Professional Documents
Culture Documents
Health Insurance Notes
Health Insurance Notes
Medical expense insurance provides for the payment of costs of medical care that results
from sickness and injury.
Surgical or medical procedures the sole purpose of which is the cure or relief
of acute illness or injury
Surgical or medical procedures, including diagnostic procedures, the
immediate purpose of which is the cure of acute illness and not the alleviation
or management of long-term illness.
Doctors’ fees
Anesthetists fees
Hospital bed and ward charges
Drugs and like requirements e.g. gloves, syringes etc. used
X-rays, scan and other diagnostic procedures
In Kenya, treatment must be at an NHIF accredited hospital. Claims are settled net of NHIF
entitlement
Definitions
Acute conditions
i) A condition that generally comes on quickly and does not last a long time and so is not
chronic
ii) A single episode of an illness or injury. The treatment has a clearly defined end point
and the patient recovers and returns to his normal or previous state of health. For some
insurers, this applies to acute episodes of a chronic disease e.g. a diabetic
Emergency Surgery
Elective Surgery
This is where both the doctor and patient are able to choose the time for the procedure.
Non-emergency cases must be pre-authorized by the insurer to confirm treatment and
cost
A long term condition that cannot be cured and so treatment can only relieve the
symptoms.
It is an illness or injury having one or more of the following characteristics:
it is permanent
It leaves residual disability
It causes an irreversible permanent change to bodily or mental condition
It requires special training or rehabilitation
It needs an indefinite ongoing period of supervision, observation or care
A point has been reached where no further intensive treatment will make any
improvement and therapy is aimed at maintaining that state without further
deterioration. There may be a need for regular drugs to control the static state.
Insurers usually make concessions and the first episode of chronic illness is covered and
excluded thereafter.
Cancer may be covered for the first year of discovery or until it is declared to be terminal
Individuals and employers have two main options to handle medical costs.
a) SELF-FUNDING
This is also known as ‘self-pay’ or ‘self-insurance’. In this method, the individual or
organization chooses to save the money that they would otherwise pay in medical
insurance premiums and pay for the medical costs themselves.
It is a risky approach but can be a viable option for the financially sophisticated.
They may be able to negotiate favorable charges directly with doctors, hospitals and
pharmacies
Employee self-funded schemes are useful to cater for outpatient costs for which
insurance is usually expensive.
The employer usually reimburses medical costs
Disadvantage
The reimbursement of medical costs by an employer is considered a ‘benefit ‘for the
employee and it is fully taxable at the employees’ highest rate of tax.
1. Personal Products
These are for individual customers who take responsibility for arranging their own
medical cover and pay their own premiums.
Cover is arranged on a single, married or family basis.
In Kenya, premium is usually paid annually in advance. It may be a possibility to
allow monthly or quarterly payments at an additional premium.
a) Comprehensive Policies
These are ‘full cost’ or ‘full refund’ policies. They have the widest range of benefits
and services and are expensive
They cover inpatient, outpatient and day case treatment of eligible medical conditions
as well as:
i. Alternative or complementary medicine
ii. Dental treatment by a specialist up to a specified annual amount
iii. Optional care up to a specified annual amount
iv. Provision of a guest room for a parent to accompany a child during hospital
stay per night.
v. Private ambulance service.
b) Standard Policies
They are similar to comprehensive policies but with some of the benefits reduced or
excluded completely in order to contain treatment costs and to reduce premiums.
They may require patients to receive treatment in pre-specified hospitals or with pre-
specified doctors with whom they have negotiated favorable rates for accommodation
and services
Limited outpatient may be allowed only when the course of treatment is directly
related to an inpatient stay or day case episode
‘Peripheral benefits’ such as hospital and dental are usually excluded.
c) Budget Policies
- Allow customers to buy medical cover at a low premium
- They may have limited benefits so that customers buy cover for only the more
important and expensive types of treatment.
