In the German private health insurance system, an insurer switch is currently associated with losing the old age provision. The study explores how a rule to transfer aging provision can be designed that makes switching insurers easier and, at the same time, does not harm those left behind with the original insurer.
The study contains a comprehensive survey of the literature including a description of private health insurance systems in ten OECD countries, a theoretical analysis of the choice of an efficient provision transfer scheme, and several simulations to determine the share of transferable aging provisions.
The simulations make use of lifetables and statistics describing claims per head for German private health insurers, published by the Federal Office for Insurance Supervision (BAV) and the Federal Financial Supervisory Authority (BaFin). Further, the current situation is illustrated by termination rate statistics published by the Federal Financial Supervisory Authority, and premium tables, planning data on aging provisions and termination rate statistics provided by HUK-Coburg Krankenversicherung.
In Germany, private health insurers typically use an individual lifetime contract in which the insurer can neither terminate the contract nor change premiums based on experience rating on a individual level. This contract is interpreted as a combination of a series of health insurance contracts, an annuity insurance and a premium insurance. The latter protects the insured against the risk of rising premiums due to a permanent substantial deterioration of health.
The approach to transfer the average aging provision leads to a loss of premium insurance. The average aging provision is accumulated by payments of the insured, interest payments and inheritance of aging provisions of the insured who have died early. Healthy individuals would then have an incentive to leave the insurer in order to save premiums. The insured left behind at the original insurer experience a seperation of risks and will therefore have to pay higher premiums. If a rule to transfer the average aging provision is implemented, it seems necessary to use standardized contracts and a risk equalization scheme. The main problem of this proposal is to design a risk equalization scheme which, at the same time, is associated with low costs, does not harm those left behind at the original insurer, and keeps incentives for cost containment.
Compared to international standards, the German private health insurance system is unique. Lifetime contracts with an accumulation of aging provisions can also be found in Austria and Switzerland, where the respective share of the health insurance market is much smaller. In both countries, individuals leaving their insurer are not entitled to take any fraction of the aging provision upon switching insurers. In other countries where private insurance covers a substantial share of the market, employment-based group insurance policies are predominant, which are often supplemented by public programs of heavily regulated standard contracts for retirees.
From a theoretical point of view, the ideal transfer rule would require differentiated transfers according to the health diagnosis of the insured. Somebody who represents a high risk should receive a higher transfer than a healthy individual. The transfer is set such as to keep the premium for the remaining insured constant. This rule is expected to induce conflicts between the old and the new insurer at court. The old insurer would like to save money by declaring that the switching individual is a low risk, whereas the new insurer has an incentive to classify the individual as a high risk.
Determining an optimum transfer being independent of the health status amounts to transfer the annuity insurance part of the aging provision. If only healthy individuals leave there insurer, those left behind will not face a change of premiums.
Several simulation scenarios are constructed to estimate the share of annuity insurance within total aging provisions, where lifetables and statistics on claims per head are used. It turns out that the transferable share of aging provisions declines both in current age and starting age, and is lower for women than for men. The first result is due to the increasing importance of subsidizing premiums of individuals who have turned into high risks. Since the age profile of insurance claims is less steep for women, the annuity insurance remains less important than for males. An analogous argument holds if a later starting age is considered. Cost shocks which have not been foreseen imply an overestimation of the share of annuity insurance in the total aging provision. However, this effect is at least partly neutralized by taking into account the additional capital stock being accumulated through the supplementary premium which has to paid since 2000.
V. Meier, F. Baumann and M. Werding (2004), "Modelle zur Übertragung individueller Altersrückstellungen beim Wechsel privater Krankenversicherer sowie Alternativen zur Vorfinanzierung der Krankheitskosten im Alter", ifo Beiträge zur Wirtschaftsforschung, Bd. 14, München.
Meier, Volker, Martin Werding and Florian Baumann, "Transferable Ageing Provisions in Individual Health Insurance Contracts", CESifo Working Paper Nr. 1116, 2004 ( Abstract / Download )
Meier, Volker, "Efficient Transfer of Aging Provisions in Private Health Insurance", CESifo Working Paper Nr. 862, 2003 ( Abstract / Download )
V. Meier (2003), "Solving the Premium Risk Problem, Insurer Switches, and Transfers of Aging Provisions", DICE Report, Vol. 1, No. 3, pp. 20-23.
V. Meier (2003), "Übertragbarkeit von Alterungsrückstellungen in der privaten Krankenversicherung", ifo Schnelldienst, Vol. 56, No. 24, pp. 5-8.
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