Deconstructing the recent hikes in health insurance premiums
Waiter, there is a hike in my renewal notice!
Many customers are witnessing a 30-50% hike in their renewal premiums for health insurance plans, this year. This sudden increase during a financially uncertain time has taken them by surprise.
Apart from the customers' increasing age, health insurance premiums this time, have also been linked to healthcare inflation, higher hospitalization costs of COVID19, and the widened scope of coverage (covering mental illness, genetic disorders, advanced surgeries) since the beginning of October 2020.
Customers are taken aback and have valid questions around the boundaries within which an insurer can keep increasing premiums- as well as the volume and frequency of such premium hikes.
Here's our attempt at deconstructing the health insurance premium hike and some probable solutions.
First things first - Let's acknowledge that this is not the first time insurers have made significant hikes in premium amounts. When a product is launched, premiums may be calculated and approved based on benchmarking and complex forecasting of a user's future claims and expenses. However, these premiums undergo reviews and revisions based on the actual claims an insurance company experiences against the premiums it collected in a financial year.
The health insurance regulation makes provisions for insurers to review their claims experience on a portfolio/plan level and in case they are facing a loss, request a revision of premiums. This can be done every year (yes! every year🙄 ), after three years of the product launch. Essentially from year four, an insurer can request premium revisions from the IRDAI, on a yearly basis.
This request is approved when the insurer proves that their earlier assumptions on pricing have failed and that they are suffering losses, which could be addressed by a revision of premiums. In effect, the premium hikes depend on whether the insurer is able to keep the portfolio financially viable at its current pricing or not.
Why do health insurance premiums increase?
So let's understand the factors that can cause the health insurance product to bleed and that could give us probable solutions to this incessant problem of price hikes.
Consistent Balancing Act:
As discussed earlier, Insurers need to collect premiums higher than claims to remain viable in the long run. If the claims received are higher than the premiums charged, they will call for a hike in premiums. The only way to achieve this, besides driving efficiencies and tight controls, is to ensure that the customer pool has enough people not likely to make claims v/s people who would. In simple language, an insurer should be able to attract and retain young and healthy individuals (with a lower probability of making claims), while it continues to serve individuals who are aging or have a disease for a lifetime of healthcare expenses. (higher probability). When an insurer can skilfully cross-subsidize premiums from younger users to the older users, they can effectively keep premiums stable, with minimal hikes. Failing to do so, will keep their pricing under constant pressure.
Even while a good insurer builds robust processes and manages a balanced, efficient portfolio of customers, it still takes some external bullets that result in premium hikes. In the absence of strong regulation, hospitals continue to increase their pricing structures, and this has a direct impact on the health insurance claims an insurer receives. You need to simply compare the cost of hospitalization for a major treatment a few years ago with their costs today and you will know what we are talking about.
Exceptional situations like the pandemic:
A one in 100 years event - unarguably, the world was unprepared for this pandemic. The government and the regulator made sure that insurers, most of whom are private entities, covered these expenses, which was a welcome move for the common man. However, we must understand that no insurer in the world had the opportunity to factor in the financial impact of the pandemic while creating their pricing model even as recently as a year ago. This huge increase in room and other charges (due to isolation, hygiene) has resulted in a big jump in the average claim size demanded from insurers during the pandemic. With no visibility of a reversal of this pandemic in the near future, an insurer will have to revise their premiums to factor in future claims with respect to the needs of COVID19 treatments.
Increased scope of coverage:
IRDAI also recently initiated a major revamp of the health insurance in the country. As part of this exercise, it improved the coverage and scope under which health insurance earlier operated. This revamped health insurance policy you will receive on your renewal after October 2020, will cover genetic disorders, obesity treatments, robotic surgeries, and oral chemotherapy - amongst a host of other significant changes. Such improved coverage will obviously have a direct impact on the bottom line of insurance companies - forcing them to raise premiums.
What can a customer do?
This makes it clear that the increase in health insurance premiums may not only mean insurers have turned greedy but could be a reality with even the most efficient, well-meaning insurance companies.
Be conscious when subscribing to attractive premium offers: As they try to acquire younger users, insurance companies are likely to offer lower premiums for the best of coverage and benefits. When you bite on to such offers, you should be conscious of the fact that such attractive premiums for high coverage plans could be temporary and the premiums will be hiked as soon as insurers see increased utilization or claims in their user pool. A classic example is the attractive premium insurers are charging on the Rs. 1 Crore Health Insurance - people are surprised that the pricing of such high coverage matches that of plans with 1/3rd of the coverage.
Incurred Claim Ratio: This could be a little technical, but if you are looking for relatively stable premiums, your best bet is to subscribe to an insurance plan from an insurer who is able to do a consistent balancing act of premiums vs claims. In the insurance world, this balancing act is measured through the Incurred Claims Ratio (Claims received / Premiums collected). An Insurer with a track record of high incurred claims ratio will always be under pricing pressure, versus an insurer who is able to control it.
- Portability: Wherever possible, customers should explore options available and attempt porting their policy to an insurer with a lower premium. However note that your portability becomes difficult once you are diagnosed with a disease, made a major claim recently, or have crossed the age of 60.
What can the ecosystem at large do to support the customer?
Advance notice of an increase in premiums: In the current situation, people have complained of receiving renewal notices at the last minute, leaving them without any choice, but to renew the policy. Customers should be informed about increasing premiums 90 days in advance so that they can opt for options including portability wherever possible.
