Friday, October 08, 2010

Insurance, What A Strange Business?

Most widget makers have the luxury of knowing their cost prior to setting their price. When they set their price, they include a profit margin. And from there, the widget maker can try to understand how many widgets he must sell in order to cover costs and make an overall profit.

The insurance business is different. Specifically, health insurance is very different. Most fully-insured large employer groups look to receive a renewal price 2-3 months prior to their renewal date. If claims are used as a basis for that renewal price, credible claims must be posted approximately 90 days prior to their use. So if you want a price for a Jan 1 renewal in September, the claims that are being used are from June of the previous year to May of this year. The renewal price is a guaranteed monthly premium for an entire twelve months quoted. How is an insurance carrier supposed to know how much a member is going to incur in claims 15 months from the day of their pricing? They estimate. Additionally, if a member uses a lot of doctor's services in the first six months, the carrier can't reprice the premium for the second six months. It's definitely a risky business and an odd one when you realize that insurance companies essentially find out their costs many months after they set their price.

I must admit, prior to leaving business school, I had never thought about this when I received medical cards. Also, here's a good quick description of how health insurance works, past the pricing aspect.

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