Ability/willingness to pay. Often inappropriately assumed to be equivalent. Willingness to pay is mediated by ability to pay and by individual and cultural aspects that determine the perceived benefit to self and to the community. There are two ways to assess willingness to pay (WTP): (i) Data on past health care utilization and expenditure; (ii) Contingent valuation methods based on surveys.

 Ability to pay (ATP) is largely determined by affordability. ATP for health insurance must be considered in the context of copayments and transaction costs. The concept of fairness may be an important consideration in designing a microinsurance scheme and setting premiums.

Accountability. Result of the process that ensures that decision makers at all levels actually carry out their designated responsibilities and that they are held accountable for their actions.

Actual premium. The premium arrived at by estimating the average benefit payout and adding a safety margin for contingencies.

Administrative costs. Costs of operating the (micro)insurance or the reinsurance that are neither the Total cost of care nor the total amount paid by the reinsurer.

Adverse selection. Problem of asymmetric information that disturbs the operation of the insurance market, resulting in an inequitable transaction. The insured, knowing the likelihood of events, chooses to insure against only those that pose a strong risk. The insurer, having less information, accepts a contract that does not include premiums for low-risk events. The insured gains from the insurer’s inability to distinguish “good” and “bad” risks.

Affordability. See Ability to pay.

Agent. Another term for insurer.

Ambulatory care. Outpatient medical care provided in any health care setting except hospitals.

Asymmetrical information. Parties to a transaction have uneven access to relevant information that governs an informed choice. Such asymmetry can result in an inequitable transaction in favor of the party with the most information, or it can result in the abandonment of the exchange.

Balance sheet. Statement showing the financial position at a particular point in time (e.g., at the end of the financial year), listing all assets and liabilities at that time.

Beneficiary or principal. The person designated to receive payouts from the scheme. This is typically the policyholder or a family member, but it may be an employer.

Benefit type. A definition of the microinsurer’s responsibility for each cost-generating event. The characteristics of this responsibility include the maximum number of occurrences, maximum amount per occurrence, a deductible, the rate (or amount) of co-pay.

Benefit package or compensation. A set of benefit types; A list of specific benefits agreed upon in the health insurance contract. While private insurance typically offers modules of benefits from which to choose, microinsurers may offer a standard package for simplicity and fairness.

Bottom-up. See top-down.

Broker. An intermediary who sells on behalf of another.

Capacity. Has two meanings: (i) Insurers’ ability to underwrite a large amount of risk on a single loss exposure or many contracts on one line of event. Reinsurance enables a greater capacity among primary insurers. (ii) Organizational and individual skills. Organizational capacity implies appropriate systems for information and management and adequate resources for handling operations.

Certainty equivalent. The minimum price that each player agrees to pay instead of taking a risk. The more risk-averse a person is, the lower the certainty equivalent.

Cession and retrocession. The relationship between the primary insurer and the reinsurer is based on the clear definition of the premium to be paid by the (micro)insurer in return for transferring (ceding) risk to the reinsurer. The risk transferred to the reinsurer is called cession. The insurer may also transfer risk to another reinsurer, and this transaction is called retrocession.

Cherry-picking. See Cream skimming

Claim. The bill presented to the (micro)insurer for one cost-generating event.

Claim Load. The amount of benefits paid to the insureds in a period. Fluctuations in claim load in the short term are covered by contingency reserves and in the long run by contribution increases.

Collection rate or compliance rate. The proportion of possible subscriptions from members that the microinsurer collects. Lack of complete compliance can be due to cultural as well as economic factors. It may be used as a measure of a microinsurer’s efficiency/commercial orientation. Members are more likely to pay contributions if their perceived risk is higher.

Community. A group of people with a common interest. Often implies locality, but can be occupation, leisure or religion based.

Community-based health insurance. Community initiatives to generate health care financing through voluntary prepayment schemes.

Community financing scheme. See Community-based health insurance.

Community participation. Sharing by citizens in any kind of community in communal decision making processes and definitions of problems.

Community rating. A method for determining insurance rates on the basis of the average cost of providing health services in a specific geographic area. This method ignores the individual’s medical history or the likelihood of the individual’s using the services. See Contribution rate

Compensation. Benefit payout.

Complementary voluntary health insurance. See Voluntary health insurance

Compliance. Payment of contribution due by members.

Compliance gap. Difference between possible contributions and collected contributions.