- The treatment must be only at a specified network of hospitals which the insurer has
negotiated favorable rates
- Cost is reduced because cover is strictly limited and also the hospitals are specified.
d) Senior Policies
These intend to encourage elderly people who are more likely to require medical treatment to
insure themselves against the cost of private treatment
They are a means of encouraging retired group scheme members from the commercial market
to retain their medical insurance on an individual basis.
e) International
They are the same as standard policies but with a wider geographical area
The geographical area may be limited as it is difficult to control claims abroad.
Most European policies exclude claims for USA and Canada because these countries have
extraordinarily high medical costs
2. Commercial Products
These are for the employers who want to be provided all or some of their staff with medical
insurance cover.
They are referred to as ‘group schemes’ or ‘company paid schemes’.
The employer pays the premium for the staffs that are covered by the group scheme and in
most cases for their dependants also.
An employer may choose to provide different categories of staff with different levels of
medical insurance cover e.g. senior managers may have higher limits and more benefits and
junior staff with reduced level cover.
It is useful for the employer as it creates staff loyalty and helps them exercise control over
staff absence for the purpose of obtaining treatment.
In both commercial and voluntary schemes there must be a stipulated minimum number of
principles members for the benefits of a group to be provided.
Further to the above , firms and individuals have at their disposal pegged on their unique
circumstances other measures to cater for medical expenses. These arrangements include health trust
policies, cost plus insurance policies and co –funding.
These are an attempt to minimize the impact of premiums and tax on large group schemes.
The employer appoints trustees (or administrators to whom it pays a sum of money.
The trustees hold the money on trust and use it to provide healthcare benefits for the
employees. Trustees are responsible for the trust’s administration as well as handling and
paying claims
The trustees may decide to purchase stop loss insurance to meet the costs of treatment over
and above that for which the employer is prepared to pay during any twelve month period
The insurer agrees to meet all eligible costs of private treatment that during twelve-month
period exceeds the previously agreed amount.
Stop loss/exess of loss cover can also be purchased for commercial group schemes. It is
important to limit the amount to be paid over and above each claim per member to avoid one
member using up all the excess of loss cover.
Cost Plus
Cost Plus is an arrangement to provide a facility for payment of legitimate expenses not
covered by the insured benefit program. Cost Plus claims are those expenses over the present
policy limits which a client wishes to have covered. In order to be eligible, they must qualify
as an eligible medical and dental expense under the income tax act.
A Cost Plus arrangement can be set up with an insurer on a fee per claim basis. Insurers
generally charge an administrative fee ranging from 10% to 15% of the amount claimed
(which often includes the Premium Tax).
Co- Funding
Under this arrangement the insured the insurer cost share in defraying the medical costs. This
is common in out-patient visits where the insured is called upon to pay a specified amount of
money for every outpatient visit to the medical service providers, a term referred to as co-pay.
Traditionally, medical insurers have followed this principle of excluding risk. They have done
this because of the absence of any suitable method for accurately predicting the frequency,
cost and incidence of medical conditions. Some healthcare insurers are now enhancing their
products to include cover for pre-existing conditions in return for an appropriate loading of
the premium.
The basic principle of medical insurance is that many members will pay premiums for the
benefit of those members who will actually need private medical attention. Each member pays
an identical basic age-related premium, and is entitled to treatment under healthcare insurance
in the event of ill health. However, the relatively high incidence of claims and their associated
costs have made a considerable impact on medical insurance premiums in recent years and
there is a need to ensure that members are treated fairly. Since people with a history of ill
health are obviously more likely to require future treatment than people in good health, it
would be unfair for them to receive medical insurance on the same terms. The method
commonly employed is the exclusion of pre-existing medical conditions from benefit
payment. There is however, full cover for the treatment of other, unconnected conditions that
may arise.
Morbidity
Morbidity is the term for the statistics used to estimate:
Underwriting principles
Commercial Principles
The aim is to keep premiums at an affordable level, whilst maintain cost-effectiveness. The
insurer must therefore limit the risk by ensuring that the applicants for cover are assessed to
determine the potential risk; that the terms, conditions, benefits and price of the product are
appropriated and will attract profitable new business.