The frequency and the volume of premium hikes:
There should be limits and restrictions on the percentage and frequency of hikes over the lifetime of the product or individual, especially for the vulnerable - people with a lower sum insured and senior citizens who may not be able to afford the premium hikes and cannot easily port to another insurer.
The exorbitant 18% GST:
The average premium paid by a senior citizen would be in the range of Rs. 30000 for a decent cover. They end up paying an additional Rs. 5000 (probably, one months' living expense) to the government for financing their healthcare needs. In the absence of adequate, quality public healthcare, the government should enable the citizens to finance their own healthcare through affordable health insurance. Health Insurance premiums should come under the essential category and no GST should be levied on Health Insurance at all.
Regulating Hospital Billing
Hospital billing has a direct impact on health insurance claims and hence insurance premiums. Currently, in absence of healthcare regulations on billing, hospitals are freely inflating charges, using differential billing for insurance and non-insurance customers. Unless such direct factors are not tackled, health insurance companies cannot be entirely blamed for increasing health insurance premiums.
As you can see, the consistent hikes in health insurance premiums are a complex outcome of internal and external, controllable, and uncontrollable factors in the health insurance and healthcare ecosystem of the country. A lot needs to be done by multiple players in the ecosystem to ensure healthcare costs and hence health insurance premiums do not go haywire.
Meanwhile, all we as customers can do is to be conscious of the complexity of this problem, be prepared for such hikes, while we stay invested with an insurance company that is able to balance its portfolio and claims, consistently and efficiently.
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Mahavir is the Founder at Beshak.org. Since 2005, Mahavir has been building tech-based startups that compare and advise insurance products to individual buyers. In his last role, he was the Chief Business Officer at Coverfox. Mahavir is a recognized professional in the personal insurance field. He has contributed to leading business publications, including The Economic Times, Business Standard, Mint, DNA, and Moneycontrol
Yet another insightful article. Thank you, Mahavir. You have mentioned that the premium can be hiked by the company only after 3 years of product launch: "This can be done every year, after three years of the product launch." 3 questions here: 1) Is this by law or just a recommendation by IRDA to the insurance companies? 2) I think we can find out how old the product is. Let's say the product is 7 years old. But is there a way to find out the increment in premiums in these last 7 years? Is this data publicly shared by the companies? This can help in looking at the trend of premium increment of a product. 3) Do you think the claims in any one product will also impact the premiums of other products of a company, as the company will look at the overall profitability of the organization. Even if Product X did not attract enough claims but other products attracted many claims, the company will hike the premium for Product X as well.
Thank you for your encouraging words!
Means a lot coming from you :)
1) The increase in premium rules we have mentioned are as per Health Insurance Regulations
2) There is no data readily available in public records to find the frequency of hikes made by insurance companies. You are right this data would be really useful to predict future trends.
3) Currently the Incurred Claims Ratio available is at a company level. There is no clarity on whether insurers are cross-subsidizing their book between products or product segments - group & retail. My hunch is they may be forced to do this, juggling the ultra competitive group business which gives them critical mass, market share, with the retail business.
Insurers do not disclose group and retail claims data separately so the ICR chart may not be entirely representative for a retail customer looking to find meaning in those numbers
1) ICR is the only published metric I am aware of that measures the pressure on pricing, insurers face.
2) Yes, retail customers seem to cross-subsidize group premiums, which in my view too is unfair.
3) The % of money an insurer pays as claim over the premium collected- the ICR does not measure whether an insurer is paying valid claims or not - in number or value - it does not reflect the intention or behavior of the insurance company to pay claims at all.
What you are probably looking for is *valid* claims received by an insurer vs *valid* claims paid - in numbers and amount. This or a similar metric, as far as I know, is not available.
Hi Mahavir, nice analysis with estimates that could only have been known by someone like yourself. Are relative ICR numbers the only valid metric to use while apportioning rates/hikes b/w group and retail customers? I digged into ICICI's latest quarterly report and it turns out retail premiums are just 44% of group premiums (roughly tallying with your 60% number) but profits are a huge 62% more for the quarter ending Mar 20. I'm not enough of an economist to say if size (revenue) or profits (which can be said to be 100 - ICR - operating expenses) should matter for an organization in the final analysis but since profits directly contribute to future growth, retail customers should be reasonably justified in asking for a less skewed balance viz a viz group customers towards both premium rates and hikes. Also, government insurers taken in your example have known governance and inefficiency issues (leading to their soon-to-be merger and eventual listing) so poor ratios are a given, I suspect retail ICR numbers will be more optimistic (total ICRs already are) given the tight ship they run. The other thing I'd like to point out is that while lower ICRs are cited in the article as a thumbrule to potentially lower hikes in the future, they also indicate lower actual claims disbursed versus total claimed amounts (I claim Rs 100, am paid only Rs 60) so it would cut both ways when used as a metric to judge the intention/behavior of an insurer.
Hello Vijay, you are right about the lack of bifurcation. However, here is some math we did. Group (including Govt) business is around 60% of the total health insurance premiums booked by insurance companies. Now with a 100%+ ICR on this busines, simple math tells us that for the blended (Group + Retail) ICR - to cross 100%, the retail ICR will have to also have to cross 100%? Even if you take the Group ICR to be 120% in case of Govt insurers, the ICR for Retail will have to also be around 80% for the overall blended ICR to cross 100% - which still shows the insurer is under pressure on its pricing for retail products. Lastly, insurers in my experience aren't able to harden their group pricing enough to control their ICR, while maintaining their GWP growth. The only alternative then is to hike Retail premiums?