Compliance rate. The actual contribution paid divided by the contribution due. Compliance rate can be calculated on a monthly basis, or for the current financial period, or on a rolling 12-month period; it can also be calculated for a single individual, a single microinsurer or for the entire pool of reinsured microinsurers. See collection rate.

Compulsory insurance. Any form of insurance the purchase of which is required by law. Governments typically require the purchase of liability insurance with respect to three types of potential loss-causing activities: those whose severity could be particularly great, with the possibility of large numbers of innocent persons being harmed because of a single event; those whose frequency is sufficiently great to affect large numbers of innocent persons independently; and those judged to be inherently dangerous.

Confidence interval. A range of values that is estimated to contain the population parameter. To be 95 percent confident that a range contains the parameter requires a larger range than to be 90 percent confident. For example, analysis of data from a community might suggest a 90 percent chance that the number of people seeking hospitalization in a year will be between 1,100 and 1,500, but the confidence interval for 95 percent confidence is 978 and 1,747.

Contingency reserves or equalization reserves. Funds held by the insurer that are in excess of expected benefit payouts in order to cover unexpected events (contingencies) that cause fluctuations in benefit payouts. They are typically regulated in order to assure the insurer’s solvency.

Contribution base. The amount that would be available to the insurer if all members contributed fully. This relies on full disclosure of income (disclosure rate or Declaration rate).

Contribution due. The price an individual must pay the microinsurer for a benefit package during a financial period, according to the applicable contribution plan.

Contribution plan. A set of contribution rates that determine the price of being insured.

Contribution rate. The percentage of contribution base actually or expected to be collected. Contribution rates can be flat-rate or progressive, and can follow several calculations: Community rating: A method for premium fixing based on the average cost of healthcare in a given area and for a given group. This rating ignores individual medical history. Experience rating: The premium is evaluated by examining health history of the customers. Income rating: Contributions defined as a percent of the insured person’s insurable income. Income-rated contributions are, in general, independent of age, sex, or the number of covered family members. Risk rating: The price of insurance is equal to the expected value of the loss based on “no-gain-no-loss” (without overhead or profit); a.k.a. “pure premium” or “actuarially fair premium”; Pay-as-you-go (PAYG): a.k.a. “assessment premium system”: the total expenditure in a given period is met by income from the same period. Under PAYG, there is no accumulation of reserves.

Contribution. Payment of an agreed sum of money by a member to a social insurance system in return for specified benefits. The implied assumption is that other sources of income complement members’ payments. See also Premium.

Cooperative. A group of people who have united voluntarily to realize a common goal, by establishing a democratically run company, providing an equitable quota of the necessary capital, and accepting a fair share of the risks and the profits of this company. Members also take an active part in its operation.

Copayments (Co-payment) or cost sharing. The portion of the cost of a claim payable by the member, as defined in the benefit package, or the part of medical expenses paid by a member/beneficiary. This is the balance remaining after the insurer has paid its portion.

Cost sharing. See Copayments.

Covariance. A measure of the relationship between two variables. Covariance does not specifically imply a cause-&-effect relationship (“Causation”), although it may intuitively be inferred to exist, as well as its direction. For example, if health problems vary with housing density, it may be possible to infer that density affects health, but the observed covariance of the frequency of schizophrenia with social status may not have a simple unidirectional explanation.

Covariant risk. When events are not independent, the occurrence of one may affect the occurrence of another. For example, the risk of one family member’s catching influenza is covariant with that of another family member. Disasters and shocks are classic cases where proximity influences covariation. When insuring against risk of events, the actuary must consider the covariation between those risks.

Cream skimming. : a.k.a. “preferred risk selection” or “cherry-picking”: An exercise whereby an insurer selects only those insureds who are expected to have a low loss ratio (the preferred risks), thus allowing the insurer to retain profits, when all individuals pay an identical risk-rated premium. Successful cream skimming depends on the insurer’s ability to distinguish the subgroups with the lower expected healthcare expenditure.

Cross-subsidies. Amounts effectively paid when the wealthy members pay more than poor, or when the healthy pay the same as the sick for lower expected benefits. The poor and the sick are said to receive cross-subsidies from the wealthy and healthy.

Data template. Social Re has developed a standard system to record, organize, analyze, audit, validate, manage, interrogate, and report data. That system is embodied in the data template.

Declaration rate. See Contribution base.

