A recent ban on guaranteed renewals in short-term private health insurance seen hundreds of plans suspended. Problematic renewal is just one symptom of the poor health of an industry overly reliant on the hard sell.
Photo from CFP
By MIAO Yiwei, ZHANG Lingxiao
In early May, hundreds of short-term private health insurance plans were taken off the shelves in response to new regulations. The plans were essentially supplemental health insurance with incredible maximum coverage, sometimes as much as 1 million yuan (US$160,000) a year. Since 2016 the market has grown fiftyfold, mostly thanks to aggressive marketing.
The many problems associated with this kind of cover have become impossible to ignore - precarious risk models, lack of flexibility and shrinking profits.
Regulators were uneasy about guaranteed unlimited renewals, a common feature of these plans. In May, the banking and insurance commission stopped sales of short-term private health plans with guaranteed renewal. Since then, other rules have restricted potentially misleading language in contracts.
A 2019 law expanded the right to underwrite health insurance policies to a larger group of commercial insurers, including some pension funds and property insurance companies. The catch was that – except for a handful of licensed healthcare insurance companies – most insurers are only allowed to sell only one-year plans. Renewals over multiple years change the risk profile, making nonsense of the idea of “short-term” and disregarding one-year actuarial forecasts. Such mismatches may result in substantial losses to insurers and eventually to consumers.
The new regulations mean that the questionable plans, hundreds of them, have been taken off the shelves, action not well-received by insurance agents, who have had their fill of complaints from patients demanding long-term coverage.
Short-term private health insurance has had an extraordinary five-year run. In 2015, online insurer ZhongAn launched Zunxiang, a plan that offered medical coverage of up to 1 million yuan for an annual premium of less than 300 yuan. It was seen as a useful supplement to government insurance and was an instant hit. Other insurers were quickly infected with unbridled enthusiasm for unsustainable premiums and multi-million-yuan coverage.
From 2016 to 2020, the market grew from 1 billion yuan to 52 billion yuan and is expected to reach 100 billion yuan by 2022. More than 100 insurance companies and 80 agencies are involved in the underwriting, sales, and servicing of these plans for over 90 million policyholders.
As the industry becomes more competitive, the cracks previously papered over with pleasing growth have started to show. There is little to choose between available plans other than the amount of coverage. Ironically, aggressive marketing and its high cost mean insurers are making no money from the plans, which are often actuarially unviable, and the problem is likely to get worse.
Healthcare spending has been growing at around 10 percent every year. Although public healthcare absorbs much of the costs, private healthcare insurers still face enormous risks. Premiums, contrastingly, have stagnated due to competition, despite rising claims and marketing costs.
The integration of insurance into the wider healthcare industry is a long-term plan. Recently, some local governments have also their own supplemental medical insurance. This makes underwriting and claims more complicated as customers now hold two policies. Collaboration between the public and private sectors will accelerate data integration and eventually bring down costs for everyone.
“Guaranteed renewals” were just a symptom of competition that had run out of control. The industry’s growth was built on low prices and hard selling. The future lies in more sophisticated risk engineering and better claim management. Private insurers must come up with ways of extending coverage to pre-existing conditions without overburdening other policyholders or bankrupting the system. They also need to do a better job negotiating with healthcare providers and pharmaceutical companies.