Value of a Health Insurer David Gulland & Tony Jeffery

Contents Scope Why is health different (and difficult)? Theoretical Measures Tools and Warnings

Scope UK and Ireland (mainly) Stand-alone company or (large) portfolio Medical Expense Repayments

Why Health is not Life or General… Premium/contract structure is neither purely annual or purely long-term Variety (and complexity) in product design Exposure to external political risks (e.g. in UK purchase is voluntary, replacing “free” State cover) Infinite consumer demand for “health” services Group and Individual markets very different

What features of Health pose problems… Medical expense inflation is not well modelled Very few companies Even fewer for profit companies Consumer issues affect ability to price Better than average public image (?)

Theoretical Value Measures Market Price related measures Embedded values Fair Values Infrastructure Values

Market Price related measures Discounted Cash Flow Measures No data on discount rates P/E Ratios No data at all

Discount rate Claims Inflation Multipliers Significant Risks Embedded Value Method Discount rate Claims Inflation Multipliers Significant Risks

Fair Values (IAS) (a) Future Premiums Criteria If there is value to the policyholder in the renewal then future premiums should be taken into account

Fair Values (IAS) (b) Term (life) Motor (general) Medex (Health) Select Period Y N Rewrite Rerate(global) Policy value ???

Discount Rate Allowance for Risk Presentation Fair Values (IAS) (c) Discount Rate Allowance for Risk Presentation

Infrastructure Method - Cost of replicating what is there. IT systems Provider network Distribution methods Intellectual capital (risk models) Economies of scale Solvency and Working capital “Brand value”

Tools and Warnings Understanding recent claim costs Complexities in projections Reserving methodology Capital adequacy requirements

Understanding recent claim costs Complexity varies with data quality Multivariate analysis and GLIM Coherence between model and premium structure Impact of changes in product design Impact of changes in provider relationships & “managed care” protocols

Complexities in projections Lapses - Any evidence of adverse selection (congruity with GLIM model and duration) Contribution increases and “claims inflation” Adherence to stated Pricing Protocols Treating Customers Fairly Reasonableness checks

Reserving methodology Usually not a problem because of short tail Issues with Group Business Congruency with claims administration Impact of changes in practice Impact of changes in provider behaviour (!) Seasonality

Capital requirements Current FSA “rule of thumb” CP136 and self assessment Other areas of risk and need for capital

Contents Scope Why is health different (and difficult) ? Theoretical Measures Tools and Warnings

Value of a Health Insurer David Gulland & Tony Jeffery