Deductible. A provision requiring the insured to pay part of the loss before the insurer makes any payment under the terms of the policy. Deductibles typically are found in property, health, and automobile insurance contracts. The purpose of establishing deductibles is to eliminate small claims and reduce the average pure premium and administrative costs associated with claims handling. Deductibles can also reduce moral hazard by encouraging persons to be more careful with respect to the protection of their property and prevention of loss. Annual deductibles and waiting periods are the most common forms of deductibles in health insurance contract.

Defined benefit. The amount, usually formula based, guaranteed to each person who meets defined entitlement conditions. The formula usually takes into account the individual number of contribution or insurance years and the individual amount of earnings during the same period.

Demand. The amount of a good or service that consumers seek to buy at a given price. Solvent demand implies the ability to pay as well as the willingness to pay. Elasticity of demand is a measure of the responsiveness of total spending on a particular good or service to a change in its price. Elastic demand implies that as the price goes up the total expenditure falls. Inelastic demand implies that as the price goes up total expenditure goes up also. Necessities typically have inelastic demand (given an adequate income base). For example, the imperative to have an aching tooth removed means that the dentist is in a position of power to charge a high price; such dental services have inelastic demand and it is unlikely that a lower price would attract people not suffering from toothache to have a tooth removed. The concept of “necessity” and therefore of inelastic demand, is cultural. In some cultures prenatal care may not be considered a necessity. Demand for some procedures may be truncated in poor communities. This means that all though the demand for surgery (for example) is inelastic and does not change with price, above a certain price it becomes zero. As half an operation is not an option, the demand is truncated due to poverty.

Dependant(s). Every person who is covered by virtue of payments made by one paying member. The record of every dependent must identify the paying member s/he depends on.

Discretionary budget. A saving constituted when the observed total benefit cost is lower than the reinsurance threshold. The microinsurer can use this amount at the end of the financial period.

Diversification. An insurance technique to reduce the expected probability of a cost-generating event included in the benefit package. Risk diversification refers to the practice of including in one benefit package events that are not inter-correlated. Time diversification refers to the practice of holding the risk for longer periods, to reduce its per-year average standard deviation and thereby decrease the uncertainty related to the exposure. The average cost of claims will not decrease with time, as it is not related to the standard deviation but to the average incidence of a cost generating event.

Dual theory of risk. The theory that describes the attitudes of individuals toward insuring themselves, by weighing on the one hand their wealth and on the other hand their aversion to risk. Two possible modifications could swing the balance in favor of insurance: decreasing the premium, or increasing aversion to risk. Even with identical feelings toward monetary loss, individuals would likely adopt different attitudes toward insurance because their feeling is different toward the probability of monetary loss; the higher that assessment, the more attractive insurance is. Consequently, two individuals sharing the same utility index for certain wealth, they cannot have a different degree of aversion for risk (and conversely).

Endemic disease. A sickness habitually present in an area or population.

Epidemic. An outburst of greater frequency and severity of disease that is not usually frequent or severe in a population or area.

Epidemiological transition. The changing pattern of health and disease within a specified population. In developing countries, as life expectancy increases, the occurrence of noncommunicable diseases more common to older age groups increases among people who have survived infectious disease, while infectious diseases endemic to the population have not been eradicated and therefore remain significant in the illness pattern of the population. This stage in the epidemiological transition known as the “double burden of disease.”

Equalization reserves. See contingency reserves.

Escrow account management. Implies the use of a special account for managing payments of various obligations. For existence, a savings account may be set up to establish funds for paying insurance premiums and loan repayments.

Estimation. The process by which sample data are used to indicate the value of an unknown quantity in a population. Results of estimation can be expressed as a single value, known as a point estimate, or a range of values, known as a confidence interval. The outcome of estimation is the estimator.

Excluded population or excluded communities. Typically agricultural, self-employed, or poor people who have neither formal employers nor steady wages as the basis for access to government-run or commercial health insurance. They may also be excluded from housing, education, disaster relief and other social services. They may also be unable to access financial services, or secure formal recognition of property they control or own, including property obtained under traditional (tribal) law.

