Actuarial Forecasting

I’ve presented some factors an insurance agency must consider when it underwrites healthcare. That work is conducted by actuaries, weathermen of corporate finance. They determine how much an insurance policy should cost in order to meet future insurance claims. In a sense, the increasing cost of a health insurance policy is their weather report for our health care system.

We also compared and contrasted two forms of insurance, car and health. Car insurers have a constant forecast. Insuring risk always makes for a dreary forecast. But for car insurers, it’s akin to Seattle; not the Gulf Coast in hurricane season. It will rain tomorrow, and we will carry an umbrella. However, there's no need to begin boarding windows, hope the gas tank is full, and begin the congested drive out of town. No recent news suggests tomorrow's drivers will be wildly reckless. Or, at least, no more reckless than they are today. A fairly consistent rate of auto accidents maintains a claims process and actuarial calculations that is relatively simple. This simplicity makes for predictability and therefore an easier pursuit of the low-cost strategy which people would like to see in healthcare insurance.

The actuaries at MegaHealth Insurance, Inc. fret over a number of statistics: a growing incidence of obesity, diabetes, and other chronic, lifestyle diseases, as well as a major shift in our national demographics.

Our scientific research continues to determine the health risks of obesity. Interpreting the evidence describes a patient thrown on a trajectory likely to strike diabetes, heart disease, or cancer. This corroborates what the actuaries expect: medical care for an aging society will become mighty expensive as 'obese' comes to describe half our population.

And, as baby boomers march on through the demographic tables, our population's average age has increased. We regularly hear that Social Security may dry up; how we lack sufficient funds to pay its obligations. Medicare may be a commitment five times greater. Whereas older cars are deemed less valuable and therefore decrease a car insurer's liability over time, we don't depreciate people. Rather, treating an older person is more expensive and more likely. Health insurers look upon the same frightful future as Congress. They too will be financially responsible for what shapes up to be frequent, expensive treatments, often complicated by severe ailments and obesity.

The forecast is a perfect storm--very many people with high medical bills and relatively few healthy, young workers.

It's comparable to auto insurers learning that Congress has done away with legal limits for Blood Alcohol Content. No longer able to offer low car insurance rates, the GEICO Gecko would be at a loss for words.