1. Actuarial Conference on International Issues, Trends and Professionalism 25 th November 2014 REGULATORY REGIME GOVERNING HEALTH INSURANCE Muhammad Hussain Boricha Fellow of Society of Actuaries Fellow of Pakistan Society of Actuaries Akhtar & Hasan (Pvt.) Limited

2. Outline  Regulatory Governing Bodies  Classification of Health Insurance  Actuarial Involvement  Valuation of Health Insurance Liabilities  Health Insurance Solvency Margins  Health Insurance Pricing  Micro Insurance Regulations  SECP Third Party Administrators Health Regulations

3. Regulatory Governing Bodies  Pakistan  Insurance is regulated by Securities and Exchange Commission of Pakistan (SECP)  India  Insurance is regulated by Insurance Regulatory and Development Authority of India (IRDA)  Malaysia  Insurance is regulated by Bank Negara Malaysia (BNM) – Central Bank of Malaysia

4. Classification of Health Insurance  PAKISTAN  Accident and Health business is the only category of insurance which can be carried out by both, a life insurer and a non-life insurer.  Non-Life insurers may issue short term health insurance policies where the duration of the contract is of not more than one year  MALAYSIA  A licensed family takaful operator may carry on the general takaful business relating to medical by reason of disease or sickness or medical expenses subject to such requirements and conditions as may be specified by the Bank.

5. Classification of Health Insurance  INDIA  Life Insurance business  Individual linked business (includes health insurance)  Individual non-linked business (includes health insurance)  For long term individual health products, premium should remain same for at least a period of every block of 3 years  Group health business (one year renewable products)  General insurance business  Individual health business  For individual health products, tenure of contract should be between 1 and 3 years, provided that the premium shall remain unchanged for the tenure.  Group health business (one year renewable products)

6. Actuarial Involvement  PAKISTAN  For every Life Insurer it is mandatory to appoint an actuary as its Appointed Actuary.  Policyholders’ Liabilities for Accident and Health Business written by a non-life insurer should be based on the advice of an Actuary (SECP Rules, 2002 as amended on 9 th January 2012)  INDIA and MALAYSIA  Appointed Actuary required for both Life and General Insurance Companies.

7. Valuation of Health Insurance Liabilities  PAKISTAN  Minimum Valuation Basis for Life and Non-Life Insurer  (a) Liability for outstanding claims including  Claims reported but not paid  Incurred but not enough reported (IBNER) claims, and  Incurred but not reported (IBNR)  (b) Liability for unexpired risk which is the SUM of:  Unearned Premium Reserve, and  Premium Deficiency Reserve (PDR)

8. Valuation of Health Insurance Liabilities  PAKISTAN  Premium deficiency reserve is the amount if any by which the expected settlement cost, including settlement expenses but after deduction of expected reinsurance recoveries, of claims expected to be incurred after the balance date in respect of policies in force at the balance date, exceeds the unearned premium reserve.  Carry out an analysis of loss/combined ratios for the expired period, such ratios being calculated after taking into account the relevant IBNR provision.  PDR = (Combined Ratio – 100%) x Unearned Premium Reserve

9. Valuation of Health Insurance Liabilities  INDIA  Minimum Valuation Basis for Life Insurers  Gross Premium Valuation  Shall take into account all future contingencies under which any premiums or benefit may be payable under the policy  Prudent Assumptions for all relevant parameters, shall include Margin for Adverse Deviation (MAD)  If in the opinion of the Appointed Actuary, a method of valuation other than the Gross Premium method of valuation is to be adopted, then, other approximations (e.g. retrospective method) may be used.

10. Valuation of Health Insurance Liabilities  INDIA  Minimum Valuation Basis for General Insurers  Reserve for Unexpired Risks  50% of the premium, net of reinsurance, received or receivable during the preceding twelve months  Reserve for Outstanding Claims  Claims Reported but unpaid  Claims incurred but not enough reported (IBNER)  Reserve for Claims incurred but not reported (IBNR)

11. Valuation of Health Insurance Liabilities  MALAYSIA  Minimum Valuation Basis for Family and General Takaful Companies  Claim Liabilities  Claims reported but unpaid  claims incurred but not reported (IBNR)  claims incurred but not enough reserved (IBNER)  Provision of risk margin for adverse deviation (PRAD) at total fund level taking into account diversification effects (75% confidence interval)

12. Valuation of Health Insurance Liabilities  MALAYSIA  Contribution Liabilities  HIGHER of: (a) Unearned Contribution Reserve (UCR) (b)Provision for Unexpired Risk (URR) using prospective valuation method (Gross Premium) plus PRAD calculated at the total fund level taking into account diversification effects (75% confidence interval)

13. Health Insurance Solvency Margins  PAKISTAN  Health Insurance Solvency Margin is HIGHER of  20% of earned premium revenue in the preceding twelve months, net of reinsurance (Max 50% of the gross figure)  20% of [liability for unexpired risk + its liability for outstanding claims, net of reinsurance (Max 50% of the gross figure)]  For Life Insurers: At Company level, a separate fixed solvency margin is required in the Shareholder’s Fund  For Non Life Insurers: At Company level, the required solvency margin is the maximum of a fixed solvency margin and the margin calculated for the whole company’s business using the above formula.

