The goal of creating a health insurance policy is to provide a comprehensive and affordable policy ensuring minimum levels of coverage. It should be easy to tailor according to the potential of a policyholder and compare between plans. However, due to the complexity of each scenario, potential policyholder’s health conditions, demographic profiles, determining the correct premium and offering a tailored policy come with a greater risk.

According to an article published by ABC News, shows that about 9,400 people have dropped their private health cover. That means, only 44% of Australians have the basic hospital cover risking a large amount of health insurance companies. Another article by Financial Review says that according to one of the regulations, low-risk young members are paying an unfair amount for their health insurance.

Risk equalisation is designed to ensure older people aren't priced out of private health insurance, but now it's pricing younger people out.

Mark Fitzgibbon, NIB managing director

These situations make the urgent call for all the health insurers to take a step to identify the risks and mitigate them.

Major Risks of Health Insurance Industry

Let’s identify what are the major risks in A report published by AON that discusses the major risks of the health insurance industry as follows.

Heath insurance risks

According to that, the major risks involve senior management judgment, risk planning, risk assessments, risk information. It shows that a larger portion of issues is rising due to the risk analysis and the decisions made using the analysis.

Furthermore, Willis Towers Watson report shows pricing/profit (i.e. legislation/ regulatory risk, interest rates) as one of the top three alarming risks. According to this list also, we can understand how important it is to determine the right technology to use and the right solution for risk assessment. Most importantly, these risks can have short-term and long-term impacts on the business.

To minimize the risks, insurance companies are required to carry out certain risk calculations every quarter and we are going to demonstrate one of them.

Calculating Age-Based Pool (ABP) and High-Cost Claimants Pool (HCCP)

Calculating Age-Based Pool (ABP) and High-Cost Claimants Pool (HCCP) are the main risk equalization steps designed to minimize the insurers’ risks associated with riskier demographic claimant profiles. It targets the older policyholder claims.

We used FlexRule Decision Automation Platform to define the age cohorts and finally calculate the ABP value followed by the Australian government regulations.

In a Decision Table, we defined the eligible benefit percentage of each pool. We will be using this table for both calculations.

Decision table

Age-Based Pool (ABP)

The basic formula is pC, where:

  • p is the percentage of the eligible benefit paid with regard to the age cohort;
  • C is the gross benefit in the current quarter

For example, if a 64-year-old person with a $10 000.00 gross benefit whose birthday is on the 20th of March and making a claim from 10th of March to 30th of March, he will fall under two age groups. Until the 20th, he is in the 60-64 group and then the 65-69 group.
Therefore, the ABP should be a combination of both:
0.5 * 10 000.00 * 42.5% + 0.5 * 10 000.00 * 60% = $5 125.00

This calculation has several steps such as determining whether there is a birthday in between the claim dates and in each day, which age groups do a claimant belongs to. Each step has a different formula which can be stored in a Boxed Expression document. It allows defining the formulas with an alias, enhancing the reusability, and bridging the gap between the business and technical users.

boxed expression

High-Cost Claimants Pool (HCCP)

The formula is m(R-T) – H, where:

  • m is 82%;
  • R is the total gross benefit;
  • T is the designated threshold;
  • H is the sum of the amounts notionally allocated to the HCCP

These are the examples mentioned in the federal register of legislation.

Example 1:  Mr. X is 63 and has a gross benefit of $100,000.  In this case, the amount that will be notionally allocated to the ABP is $42,500 (42.5% * $100,000).  Assuming that Mr. X has not made a previous claim in the preceding 3 quarters, Mr. X will be above the $50,000 threshold.  That is, $57,500 (the amount not notionally allocated to ABP in the current quarter with no other claims in the preceding 3 quarters) exceeds the designated threshold of $50,000.  Here, the amount that will be notionally allocated to the HCCP is $6,150 (82% * ($57,500 – $50,000) – 0).  As there are no gross benefits in the preceding 3 quarters, the only amount that was not allocated to the ABP is the amount in the current quarter (ie, $100,000 – 42,500 = $57,500) and the amount notionally allocated to the HCCP in the preceding 3 quarters is zero.

Example 2:  Assuming that, in the next quarter, Mr. X has another gross benefit of $100,000 and is still 63, the amount to be notionally allocated to the ABP will be the same as in the previous example.  That is, the amount allocated to the ABP will be $42,500.  The calculation of the total amount not notionally allocated to the ABP will need to account for the previous claim amount in Example 1 for the purposes of calculating whether the total amount not allocated to the ABP exceeds the designated threshold.  In this case, the total residual amount will be $115,000 ($57,500 (amount not allocated in the ABP in the previous quarter) + $57,500 (amount not allocated in the ABP in the current quarter).  The result is that the total amount not allocated to the ABP in the current quarter and in the preceding 3 quarters of $115,000 exceeds the designated threshold of $50,000.  Subject to the limit in subrule (9), the amount to be notionally allocated to the HCCP, in this case, will be $47,150, which represents 82% of the difference between the sum of the total amount not allocated to the ABP in the current and in the preceding 3 quarters ($57,500 + $57,500) and the threshold ($50,000), minus the sum of the amount notionally allocated to the HCCP in the preceding 3 quarters (in this case, as there was only one amount in the previous quarter, the sum is $6,150).

We used a separate Boxed Expression document to store the expressions here.

Boxed expression

Finally, a business decision that represents risk equalization as below:

decision requirement diagram - risk equalization

Next, let's see how to mitigate the risks.

Mitigating the Risks

Is Mitigating Risks Important? The simplest answer is yes!

In fact, the following chart shows how average annual claim costs by age were reduced after risk equalization we calculated in the above sample project.

health insurance risks

If you don’t know what will happen, you may end up losing customers, and eventually, the profit will decline.

To mitigate this, you can use,

  • Decision Automation
    Since we have already identified that senior management judgment and decisions are risking the insurance business, you can automate certain decisions. Therefore, instead of the management taking every decision, a system with predefined business rules, analytics, and decision robotics can perform better.
  • Automated Risk Scoring Calculations
    Risk calculation is important, yet complex. That is why in the identified risk categories, there are two categories related to risk analysis. Each risk calculation has several steps that can also be reused. Also, it gives better transparency over each step and decision taken in risk assessment. You will know why a certain risk is there and what is its weightage.

Furthermore, understanding the risks has these benefits.

  • Implementing a Contingency Plan:
    The insurers can create a contingency plan according to the analyzed risks. This helps to develop a more reasonable plan with accurate evaluation.
  • Fixing Existing Process/ System Deficiencies:
    Risk Analysis is not only about future problems, but also about the existing issues. It helps to identify the existing system risks and minimize/ fix them.


Risks always come with a cost. Whether you know a specific potential risk, or it comes unexpectedly. But using decision automation and automating risk scoring calculation, you can understand the potential risks, which helps to minimize them and reduce the impact. Additionally, it improves the accuracy, performance, and availability of decision automation and risk calculation process. In this way, you have a better plan to face the future and ensure that you do not put your company and its valuable customers in danger.

Learn More

  1. Dynamic Pricing
  2. Streamlining Business Processes
  3. 3 Ways to Improve Insurance Underwriting using Decision Automation
  4. Machine Learning in Health Insurance Premium Calculation
  5. Handling Compliance Challenges in Insurance
  6. Minimizing Health Insurance Risks
  7. Why Automate Insurance Pricing Model?
  8. Digital Transformation in Insurance
  9. Insurance Premium Calculation

Last updated August 20th, 2021 at 04:17 pm, Published February 25th, 2021 at 04:17 pm