Pricing Your Policy

Summer 2009 CSANews Issue 71  |  Posted date : Jul 21, 2009.Back to list

Every year, during the months of April and May, actuaries, mathematicians and underwriters gather in little rooms in several cities of Canada to pore over policy documents, vast spreadsheets and the past five years of claims and their causes. Their job is to strike the next season's prices for your out-of-Canada medical insurance policy. Having some actuarial and mathematical background myself, I like to compare it to the witch doctor's "casting of the bones."

Probably the most important consideration is the FX (foreign exchange) rate. Not today's rate, but the rate when the actual claims will be paid - which can be almost a year away. You could actually use today's currency exchange rate, if you wished, by simply "hedging" the U.S. dollar. This is a very simple process, but it would normally cost in excess of $100,000. If the insurer decides to do this hedging, we all know who is going to pay for are! Medipac has never hedged the U.S. dollar, much to the distress of our insurers, as we believe that this is part of the risk that an insurer should assume, not our individual clients.

After reviewing several economists' predictions for the Canada/U.S. dollar exchange rate at December 31, 2009, there is very little agreement on anything. Some of the economists are predicting a par dollar, another $0.80, another $0.91 and the lowest was a $0.75 to $0.80 range. Casting the bones they are! If we look back over the past two years, the Canadian dollar was worth $0.76 at its low and $1.11 at its high and I can almost guarantee you that NO ONE predicted the time and place of either the high or the low.

Now let's look at the scary part. If we priced our policies at $1.11, which means fabulous rates, but the dollar was actually at $0.76 when we paid our claims, our insurers would lose $8,297,771 on paying $20 million of claims. Insurers get very cranky about this and usually would stop underwriting the travel medical business totally, if they lost $8,000,000. This is BEFORE we talk about U.S. medical inflation, the increasing frequency of claims, lag times, evacuation results, GHIP creep and actual claims results, which can all make the losses even greater.

There is a wonderful nirvana for an insurer when the currency works in the opposite direction. If we price our policies at $0.76, the insurer will make a profit of the same amount as above, $8,297,771 without lifting a finger, should the rate rise to that magic $1.11. Unfortunately, but perhaps wisely for most insurers, they hedge the U.S. dollar in the amount of their expected claims and, when this reverse happens, they do not get to "Pass Go" and collect their free $8 million. Don't ask what your premium rate would be, but it's roughly $400 higher per person to price it the safe way.

So where do we find the right balance? Well, Medipac has to go to war every year to try and bring some rational thought to the small rooms of actuaries, mathematicians and underwriters. And I do mean war! Most of the people in those rooms have been trained to be very, very conservative and to add many "pads" to their rates so that they will not be wrong and lose money. A little 10% pad here, a little 6% pad there and don't forget to set up a few safety reserves in your calculations. I know several people who have been fired for losing the money of their insurer/employer. The pressure is high and the stakes are high. The reality, of course, is that no one will accept a premium rate that is $400+ higher and there must be compromises.

Manulife asked their own economists what they thought the exchange rate would be when next year's claims are paid. They said a very reasonable $0.91; perhaps it is coincidence that the rate on that specific day was $0.91. The best estimate by our senior Medipac employees was $0.925 and we actually won the day, and that is how we priced the 2009-10 travel medical season. Well, there were a few dozen other factors which we had to bring into the pricing - we were certainly going to keep our 5% discount for Early Birds and we had to retain our Loyalty Credits and our Claim Free Discounts.

I love casting the bones, but I immensely detest the wars; I guess that's just the insurance business in the 21st century. It used to be a kinder and gentler world. We have a great insurance program this year and we hope that you are able to join us once again.

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