Apply the concepts of deductibles, coinsurance, benefit limits, and inflation to convert a given loss amount from a policyholder into the corresponding payment amount for an insurance company

Policy modifications refer to changes made to the loss random variable for an insurance product. In this chapter, we will explore several policy modifications, each serving a specific purpose in enhancing insurance coverage. These modifications include:

1. Deductibles
2. Benefit/policy limits
3. Coinsurance and Inflation

Deductibles

A deductible is a fixed amount you are required to pay out-of-pocket before your insurance company begins covering the remaining insurance expenses. For example, if you have a $1,000 deductible, you will need to pay the first $1,000 of your covered expenses before your insurance company begins to pay its share. Deductibles encourage policyholders to take greater responsibility for minor claims, while the insurance company focuses on more significant losses.

Benefits/Policy limits (Caps)

Benefit limits are the maximum amount an insurance company will pay for a particular category of service, such as doctor visits, hospital stays, or prescription drugs. After a policyholder reaches the benefit limit, the insurance company will not pay for any additional services in that category.

Most health insurance policies have several benefit limits, and each policyholder's benefit limit amounts may vary depending on the type of coverage they have. Some common types of benefit limits include:

• A per-policy limit on how much the insurance company will pay for services rendered by any healthcare provider in a given year.
• A per-policy limit on how much the insurance company will pay for services rendered by any hospital in a given year.

Coinsurance and Inflation

Coinsurance is a policy modification that involves the policyholder sharing a portion of their healthcare costs with the insurance company. Unlike deductibles, which represent a fixed amount that must be paid before the insurance coverage takes effect, coinsurance is calculated as a percentage of the total cost of a medical service or treatment, which varies depending on the type of insurance plan and service being offered.

For instance, if you have a 20% coinsurance and you undergo a medical procedure that costs $1000, you would pay $200, and your insurance would pay $800. Note that coinsurance usually only applies to certain types of healthcare services, such as outpatient care or prescriptions, and not to all medical expenses. It is also worth noting that, generally, coinsurance only kicks in after you've met your deductible. Once a deductible has been met, the coinsurance takes effect, thus ensuring that the policyholder continues to share in the insurance cost.

Another important concept in the context of insurance and healthcare costs is inflation. Inflation refers to the overall increase in prices over a given time, which can, therefore, lead to an increase in the prices of medical services and prescription drugs, among other healthcare expenses. As such, inflation can lead to an increase in the cost of medical services. As the cost of medical services increases, deductibles and coinsurance payments are also likely to increase, hence placing a burden on policyholders. Insurance companies, on the other hand, should adjust their premium rates accordingly in order to accommodate the rising costs of healthcare.

Learning Outcome

Topic 2.e: Univariate Random Variables – Apply the concepts of deductibles, coinsurance, benefit limits, and inflation to convert a given loss amount from a policyholder into the corresponding payment amount for an insurance company.