Expected Utility Theory. The theoretical model, originally formulated by Bernoulli in 1738, and amplified by von Neumann and Morgenstern (1944), defining that people make choices and reach decisions by reference not to the price of an item but rather to the utility that it yields. EU theory rests on a set of axiomatic principles of rational choice: ORDERING individuals are willing to state preferences across all pairs of alternatives, i.e. having once preferred A over B, and B over C, they do not then prefer C over A CONTINUITY there are no kinks in indifference curves INDEPENDENCE for any three prospects A,B & C, if A is preferred to B then an x% probability of A combined with a (1-x) percent probability of C will always be preferred to an x% probability of B (which is in fact zero), combined with a (1-x) percent probability of C, whatever the probability may be; in other words, once third options are introduced, they do not – however they are presented – alter the structure of an individual’s preference between any two basic options.

Experience rating. A system where the insurance company evaluates the risk of individuals or groups by examining their health history. See Contribution rate

Externalities. Benefits or costs with an impact beyond the parties to a transaction. That impact is not considered in the buy/sell decision and so is not reflected in the price. Pollution is an example of an external cost; safe waste disposal has external benefits.

Fairness. See Ability to pay.

Fiduciary. A person who holds something in trust for another.

Financial period. The period used for the accounting, usually the calendar year.

First line insurer. See Insurer.

Formal sector. The part of the economy/society that is registered with authorities and that is subject to regulations and standards.

Free-riding. Exists in health care when persons can benefit from a health care system without contributing to the system.

Gatekeeper. A primary care physician responsible for overseeing and coordinating all of a patient’s medical needs. The gatekeeper must authorize any referral of the patient to a specialist or hospital. Except in cases of emergency, the authorization must be given prior to care.

GDP (gross domestic product). The annual total value of goods and services produced in a country for use in that country

Government failure. Occurs where government does not provide goods and services or an adequate regulatory or support framework for the private sector to provide them.

Imperfect competition. Occurs in markets or industries that do not match the criteria for perfect competition. The key characteristics of perfect competition are: a large number of small firms; identical products sold by all firms; freedom of entry into and exit out of the industry; and perfect knowledge of prices and technology. These four criteria are essentially impossible to reach in the real world.

Income effect. A price reduction that gives buyers more real income, or greater purchasing power for their income, even though money or nominal income remains the same. This can cause changes in the quantity demanded of the good.

Income rating. Contributions defined as a percent of the insured person’s insurable income. Income-rated contributions are, in general, independent of age, sex, or the number of covered family members. See Contribution rate

Independence. Two events are independent if the occurrence of one of the events gives no information about whether or not the other event will occur; that is, the events have no influence on each other. For example, falling ill with measles may be independent of being injured in a cyclone.

Induced demand. Demand created by physicians who face inelastic demand and so can set both the price and the level of care. This ability to determine their own income is difficult to control, and has great repercussion on health budgets.

Informal risk protection mechanism. See Informal sector.

Informal sector. The part of the society/economy that is not registered with authorities and de jura or de facto, is not subject to public regulation and does not benefit from public services or goods. For example, support given by a family, friends, and member of a community in times of loss or illness effectively forms an informal risk-protection mechanism. Despite the presumption that such care is voluntarily given, in some cases (e.g. fostering of children in care), payment may in fact be given.

Inpatient. Individual admitted to a hospital for health care and the allocated a bed for the duration of that admission.

Insolvency. Inability to meet current expenses from current income plus reserves, leading, in the long run, to bankruptcy.

Institution. Social constructs that are based on "rules of the games" and thereby both enable and constrain behavior by applying those rules. By enabling the individual and organization to understand and predict behavior, they facilitate economic and social interaction. Institutions include regulations and policies of organizations and governments. They also include community-based traditional patterns of behavior and those that have developed in the face of modernization.

Insurability. A risk is insurable if there is a party willing to accept the risk for an agreed premium, and another party prepared to pay that premium (this means it is solvable). This situation implies that the probability is known, it is free of moral hazard and adverse selection problems, that it is a legal proposition, and that the premium is affordable. Practical problems associated with information availability may render otherwise insurable risks uninsurable.

Insurance. Insurance is any activity in which a company assumes risk by taking payments (premiums) from individuals or companies and contractually agreeing to pay a stipulated benefit or compensation if certain contingencies (death, accident, illness) occur during a defined period.

Insurance penetration. Insurance premiums expressed as a percent of national GNI

Insurance threshold. Insurers typically request that the insured pay the first part of any claim. This is a form of deductible and is used to simplify administration by reducing the number of small claims.

Insured unit. See Subscription unit.

