to 30%.
At Bowtie, our aim is to offer customers the broadest coverage at the most reasonable premium level. Thus, when crafting Bowtie Pink, we made the decision to exclude the United States from coverage to ensure that premiums remain affordable. Simultaneously, we provide consumers access to high-quality medical service in Hong Kong and other regions, such as Europe, Japan, and beyond, along with cutting-edge treatment options.
Bowtie Pink offers multiple deductible options, but how is the deductible amount determined?
Our goal is to bridge the protection gap in Hong Kong. Therefore, when setting the Bowtie Pink deductible, we primarily target consumers with group medical insurance, aiming to address the shortcomings of their group medical insurance through Bowtie Pink.
Bowtie’s pricing advantage primarily stems from the operational model of the virtual insurance company, which eliminates the need to pay sales commissions to intermediaries (such as agents or banks), thereby reducing sales costs. Additionally, we harness advanced technology to automate processes and minimize administrative expenses, including:
- Bowtie’s in-house developed underwriting system: it accurately determines premiums based on the insured’s risk, with the underwriting team handling the review process.
- Digitization of all documents: while paper is not costly, administrative tasks such as printing, mailing, locating, and re-issuing lost documents incur additional costs that would ultimately be passed on to the client.
Proactive health checkings
Bowtie encourages customers to prioritize their health, and as part of this initiative, it has introduced the Metabolic Health Test. This plan not only covers more than a dozen examinations but also includes 2 rare tests in the market to estimate the risk of heart disease, stroke, and diabetes in the next 10 years. Moreover, Bowtie offers customers up to a 24% premium rebate* on existing policies based on their health score. This not only helps everyone save money but also aims to promote regular physical examinations every year to monitor changes in their physical condition.
*This offer is exclusively available to current insured persons who hold at least one Bowtie VHIS Plan, Critical Illness Plan, Term Life Plan, Cancer Fighter Plan, or Touchwood Protector Plan.
Author
Karthik is the Pricing Actuary of Bowtie Life Insurance Company. He is an experienced health care actuary, specializing in product development and pricing of medical reimbursement products, with a back-ground in consulting, direct insurance and reinsurance.
LinkedIn:
https://www.linkedin.com/in/rkarthik85
