Hi there. For reasons of fairness, many individual health insurance markets are subject to premium regulation. We refer to these markets as social health insurance markets. Examples are found in Belgium, Germany, Israel, the Netherlands, Switzerland, and the United States. In this video, you will learn what premium regulation typically looks like. Moreover, you will learn how premium regulation promotes affordability of insurance plans for people with expensive medical conditions. Let's start with a typical forms of premium regulation. In most social health insurance markets, insurers have to charge the same premium to consumers who choose the same insurance plan. This is called community rating per insurance plan. For example, this form is applied in Belgium and the Netherlands. Another form of premium regulation is that insurers are not allowed to differentiate their premiums according to specific consumer characteristics. Under the Affordable Care Act in the US for instance, insurers are allowed to risk-weighted premiums according to age, area of residence, and tobacco use, but not directly according to the health status of people. A third form of premium regulation is a premium bandwidth. This means that insurers have flexibility to differentiate the premiums but only within a certain range. Under the Affordable Care Act for instance, the premium for old people can only be three times as high as that for the young. Now let's take a look at how premium regulation can promote affordability. Consider a population with only two types of people, low-risk people and high-risk people. The low-risk people are relatively healthy and comprise 50 percent of the population. The high-risk people are relatively unhealthy and comprise the other 50 percent of the population. Now, assume that the blue bars show the mean expected costs for insurance in these groups. Because of the difference in health between these groups, the mean expected costs for the insurer are higher in the group of high-risk people than in the group of lowest people. Now imagine a situation without premium regulation. What would premiums for these groups look like? Well, in a competitive market, insurers will be forced to charge premiums equal to the mean expected costs in these groups. This means that the high-risk people they'll be charged a premium of €5,000. The low-risk people they'll be charged a premium of €1,000. For some of the high-risk people, a premium of €5,000 will be unaffordable, and without insurance these people might not be able to get the healthcare they need. Many societies consider this as unfair, and therefore apply premium regulation. It is easy to see how premium regulation improves affordability for high-risk people. A community rated premiums for instance will bring down the premium for high-risk people to €3,000. This is the overall mean expected costs for insurers in the population. Premium regulation however also comes with a problem. For low-risk people, the premium of €3,000 exceeds the expected cost of €1,000. For the insurer therefore, these people are on average profitable and financially attractive customers. In contrast, the high-risk people, the premium falls below the expected cost of €5,000. This predictable loss makes these people unattractive for the insurer. Predictable profits and losses incentivize consumers and insurers to engage in risk selection. For a discussion of risk selection by consumers, we refer to this paper which is in the readings for this MOOC. For a discussion of selection by insurers please start the next video. I hope to see you there.