14. Health Insurance Solvency Margins  INDIA  Life Insurers  Factor based approach  Health Insurance Solvency Margin  Factor x K1 x Math Reserve before reinsurance  Factors range from 1% to 4% depending on the health insurance product category

15. Health Insurance Solvency Margins INDIA Factor Individual Business Linked Business With Guarantee 2 % Without Guarantee 1 % Non Linked Business 4 % Group Business Linked Business With Guarantee 2 % Without Guarantee 1 % Non Linked Business Premiums guarantees for not more than one year 1 % Premiums guarantees for more than one year 3 %

16. Health Insurance Solvency Margins  INDIA  General Insurers – Health Insurance Solvency Margin is HIGHER of  (a) 20% x Higher of [0.85 x Gross Premiums, Net Premiums]  (b) 30% x Higher of [0.85 x Gross Incurred Claims, Net Incurred Claims]  Here gross and net refers to amounts before and after reinsurance respectively.

17. Health Insurance Solvency Margins  MALAYSIA  Family or General Takaful Companies  Risk Based Capital Requirements  Short term Medical and Health takaful business Solvency Margin is SUM of  25% of Claim Liabilities @ 75% confidence interval  37.5% of Provision for Unexpired Risk (URR) @ 75% confidence interval  For long term business, actuary has to determine Solvency Margins using Stress testing

18. Health Insurance Pricing  PAKISTAN  Life Insurers  Product approval required from SECP  Appointed Actuary involvement Statement of Rates Statement of Advantages Statement of Terms and Conditions Post registration implementation certificate

19. Health Insurance Pricing  PAKISTAN  Life Insurers  Appointed Actuary Statement: Terms and Conditions of the life insurance contracts proposed to be entered into are sound and workable.  The statement is from Shareholder’s perspective.  Individual products in the market currently have very high premiums with restricted benefits. Regulation is required for further development.

20. Health Insurance Pricing  PAKISTAN  Non-Life Insurers  No Product approval required from SECP except in case of Micro Insurance products  No actuarial involvement despite increasing complexity of health products being offered  Health insurance offered by both Life and Non-Life Insurers in the same market with different regulatory environment

21. Health Insurance Pricing  INDIA  IRDA Health Insurance Regulations, 2013  No health insurance product shall be marketed by any insurer unless it has the prior clearance of IRDA.  File & Use application for the prior approval of IRDA shall be certified by the Appointed Actuary and the CEO of the insurance company  All particulars of any product shall after introduction be reviewed by the Appointed Actuary at least once a year.

22. Health Insurance Pricing  INDIA  Five years after a product has been accorded IRDA approval, the Appointed Actuary shall review the performance of the product as compared to the original assumptions made while designing such product and seek fresh approval with suitable modifications of the earlier assumptions made.  MALAYSIA  Actuarial Certificate required for all medical and health takaful/insurance products.

23. Micro Insurance Regulations  PAKISTAN  Definition of Micro Insurance  Insurance products and services for low income persons that meet their needs for risk protection and relief against distress, misfortune or contingent event for modest and defined benefit levels.  Health micro insurance offered by life and non-life insurers shall not have the sum insured exceeding:  Individual Health – 5 x minimum monthly wage  Family Health – 15 x minimum monthly wage

24. Micro Insurance Regulations  PAKISTAN  Disclosure Requirement  Onus strictly lies on the insurer to ensure that a product which satisfies the definition of microinsurance shall be disclosed to SECP.  Contract provisions – at least in simple Urdu Language  SECP approval required for all micro insurance products offered by life or non-life insurers  Claims handling and process – process and settle claims within 30 days

25. Micro Insurance Regulations  PAKISTAN  Complaints handling – shall be acted upon in 5 working days from filing the complaint. To be resolved within 25 working days.  Code of conduct and consumer protection  For life insurers, annual FCR shall specifically consider the implications of the microinsurance business on the financial soundness of the insurer.  Micro Insurance to be a separate category in regulatory returns  Annual post-profiling assessment of the microinsurance products

26. SECP TPA Health Regulations  Third Party Administrators (TPA) Health Insurance Regulations were issued by SECP in March 2014  TPA is engaged for a fee or remuneration in accordance with agreement with an insurer or self- funded pool for carrying out functions mostly related to administration  TPA should be registered with SECP  Should not be engaged in any other business other than TPA  Paid-up capital >= Rs 50 million  Shareholders’ Equity >= Rs 30 million at all times

27. SECP TPA Health Regulations  Minimum functions of TPA  Prepare systems to administrate health insurance  Pay claims on behalf of insurer  Suggest, design, present and develop health insurance programs which shall only be promoted directly by the Insurer  Conclude agreements with medical service providers  Provide a network of physicians/consultants/labs for medical underwriting purposes  Maintain database of policyholders and issue ID cards  Handle all the policy-related issues, including claim settlements  Manage medical management (case and utilization management)

28. REGULATORY REGIME GOVERNING HEALTH INSURANCE ? Questions and Answers Session