Capital requirements for
health insurance under
Solvency II
Medical Expense Insurance: Actuarial Aspects and Solvency
Afternoon Seminar at the AG Insurance Chair in Health Insurance, KU Leuven
Pillar 2: qualitative requirements and
supervision
1. Enhanced governance, internal control, risk management and own risk
and solvency assessment (ORSA)
2. Strengthened supervisory review, harmonised supervisory standards and
practices
Pillar 3: prudential reporting and public
disclosure
1. Common supervisory reporting
2. Public disclosure of the financial condition and
solvency report (market discipline through
transparency)
Pillar 1: quantitative requirements
1. Harmonised calculation of technical provisions 2. "Prudent person" approach
to investments instead of current quantitative
restrictions
3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement
(MCR)
Group supervision & cross-sectoral convergence
Groups are recognised as an economic entity => supervision on a consolidated basis
(diversification benefits, group risks)
SCR standard formula
Modules of the SCR standard formula
• Non-life underwriting risk • Life underwriting risk
• Health underwriting risk • Market risk
• Counterparty default risk
"The health underwriting risk module shall reflect the risk arising from the underwriting of health insurance obligations, whether it is pursued on a similar basis to that of life insurance or not, following both from the perils covered and the process used in the conduct of business."
Definition and segmentation of health
insurance
Heterogeneity of the European health insurance market
• 27 different social systems and insurance traditions • substitutive, supplementary or complementary
• large variety of medical services covered • long-term or short term
• covering expenses or paying lump sums
• special features like premiums adjustments, risk equalisation …
Health Task Force in 2010
• Members: supervisors, industry representatives, actuaries • Worked on
– definition
– segmentation
Definition and segmentation of health
insurance
Health insurance covers one or both of the following:
Workers' compensation insurance (WC) = health insurance
relating to accidents at work, industrial injury and occupational disease.
The provision of medical treatment or care including preventive or curative medical treatment or care due to illness, accident,
disability or infirmity, or financial compensation for such treatment or care
Financial compensation for illness, accident, disability or infirmity Medical expense insurance (ME) Income protection insurance (IP)
Definition and segmentation of health
insurance
Non-life insurance obligations (NSLT Health)
* excluding WC
Life insurance obligations (SLT Health)
ME insurance * IP insurance * WC insurance ME prop. reinsurance * IP prop. reinsurance * WC prop. reinsurance Health nprop. reinsurance Health insurance Health reinsurance Annuities
Health underwriting risk module
Health
NSLT Health SLT Health CAT
Premium & Reserve Lapse Mortality Lapse Longevity Expense Morbidity/ Disability Revision Mass accident Accident concentration Pandemic
NSLT Health risk sub-module
Premium and reserve risk
𝑆𝐶𝑅𝑝𝑟 = 3 ∙ 𝜎 ∙ 𝑉 standard deviation of annual losses, normalised by volume measure volume measure V = Vprem+Vres multiplication by 3 corresponds to slightly skewed distribution of annual losses
NSLT Health risk sub-module
Calibration of standard deviations
• Non-life and NSLT health calibration controversial since QIS2 – poor empirical justification
• For QIS5 larger calibration exercise of CEIOPS
• But data base and calibration methodology remain controversial
• 2010/2011 EIOPA Joint Working Group on Calibration
– Chaired by Peter ter Berg (Dutch National Bank)
– Involves supervisors, industry representatives and actuaries
• Mid-2011: new calibration proposal for non-life and NSLT health
NSLT Health risk sub-module
Data basis
• Content of data sets:
– Earned premiums – Claims triangles
– Ultimate loss estimates – Expenses
• Gross/net of reinsurance; including/excluding CAT losses
• About 2700 data sets from insurers of 26 EEA member states
NSLT Health risk sub-module
Insurers BE Insurers Countries Medical expenses 269 6 25 Income protection 381 6 24 Workers' compensation 51 5 16 NP reinsurance 8 - 6NSLT Health risk sub-module
Data limitations and data cleaning
• Automatic filters for data anomalies – manual correction or exclusion of data
• Length of data series: min 3 years, confirmed by sensitivity analysis
• Insurers' data excluding CAT only usable for property insurance – for other LoB manual removal of isolated peaks
• Data with outlying residuals removed
• Mainly use of data gross of reinsurance because sample of net data significantly smaller
NSLT Health risk sub-module
Estimation process
Step 1: Estimation of standard deviation per insurer
Step 2: Modelling of size-dependent standard deviation
NSLT Health risk sub-module
Step 1: Estimation of standard derivation per insurer
Premium risk:
• Standard estimator applied to time series of combined ratios
Reserve risk:
• Standard estimator applied to time series of run-off ratios
• Mean squared error of prediction (MSEP) Merz/Wüthrich: "Modelling The Claims
NSLT Health risk sub-module
Step 2: Modelling of size-dependent standard deviation Premium risk:
• Variance proportional to premiums or squared premiums or a mixture of both
• Lognormal distribution of annual loss • Maximum likelihood estimation
Reserve risk:
• Run-off ratios – same model as for premium risk with best estimate as volume measure
• MSEP – two approaches:
– Variance proportional to squared best estimate; least squares fitting
NSLT Health risk sub-module
Step 3: Correction for sample biasSize bias of sample
• Larger insurers may be overrepresented in the sample
• Use of size distribution of QIS5 participants plus correction for missing small participants
National market bias
• Some national markets may be better represented in the sample than others
• Average of country standard deviations, weighted with country market size
Example: Medical expense insurance – premium risk
NSLT Health risk sub-module
NSLT Health risk sub-module
Step 3: Choice of relevant insurer size for calibration
• How many insurers should be below/above the relevant size?
• How many policyholders should belong to insurers below/above the relevant size?
• Median insurer size, but not more than 95% of
policyholders should belong to insurers larger than the
relevant size.
NSLT Health risk sub-module
Results
Premium risk Reserve risk
QIS5 new QIS5 new Medical expenses 4% 5% 10% 5% Income protection 8.5% 9% 14% 14% Workers' compensation 5.5% 8% 11% 11% NP reinsurance 17% 17% 20% 20%
NSLT Health risk sub-module
Impact assessment
More details about the calibration on EIOPA's website:
"Calibration of the Premium and Reserve Risk Factors in the Standard Formula of Solvency II" Change in SCR Medical expenses +5% Income protection ±0% Workers' compensation +15% NP reinsurance ±0%
Solvency Capital Requirement
The SCR standard formula is not the last word!
• Recognition of health risk equalisation systems • Undertaking-specific parameters
– Premium and reserve risk – Revision risk
• Partial and full internal models • Capital add-ons