What is a contract between an insurance company and a customer to cover a specific risk?
For a print-ready PDF of this page, click here. The higher premiums that result from adverse selection, in turn, may lead to more healthy individuals opting out of coverage, which would result in even higher premiums. This process typically is referred to as a “premium spiral.” Avoiding such spirals requires minimizing adverse selection and instead attracting a broad base of healthy individuals, over which the costs of sick individuals can be spread. Attracting younger adults and healthier people
of all ages ultimately will help keep premiums more affordable and stable for all members in the risk pool. The ACA rules also support a level playing field. That is, the rules governing the insurance market regarding issue, rating, and benefit requirements apply equally to all insurers. In addition, the ACA includes a permanent risk adjustment
program that transfers payments among insurers in the single risk pool based on the relative risk of their enrollees. By limiting the adverse selection in the market as a whole and mitigating the effects of enrollee risk profile differences among insurers, the single risk pool requirement, uniform market rules, risk adjustment program, and provisions to encourage enrollment work together to facilitate market competition and the ACA’s pre-existing condition protections. What if more flexibility were allowed in the ACA market rules?If insurers were able to compete under different issue, rating, or benefit coverage requirements, it could be more difficult to spread risks in the single risk pool. Currently, risk adjustment is used to calibrate payments to insurers in the single risk pool based on the relative risks of their enrolled populations.By reducing insurer incentives to avoid high-cost enrollees, risk adjustment helps support protections for those with pre-existing conditions. Some changes to market rules, such as increasing flexibility in cost-sharing requirements, could require only adjustments to the risk adjustment program. Other changes, such as loosening or eliminating the essential health benefit requirements, could greatly complicate the design and effectiveness of a risk adjustment program, potentially weakening the ability of the single risk pool to provide protections for those with pre- existing conditions. What if some plans were allowed to avoid ACA rules altogether?If some plans were allowed to avoid the ACA rules altogether, then plans competing to enroll the same participants wouldn’t be competing under the same rules. Noncompliant plans would likely be structured to be attractive to low-cost enrollees, through fewer required benefits, higher cost- sharing, and premiums that vary by health status.Higher-cost individuals would tend to want the broader benefits and pre-existing condition protections of ACA-compliant coverage. Rather than having a single risk pool, in which costs are spread broadly, there would be in effect two risk pools—one for ACA-compliant coverage and one for noncompliant coverage. As a result, average premiums for ACA-compliant coverage could far exceed those of noncompliant coverage, thereby destabilizing the market for compliant coverage. The instability would be exacerbated if market rules facilitate movement of people between the two pools (e.g., if people with noncompliant coverage can easily move to compliant coverage when health care needs arise). By transferring payments among insurers based on the relative risk of their enrollees, the ACA risk adjustment program can reduce premium differences resulting from some insurers attracting more costly enrollees than others. However, risk adjustment programs transfer payments within the same risk pool, but not between pools, especially when the different pools have different issue and rating rules. Therefore, in a market with separate risk pools for compliant and noncompliant coverage, costs would no longer be spread over the broad enrollee population. In addition, for risk adjustment to work properly, the benefit coverage requirements need to be fairly similar across plans. Even if the compliant and noncompliant plans were pooled together for risk adjustment purposes, the potentially large differences in underlying benefits between compliant and noncompliant coverage would make risk adjustment extremely difficult to implement. And any resulting risk transfers from noncompliant plans to compliant plans would be very high, thus negating much of the premium advantages of noncompliant coverage. Instead of using risk adjustment to mitigate the higher premiums needed for compliant coverage, external funding could directed to the compliant pool, for instance in the form of a reinsurance program. However, the funding for such a program would have to be substantial and permanent. What is the contract between an insurer and a customer called?An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured).
What is risk in insurance contract?In insurance terms, risk is the chance something harmful or unexpected could happen. This might involve the loss, theft, or damage of valuable property and belongings, or it may involve someone being injured.
What are insurance contracts known as?Aleatory Contract — an agreement concerned with an uncertain event that provides for unequal transfer of value between the parties. Insurance policies are aleatory contracts because an insured can pay premiums for many years without sustaining a covered loss.
What type of contract is an insurance contract?insurance contract A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
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