Guaranteed renewability in health insurance: Taking into account changes in risk status and the cost of dying

Guaranteed renewability protects policyholders from reclassification risk. Being an important characteristic of social health insurance, the potential for private insurance markets is high given its property of competing with risk selection. Without regulation, since healthcare expenditures increase strongly near death, it seems questionable whether insurers will be able to sustain guaranteed renewability in the long run - rather than investing in risk selection activity, In this study, the authors extend the seminal model of Pauly et al. (1995) to include (1) policyholders with improving risk status over time, and (2) policyholders’ high cost of dying. The objective is to find out about the actuarially fair guaranteed renewable premium in realistic conditions when taking into account these two extensions.