Insurer (first line, primary, or ultimate). The company that contracts with the end user for insurance. This may be the ceding insurer if they choose to reinsure.

Internal rate of return. The discount rate that makes the net present value of an investment project equal to zero. This is a widely used method of investment appraisal as it takes into account the timing of cash flows.
 

Joint Underwriting Association (also known as Reinsurance Facility): A device used to provide insurance to those who cannot obtain insurance in the voluntary market (the group of people who cannot find insurance is also known as Residual Market). Premiums are usually determined for this group on the basis of that group's experience (Experience Rating). Profits and losses of the business are distributed among all insurers, according to their proportion of the voluntary market. Certain companies (called carriers) issue policies for the Joint Underwriting Association and handle claims.

Law of large numbers. The concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures (In fact, the difference between the number of successes and the number of trials times the chance of success in each trial tends to grow like the square-root of the number of trials).

Load is the cost of insurance (administration, finance, etc) as distinct from payouts (benefits). Efficient companies have a low load relative to benefits

Local government unit (LGU). The term used in the Philippines to describe pubic authorities at lower-than-national level (Region, Province, Municipality, Barangay)

Loss cost. The sum of all indemnities paid by an insurer, divided by the sum of all insurance protection purchased. Example: If over a 1-year period, an insurer paid $2,000 in indemnities for every $100,000 of maximum insurance protection sold, the loss cost for that year is 2%.In the insurance industry, this is often the starting point for rate making.

Loss ratio. The sum of all indemnities paid, divided by the sum of all premiums collected for a given period (typically a year). If more was paid out in indemnities than was received in premiums, the loss ratio is >1. The loss ratio is < 1 when the product generated a surplus for the period. For any given year, the loss ratio may exceed a value of 1 due to an unusually large number of loss events. But in the long-term, loss ratios must be less than one. Loss ratio is a common measure of annual operating performance for insurance products. The expected loss ratio is one of the main assumptions for estimation of solvency.

Market failure. A condition in which a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction. The four main market failures are: public good, market control, externality, and imperfect information. In each case, a market acting without any government-imposed direction, does not direct an efficient amount of resources into the production, distribution, or consumption of the good.

Mean. Average. It is equal to the sum of the observed values divided by the total number of observations

Members. See Insured unit.

Microfinance Institution (MFI) Organization. Provides financial services to the poor on a sustained basis. They include saving and credit societies, agricultural insurance, property insurance schemes and, more recently, health insurance schemes.

Microinsurance. A mechanism for pooling a whole community’s risks and resources to protect all its participating members against the final consequences of mutually determined health risks.

Microinsurance unit (MIU). A very small finance institution specifically designed to offer health insurance to the poor by pooling risks across a community.

Monte Carlo simulation. A statistical technique in which an uncertain value is calculated repeatedly using randomly selected "what-if" scenarios for each calculation. The simulation calculates hundreds and often thousands of scenarios of a model. Uncertain quantities in the model are replaced with fuzzy numbers to see how that uncertainty affects results. Ideally, the simulation aids in choosing the most attractive course of action, providing information about the range of outcomes such as best- and worst-case and the probability of reaching specific targets.
 

Moral hazard. An insurance-prompted change in behavior that aggravates the probability of an event in order to access benefits, e.g., an insured’s demanding tests not required on medical grounds. Provider-induced moral hazards include over servicing.

Morbidity. Refers to illness from a specified disease or cause or from all diseases. A change in health status from a state of well-being to disease occurrence and thereby a state of illness.

National Health Accounts (NHA). A standard accounting system (WHO standard) to provide a systematic, comprehensive, and consistent evidence of resource flows in a country’s health system.

Nongovernmental organization (NGO). Generally refers to a not-for-profit or community organization.

Normal distribution. Statistically speaking, values of events fall in a pattern around the average value with known frequencies. For instance, if the average stay in hospital after childbirth is three days, the values of each stay would be distributed around three, some more, some less, approximately symmetrically, with greater concentration around three than around any other number. The normal distribution is a particular distribution of this kind that is rigorously defined mathematically and gives the typical bell-shaped curve from when graphed. This distribution is very powerful in enabling insurers to calculate costs and utilization.

 Outlier. Denotes events that fall outside the norm. For example, in a “review of utilization” a provider who uses far fewer or far more services than the average is called an “outlier.”

