Applications Of Option Pricing Method In Major Medical Expense Insurance

With the continuous development and progress of economic and social environment,citizens’ living standards have improved dramatically, the health care environment hasbeen greatly improved. With the accelerated pace of life, the pressure of livingincreases, a variety of diseases, especially genetic diseases and the incidence of majordiseases, increasing rates. High-tech drugs, instruments such as magnetic resonanceimaging, radiotherapy and chemotherapy, biological treatment, organ transplantationhas played an important role in the treatment of disease, but its high cost of treatmentis still beyond the affordability range of most ordinary families. To compensate for thehigh medical costs, to meet the needs of people seriously ill medical, Major MedicalExpenses Insurance came into being.Major Medical Expenses Insurance takes the necessary and reasonable medicalexpenses to compensate for a kind of insurance，for major diseases or accidentalinjury arising from medical expenses to remove the basic medical insurance limit。Itspolicy holders must be unit or individual who have social basic medical insurance orcommercial health insurance. the insurance can be a social health insuranceinstitutions, commercial insurance companies. Major Medical Expense Insurance is animportant form of supplementary medical insurance, it can effectively solve theproblem of the low level of insurance in the basic medical insurance and limited scopeof protection. Therefore, to develop the Major Medical Expenses Insurance is notonly the development trend of social basic medical insurance, but also an importantway to innovation management, and to explore the market for commercial insurancecompanies.Pricing the Major Medical Expenses Insurance product, is the core of thedevelopment of Major Medical Expenses Insurance plan and product development. The difficulty of the Major Medical Expenses Insurance pricing is the lack of basicdata for the selection and pricing models. The difficulty of the Major MedicalExpenses Insurance pricing is the lack of basic data and the selection of pricingmodels. Commercial health insurance had been started relatively late in China, thebasis data for product pricing is less, these bring a certain amount of difficult for thepricing model has some limitations, accurate pricing for Major Medical ExpensesInsurance premiums.In addition, because of the existing higher premium rates, theinsurance rate of the majority residents of Major Medical Expenses Insurance is nothigh. According to information from the insurance web site: As of2010, criticalillness insurance was only15%, medical expenses of major diseases is an estimatedaverage of154,733yuan, and critical illness insurance(including hospital and surgicalinsurance amount of the cost of insurance) the current has is only75,215yuan. Butthe mechanism of operation of insurance companies must be digested and dispersed alarge crowd. Therefore, to find a suitable for China’s Major Medical ExpenseInsurance product pricing model have important theoretical and practical significancefor the development of China’s Major Medical Expense Insurance and theimprovement of the social security system.In this article, firstly, theory summarization of the Major Medical ExpensesInsurance’s concept, characteristics, role and product is proposed. Secondly, itanalyzes the pricing principles and influencing factors of the high medical costs,compares some traditional model of the Major Medical Expense Insurance, such asthe experience frequency method, limited Pareto distribution method, extreme valuetheory method.Then, focus on the application of option pricing models of MajorMedical Eexpenses Insurance, and actually estimated that the insurance model,obtained several characteristics of each pricing methods and applicable conditions. theexperience frequency method get lower premium, consistent with the public insuredpsychological, but the insurance company has a big risk on operations and claims; thelimited Pareto distribution method, and the extreme value theory method get higherpremium given, although they are more conservative, may result in the reduction of market share; the dispersion of risks of the insurance companies has been consideredin the Major Medical Expense Insurance’s option pricing method, and the calculatedpremium in the option Model consistent with the public insurance psychological. It’s acompromise pricing model. Finally, the paper proposes two countermeasures for theinsurance company: first, the accumulation of relevant data; second, the reasonablecontrol of risk.