Speaker(s): Thomas Neusius (Wiesbaden Management School)
Private health insurance in Germany is designed as a life-long contract. This corresponds to an automatic renewal where pricing is based on the initial medical underwriting, but without further risk assessment in the future. As the premium is calculated as constant during the life-time of the insured, this leads to substantial front-loading of the contract: the premium exceeds the average yearly loss in the initial years but falls short of the expected medical expenses after several years. As a consequence, every insured accumulates deferred assets against the providing insurance showing up as aging provisions in the insurer's balance sheet.
Such a contract design provides coverage against the reclassification risk, i.e., the individual risk of deteriorating health conditions, as the insurance company cannot cancel contracts based on a revised risk assessment. However, the coverage leads to a lock-in once preexisting conditions make a switch of the provider impossible. To prevent adverse retention, no surrender value is attached to those leaving the company upon lapsation.
Though unintended, the result is the absence of competition in such health plans for those insured that stayed for some years and have accumulated substantial aging provisions. We present the idea to provide risk-based surrender values that allow a switch from one to another insurance company even with preexisting conditions. We discuss the economic problems and possible ways of implementation in the present setting of the German private health insurance