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Health Insurance

+1 vote
asked Aug 24, 2018 in BUS 4027W - Actuarial Risk Management by anonymous

I have a question regarding GAP cover. To my knowledge, GAP cover is an insurance product which pays out the difference between your actual medical bill and what your medical scheme will pay. But isn't this what a health insurance product needs to do? You have some unknown future liability, the idea of insurance is that it will cover it. Now I get that there needs to be limits on the amount paid out, but it seems like GAP cover is quite prevalent (in South Africa at least) which means this "insurance" seems to be written on a fixed basis rather than an indemnity basis. 

First of all, is there a difference between a medical scheme and health insurance product and medical aid plan (sorry this may be a very stupid question)? 

I also notice that in the slides for health insurance, one of the main categories for health insurance is 'Private medical insurance'? What sort of events does this cover that makes it different to the other categories (Income protection, critical illness and long-term care)

Final (and perhaps another stupid) question, is the main difference between life insurance and health insurance that life insurance pays out on death/survival but health insurance products (such as critical illness benefits) can be attached to these life products?

1 Answer

+2 votes
answered Aug 27, 2018 by Rowan (4,010 points)

Question 1:

The reason why gap cover is so prevalent in South Africa is due to the way in which medical aid schemes define the costs which they will cover. Technically, they do indemnify you for the full cost, however, they calculate the full cost as what you would have been charged had you gone to one of the hospitals/clinics which they are partnered with. Therefore, if you use a provider which charges rates that are higher than those which the medical aid partners charge, your medical aid will not cover the full cost of your medical bill, hence the need for gap cover.

Question 2:

As far as I am aware, those are both different names for the same thing.

Question 3:

PMI covers any medical costs (subject to Ts&Cs) incurred by the policyholder.
Income Protection will pay out a lump sum or annuity if you lose your income due to an illness or disability.
Critical Illness will pay out a lump sum or annuity if you are diagnosed with one of the specified medical conditions.
LTC covers the medical costs specifically associated with aging and having to go into a long term care facility.

Question 4:

Either type of product can be included as a rider benefit on the other, the main difference between the two is the event which triggers the benefit payment. Life/survival for life insurance and the diagnosis of a specific illness for critical illness insurance.

commented Aug 28, 2018 by PBotha (490 points)

On indemnity vs fixed benefits - for health insurance indemnity products link the benefit directly to the cost of treatment, subject to limits, co-pays exclusions, etc. (designed to help contain costs), whereas fixed benefits are merely stated sums. For fixed benefits, the actual amount of the benefit is stated upfront and if you meet the claim conditions, e.g. being diagnosed with a critical illness that meets the critical illness definition, you get the full sum assured, irrespective if your actual healthcare costs. These costs can be way below the benefit amount (e.g. you may choose to refuse all treatment), or your costs are way above the benefit (you go for the most aggressive, most expensive treatment with the best specialists). For an indemnity-type product (such as PMI-type policies), benefits are linked more closely to the actual treatments.. I agree, that if the limits are set very low, then this seems more like a fixed benefit, but remember all treatments below the limits will be indemnified. We can say that the effect of these limits results in the product being part-indemnity, not full indemnity.

PMI-products are all short-term, annual products (like general insurance), whereas CI, IP/Disabilty & LTC are all long-term products (like "life" insurance), and share similar characteristics, respectively. 

Main difference between "health" and "life" products are that as you say "life" products are more contingent on death/survival events,  whereas "health" products are contingent on health-related events, i.e. becoming ill or critically ill/having an accident, requiring some form of medical/nursing care, being unable to work...

In SA, given our regulatory framework, long-term health insurance products are typically sold by "life" insurance companies (governed under the same Act), and  short-term (medical expenses cover) by medical schemes, governed by the Medical Schemes Act. Other short-term products like hospital cash plans that offer fixed benefits are governed by the short-term insurance Act.

CI is very popular to add as a "rider" to life policies as it makes the cover more attractive and allows for tailoring of the cover to individual's needs or differentiating products from competitors'. Normally what happens is that the policy will "accelerate" the death benefit if you get diagnosed by a CI before you die, and then there is no more benefit on death - you get the sum earlier. But you can also get stand-alone critical illness that pays no death benefits, and only pays on CI diagnosis.