Out-of-pocket. The part of a claim paid by a member, composed of deductible amounts, plus co-pay, plus the services that are not covered under the benefit package, plus the contribution due for insurance.

Outpatient. Person receiving health care in a hospital without admission to the hospital or accommodation in it. The length of stay is less than 24 hours. It may be a consultation or the carrying out of technical act (diagnosis or therapy).

Pandemic. A disease that is prevalent throughout a locality or population.

Parameter. A number that describes a characteristic of a population. For example, the life expectancy of men in a community might be 56 years. Health insurance uses statistical techniques to estimate the parameter the estimation of the parameter is called the statistic. One sample of 50 men taken from the community might estimate the average age statistic to be 54 years while another sample might estimate it to be 57.5 years.

Pay-as-you-go. Refers to a system of insurance financing under which total expenditure (benefit expenditure plus administrative expenditure) in a given period is met by income (contributions and other sources) from the same period. Pay-as-you-go financed insurance schemes do not accumulate reserves, except contingency reserves. See Contribution rate

Paying member. A person paying the contribution due. According to the contribution plan, a paying member may also cover other members of the family as his/her dependents. The record of every paying member must identify all his/her dependents.

Per-capita premium. The practice of applying a single premium per head across the population.

Point estimation. An estimate of a parameter of a population that is given by one number.

Poisson distribution. Typically, a Poisson random variable is a count of the number of events that occur in a certain time interval or spatial area. For example, the number of people seeking critical care for malaria in a wet season month in a particular village. The Poisson distribution can sometimes be used to approximate the binomial distribution when the number of observations is large and the probability of success is small (i.e., fairly rare event). This is useful since the computations involved in calculating binomial probabilities are greatly reduced.

Population density. A measure of the size of the population in comparison to the size of a specified geographic area (region, country, province, city). Typically it is a count of the number of residents per square kilometer.

Preferred risk selection. See Cream skimming

Premium. (1) Fee paid by an insured to an insurance company in return for specified benefits. See Contribution. (2) The price of reinsurance, paid by the microinsurer to the reinsurer

Premium volume. The share of insurance premiums paid in a specific country, expressed as a share (percent) of the global premium amount. Sigma (Swiss Re) published an annual ranking of countries by premium volume.

Prevalence. The total number of cases or people who have a specified disease, health condition, attribute, or risk factor within a specified population at a specific point in time.

Preventive health care. Medical directed primarily toward early detection and treatment or prevention of disease or ill health (e.g., such as immunizations, prenatal care).

Primary health care. The first level of contact by individuals, families, and communities with the health system, bringing health care as close as possible to where people work and live. The organization of primary health care depends upon the socioeconomic and political characteristics of the country, but should address prevention, curative and rehabilitation services, and include education of the population about major health problems and their prevention and control. Such care may be provided by a variety of health workers, acting together as a team, in partnership with the local community.

Primary insurer. See insurer

Principal. See Insured.

Probability. A quantitative description of the likely occurrence of a particular event. Probability is conventionally expressed on a scale from 0 to 1; a rare event has a probability close to 0, a very common event has a probability close to 1.

Probability distribution. A list of probabilities associated with each possible value of a variable. For example, the probability of a woman’s delivering a single live baby might be 98 percent, twins 1.78 percent, triplets 0.218 percent, more than triplets 0.002 percent.

Prospect theory. A theory that human choice is made by considering gains and losses rather than final status of wealth. Formulated by Kahneman and Tversky (1979). The PT invokes a principle that changes are relatively more accessible than absolute values, and that people are “loss averse”, i.e. dislike symmetric 50-50 bets, and the aversion increases as the absolute size of the bets increases. Thus, in a situation of choice under uncertainty, the outcomes of risky prospects are evaluated by a value function that has three essential characteristics: Reference dependence: the carriers of value are gains and losses defined relative to a reference point; Loss aversion: the function is steeper in the negative than in the positive domain, losses loom larger than corresponding gains; Diminishing sensitivity: the marginal value of both gains and losses decreases with their size. This last point leads to the conclusion that low probabilities are overweighed and high probabilities underweighted, which may contribute to the attractiveness of both insurance and gambling.

Providers. Doctors, nurses, hospitals, clinics, laboratories, imaging facilities, pharmacies, and other deliverers of medical services. The insurer or regulating body typically requires that a provider be qualified and/or registered in order to be included in a health insurance scheme.

