Updating mechanism for lifelong insurance contracts subject to medical inflation

This paper proposes a practical way for ex-post indexing of level premiums in lifelong medical insurance contracts, in order to take into account observed medical inflation. We show that ex-post indexing can be achieved by considering only premiums, without explicit reference to reserves. This appears to be relevant in practice as reserving mechanisms may not be transparent to policyholders and as some insurers do not compute contract-specific reserves, managing the whole portfolio in a collective way. The present study originates from a proposal for indexing lifelong medical insurance level premiums in Belgium. As an application, we study the impact of various indexing mechanisms on a typical medical insurance portfolio on the Belgian market.