Reinsurance as an Alternative to Capital in Micro Health Insurance - A Simulated Exercise to Compare the Cost of the Alternatives
Posted: 20 Jun 2007
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: Suggested Citation