Health Insurance Articles
The Role Of An Actuary In Health Insurance Firms
2010-07-23
There is a lot more to health insurance coverage than whether last winter's knee surgery or next month's prescription medications will be covered. Health insurance is issued by companies that must figure out how to perform a delicate balancing act in order to stay in business. This process is where the actuary function plays an important role.
A health insurance company must maintain its focus on two areas of its operation: maximizing profitability by earning as much as possible in premiums (the costs of the policies) and investment of those premiums; and paying as little as possible in the incurred loss that they accept from policy holders, the claims that policyholders file, and expenses from underwriting (selecting risks to insure and deciding how much in premium to charge for accepting those risks). Health insurance companies depend on actuaries to prolong their life spans and maximize their profits.
In the same way that a health insurance company assists customers to plan for unforeseen events, the actuary function helps insurance companies understand their risks and plan for their futures accordingly. If a company prices its policies too low, there might not be enough money on hand to pay to pay out all claims. On the other hand, if a company prices its policies too high, it risks losing its customers to companies that charge lower premiums. In both cases, the health insurance company runs a significant risk of going out of business.
The actuary function can have a significant impact not only on the company providing health insurance coverage, but also on the customers. This is true even though most customers are unlikely to interact with the actuary tied to their insurance policies. For example, an actuary may decide to withhold certain types of treatment, such as a medication or therapy that is expensively priced and not specifically included in the health insurance plan. The intent would be to make more money available for customers with basic health care needs. Actuaries often design some of the details contained within customers' insurance policies. An actuary might have a large role in a health insurance company's decision to provide flu shots free of charge during a particular season. The intent of such a decision would be to inoculate more employees and hopefully decrease the number of doctor visits and medications purchased.
Actuarial work is performed by a relatively small and highly-trained group of professionals. For as few actuaries as there are, the role that they play is tantamount to a health insurance company's business success. Actuaries also have a significant impact on determining the terms of customers' policies.
