Basic Theories and Operational Characteristics of Health Insurance: The Diversified Basis from Underwriting Liability Definition to Insurance Benefit Payment

Chapter 10 Sub-health Concept and Health Insurance Section 1 Overview of Health Insurance I. Concept of Health Insurance (I) Basic Concept of Health Insurance Health insurance is a type of insurance that uses a person's physical health as the insured object. Insurance companies use methods such as disease insurance, medical insurance, disability income loss insurance, and nursing care insurance to ensure that the insured receives compensation for expenses or losses caused by illness or accidents. Just as life insurance does not guarantee that the insured will avoid life-threatening situations during the insurance period, health insurance does not guarantee that the insured will not be troubled by illness or injury. Instead, it is a type of personal insurance that covers medical expenses and nursing care expenses due to illness, disability caused by illness, and reduced labor income due to temporary or permanent inability to work caused by childbirth, illness, or accidental injury. According to the practice in the personal insurance industry, personal insurance business that does not belong to life insurance or accidental injury insurance is often classified as health insurance. Health insurance mainly has the following two meanings: (1) Health insurance covers two types of loss situations: illness and accidental injury. Diseases are mainly caused by internal physiological or disease factors; accidental injuries are caused by unintentional, external, and sudden factors. (2) Health insurance covers the loss of medical expenses due to illness (including childbirth) and the loss of normal income due to disability caused by illness or accidental injury. We know that the results of illness and accidental injury may be the same, namely, going to the hospital for treatment and incurring medical expenses or delaying work and reducing labor income. Therefore, health insurance is an insurance liability stipulated for these two consequences to compensate people for medical expenses and income loss. Article 91 of my country's Insurance Law stipulates: "Personal insurance business includes life insurance, health insurance, accidental injury insurance and other insurance businesses." The "Health Insurance Management Measures" issued by the China Insurance Regulatory Commission points out: Health insurance refers to insurance that insurance companies pay insurance money for losses caused by health reasons through disease insurance, medical insurance, disability income loss insurance and nursing insurance. Critical illness insurance is insurance that pays out benefits upon the occurrence of a disease specified in the insurance contract; medical insurance is insurance that pays out benefits upon the occurrence of a medical procedure specified in the insurance contract, providing coverage for medical expenses incurred by the insured during treatment; disability income loss insurance is insurance that pays out benefits upon loss of earning capacity due to a disease or accidental injury specified in the insurance contract, providing coverage for reduced or interrupted income for a certain period; long-term care insurance is insurance that pays out benefits upon the need for care due to impairment of daily living abilities specified in the insurance contract, providing coverage for care expenses incurred by the insured. In the past, in my country's insurance practice, health insurance was often customarily referred to as medical insurance, which pays out benefits upon the occurrence of agreed-upon medical expenses.

(II) Coverage of Health Insurance Health insurance coverage can be broadly categorized into two types. One type covers medical expenses incurred due to illness, childbirth, etc., generally referred to as medical insurance or medical expense (including nursing care) insurance. The other type covers income loss due to disability caused by illness or accident. If the insured is completely unable to work, their income loss is total. If they cannot return to full employment and can only take on lower-paying jobs, the income loss is partial, the amount being the difference between their original and new income. This type of health insurance is generally called disease insurance or income protection insurance. Currently, there are not many income protection insurance products available in my country. The scope of health insurance coverage mainly includes illness, childbirth, disability or incapacity caused by childbirth or illness, and death caused by childbirth or illness. The first two items aim to compensate for illness and medical expenses. The third item, in addition to medical expenses, also compensates for the insured's living income and loss of income due to incapacity, thus belonging to income protection insurance. The fourth item compensates for other expenses incurred due to death, similar to life insurance with death as a condition. Therefore, some people say that health insurance is a comprehensive type of insurance. In reality, single-liability health insurance is relatively rare; most of the time, it's a combination of several coverages or appears as a supplement to life insurance. Health insurance policies generally specify the scope of coverage clearly. This is partly to clarify the rights and obligations of both the insurer and the insured; partly because long-term insurance practice has shown that with advancements in science and technology, medical technology is constantly improving. Diseases that were once incurable may become common illnesses years later, while many previously unknown diseases are constantly emerging as new incurable diseases. This is naturally a mixed blessing for insurers. To ensure operational stability, the most conservative approach is to list all known insurable diseases in the specific policy, avoiding potential disputes and conflicts during the claims process. Risks not covered by health insurance are clearly listed in the "Exclusions" clause of the policy. The legal meaning of "Exclusions" is that the insurer is not liable for paying or compensating for the insurance claim. Including exclusion clauses in insurance contracts to further clarify the scope of insurance liability can effectively avoid many unnecessary disputes during claims settlement and protect the insurer's business interests. Generally, exclusions are determined based on factors such as: inevitable losses; losses lacking measurability; coverage that could easily lead to moral hazard for the insured; insurance coverage that violates laws and social morality; losses that the insurer cannot afford; and negative effects that may arise from the insurance system itself.

