The role of private health insurance differs significantly from one country to another. A key reason for this relates to the availability and the delivery of public healthcare within each country. In addition, governments often dictate the role of private health insurance within any particular country. This eight-part series focuses on international health markets, comparing and contrasting the key elements of risk selection practice in the public and private health insurance markets in each region.

Health insurance market summary
Social health insurance (SHI) in Germany is a premium-funded system that covers about 86% of the German population (70.5 million). The basic insurance principle is that the allocation of costs is based upon the gross income of insured people, as opposed to health status. About 66.1 million people are obligated to be insured by the SHI, while 4.4 million are voluntarily insured. Premiums are based on gross income from employment (or retirement pension). Employees (or retired people) and employers split the premiums about fifty-fifty. Children (until 25 years old) and spouses without their own income are insured with no extra premium.

Premiums are paid to a nationwide German 'Gesundheitsfonds' Health Fund (GHF). In addition to premiums, the GHF receives grants (subsidies) from the federal states. The GHF pays contributions to the statutory SHI insurers based on a risk equalisation system that considers numbers of insured lives, age, gender, 80 serious illnesses including 3,800 diagnoses, and disability of insured lives including daily allowance, costs of implemented managed care plans, and administration expenses.


Insurance funds are able to ask the insured for additional premiums, which have to be paid directly to the fund. Only a few funds have asked for these premiums and it is expected that some of the funds will reduce these premiums in 2011, but an increase could be possible for some funds that are perceived to be nearly bankrupt.

Insurance coverage of SHI includes inpatient benefits for surgery, treatment, drugs, and hospitalisation costs. Consultations and surgery by the chief physician, and single and twin hospital rooms, are not insured. The outpatient benefits include examination and treatment by licensed general practitioners as well as specialists. About 90% of all physicians are licensed by the public fund organisation. Further benefits include prescription drugs based on a drugs list published by the fund organisation, including generics and publicly approved prescription drugs.

A similar situation exists for dental healthcare. SHI covers basic examination and treatment by licensed dentists. For dentures, benefits are limited to fixed subsidies, which cover 50% of an average standard denture. High-quality dentures and implants are not covered. The patient has to carry a high deductible depending on the kind and quality of prostheses.

The private health insurance (PHI) industry provides about 9 million people with full insurance coverage (inpatient, outpatient, dental, daily allowance for disability), and about 24 million people (who have basic insurance through SHI) with supplemental insurance (i.e., hospital services, outpatient additional services, dental care supplements, per diem sick pay, per diem inpatient sick pay, foreign travel healthcare, etc.).

The insurance principle is equivalence between premiums and expenses. The premiums are dependent on age, gender, and plan benefits. PHI offers many different products from cheap versions to extremely high-cost plans. Products that can substitute for public coverage have to be calculated on life insurance principles (meaning for whole of life) including an aging reserve that avoids premium increases that are only due to aging of the insured. However, the contracts have a premium increase clause. Based on an increase in insurance expenses (utilisation, inflation, medical and technical improvement), insurers are able to adjust premiums to deal with emerging experience.

The PHI industry is obliged to offer a plan with basic benefits similar to the SHI. It is called 'Basistarif.' Although the calculation is also based on life insurance principles and equivalence, a premium-limiting system is included. Nobody pays more than the maximum premium for public insurance coverage. Differences in premiums have to be funded by younger persons and the whole insurance portfolio. This situation burdens the companies and the insured more and more as many insured people are not able to pay the premiums. Bad debt is currently at 450 million Euros. Insurers are not able to terminate contracts even in the case of a policyholder not paying premiums. The only recourse allowed is the reduction of benefits to a basic and social level.

Underwriting practice
People insured under social health insurance (SHI), including the coinsured, are able to change their insurance fund after written termination with a two-month period to the end of a month. After changing the fund, the insured is bound for 18 months. Public funds are not allowed to use underwriting. Everybody has to be insured. All contracts are renewed annually. No underwriting is allowed at renewal. The premium depends on the monthly income, the premium rate, and the threshold. If a fund asks for an additional premium or increases it, the insured may change the insurer subject to the same rules as described above.

Underwriting is used for private health insurance (PHI). The only chance to assess a new risk is at first entrance into the company. An exception is Basistarif, where insurers use underwriting but only for the situation where a person wants to change into a 'normal' scheme. Underwriting is usually based on the insurer's claim experience. In the case where an applicant is estimated as an abnormal risk, underwriting will ask for additional risk premiums (5%, 10%, 15%, up to 100%) depending on the scheme (inpatient, outpatient, dental). Policyholders pay additional risk premiums as net risk-carrying value. Underwriting may even lead to declining the risk.

If there is no premium increase, PHI contracts are renewed automatically. No termination is allowed by the insurer. Underwriting on renewal is not necessary and not possible. Any change of an insured's health status is included.

If a premium increase is necessary and possible (this has to be approved by an independent trustee, who has to be appointed by the insurer's supervisory board after acceptance by the regulator BaFin), the insurer has to inform the policyholder in writing one month before the premium change happens. Re-underwriting on renewal is not possible; health status is included as before.

Risk adjustment was used by Bundesversicherungsamt (Federal Social Insurance Authority) to create the risk equalisation system that has been used since 2009.

Final thoughts
Social health insurance funds do not need underwriting tools, as underwriting is excluded by law. But as premium depends on the health status of the insured people, an individual fund should try to obtain and analyse more information about its risk exposure. This may lead to greater stability of premium cash flow and claim payments and ultimately to predict the financial situation of the insurer more precisely. Therefore risk adjustment tools could give companies valuable information regarding their expected future financial performance.

Private health insurers have a vested interest in underwriting as they have only one chance to assess new risks. Therefore most of the companies are using underwriting tools. Many of them are based on insurer's experience but not necessarily on actuarial techniques. Only a few are using the external experience of millions of health risks, which may be considered as an expert system. Risk adjustment is in the fledgling stages, because the financial situation of the private health industry is still fairly buoyant. In this respect private health insurers can optimise their financial situations depending on the political challenges they might face in the future.