MEDICAL INSURANCE

Objectives

 The purpose of medical (health) insurance is to provide cover against the

course of secondary healthcare.
 It aims at providing cover for ‘acute’ illness or injury that requires relatively
short-term treatment, which in turn leads to recovery.
 It does not cover primary care provided by dentists or general practitioners or
the functions that support them.

Definitions of eligible treatment

 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.

The following expenses are generally paid:

 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

 This is where surgery has to be performed as soon as possible

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

Definition of chronic conditions

 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.

b) MEDICAL INSURANCE MARKET

The medical insurance market is divided into the following categories:

i. Personal or individually paid

ii. Commercial or company paid (group schemes)
iii. Voluntary/ organized through a company.

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.

The range of products is now divided into:

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.

The benefits vary with insurers.

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.

3. Voluntary/ Employee Funded

These can be personal or commercial whereby an association or organization or employer
wants to offer medical insurance for its members but does not want to pay the premiums.
The members or employees pay the premiums. They receive a discount dependent on the size
and/or claims experience of the scheme.
The benefits are the same as those for individual market with better terms negotiated by the
group.

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.

Health Trust Policies

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/excuses 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.

Premium is payable on the stop loss cover

BASIC PRINCIPLES OF MEDICAL INSURANCE UNDERWRITING

Underwriting is the process whereby an insurer decides whether a pre-existing condition

affects the risk for which cover is being sought. Where necessary, the insurer excludes
treatment for this, or any related conditions, from the payment of benefits. In the case of
private medical insurance (PMI), when a policy is described as being underwritten, it usually
means that exclusions have been applied to the cover given for the member, not that the risk
has been accepted by the insurer subject to charging an appropriately increased premium.
Many insurers refer to the policyholder as the member and include any dependants who are
also covered.

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:

i. The probability of the occurrence of certain medical conditions; and

ii. The frequency with which these conditions may affect a member during their
expected life.

ASSESSING THE RISK

Underwriting principles

The main underwriting principles are:

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.
Why is underwriting required?

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:

 Accurately reflects the degree of risk posed; and

 Remains cost-effective for the insurer.
 Ensures that all members are treated equitably
 For larger corporate schemes, the overall group claims experience is often used as the
basis to calculated the premium.

Methods of underwriting

Healthcare insurance policies often incorporate some built-in exclusion that applies to all
members of a particular product. The following exclusions usually apply to all types of
healthcare insurance policies:

 Pre-existing conditions
 Chronic conditions
 Accident and emergency treatment
 Consultations with a GP
 Self-inflicted injuries
 Routine dentistry
 Geriatric care
 HIV/AIDS;
 Normal pregnancy and childbirth;
 Optical cover;
 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.

Insurer use different styles and approach in their underwriting.

The common methods are:

i) Exclusion of all pre-existing medical conditions

ii) Full medical underwriting

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:

 Allow cover on standard terms and with no exclusions applied

 Exclude cover for specified medical conditions, and any associated medical conditions
 Exclude cover as above, but with the provision that the insurer will review the
decision, at a stated time in future
 Offer standard terms but charge a higher premium

iii) 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.

iv) Medical history disregarded

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.

v) Continued personal medical exclusions

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.
 Group vs. individual underwriting

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 insurer will usually seek answers to the following questions:

 Have you, or any of your dependants to be included in the policy, any physical
defect, infirmity or medical conditions?
 Have you, or any of your dependants to be included in the policy, been admitted to
a hospital or nursing home or consulted a specialist during the last five years?
 During the last twelve months have you, or any of your dependants to be included
in the policy, consulted a GP? Please include details of any repeat prescriptions.
 Have you, or any of your dependants to be included in the policy, any foreseeable
need for treatment or for consulting any medical practitioner?

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.

A medical insurance premium will therefore arrive at by reference to:

 Hospital charges, including in-patient, out-patient and day cases;

 Average lengths of stay;
 Classification of operation;
 Administration costs and expenses;
 Capital and solvency costs;
 Contingency (to cover fraud etc.);
 Inflation (medical inflation generally runs at a higher level than retail prices inflation);
 Any additional benefits (such as psychiatric treatment) home nursing. overseas cover,
cash benefits etc.
 Underwriting, claims and product design;
 The age of the insured (s);
 Sales and marketing costs; and
 Profit

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%.
Member-get-member-schemes: members or customers may get cash bonus or goods
with a financial value if they introduce a new customer.