Public goods. There are two aspects to public goods: it is difficult to prevent nonpayers from consuming them (nonexcludable), and their consumption by one party does not affect their consumption by others (nonrival). Vaccination is an example—those who do not pay and are not vaccinated cannot be excluded from enjoying the lower prevalence of disease; and the fact they are healthy as a result does not affect another’s ability to be healthier as a result of the program. Government usually provides public goods, because private businesses do so profitably.

Pure premium The pure premium can be defined as the average loss per exposure unit for a specific coverage, or more specifically, the product of the average severity and the average frequency of loss. The result is the amount, which the insurance company should collect to cover all the losses to be met under the pre-defined types of coverage. See Contribution rate

Qualifying conditions. Requirements for acceptance into an insurance plan.

Random variable. A function that provides a single numerical value to a particular event or outcome. For example, if 10 people visit a hospital as outpatients in a morning, and 7 of them have injuries rather than disease, the random variable for that event is 0.7. Another example, if the life span of a particular baby born 10 weeks premature in a community is 2 days, 4 hours and 7 minutes, the random variable of that event is that duration.

Recovery gap. An excess of benefit payouts over income. The gap is not random and so cannot be solved by reinsurance. The recovery gap is influenced by five factors: (1) the contribution rate or per capita premium; (2) the contribution base; (3) the declaration rate; (4) the collection rate; and (5) the expenditure. A shortfall in any of these can result in a deficit.

Reinsurance. The transfer of liability from the primary insurer, the company that issued the contract, to another insurer, the reinsurance company. This mechanism allows a diversification of the risk and enlarges the risk-pooling base, thereby reducing the risk of insolvency. However, reinsurance is not a panacea for poorly run or unviable insurance--it cover extends to risk of fluctuations in payouts.

Reinsurance premium. The amount charged by the reinsurer to accept an agreed amount of risk.

Reinsurance threshold. Reinsurers typically require that the insurer retains the first proportion of risk for any event. That proportion is the threshold as it is equivalent to the deductible or excess borne by the insured when making a claim against property insurance.

Reserves. (1) Funds held either for a possible but unknown event (contingency funds) or due to regulation. A major financial management goal is to minimize reserves and thus maximize funds available for current use. (2) The sum of the reinsurance threshold plus the premium. The microinsurer must have this amount at the beginning of each financial period to ensure its solvency.

Reciprocating arrangements. Agreements exist between primary insurers to coinsure, the objective being to stabilize funds. It is an alternative to reinsurance in that it enlarges the pool.

Retrocession. See cession.

Risk. The probability or likelihood that a specified health event (for example, the occurrence of a disease or death) will occur to an individual or population group within a specific period of time.

Risk diversification. See Diversification

Risk factor. An attribute (e.g., a lifestyle factor or a personal characteristic) or an exposure to an environmental factor associated with an increase in the probability that a specified health event (for example, onset of disease) will occur

Risk pooling. The process by which fluctuations in risk are reduced by averaging the risk over large numbers and heterogeneous memberships. Insurers risk pool through reinsurance.

Risk rating: The price of insurance is equal to the expected value of the loss based on “no-gain-no-loss” (without overhead or profit); a.k.a. “pure premium” or “actuarially fair premium”. See Contribution rate

Risk segregation. Each individual faces their own risks without pooling.

Risk sharing. Individuals agree to split the cost of risky events. Insurers share risk through reciprocal relationships. Loan guarantees and insurance are among the many ways of sharing risks.

Risk transference. See Transference

Safety coefficient. A measure of the difference between the expected annual result of an insurance scheme and the worst possible loss than can be borne. Information on the safety coefficient enables management to make better decisions about reserve levels.

Self-insurance or self-protection. Refers to all the arrangements made by an individual or group to protect themselves from risk. It includes not only saving and establishing contingency reserves but also changing behavior to diminish or avoid risk.

Simulation. The technique of imitating behavior and events during an experimental process. Typically involves a computer.

Social insurance. Applies the insurance principals that persons are insured against a definite risk and that there is a social element, i.e., the program is shaped by broader social objectives rather than self-interest.

Social protection. Policies and programs designed to reduce poverty and vulnerability. Social protection policies typically focus a labor market, social insurance, social assistance, community-based schemes and child protection.

Social Reinsurance, Reinsurance undertaken in pursuit of social goals rather than profit.

