Reinsurance as an Alternative to Capital in Micro Health Insurance - A Simulated Exercise to Compare the Cost of the Alternatives

Posted: 20 Jun 2007

See all articles by John Armstrong

John Armstrong

Institue of Health Policy and Management, Erasmus University

David M. Dror

Micro Insurance Academy (MIA)

Date Written: June 2007

Abstract

Rationale: The use of reinsurance has been proposed as an alternative to traditional forms of capital for micro health insurance entities. However, there is almost no literature on the ramifications of this substitution, notably the fit of different types of reinsurance and comparisons of the cost of reinsurance versus capital.

Objectives: The objective of this paper is to demonstrate the use of reinsurance as an alternative to classical capital reserving for micro health insurance. It will include a comparison of reinsurance with traditional capital surplus.

A Monte Carlo simulation exercise will be performed to consider the cost using actual data from an existing health insurance organization.

Methodology: A simulation exercise, using actual insurance data from an operating health insurance which has upward of 1.5M insured persons, will be undertaken to estimate the cost of reinsurance under different alternatives of cession of risks to reinsurance. The criteria for determining the most appropriate form of reinsurance will be identified and evaluated based upon the findings.

In addition, factors such as scheme size and benefit package composition will be considered to see how they affect the cost of the reinsurance.

Results: The base case shows that reinsurance can be considered to be an effective alternative for micro health insurance entities rather than maintaining large capital reserves. Comparing the results of this study to previous analyses using the same data set offers evidence that reinsurance can be a cheaper alternative to capital retention. Finally, by ceding risks to reinsurance, micro health insurance units improve their managerial options by deciding on the type and level of risk to retain.

Conclusions: Reinsurance can be considered to be a cost effective alternative to maintaining capital for micro health insurance schemes.

Keywords: Reinsurance, capital requirements, health insurance, micro health insurance, social reinsurance, low-income countries

JEL Classification: I1

Suggested Citation

Armstrong, John S and Dror, David M., Reinsurance as an Alternative to Capital in Micro Health Insurance - A Simulated Exercise to Compare the Cost of the Alternatives (June 2007). iHEA 2007 6th World Congress: Explorations in Health Economics Paper, Available at SSRN: https://ssrn.com/abstract=995027

John S Armstrong (Contact Author)

Institue of Health Policy and Management, Erasmus University ( email )

Rotterdam
Netherlands

David M. Dror

Micro Insurance Academy (MIA) ( email )

New Delhi, NCR
India
+41 78 790 6789 (Phone)

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