In the individual and small/medium group sectors of the market, underwriting is used to
ensure that the terms and conditions of membership are set at a level which:
Methods of underwriting
a) Exclusions
Healthcare insurance policies often incorporate some built-in exclusion that applies to all
members of a particular product. The following exclusions usually apply to healthcare
insurance policies:
Pre-existing conditions
Chronic conditions
Experimental procedures
Expenses incurred while on active duty with the armed forces.
Self-inflicted injuries
Expenses recoverable under any other insurance such as NHIF, Workmen’s
Compensation, Personal Accident among others.
Routine medical check ups.
Personal comfort items. eg television, air conditioners, etc
Routine dentistry
Contraceptive services and supplies, family planning, fertility treatment e.g. costs of
treatment related to infertility, impotence.
HIV/AIDS;
Normal pregnancy and childbirth;
Optical cover
Nutritional food supplements or replacements and vitamins whether prescribed by a
physician or not.
Elective cosmetic surgery;
Mental and addictive illnesses, including drug and alcohol dependency (these are
usually covered under comprehensive policies); and
Overseas cover/ emergency repatriation: usually covered under comprehensive
policies.
Transportation other than a licensed ambulance, as provided for under the inpatient
coverage of the contract.
Insurer use different styles and approach in their underwriting. The common methods are:
The underwriter needs, from applicants covered by the policy, their previous medical history
and current state of health. From this information the underwriter can decide whether to:
b) Moratorium underwriting
This is where any medical condition that occurred prior to the policy start-date (usually up
to five years before) are, at least initially, excluded from benefit. Under it, the insurers
suspend their right to do so in the event of a claim. This form of underwriting is often
referred to as ‘point of claim underwriting’. For the member this is a less secure method of
being underwritten than that based on the assessment of a declared medical history. This is
because the member does not always know if the benefit will be available until after their
claim is submitted. Whether the benefit is paid depends on the underwriter’s decision
made at that time.
In some cases, cover for pre-existing conditions that the member was aware of or had
treatment for in the five years prior to starting their plan, will be given, subject to a
qualifying period of, for example, two years. If during this period the member does not
need to seek medical advice or receive treatment for the pre-existing condition, then that
condition will be covered from when the policy is renewed for a third year.
Medical History Disregarded or MHD often applies to large group schemes, where pre-
existing medical conditions are covered. The insurer relies on the fact that every
employee, within a particular group, automatically has cover.
This avoids anti-election, which is where the insured knows more about the risk than the
insurer and so takes out a policy because they believe they have a higher risk of making a
claim than is assumed by the insurer.
In some cases an insurer may be prepared to offer continued personal medical exclusions
(CPME). Under this the insured simply carries over any existing exclusions to a new
policy and does not have any new ones imposed by the new insurer. This facilitates
switching between insurers, but typically it only applies to group policies.
Individual policies are usually subject to the strictest levels of underwriting, in order to
avoid anti-selection. Anti-selection is also a concern on voluntary schemes where the
insured can choose whether to join the scheme. For larger schemes, and especially those
where every member of a particular group automatically joins and where premiums are
paid by an employer, the risk of anti-selection is minimal. In some cases a very large
group scheme will be costed on a ‘claims plus’ basis where the premium will effectively
base on the last years claims with a loading to allow for inflation, increased costs and
administration expenses.
In such cases, employers recognize that if they wish to automatically include a poor risk,
the premium they pay will be affected directly.
The medical information declared by the customer, and any further information obtained
by the insurer, should give the underwriter sufficient data to fully assess the risk.
The underwriter also has to bear in mind a number of general factors that may be relevant
when assessing a customer’s medical history such as age, gender, the start date of any
illness, the duration and severity, the frequency of symptoms and whether the condition is
likely to recur, the nature and effectiveness of any treatment received, and their present
state of health.
Rating factors
Currently, rating factors are not generally used in the way they are in life underwriting or
income protection insurance. In medical insurance the premium generally takes into
account:
Age; this varies from insurer to insurer- some apply five – year bands, others ten-year
bands whilst some may only have one age-related premium increase or no increases
depending on the contract.
Marital status: i.e. single, married, with a family or a single parent.
Smoker or non-smoker.
Per person price.