No claims bonus: this works in the same way as on for example, motor insurance.

Key stages of the contract and policy document

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 insurer may terminate because of:

a) The insured having misled the insurer on material facts.

b) The insured failing to pay premiums on or before their due date.
c) The insured failing to renew their membership.

The policyholder does not have to give a reason for terminating the contract.

4. General rules on benefits

This covers issues like:

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

This section states that:

a) Claims may be paid directly to the service provider concerned.

b) If the policy is on reimbursement basis, the original receipts and copies of
prescription in support of a claim must be made on the insurers prescribed form.
c) Premiums must be paid to date before claims are assessed.
7. Alterations to the contract
 Alterations to the contract can be made by endorsement but it is preferable that they
are made at renewal.
 Additions of members must be made as and when they occur as members and
dependants must be named under the policy
8. General
This covers:
o Policyholders name and address for correspondence must be known and indicated
o States which country’s law will govern the terms and conditions.
o Notification of other medical insurance policies in force is required.
o Complaints procedure and arbitration

MAJOR MEDICAL EXPENSES COVER

 Provides a lump sum payment when the claimant undergoes an operation which
is medically essential and which also requires a general anesthetic. This is known
as a ‘qualifying operation’.
 It is not indemnity as it is given over and above what is paid by the medical
insurance policy.
 Both life and medical insurers sell them.
  They can be purchased as stand-alone products or as an extension of a medical
insurance product.
 The contract may be annually renewable or even whole life.
 3 months waiting period is normally imposed.
 Pre-existing conditions are excluded
 There are standard exclusions e.g. self-inflicted injuries, treatment for AIDS and
related conditions.

INSURANCE MARKETS

Like any other market, the insurance market comprises of sellers, buyers and middlemen.

The Buyers of Insurance

Most people tend to think of insurance in terms of personal insurances e.g. private car insurance,
household insurance, life assurance etc. However, for most insurance companies, it is commercial and
group insurances that form a big volume of their business. One single company could be spending
millions per year on insurance premium. Thus buyers of insurance are individuals and enterprises.

7.2 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:-

a. Insurance Broker – A broker is an individual or firm whose full time

occupation is the placing of insurance with insurance companies e.g. AON
Minet Insurance Brokers Ltd. The broker offers independent advice on a
wide range of insurance matters e.g. insurance needs, best type of cover, best
market, claims procedure etc. Most commercial insurance will be transacted
through a registered broker
 b. Lloyds Brokers – carries out the functions mentioned above but only for
placing business at Lloyd’s. The council of Lloyd’s registers broking firms to
act as Lloyds brokers.
c. Insurance Consultants - Regulations exist for those who wish to call
themselves brokers. Many of the persons acting as intermediaries without
registering under the relevant legislation (The insurance Act) may refer to
themselves as consultants.
d. Tied Agents – tied agents can only advise on products offered by their host
company.
e. Home service representatives – industrial life offices employ representatives
to call at the homes of policy holders to collect premium and pay claims.

The Sellers or Suppliers of Insurance

1. Lloyds - The Corporation does not transact insurance but provides premises, services
and assistance for the individual or corporate underwriting members. The capital
behind underwriting at Lloyds is supplied by investors called “Names”. Until 1994
Names had to be individuals investing in personal capacity but from January 1994,
corporate members have been admitted.

2. Insurance Companies - majority sellers are insurance companies which can either be:

a) Proprietary companies – created by royal charter, or Act of parliament –

normally formed by registration under the companies Act. These companies
have an authorized and issued share capital. The shareholders liability is
limited to the normal value of their shares.

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.

3. Captive Insurance companies – its an arrangement where the parent company forms
a subsidiary company to underwrite certain of its insurable risks. It benefits by the
 groups risk control techniques thus paying premiums based on its own experience,
avoidance of direct insurers’ overheads and purchasing reinsurance at lower costs.

4. Reinsurance Companies - Reinsurance furthers the principle of spreading risk and

offers the insurer stability and protection against catastrophe and offers technical
devises.

GOVERNMENT REGULATION

Need for 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

It is an act of Parliament consolidating the laws relating to insurance and regulating the business of
insurance and connected purposes.

Methods of Regulation

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.

Underwriting
State laws dictate how insurance companies may underwrite risks. IRA establishes certain
underwriting guidelines to be observed by insurance companies.

Unfair Trade Practices

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.

8.3.4 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.

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.