Both supply-side aspects (the limits of insurability) and demand-side aspects (behavioral economics) may explain why dental insurance is not optimal.
Limits of insurability
A potential explanation of why insurers offer suboptimal CDI is that optimal CDI exceeds the limits of insurability. According to Berliner [
4], risks properly belong in the area of insurability where: (1) losses occur with a high degree of randomness; (2) the maximum possible loss for the insurer is limited; (3) the average loss amount upon loss occurrence is small; (4) the average time interval between two loss occurrences is small (i.e., losses occur frequently); (5) the insurance premium is sufficiently high; (6) there is virtually no possibility of moral hazard; (7) coverage of the risk is consistent with public policy; and (8) the law permits the cover.
Public policy (7), moral hazard (6), the degree of randomness of losses (1) and the maximum possible loss (2) are important issues as far as the suboptimality of CDI is concerned.
Public policy plays an important role in Belgium, France, and the Netherlands, where the ‘solidarity’ principle is paramount in health care financing. Equal access to health insurance is at the heart of the values of the mutual insurers (‘mutuelles’) established in those countries. Their goal is to organize solidarity between their members for the reimbursement of health care costs. According to the French ‘Code de la mutualité’, medical questionnaires may not be used by mutuals and thus selective underwriting cannot be applied. The solidarity idea is not restricted to mutuals. In France, for instance, a 7% tax is due when selective underwriting is applied. So, commercial insurance companies are encouraged by the French government not to apply selective underwriting. In Belgium as well, the government intervenes in the organization of CDI. Premium increases for existing clients are strictly regulated. Premiums can only be adjusted in line with the consumer price index or a specific ‘medical index’ for dental care, which is calculated annually by the Ministry of Economic Affairs.
Fear of reputational damage and the wish to avoid (further) restrictive regulation being adopted may help to explain why (commercial) insurance companies in Belgium, France, and the Netherlands refrain from applying ‘hard insurance logic’ such as selective underwriting. By offering limited coverage, which is equally accessible for all citizens, insurers willingly refrain from applying private insurance logic. Rather, they apply ‘social security mechanisms’ (open enrolment, no selective underwriting, community rating). Insurance companies may be concerned that the unfettered application of insurance logic could provoke a reaction from the regulator. In a market where it is impossible or very difficult for mutuals to engage in selective underwriting, commercial insurance companies applying selective underwriting could easily be accused of ‘cherry-picking’. By sticking to social security-type mechanisms, insurance companies err on the safe side. However, insurers’ reluctance to apply private insurance logic (such as selective underwriting) and reliance on other methods (such as setting upper limits on coverage) lead to the development of suboptimal CDI products.
Moral hazard is an important problem due to the very nature of dental care. Choices among different treatment options are strongly influenced by individual consumer preferences, where aesthetic aspects often play a role. Dentists also have their preferences, which can be influenced by the consumer’s and insurer’s ‘willingness to pay’. Dental insurance can thus provide fertile ground for both consumer- and provider-induced moral hazard. Therefore, in an optimally designed scheme, insurers ought to fully invest in countermeasures. However, classic private insurance measures such as deductibles and co-insurance are not or are not fully implemented due to public policy concerns. Rather, insurers prefer to use other measures such as offering restricted coverage, setting upper limits on coverage, and not applying a cap on out-of-pocket expenditure. However, this contributes to the development of suboptimal CDI products.
The degree of randomness of losses varies between total randomness and absolute predictability. Pre-existing conditions come close to being absolutely predictable. In Belgium, France, and the Netherlands, CDI covers pre-existing conditions. Consequently, adverse selection is inadequately counteracted and a vicious circle arises whereby the insurer needs to repeatedly increase premiums to be able to continue coverage for the high risks that have subscribed the insurance policy. This leads to the development of suboptimal CDI products [
5]. By comparison, in Germany, CDI is effectively limited to future, unforeseen events. It may not be a coincidence that CDI in Germany generally provides unlimited coverage, in contrast to the situation in Belgium, France, and the Netherlands.
The ‘maximum possible loss’ is also a potential explanation for the sub-optimality of CDI. Certain dental treatments, i.e., prosthetic treatments such as the replacement of multiple teeth, constitute a risk with a relatively large loss amount (more than €10,000) and a low loss frequency. Such risks can only be made insurable if the insurer is given the opportunity to build up long-term loss reserves from its premium income. However, CDI contracts can be cancelled by the insured every year. Uncertainty about the duration of the contract together with moral hazard and adverse selection may lead insurers to limit coverage, resulting in suboptimal dental insurance.
Behavioral economics
Van Winssen et al. [
6] explored potential explanations of why individuals choose suboptimal complementary health insurance. Based on key insights from behavioral economics, they discuss several factors that can have an impact on the high uptake of suboptimal insurance by consumers. For CDI, the following factors are relevant.
Factors such as liquidity constraints and debt aversion may help to explain why people buy dental insurance products that provide only limited coverage. Liquidity constraints imply that individuals do not have the means to free up (substantial) funds at a given point in time. Debt aversion stems from mental accounting theory [
7] and is illustrated by individuals’ preference to prepay for consumption and to get paid for work after completion.
Ignorance and social comparison may also affect individuals’ willingness to purchase suboptimal insurance. People often do not know exactly what they are insuring themselves against by taking out complementary dental insurance (see, e.g., [
8]) and they often do not know the costs of dental care that is (not) covered by their insurance. They often rely on what their peers decide [
9].