Underinsurance

Underinsurance refers to inadequate insurance coverage held by a policyholder. In the event of a claim, underinsurance may result in economic losses to the policyholder, since the claim would exceed the maximum amount that can be paid out by the insurance policy. While underinsurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums.

Underinsurance can cause a serious financial crisis, depending on the asset that is insured and the extent of the shortfall in insurance. For example, assume a house and its contents are insured against all risks for $250,000, with a deductible of $20,000. It is subsequently destroyed in a fire, but the cost to replace the house and contents amounts to $350,000. The homeowner will have to make up the difference of $100,000 plus the $20,000 deductible from his or her own resources.

There is not a single definition of underinsurance as it relates to health insurance. Rather, there are actually three different types: economical underinsurance, attitudinal underinsurance and structural underinsurance.

• Economic underinsurance refers to a person’s actual ability to pay for their healthcare, including the cost of the insurance premiums, co-payments and deductibles. This definition defines a threshold above which the costs of healthcare become a significant financial burden and interfere with access to care. Usually, this happens when an individuals' out-of-pocket expenses for necessary medical care are above a specified percent of that individual’s income, within a given time frame.
• Attitudinal underinsurance refers to consumers' perceptions, (rather than actual, factual monetary limits) as well as their satisfaction in regards to health care. This definition is recognized when at least one healthcare benefit that an individual wants is not covered by their health insurance policy, when there is at least one symptom that requires treatment that isn't covered or when a person is dissatisfied with their insurance plan.
• Structural underinsurance considers both the type of available benefits and the number and range of providers, whose services are covered under a given plan. A structural approach to defining underinsurance uses a benchmark benefits package as a basis of comparison. Structural underinsurance happens when at least one benefit in the benchmark package is not covered by a policyholder's health insurance plan.

All of these factors should be considered when defining, measuring and identifying instances of underinsurance as it relates to health insurance.