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Cost of business

24 June 2004 Angelo Coppola

Although medical schemes in South Africa conduct business in a highly regulated and complex environment, appropriate reinsurance arrangements are valuable risk management tools, says Munich Reinsurance Company of Africa Limited (MRoA).

Medical schemes are currently facing numerous risks.

Rising costs associated with the medical scheme environment is hard to predict. The reason for this is that so many factors influence the costs associated with one’s health.

Doctor’s fees, the prices of medicine, theatre costs and increasingly advanced medical technological all contribute to the rising costs in medical aid contributions.

The ageing demographic profile of members and prevalent movement of young members away from medical schemes also present a risk since medical aid contributions are flying through the roof.

A further risk faced by medical schemes is fraud and over–servicing from doctors. Managed care companies are trying to curb this, but only partly succeed in doing so.

Reinsurance can be used in many ways as a risk management tool. Appropriate reinsurance will assist the scheme to effectively evaluate the risk and assess the potential impact.

Furthermore, reinsurance is an economical and appropriate action to take to avoid or control risk.

A good example is the cost of certain hospital procedures, which are especially exposed to risks such as technological advancement. Certain hospital procedure costs can be as much as two million rand per person per year.

It is difficult to predict how many such claims a medical scheme might face during one year because of the many risk factors that contribute to such costs.”

Reinsurance effectively removes the risk of a scheme suffering substantial loss from an unexpected high number of such large claims. This is just one example of reinsurance, but in today’s market, it is the most common method used.

Hence reinsurance smooth contribution increases each year so that members do not experience sudden shocks after an unusual bad year experienced by the medical scheme.

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