This week, Bank Negara Malaysia (BNM) passed measures to mitigate rising insurance premiums, including directing insurance providers to limit premium rises to not more than 10% per annum. BNM also said that the government, along with insurance companies and private hospitals, are setting aside RM60 million for insurers and takaful operators to develop medical policies covering basic health care needs for those above the age of 60.
BNM Governor Datuk Seri Abdul Rasheed Ghaffour explained, “We need to address the root causes of rising medical and health insurance and takaful premiums which are driven by higher medical costs and utilisation of medical services,” adding that the interim measures would provide some temporary support to policyholders, but broader health reforms must be expedited. The Governor said the design of medical and health insurance/takaful products must be improved to make them more aligned with value-based and sustainable healthcare that prioritises better coverage.
It was earlier reported that medical insurance premiums are expected to rise by between 40% and 70% next year, based on notices sent by insurance providers to policyholders, citing rising costs of medical care in private hospitals was cited as the primary reason for the hike.
The drastic hike of health insurance premiums is an episode far behind us now. Nevertheless, understanding insurance premiums in-depth will help us produce and receive better health services and healthcare coverage, especially in light of global struggle to keep pace with rising medical cost.
What exactly are insurance premiums?
Insurance premiums are the amounts of money an individual or business pays for obtaining insurance policy in order to receive protection, or coverage for healthcare, auto, home, life, fire, flood, and so forth.
Such premiums are often paid monthly, quarterly, or annually. Failure to pay the premiums may result in the cancellation of the policy and thus lost coverage.
Perhaps many of us are unaware that insurance premiums are “calculated” meticulously based on several criteria including age, location, past claims filed by insurers, as well as chances of occurence for the type of misfortune that needs protection. The branch of mathematical science called “actuary” assesses the risk of an insurance policy utilising statistical and probability models, economic theories, and data analytics to determine the level of risk and the proper premium to be charged for an insurance policy. Generally speaking, the higher the risk, the higher the premium.
The emergence of sophisticated algorithms and artificial intelligence (AI) is changing the way of setting insurance premiums. Actuarial scientiests are still key to the process, but they now rely on computer models to analyse historical data and anticipate future occurences so they can set premiums that allow the insurance company to make a profit while providing coverage for the policy holders.
Commercially, insurance companies make money by collecting premiums and by investing this revenue to generage higher returns, which can offset some cost and help an insurer to keep the premiums competitive in the marketplace.
While life insurance premiums are generally set for the lifetime of the insured, actuaries for health and auto insurers often adjust premiums on a regular basis. Insurance premiums may increase after the current policy period ends. The insurance company may increase the premium if claims were made during the previous coverage period, or when the risk or cost associated with offering a particular type of protection increases due to environmental factors.
Here’s how various factors are considered in determing insurance premiums for some of the most common types of insurance coverage:
Health Insurance
There are several major factors that insurance providers normally consider in setting health insurance premiums, namely, age, geographic location, medical history, lifestyle (tobacco use), frequency of utlisation, type of medical plan and whether the enrollment covers an individual or a family. Understanding these can help explain why do health insurance premiums increase and what drives changes in these costs over time. Businesses and individuals can then make more informed decisions about their health insurance options, potentially leading to cost savings and better coverage tailored to their needs.
Demographic Factors (Age, Gender & Location)
Demographics such as age, gender and location can significantly affect health insurance premiums in some parts of the world if permissible by law. Typically, older individuals are charged higher premiums because they are more likely to require medical services. Geographic location impacts costs due to differences in local healthcare prices and the prevalence of certain diseases or health conditions. Gender can increase or decrease insurance premiums based on risk assessment, but some countries might enforce gender equality and require insurers to assume equal risk for male and female.
Medical History & Lifestyle
Individual medical history, including pre-existing conditions and lifestyle choices like tobacco use or substance abuse (drug addiction), are critical in assessing risk. For instance, smokers may face higher premiums due to increased risks of health issues compared to non-smokers. This risk assessment helps insurers predict the likelihood of claims that can influence premium costs.
Certain professions and lifestyle choices can significantly impact premium costs. High-risk occupations like construction or mining may increase premiums due to the likelihood of filing health claims. Similarly, extreme sports participation can also affect premiums, reflecting the higher health risks associated with these activities.
Healthcare Utilisation Rate
The frequency with which healthcare services are used and the overall cost of healthcare in a region also play significant roles. Insurers assess past healthcare utilisation to forecast future needs and set premiums accordingly. High utilisation rates, in other words, frequent hospital visits or regular hospitalisation, often lead to higher premiums.
Plan Category and Coverage
The type of plan chosen also impacts premiums. Plans are sometimes categorised into different levels labelled as Silver, Gold and Platinum, each offering different balances between monthly premiums and out-of-pocket costs. Higher-tier plans like Gold and Platinum typically feature higher premiums but lower out-of-pocket service costs, appealing to those who expect higher medical usage. While lower-tier plans usually charge lower premiums but policy holders might need to pay more out-of-pocket costs for actual medical usage.
Family versus Individual Health
Premiums also vary depending on whether the coverage is for individuals or families. Family plans are generally more expensive than individual plans but less costly per person than individual coverage for each family member. According to US statistics in 2023, the average annual premium for employer-sponsored health insurance was approximately US$8,435 for individuals and US$23,968 for families.
Auto Insurance
The main factors in determining automobile insurance premiums include the insured’s driving record, geographic location, how often the car or vehicle is used, the type of car being insured, gender, credit record, and age. Another consideration is the type of insurance coverage purchased, including the zero-deducticle package or the limited deductible package.
For example, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driver in a suburban area. Similarly, younger and newer drivers carry a greater risk of being involved in an accident than older, more experienced drivers.
Life Insurance
In the case of a life insurance policy, the major factors the insurance company looks at in pricing coverage are an insured’s risk of mortality, the interest to be earned by investing the premium, and the expenses incurred. The age at which the coverage begins will determine the premium amount, along with other risk factors (such as one’s current health). The younger the insured is, the lower the premium will generally be. Conversely, older policy holders pay more in premiums to the insurance company. Also, high-value policies will carry a higher premium.
Since life insurance covers a period of many years, there may be more flexibility in how the insured can pay the premiums. Some insurers may offer premium cash flow payment plans, allowing the policyholder to pay the premium in small intervals.
Source: www.investopedia.com & takecommandhealth.com