II. Characteristics of Health Insurance Although health insurance, along with life insurance and personal accident insurance, falls under the category of personal insurance, it also possesses many characteristics that distinguish it from other types of personal insurance. These characteristics are reflected not only in the insured object and insured event, but also in the unique nature of health insurance business. (I) The Insured Object and Insured Event of Health Insurance Have Special Characteristics 1. Health Insurance Risks are Volatile and Unpredictable Health insurance involves many medical technical issues, especially the estimation of risks and the determination of premiums, which are quite complex. The types of human diseases are increasing, medical technology is developing rapidly, medical equipment and medicines are constantly being updated, and the level of medical expenses is constantly rising. Moreover, the increasing medical expenses of health insurance contain many human factors, including both reasonable and unreasonable factors, and the distinction between the two is difficult, further making the risks of health insurance unpredictable. 2. Health Insurance Takes Human Health as the Insured Object The insured events are losses due to disability, incapacity, and death caused by illness, childbirth, accidents, etc., and the resulting medical expenses. The "disease" in health insurance must be caused by some internal factor within the body, meaning it's due to lesions in one or more organs, tissues, or even systems leading to functional abnormalities and various pathological manifestations. Furthermore, health insurance coverage also includes all personal risks not covered by life insurance or accident insurance. 3. Health insurance is a comprehensive insurance. Health insurance is broad and complex; generally, any personal insurance not covered by life insurance or accident insurance can be classified as health insurance. Health insurance coverage can be categorized into several types, including illness, childbirth, disability or incapacity resulting from illness or childbirth, or death resulting from illness or childbirth. Therefore, health insurance can also be divided into three categories: illness insurance pays out upon diagnosis of illness, medical insurance pays out upon agreed-upon medical expenses, and income protection insurance pays out upon income interruption or reduction due to accidental injury, illness, or incapacity. Therefore, health insurance is both an independent insurance business and possesses the characteristics of comprehensive insurance.

(II) The complexity of health insurance business operations Whether from the perspective of the overall health insurance business operations or from the perspective of a specific health insurance business operations, its complexity is very obvious, mainly manifested in the following aspects. 1. Complex underwriting standards Because the insured events of health insurance are different from other personal insurance, the underwriting conditions of health insurance are much stricter than those of life insurance. Taking "disease" as a major risk, the factors that cause the disease must be strictly reviewed. On the one hand, the past medical history must be examined based on medical records; on the other hand, a detailed analysis must be made of the insured's occupation and geographical location. For example, health insurance business has the following provisions. (1) Observation period. It is difficult to determine whether the insured has a certain disease at the time of application based solely on limited information such as medical records. In order to protect the interests of the insurer, an observation period (mostly six months) must be stipulated in the policy. During this period, the insurer is not responsible for the medical expenses or income loss caused by the disease. The policy only becomes effective after the observation period expires. In other words, diseases that occur during the observation period are assumed to have been present before the insurance was purchased, and the insurer can refuse to assume liability based on the principle of utmost good faith. (2) Sub-health insurance policy. This refers to the underwriting method implemented for insured persons who do not meet the physical health requirements stipulated in the standard terms. Underwriting is generally completed by increasing the premium or redefining the scope of coverage. (3) Special disease insurance policy. For special diseases, the insurer formulates special terms and underwrites at a specific rate, which not only broadens the insurer's business scope and improves its reputation, but also does not put too much pressure on insurance operations. 2. Complex factors in determining premiums We already know that the three basic rates for calculating the pure premium of life insurance are the expected mortality rate, the expected interest rate, and the expected expense rate. Health insurance premiums are slightly different due to the different insurance content. First, there are more factors that determine the premium rate of health insurance than life insurance and other types of insurance, and these factors are difficult to measure reliably and stably. They mainly include disease incidence rate, disability incidence rate, disease duration, interest rate, expense rate, mortality rate, etc. Secondly, like other types of insurance, factors such as policy default rate, sales methods, underwriting practices, claims principles, and the insurance company's main business objectives all affect premium rates. Thirdly, due to the specific nature of health insurance coverage, premium determination is highly dependent on factors such as hospital management, medical equipment, economic development, and geographical environment. Changes in these aspects can significantly impact the insurer's prediction of future payouts. In short, the influencing factors are multifaceted, and each factor is difficult to predict completely and accurately, all of which bring certain difficulties to determining health insurance premiums. 3. The Complex Nature of Liability Reserves Insurance operators deal with personal risks, which inherently possess significant uncertainty. To ensure operational stability, be responsible to thousands of policyholders, and guarantee the company's continued operation, insurers must accumulate funds in various forms of reserves to cope with unforeseen events, ensure normal payouts and freedom of policy surrender, and maintain the insurance company's good reputation. As mentioned earlier, liability reserves in life insurance are of great importance to life insurance operations, with policy liability reserves being the most important. The situation is slightly different for health insurance. The most important reserve here is the so-called unexpired premium reserve, which is the reserve that should be set aside at the end of the year for premiums for which the insurance liability has not yet matured. Compared to life insurance policy liability reserves, health insurance unexpired premium reserves offer insurers greater flexibility and therefore should be used more cautiously. 4. Diversity of Insurance Payment Basis Life insurance payments are usually fixed according to the insurance contract, hence the term "fixed-amount insurance." Health insurance is different; its payment amount is usually uncertain. Generally speaking, there are three different payment bases according to the insurance contract: ① Fixed-amount basis, similar to life insurance payments; ② Actual reimbursement basis, payments are based on actual expenses incurred within a maximum limit; ③ Prepaid service basis, which provides services where the insurance organization directly pays for hospitalization, surgery, and other medical expenses.