Premium calculation on health insurance implementing deductible

Abstract

Implementation of deductibles on insurance contracts is one of many ways to solve the adverse selection and moral hazard problems that often arise in health insurance. Deductibles will make the amount of expected loss for insurance companies lower. However, the deductible will also affect the amount of net premium. The higher the deductible, the lower the net premium that insurance company will get. If the claims amount are very large, then the insurance company would not be able to pay the claims because the amount of net premium that have been earned is small. Thus, the net premium principle is less suitable to use when the insurance companies. Then, they must find more suitable premium calculation method and in this paper, Proportional Hazard (PH) transform principle proposed by Wang being analyzed as an alternative premium when the insurer applies deductibles. The amount of PH transform premium will be higher than net premium and it has more slightly decrease when deductibles are applied compared to the amount of net premium.