Government reforms look to control medical expenses
Hong Kong, Nov. 3, 2016 — /BUSINESS WIRE/ — Japan’s private health insurance market has been actively developed, driven by the robust growth of third-sector insurance products over the past 10 years, according to a new A.M. Best report.
The third-sector insurance market includes coverages for medical, cancer, nursing care, personal accident and income compensation, has seen in-force annualized premium income increase to JPY 5.9 trillion in fiscal-year 2015 from JPY 4.5 trillion in fiscal-year 2006.
The Best’s Special Report, titled, “Health Insurance Market in Japan,” states that comprehensive coverage offered by the public health insurance scheme has somewhat mitigated the growth of the private health insurance market. However, the rapidly increasing aging population in Japan has led to a significant increase in medical expenses in the past 10 years, which places an immense fiscal burden on the government.
Nevertheless, a recent series of reforms in the national health care insurance schemes have been made by the government in order to control the medical expenses. Foreign and domestic life insurers penetrated the third-sector insurance market to provide supplemental health insurance products to cover the extra costs resulting from hospitalization, which the national health insurance scheme does not cover.
According to reports, public medical expenses rose 1.9% to JPY 40.6 trillion in fiscal-year 2014, which equates to 8.33% of gross domestic product. The increase in medical expenses of the elderly population was particularly noticeable, since it was as much as four times the costs paid by the younger generation.
Excerpts from Health Insurance Market in Japan
- Rising Demand on Health Insurance Brings Opportunities as well as Risks to Insurers
Japan’s aging population and significant advances in medical technologies drove the increase in public medical expenses in fiscal year 2014, according to a release by the MHLW. The public medical expenses rose 1.9% to JPY 40.6 trillion in fiscal year 2014, which equates to 8.33% of GDP. The increase in medical expenses of the elderly population was particularly noticeable, at as much as four times the costs paid by the younger generation. It is highly likely that the government will control the benefit amounts for elderly patients with consideration of income levels going forward, which is likely to lead to an expansion in private health insurance for this market.
However, it means the insurers will face a higher risk profile. Given the unprecedented pace of the aging population and increasing longevity, A.M. Best notes that the rapidly growing aging population and the government policies to shift the medical cost burden to the private sector continue to support the stable growth of the third-sector insurance market. However, the rising demand is mainly driven by the elderly, which reflects a higher risk profile for insurance companies. Given the unprecedented pace of the aging population and increasing longevity, accompanied by the rapid development in advanced medical treatment technologies, pricing will remain a challenge for insurers.
- Low Interest Rate Environment Leads to Challenges in Pricing
Although life insurers are able to control medical expense inflation risk by offering fixed benefits, they are also exposed to the risk that there will be a higher-than-expected number of survivors mainly due to the extended longevity. Also, the current conservative pricing could be undermined by the continued low-interest-rate environment. The ultra-low rates have led some of the major life insurers to suspend sales of interest-rate-sensitive products such as single premium whole life insurance. Given the narrowing scope in first sector insurance to cope with the prolonged low rate environment, the competition in the third sector insurance market is expected to intensify.
Whole-life coverage of third sector insurance products has been promoted as life insurers attach such coverage to the main life policies, whose durations tend to be longer. The premium rates of the whole-life medical insurance policies are set by the level premium method in order to avoid a sudden increase in premium rates as policyholders get older. Hence, the reduction in standard crediting rates, followed by the current rate movements, means overall premium rates of these products would increase if all other assumptions remain unchanged. In order to offset the impact of a rise in premium rates, companies might consider reducing the risk margin or curtailing benefits. This could undermine the stability of pricing and erode the margin going forward. Some insurers have introduced a hospitalization benefit to cover the shorter period in order to reduce the premium rates and reflect the improving trends in claims frequency.
To access a copy of this special report, please visit here.
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