3 Keys to Understanding Insurance

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Information about 3 Keys to Understanding Insurance
Health & Medicine

Published on February 25, 2014

Author: OlympiaHSA

Source: slideshare.net

Description

Does insurance confuse you? Find out how to make sense of insurance and make an informed decision on your next purchase.

The Complete Health Spending Account eBook Series Three Keys to Understanding Insurance A Special Guide for Small Business Owners

Optimal Healthcare and “Life“ Benefits Olympia’s All-in-one Benefits Program HEALTH SPENDING ACCOUNTS Optimize your Health Benefits and make Claims online TRAVEL MEDICAL INSURANCE Protect yourself and your family on your next vacation EMERGENCY MEDICAL INSURANCE Prepare for life’s unexpected emergencies SIGN UP NOW VIDEO OVERVIEW Share This Ebook www.olympiahsa.com

The purpose of this guide is to help you understand insurance. We’ll accomplish this task in three sections: 1. 2. 3. First, we will give you a clear definition of insurance. Next, we will show you the difference between an insurance event (also known as a pooled event) and an administrative event (also known as an experience event). In other words, we want to show you what insurance is and what insurance is not. Following on this point, we will show you what you should always insure and should never insure. OK …let’s dive into Three Keys to Understanding Insurance!

What is insurance? Let’s take a look at a formal definition. Investopedia defines insurance as “a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools client risks to make payments more affordable for the insured.” In essence, insurance is the transfer of risk from one entity (you) to another (the insurance company) in exchange for a payment. Therefore, insurance is about risk sharing. Specifically, the risk is (usually) an unexpected financial loss. For example, there is a risk that your home may be damaged from a natural disaster. You transfer the risk to the insurer (along with thousands of other home owners), and in return for the insurance company absorbing that risk, you are charged a premium (a form of payment). Now that we have a working definition of insurance, we will show you the difference between an insurance event and administrative event. Share This Ebook

What is the difference between an insurance (pooled) and an administrative (experience) event? An insurance or pooled event has three primary characteristics: 1. Uncertainty - you don’t know where or if there will be a claim 2. Low incidence of claim – claims occur rarely 3. Expensive claim amount Example: Home Insurance You, as well as your neighbors and friends, insure your respective homes. You transfer the risk of damage to your home to the insurance company. In exchange for the transfer of risk, you pay a premium to the insurance company. All of the premiums are put into a pool. As there are more people contributing to the pool than there are making a claim, the insurance company is able to pay claims. An administrative or experienced event has three primary characteristics: Share This Ebook 1. Certainty – you expect there will be a claim 2. High incidence of claim – claims occur regularly 3. Less expensive claim amount

Example: Maintenance and Planned Medical Events We all visit the dentist for annual or semi-annual checkups. Perhaps we occasionally see a chiropractor, physiotherapist, or other service professionals. All of these routine, maintenance, and planned events are experienced (administrative) events. This means your premiums are established by the usage of your benefits. Why would you insure an event that you expect to happen? There is not much risk with an administrative event yet you are paying a significant mark up (in the form of a premium) to the insurance company. Share This Ebook

What should you always insure and what should you never insure? Dental services are a great example of administrative events. Dental services are almost exclusively planned events. You will have a dental checkup. You will have an x-ray. You will have scaling and polishing. You may have to have that root canal if you have an abscessed tooth. All of these events fall into the category of maintenance events. Coincidentally, dental premiums represent upwards of 70% of a health and dental insurance plan. Conversely, let’s say your son dove into the pool at the local recreation centre and broke his front adult tooth on the bottom of the pool. This was an unplanned emergency dental event. This event can be insured under an accidental dental insurance policy. This falls into the pooled insurance event category (no pun intended on the “pool” word). Share This Ebook The point here is that you should question the validity of insuring an event that you expect to happen. Visits to the dentist, a paramedical practitioner, and other events based on your “experience” (or usage) are questionable events to insure. You are essentially paying the insurance company a premium to perform administrative duties on your planned events.

If we take a historical look at insurance premiums versus payout in claims, an insurance company is essentially marking up the cost of your planned event by 32-40%. An insurer’s objective is to maintain claim costs equal to a fixed percentage of a premium. This is essentially the break even position for the insurer and is referred to as a target less ratio. The remaining percentage is reserved for “adjustment” expenses. Adjustment expenses include the cost to collect premium, cost to process & monitor claims, agent commission, taxes, inflation, plan design, overhead, and profit. Example: Let’s say the premium is $100 and the target loss ratio is $70. The remaining $30 is the amount the insurer needs to stay profitable. If you spend more than $70 you will get an increase in your premium the following year. If you claim less, the chance of getting a reduced premium will depend on how the insurer feels about the adjustment expenses. In short, if you spend $70 on medically related events out of a premium of $100, this represents a 42.2% markup. Share This Ebook

Conclusion and Additional Resources

Insurance is about risk sharing. Insurance involves the transfer of risk from one entity to another in exchange for a payment. Specifically, the risk is usually an unexpected financial loss. Today, there is widespread confusion on what constitutes an insurance event and an administrative event. An insurance event is characterized by a high degree of uncertainty, a low frequency of claims, and expensive claim payouts. On the other hand, an administrative event is typified by the exact opposite: a high degree of certainty, high frequency of claims, and less costly payouts. When you purchase health and dental insurance for administrative events, you are essentially paying a significant markup to the insurance company to perform these events. You will improve your financial position by paying for your administrative events (health and dental expenses) out of pocket or if you own a corporation, by using a Health Spending Account. Go ahead and insure your home, but think twice before you purchase insurance for your health and dental procedures.

Discover the Savings of a Health Spending Account Now that you’re familiar with Health Spending Accounts, try our Savings Calculator and download your custom report. Download Now Share This Ebook www.olympiahsa.com

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