Previous claims experience: premiums based on this are applied to group healthcare
insurance contracts and schedule rates are applied to new applications.
Hospital accommodation or boarding.
Excess: whether the member wishes to opt for excess on the policy.
Loyalty schemes
It is clearly in an insurer’s interests for people to continue with their policies in the vast
majority of cases, so insurers have developed various ways to encourage it. A key element
is providing good services, competitive premiums and benefits and making renewal as
easy as possible. Some insurers go further by adding a loyalty scheme. This can take the
following forms;
Loyalty bonus paid after the first year for example, 5% discount after the first year- this
form of loyalty bonus is not common.
Profit sharing: this only applies on large group schemes, but may involve, say, the
insured company getting 50% of any profit if the claims ratio is below, say, 60%.
No claims bonus: this works in the same way as on for example, motor insurance.
1. Enrolment
This covers:
a) The criteria and process for qualifying as a member.
b) Definition of a ‘dependant’. This is usually a spouse and dependant children i.e. up
to age 18 or 25 if still in full time education and unmarried. Legally adopted
children are covered.
c) Contractual position covering addition of dependants to an existing contract,
including coverage of a newly born child can be added at birth, after 30 days or 6
months depending on the insurer.
2. Renewal
o Refers to when the premium should be paid, by what method and with what
frequency.
3. Termination (Cancellation Notice)
o This explains how the policyholder or insurer may terminate the contract and any
penalties that may be incurred for doing so by the party instigating the termination.
The policyholder does not have to give a reason for terminating the contract.
o Benefits being conditional on the patient being referred for specialist treatment on
the recommendation of their General Practitioner.
o Settlement of accounts directly with the medical provider concerned.
o The effects of any excess applied to the policy. Medical policies do not usually
have an excess. They may be however imposed for certain conditions or for
outpatient so as to avoid abuse.
5. Exclusions
o Covers those conditions and treatments that are excluded
o Some of the claims may be paid on discretionary basis.
o Some exclusion may be brought back on payment of an additional premium e.g.
maternity cover. However, when this is done the insurer attaches conditions to
avoid selection e.g. all women of childbearing age have to be covered for maternity
expenses.
6. Claims
Having accepted a risk the insurer is in much the same position as the insured as pertains to
uncertainty. Insurers are not immune to the possibility of larger than expected losses or more looses
than anticipated. Thus insurers also seek insurance; the insurers insure the risk again, which is called
reinsurance. The reasons why insurers buy reinsurance are:-
There are two main forms of reinsurance namely facultative and treaty. For facultative, each risk is
offered to the reinsurer by the direct office and the reinsurer assesses it and decides whether to accept
or not. Treaty is where there is an agreement to the effect that all risks within certain parameters will
be offered (ceded) to the reinsurers. The reinsurer cannot decline the risk and the direct office cannot
select which risk to offer and which ones to retain.
The methods of provision of treaty reinsurance can either be by proportional treaties or non-
proportional treaties. The arrangements under proportional treaties include:
(a) Quota share treaty where a fixed proportion of every risk defined in the treaty is
reinsured e.g. reinsure 80% of each and every risk.
(b) Surplus treaty - The direct office decides how much to retain on each risk (retention)
e.g. Ksh.20,000. The direct office then arranges reinsurance measured in lines. A line
being equal to the retention. Reinsurance will be multiples of this line e.g. a risk of
Ksh.500, 000 is placed with an insurer whose retention is Ksh.20,000. There are two
surplus treaties, a ten line first surplus and a ten line second surplus. The reinsurance
arrangement would be as follows:-
Retention - 20,000
TOTAL 420,000
The arrangement under non-proportional treaties include; Excess of loss and stop loss reinsurance.
THE INSURANCE MARKET
Like any other market, the insurance market comprises of sellers, buyers, middlemen, service
providers and the regulator.
