Why health insurance premiums increasing at more than 15% yearly?

Is it true that health insurance premiums are increasing drastically? Why health insurance premiums are increasing by more than 15% yearly basis? How to protect ourselves from such a steep yearly increment in health insurance premiums?

health insurance premiums increasing

Let me first share the tweet.

First of all the increment of 79% as per this guy is wrongly calculated. He considered the four years back premium to the current premium and arrived at the number of 79%. This is something like an absolute return calculation. Hence, better ignore this eye-catching 79% increase rate. If we apply CAGR, then it is around a 15% increment on yearly basis.

However, a 15% yearly increment may not happen on regular basis. Hence, the instant raise from the earlier premium to the current premium surprised the policyholder. But still, 15% increment means a huge burden for normal individuals. Hence, let us try to understand the reasons behind such a steep increase in premiums.

Why health insurance premiums increasing at more than 15% yearly?

Let us go deeper into this and try to understand whether such an increase in premium is valid or not.

# Health Insurance Premiums will not remain constant

Unlike life insurance premiums, health insurance premiums will not remain constant through your policy period. The premium increment will happen based on the oldest person in the family. The premiums are increased based on this person’s age group.

Hence, suppose someone is currently in the age group of 35-40 years and next year turning to 41 years means the premium of 41-45 years of age group is applicable. Therefore, in terms of health insurance, the premium will slowly increase based on the age of the oldest member of the family.

# There is no claim-based loading

This is one more misconception among many of us that if there is a claim, then our premium will increase next year. However, it was a norm earlier. But recently IRDA strictly abolished this system of claim-based loading.

Hence, you no need to worry much about this aspect.

# Insurance companies now have more freedom

Earlier if whether it is life or health insurance, if insurance companies wish to increase the premium, then at first they have to approach the IRDA. Premium will be increased only after the approval of IRDA. However, this process was removed now.

Currently, whether the life or health insurance companies, if they wish to increase the premium of the product, then they approach the internal product committee approvals and update the reasons for increasing premiums on their website.

Hence, the premium-increasing process now turned much simpler for insurance companies than the earlier lengthy process.

# Cost of hospitalization is increasing drastically

You may feel the heat of such a drastic increase in hospitalization expenses especially if you are living in big cities or metro cities. Cost of hospitalization is actually increasing drastically due to the advancement in medical technology, and facilities they are providing, there is no pricing mechanism in the hospital industry and exploiting our emergency.

In fact, there are two types of price mechanisms in all hospitals. If you have health insurance, then the billing rate is different than if you don’t have health insurance. As there is no such strict regulation from the Government, we don’t have any other option but to be SCAPEGOAT of this industry.

To cope with such increment, insurance companies obliviously increase the premium.

# More unwanted features

To showcase to you that their product is the best in the market, insurance companies add so many colorful features to the product. But we the buyers forget one important aspect that each such product cost us a lot. There is no free lunch. We have such a mentality that there should be an insurance product that MUST accept all our health-related claims. No matter whether it is a small dental care treatment or even a normal fever-related hospitalization. However, we forget one important aspect that such features will cost us.

In my earlier post “Top 5 Best Health Insurance Plans in India 2020“, I have covered the important pointers to look for in health insurance.

# Thre are other reasons also for premium increment

a) Business Module

Assume that you are running an insurance company and covering around 10 people of aged 40 years. You are collecting the premium of around Rs.20,000 from each insured for the coverage of Rs.1 lakh. Hence, the total premium collection from these 10 members is Rs.2,00,000.

If during the year, around 3 people were hospitalized and each of them spent around Rs.70,000 and approached the insurance company for the claim means the insurance company has to pay Rs.2,10,000 in that year. The insurance company’s total premium collection is Rs.2,00,000. But due to the 3 members’ claim, they have to pay Rs.2,10,000 which is higher than what they collected.

If such a situation continues, then insurance companies have no option but to increase the premium. To avoid such business loss, they have to initially charge more premiums, issue fewer policies to risky individuals, or charge a higher premium to the young group of insured and compensate the same to the risky insured group.

All these are internal processes and reasons for the increase in premium. Such reasons are not disclosed to the public. Hence, hard to arrive at the reasons for a drastic increase in premiums.

What are the ways to protect ourselves from such health insurance premium drastic hikes?

# Concentrate on HEALTH

Yes, relying on health insurance and living a sedentary lifestyle may cost you in a big way. It not only impacts your finance but also your profession and family setup. Hence, try to lead a healthy lifestyle by taking control of food, being physically active as much as possible, and surrounding yourself or following people who are health freaks. At least few percentages of inspiration or following may create a huge change in your health.

