Wednesday, January 04, 2006

A Time for Renewal...

UPDATE: Well, that's interesting. It appears that this issue has gone into hibernation, as we have been unable to find anything substantive on it newer than 2003. There have been some state laws prohibiting reunderwriting, and [the carrier] cited in the WSJ story has ceased the practice, as well. I've decided to leave this posted, for the purpose of eliciting discussion about the nature of the health insurance renewal process.
Normally, when we think of “renewal,” we think of Springtime. But one’s health insurance renewal, particularly if one has an individual plan, is (usually) the anniversary date, which could be any time.
Now, for as long as I can recall, I’ve explained to my clients that their rates will go up at renewal time (no, it’s not actually a law that that they must go up, it just seems like it), but that the increase is based primarily on the experience of the group of folks who own such policies, not on one’s own particular claims.
Apparently, though, that’s changed. And not necessarily for the better:
I’ve redacted the name of the insurer not to protect the innocent, but because it is not the only one currently engaged in this practice. The justification for “reunderwriting” is that rate increases are "based on an individual's experience, just like auto or homeowners' insurance. If the risk changes, the premiums change."
Some regulators and industry pundits claim that this is specious: “(D)rivers and homeowners have more control over the likelihood of having a claim than people have over their health. Some state regulators also view health insurance differently because the stakes are higher. They note that reunderwriting could price people out of the market, leaving them uninsured and unable to afford medical care when they need it most.
It’s true that auto and homeowners insurance (called P&C in industry jargon) are treated differently than health insurance: rates are more closely regulated by the states, and coverage itself is generally required by the law or the lender.
But just because health and P&C are treated differently doesn’t mean that they are different: they are both based on an insurance principle called “indemnity.” Briefly, indemnity means that that one is “put whole:” If your car gets dinged, the insurance pays the repair shop to fix it. Likewise, if you get sick, the insurance pays your doctor to treat you. Of course, there are significant differences in how each type of policy works, but the underlying principles are the same.
So, if you have a ticket or an accident, then your car insurance will go up at the next renewal; the nature of the risk has changed, and therefore the underlying assumptions (upon which your premiums are based) must change as well.
So, if the principles undergirding P&C and health are the same, why shouldn’t the consequences be the same, as well?
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