A fair model for adjusting health insurance premiums using individual's risk

This study proposes a health insurance premium adjustment model to maximize individual's benefit and minimize health insurance company's loss, considering health risk of individuals. Over the years, both optimistic and pessimistic premium adjustment models have been studied in the literature, which led to adverse selection or excessive coverage, respectively. The proposed premium adjustment model determines actuarially fair health insurance plans, wherein individuals choose or refuse to buy the plan according to their benefit or utility (Bowers, 1997). In this research, a fair health insurance premium is a risk-adjusted one to balance between adverse selection and excessive coverage for both the insurance company and the individual.;The utility of an individual is defined as a function of his/her expected benefit based on their decision to either buy or refuse to buy health insurance from the set of plans, with different profit margins, offered by the insurance company. A Bayes network is first used to determine the individual's and insurance company's utility function. The proposed model then incorporates game theory to maximize the individuals' minimum utility while minimizing the insurance company's loss. The proposed model was used to conduct several experiments with hypothetical probability datasets of correct and incorrect risk classifications and two different health insurance plans for each individual. The performance of the proposed model is evaluated by the percentage difference between the results of the optimization algorithm compared to the global optimum.;Experimental results indicated that the proposed optimization algorithm optimizes the value for the insurance company and the individual with 100% accuracy. The proposed model indicates that it is more probable that a high-risk individual receives a health insurance plan with higher premium compared to a low-risk individual. Also, the saddle point between the individuals and the insurance company can be obtained by applying the proposed individual utility function to choose a health insurance plan from all the profitable plans offered.