Social utility. The gain to society from, in this case, insurance. Where insurance has zero or negative social utility it may be banned; where it has high social utility but low private utility it may be mandated. This depends on political will or power of authorities including community leaders.

Soft budget. A budget with a flexible limit.

Solvable. An insurance transaction is said to be solvable if the risk is observable; there is no antiselection (adverse selection), and the premium is acceptable to both parties.

Solvent Demand see demand

Spot market transaction. The “spot market” implies transactions for immediate delivery of services as distinct from insurance requirement of prepayment against (possible) future delivery of services. Populations that are excluded from health insurance rely on spot payments (user fees).

Standard deviation. A statistical term for a measure of the variability in a population or sample.

Subscription unit. Refers to the people covered by a single membership. This may be the individual (usually in developed economies) or the household (usually in developing economies).

Substitutive voluntary health insurance. See Voluntary health insurance

Supplementary voluntary health insurance. See Voluntary health insurance

Target group. Refers both current and future beneficiaries of the insurance system. The target group can comprise several subgroups of people with similar characteristics (e.g., income,, economic sector). Social Re’s target population is the microinsurers that serve communities excluded from other health insurance programs (not just current members, but all members of the community).

Time diversification. See Diversification

Top-Down Global Strategy. Implies that the approach to improving was directed by a powerful global body to national governments and down through the rank and file to the community. This contrasts to the “bottom up” approach of the Bamako Initiative that calls for the empowerment of communities

Transference. The shift of the impact of a risk from an individual to a pool of the insurance company’s policyholders, together with ownership of the response. Risk transference, sometimes called ‘pooling’, is a process composed of three elements: (i) identifying the risk; (ii) measuring its impact; and (iii) assigning a defined part (the risky part) to a third party

Transaction costs. The costs additional to the price of a good or service, arising, for example, from search costs, travel costs, transfer of ownership costs.

Treaty. The written contract defining the terms for the transfer of liability from the ceding (primary) insurer (or “cedant”) to the reinsurer. It contains provisions defining the limits of ceded risk, retention, and provisions for payment of premium.

Ultimate insurer. See insurer.

Underwriter. A company that receives the premiums and accepts responsibility for the fulfillment of the policy contract; the company employee who decides whether or not the company should assume a particular risk; the agent who sells the policy ).

Underwriting. The process by which the insurer decides what risks to cover. The profit objectives may conflict with social obligation. For the reinsurer, underwriting implies deciding which risks to allow the primary insurer to cede and which to retain.

Underwriting assistance. Reinsurance companies gather extensive data on the insured and events. They can share this with insurers to improve the performance of insurers.

Unilateral utility. See utility.

Uninsurable. See insurable.

Unit cost. The average cost of particular health care treatments. These are negotiated between a microinsurance unit and providers. Insurance enables a move away from fee-for-service toward averaging out of unit costs.

Universal coverage. Implies that all members of a community have health insurance.

User fees. See Spot market transactions.

Utility. The satisfaction gained from having the desire for goods and services met. Multilateral utility means that several parties benefit from outcomes. This can be a group of insureds or the insurer and the insured. Unilateral utility means that only one party gains. The balance between group and individual utility is a delicate component of in-community, insurer/insured, and insurer/reinsurer relationships.

Utilization. Refers to utilization patterns of medical services in a location over a period. Data on recent utilization, collected at the national and community levels, is a valuable asset in predicting future patterns.

Variation coefficient. A measure of the variation in a set of events. It is used in health insurance to understand the extent to which individual outcomes differ from the mean. This enables, for example, estimation and comparison of ranges of likely expenses for various communities.

Vector-borne infectious disease. Infections caused by human contact with an infectious agent, transmitted from an infected individual by an insect or other live carrier. For example, malaria is biologically transmitted from an infected individual to an uninfected person by the same mosquito (the vector) biting both people.

Voluntary health insurance (VHI). VHI is health insurance taken up and paid for at the discretion of individuals (or employers on behalf of individuals). Three main forms: Substitutive VHI: substitutes for cover that would otherwise be available from a statutory scheme; Complementary VHI: provides cover for services not (fully) included by the statutory scheme, incl. co-payments; Supplementary VHI: provides faster access and increased consumer choice

Working capital. Current assets minus current liabilities. It is the capital available for an organization’s short-term financing.

WTP. See Ability to pay.