Prisoners of Their Own Insurance Policies

Meirav Arlosoroff
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Meirav Arlosoroff

The dry statistics tell us that one out of every three Israelis above the age of 80 will need nursing care. And since life expectancy already exceeds 80 years, the prospect of nursing care hangs over everyone - a risk that needs to be addressed by buying some type of long-term-care insurance.

Private long-term-care insurance is considered the best, mainly because it is based on a binding contract. The insurance company can't deviate from its obligations, not even if life expectancy increases even more in the future. This also holds for insurance premiums: Nursing care already costs between NIS 5,000 and NIS 15,000 a month, so it is particularly important to purchase a policy that already guarantees the price today.

But this is also the main weakness of private long-term-care insurance: It is extremely long-term. A 30-year-old buying a policy is entering a contract that is binding for 50 years or more. Even if he buys the best and most expensive policy available, one that guarantees NIS 15,000 a month, what is the probability that this insurance will still remain relevant in another 50 years?

When talking about long-term insurance, it turns out that a binding policy could be more of a liability than an asset. The obvious absurdity is that it is almost certain that over the next half century the price of nursing care will climb to well over NIS 15,000, so the policy will provide only partial coverage.

Since the absurdity is obvious, the policyholder should at least grasp at some point that his insurance isn't enough and that he'll need to do something to increase his coverage. But what happens with the long-term policies where the holder isn't capable of understanding that his coverage is already outdated?

This isn't a stretch of the imagination, but precisely what happens with private health insurance policies. As opposed to group policies purchased by employers and supplementary insurance offered by the health maintenance organizations, both of which are renewed and updated every few years, private policies are based on life-long binding contracts.

Built-in obsolescence

This would seemingly be to the policyholder's advantage, but in fact it's an absurdity hidden from view. At the rate medical technology is advancing, these policies become outdated almost the moment they're signed. New technologies are introduced, old technologies are displaced or enter the government basket of universal health coverage (so that there's no point in paying for them privately ), prices of innovative drugs decline over the years, the medical field is making strides at a dizzying pace - and all this skips over the private health insurance policy that remains frozen in time.

"In the space of 10 years a private health insurance policy becomes 30% obsolete," estimates a senior Health Ministry official who also said he believes the problem is particularly severe with regards to the chapter of the policy dealing with acute illnesses.

The Finance Ministry's insurance commissioner says he thinks this is an exaggeration and that most health insurance policies are relevant to policyholders' needs, but his department admits to there being a problem. Health policies indeed aren't adjusted to changing conditions and, in contrast with long-term care insurance, the policyholder has no way of keeping up.

The problematic nature of private policies is evidenced by the loss ratio: the difference between premiums charged by the insurance companies and the amounts paid out in claims. The loss ratio in private health insurance is just 40%, compared to 80% or more for collective insurance. What this means is that the insurance companies collect a great deal of money from policyholders and give them very little back in exchange.

The changelessness of the insurance contract which becomes obsolete and irrelevant within years is one of the reasons for this.

The treasury's insurance commissioner attributes the low ratio to high commissions paid to insurance agents and to prudence on the part of the companies that worry about their profits due to the long span of the insurance policy. These are interesting arguments but they don't really need to concern the policyholder paying out of pocket for the most expensive health insurance product in the market, presumably a premium product, when he is actually receiving an outdated and inferior product.

It should be pointed out that elsewhere in the world solutions to the problem have been devised.

In the United States, where health insurance is almost entirely private, an obligatory loss ratio of 70% was established. This means that insurance policies must be structured to return at least 70% of the money to policyholders at any given point in time. A different mechanism was set up in Britain, a type of health basket: The supervisor determines the services that must be provided in insurance policies and the premium gets updated accordingly.

In any case the mechanisms established around the world disrupt the stability of insurance policies: The terms of the policy are updated as well as the price.

Fear of change

Israel's insurance commissioner is very much afraid to adopt any of the mechanisms used elsewhere in the world because of the implications for prices: The insurance premium, which is now binding and permanent, would become variable. The commission believes this would drive up the price of health insurance drastically over the years and that we'll lose more than we gain: The insurance would be better and more up-to-date, but so expensive that hardly anyone could afford it.

At the Health Ministry they disagree, claiming that the rapid obsolescence of drugs and medical technologies also bring down prices, so technologies could be switched at an additional cost that isn't too high. In any case, one can't help but wonder what Israeli policyholders would prefer: Paying a fixed price for insurance that isn't worth very much or paying more over the years for insurance that, when needed, can also be used.

It is questionable whether the stance taken here by the insurance commission is the correct one.

A center for the elderly in Sderot. Credit: Eyal Toueg

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