The Intermediaries
It is possible to buy insurance direct from the insurance company. It is also possible for an
individual to use services of an intermediary. The commercial buyer however may be faced
with complex risks. He needs expert advice to enable him assess the risks he has and match
then to the best seller of the insurance. In legal terms an intermediary is an agent who is
authorized by the principal to bring the principal into a contractual relationship with another
third party. There are different forms of intermediaries in the market place:-
b) Mutual Companies – They are owned by the policy holders, who share
any profits made. The shareholder in the proprietary company receives
his shares of profit by way of dividends but in the mutual company the
policy holder owner may enjoy lower premiums or higher life
assurance bonuses than would otherwise be the case.
c) Life Insurance Companies- these are insurance firms that are licensed
to transact long term business usually life and pension. Liberty life
d) General Insurance Companies- These insurance companies that transact
only short time insurance nosiness usually referred to as general
business. Eg. General Accident insurance company, Directline,etc.
The service providers include, the claims settling agents, risk surveyors, doctors,
lawyers, motor assessors, investigators, claim adjustors, among others.
GOVERNMENT REGULATION
Government Regulation
Since each state is responsible for its own insurance laws there is no one set of government
regulations that insurance companies must follow, but rather each company must comply with
the laws of each state in which it wants to do business. The Insurance Regulatory Authority
(IRA) in Kenya is responsible for primary oversight roles, including regulation of an
insurance company's financial solvency through the Insurance Act.
The Insurance Act is an act of Parliament consolidating the laws relating to insurance and
regulating the business of insurance and connected purposes.
a) Maintain Solvency
This relates to the assets and liabilities of the company. The Act requires that the margins
between assets and liabilities remain within the prescribed ratio to ensure that the insurance
company is able to meet its expenses and pay claims.
b) Equity
This implies fairness between the parties to the contract. The insurance contracts are complex
and usually the contract documents are pre-printed. The regulator checks these documents to
ensure fairness and reasonableness to have both the policy holders and the claimants.
c) Competence
This refers to suitability of those charged with the responsibility of running the insurance
business in the country. This includes the agents, the brokers and the Key decision makers in
the insurance firms.
d) Insurable Interest
The legal right to insure arising out of a financial relationship recognised at law, between the
insured and the subject matter of insurance.
There are two main reasons why the law requires insurable interest:
Compulsory insurance
Road Traffic Act policy third party losses including:.
Insurers give a little wider cover of 3rd party losses than is required by the Traffic Act.
In addition to coverage under Traffic Act, the cover extends to the following:
a) Applies to accidents occurring within the geographical area.
b) Indemnity to third party property damage.
c) Indemnity to anyone who is driving with permission.
d) Indemnity to a passenger responsible for an accident.
e) Indemnity to employer, partner or fellow employee in accordance with the
classifications of use.
f) Legal costs and expenses as mentioned in Road Traffic Act. These include those
that relate to property damage claims as well as to injury claims.
g) Any other expenses related to the accident.
Methods of Regulation
a) Financial Solvency
Each insurance company must prove to its state regulators that it is financially solvent enough
to conduct business in that state. A detailed financial statement including the insurer's balance
sheet, income statement and a number of schedules and exhibits must be delivered annually.
Quarterly reports may also be required. The regulatory agencies track financial patterns to
determine which insurance companies are at risk of insolvency so action can be taken
appropriately.
b) Underwriting
State laws dictate how insurance companies may underwrite risks. IRA establishes certain
underwriting guidelines to be observed by insurance companies..
Each state defines what it considers to be "unfair trade practices" in how insurance companies
deal with their customers. IRA is responsible for executing this oversight in two primary
ways: through routine monitoring of the business operations of insurance companies and
through investigation of complains received from customers. Imposing financial penalties
against insurance companies that violate the unfair trade practices is one of many
administrative powers of oversight given to IRA.
d) Policy Approval
An insurance company must submit its policies for review before executing the contracts. The
state reviews the policies to verify the policies are competitive and fair, in compliance with
the state's laws, and do not have large gaps in coverage that may mislead or confuse the
public. The state can refuse to allow a policy to be executed if it does not meet specified
criteria.
e) Premium Regulation
Approval of each insurance company's premium rates by IRA. Where this applies, proposed
premium increases or decreases that apply to all customers uniformly must still be
competitive in the marketplace, and the state reserves the right to disapprove rate changes if
competition will be compromised.