Calculation of tariffs with a claims amount per risk that decreases with increasing age in the German private health insurance system

Abstract

In the private health insurance system the ageing reserve represents future cash flows of an insurance policy. The ageing reserve equals the difference between the present value of future insurance benefits and the present value of future premium payments. To comply with German law and the requirements of the Federal Financial Supervisory Authority, the ageing reserve should not be a negative value.

This legal requirement is always fulfilled in tariffs with a claims amount per risk increasing with age. In certain tariffs (for example, tariffs for the reimbursement of dental expenses) the insurance benefits increase until a certain age. Beyond that age, insurance benefits decrease again. In such tariffs the legal requirements cannot be fulfilled using the familiar calculation methods.

The present advisory note deals with such tariffs. To ensure a non-negative ageing reserve in these cases, a special calculation method called the “method with compensation payments” has been developed. For the premium calculation and the calculation of the ageing reserve, the claims amount per risk in the age range with decreasing insurance benefits are assumed to be always at the highest level.

Thus, the calculated premium is too high for the age range with decreasing insurance benefits. To compensate these too high premiums the insured person receives a premium reduction in this age range. The premium reduction equals the difference between the assumed high insurance benefits and the actual decreasing insurance benefits. The premium reduction increases every year so that the calculation method finally results in risk-adequate premiums.

Professional standards of practice are DAV publications that – together with the rules of professional conduct – set out the fundamental principles for the correct practice of actuarial activities. Professional standards of practice are characterised by their

• treatment of specialist actuarial and professional issues,
• fundamental significance and practical relevance for actuaries,
• professional legitimisation through an implementation process that allows all actuaries to be involved in such implementation,
• correct application, with members being professionally safeguarded by a disciplinary process.

The professional standard of practice „Kalkulation von Tarifen mit fallendem Kopfschadenprofil (Calculation of tariffs with a claims amount per risk that decreases with increasing age in the German private health insurance system)“ is an advisory note. Advisory notes are professional standards that are to be taken into account in actuarial considerations, the application of which can be freely decided upon in individual cases, however, within the framework of the code of conduct, and which address specific questions.