In this article, which originally appeared in the Magazine of China Actuaries, RGA’s Jason Zhang explains why a comprehensive risk management framework is crucial for balancing expanded coverage with effective risk control, paving the way for high-quality health insurance industry development in China.
As China’s population ages and healthcare demands diversify, health insurance plays an increasingly vital role in the social security system.
The New National Ten Policies on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development in the Insurance Industry, released in September 2024, explicitly aims to establish a framework for high-quality insurance industry growth by 2029, characterized by expanded coverage, comprehensive protection, and improved services. Against this backdrop, health insurance risk management has become a focal point for industry stakeholders.
This article explores the theoretical framework and practical pathways of health insurance risk management. A comprehensive case study illustrates the need for cooperation on risk management among insurance companies, regulatory authorities, reinsurers, and third-party service providers.
China’s health insurance market is rapidly expanding but faces significant challenges. From a policy perspective, since the release of the State Council’s Opinions on Reforming and Developing the Insurance Industry (National Ten Policies 1.0) in 2006, the industry has transitioned from scale expansion to quality development. The 2024 iteration of the New National Ten Policies emphasized "strengthened regulation, risk prevention, and high-quality development," directing the insurance sector to prioritize fintech, green finance, inclusive finance, pension finance, and digital finance. This policy orientation provides both direction and heightened risk management requirements for health insurance.
China’s aging population is bringing added attention to the middle-aged and elderly insurance market. Neighboring countries South Korea and Japan entered their aging phases approximately 10 and 20 years earlier than China. Currently, China’s 45–60 age group – comprising the largest and most financially capable demographic – exhibits lower insurance penetration compared to mature markets like Japan and South Korea. By 2034, China’s 50+ population is projected to surpass 40%, mirroring current trends in South Korea and Japan. This demographic shift presents both opportunities and challenges.
The development of the senior insurance market faces three major obstacles:
Because risk permeates every stage of the product lifecycle, cross-departmental collaboration is key. Throughout the process, balancing risk control with expanded coverage remains the central challenge.
Health insurance risk management requires the establishment of a systematic and structured framework tailored to its unique characteristics.
For example, interest rate risk is present in almost every insurance product, but since its driving factor is its own fluctuations, the interest rate risks of different products can be identified and assessed using quantitative models and measurement approaches, such as dollar duration and key rate duration. These risks can be aggregated and summed up, allowing for top-down risk control, including asset-liability matching and capital market hedging.
Health insurance risks are comparatively more complex, diverse, and bottom-up in nature, distributed across multiple specialized risk control processes. Different product lines, distribution channels, and even product generations within the same product line and channel exhibit distinct risk characteristics.
Thus, when constructing the health insurance risk management framework, insurers need to account for both top-level and bottom-level designs. The top-level framework, as shown in Figure 2, shows the various components of health insurance risk management, the responsible personnel, and their respective roles. Meanwhile, the bottom-level design, namely the health insurance risk identification and assessment framework (Figure 3), provides more practical guidance for risk control operations.
Based on first-principles reasoning, a problem-solving method that breaks down complex situations into their most basic truths, health insurance risks can be categorized into three types: incidence risk, behavioral risk, and other risks. Each category can be further classified into four levels based on risk severity – low, moderately low, moderately high, and high. This classification provides a clear framework and practical tools for risk assessment and management.
Together, these risk factors form the comprehensive framework of health insurance risk management.
The practical application of health insurance risk management can be examined through a typical critical illness (CI) insurance product in the Asia-Pacific region.
In this example, coverages include an early-stage CI benefit, late-stage CI benefit, death benefit, multiple CI benefit, and specific disease benefit, encompassing the main forms of CI products.
Next, apply the risk identification and assessment framework and conduct comprehensive risk evaluation of the product.
Incidence risk: The misestimation of baseline incidence rates for early-stage critical illnesses and specific diseases is generally classified as moderately low due to the availability of sufficient experience data. However, the extrapolation risk for late-stage critical illness in older age groups is categorized as moderately high, especially for individuals aged 70 and above. The deterioration trend risk must focus on the changing patterns of early-stage critical illnesses and is typically assessed as high risk.
Mitigation: Implement measures such as limiting the maximum entry age and setting tiered coverage amounts.
Behavioral risk: If the product adopts a simplified issue approach, the adverse selection risk at the underwriting stage may reach a moderately high level, particularly for high-coverage policies. Adverse selection risk in claims is linked to the clarity of liability definitions, with multiple-pay CI products generally carrying higher claims risks than single-pay products.
Mitigation: Refine underwriting rules, introduce waiting periods, and impose survival period requirements.
Other risks: Product design risks, primarily concerning high coverage amounts and high-age entry; risk hedging and diversification, which depend on the diversity of the insured population; business structure and customer profiling, which influence risk homogeneity; and asset-liability matching, which must account for long-term payout obligations.
Finally, based on qualitative identification and assessment of various risk exposures, a standardized model – such as stress testing with impact scenarios (e.g., high risk: 30-50%, moderately high: 20-40%, moderately low: 10-30%) – can be used for risk quantification and aggregation. After assessing risks qualitatively and quantitatively against internal risk tolerance levels, the insurer can further refine product liabilities, impose portfolio restrictions, and optimize risk transfer strategies through reinsurance.
In summary, the risk management practices in this case include:
These practices validate the effectiveness and practical applicability of the health insurance risk management framework.
Health insurance risk management is a critical component of the continued development of the Chinese insurance industry. The dual-layer framework constructed in this study, particularly the bottom-level design that classifies and evaluates risks across three dimensions – incidence risk, behavioral risk, and other risks – provides a systematic approach to risk management.
Moving forward, health insurance risk management should focus on the development of the senior market, striking a balance between risk control and market expansion. Leveraging multiple strategies, including data infrastructure enhancement, product innovation, mechanism optimization, and external collaboration, can elevate the overall standard of health insurance risk management.
With the implementation of the New National Ten Policies and more robust industry practices, China's health insurance risk management capabilities will continue to improve, providing a solid foundation for high-quality business development in the insurance sector.
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