However, do remember that managing good health is not an INSTANT process. It requires consistent follow-up.

# Create HEALTH EMERGENCY FUND

After a certain period, if you notice that paying health insurance is not a feasible way then you realize the importance of this health emergency fund. Hence, before you reach that level, try to slowly create this fund as it may be handy once you turn older and insurance premiums are unaffordable or not a viable solution.

Another important usage of this fund is that even though you have health insurance, they will not settle 100% of the billed amount. During such a situation, then funds may be handy for you.

# Look for INCURRED CLAIM RATIO

You have to check the incurred claim ratio of Health Insurance Companies. Incurred Claim Ratio or ICR is a ratio of the total value of claims paid or settled to the total premium collected in any given year. This can be calculated as an Incurred Claim Ratio or ICR=(Total Value of Claims Paid/Total Premiums collected)*100.

For example, let us say Company ABC settled the total claim amount of Rs.90 Cr in the year 2015-16. In the same year, it collected Rs.100 Cr as a total premium. In this situation, the incurred ratio stands to be 90%.

This Incurred Claim Ratio is applicable only to non-life insurance companies. For life insurance companies, IRDA publishes Claim Settlement Ratio. But sadly many (even experts) complicate it.

If the incurred claim ratio of a company is more than 100%, then it indicates that for every Rs.100 they collect as a premium, they are paying more than Rs.100 as a claim for a year. In simple terms, your income is Rs.100 but your expenses are Rs.100 or more. So instead of profit, they are into a loss.

If the incurred claim ratio of a company is less than 100%, then it indicates that for every Rs.100 they collecting as a premium, they are paying less than Rs.100 as a claim for a year. Such companies are making a profit as your income is Rs.100 but expenses are less than Rs.100.

However, rejecting claims only on grounds to profit will not work out for any company. They have to look for reputation, future growth, and regular guidelines. Hence, simply for the sake of profit-making, they can’t deny claims.

In my view, going with companies of high ICR or low ICR is risky. Hence, always choose a company which is in between both these points.

# Cheap PREMIUM means a RISKY Insurance company

Many buyers just look for the cheaper premium and go with it. Otherwise, they wish to go for Rs.50 Lakh or Rs.1 Cr health insurance (or super top-up health insurance) mainly because the product is available at a peanut price.

However, we are not questioning ourselves why they are offering us at a cheaper price, and what if after few years they increase the premium drastically?

In this industry too…CHEAP MEANS A TRAP…Hence, be cautious. Look for a stabilized company and important features rather than a new company with a lot of features and low premium charges.

12 thoughts on “Why health insurance premiums increasing at more than 15% yearly?”

  1. Hi Basavaraj jee. Nice article.

    Will you share your views on Lifetime health Insurance policies offering a very high Sum Insured like 1 cr? For example Manipal Lifetime Health Insurance policy.

    1. Dear Praveen,
      There is noting special to assume LIFETIME. It is just a name what they called it and typical act like super top up.

  2. Sir, Thanks for sharing your valuable views regarding Financial Planning. Your valuable posts are much appreciated.

    Request you to please share latest article regarding “Top 5 Best Health Insurance Plans in India 2022“

  3. Thanks for the article Sir. Can you give us an idea whether to go online or offline for health insurance. Though online is convenient for transacting but if the need to claim arises then isn’t it better to have one person handy so that we can call him and he can arrange claim related things? Most companies online services are not up to mark I heard.

    1. Dear Kishor,
      Many insurance companies nowadays work online. Take for example, in my case, when I applied for the claim, the insurance company assigned one of its representatives to be in touch with him for the claim process. Hence, saying ONLINE is risky is a strategy created by the agents fraternity to garner the business. You have to cross-check whether the middleman is a full-time professional or part-time. Above that for how many years he will remain as a representative of the company is the biggest question mark.

  4. S. Bhattacharya

    Can you please provide a post on the best health insurance policy for a average person in the age bracket to 40 to 50, 50 to 60 etc. Thanks in advance. Your valuable posts are much appreciated.

    1. Dear Devan,
      Try to set the target amount equal to the sum insured you are looking for from health insurance. Start the monthly contribution towards this goal accumulation in a small way (around 10% of your savings). Let me write a detailed post on this.

      1. Thanks . So what kind of asset class to choose for this fund investment. and how much time to allocate to save. Because most of us already investing for long term goals and short term needs like insurance prem,school fee etc.

        1. Dear Devan,
          Use Bank RDs (if you wish to accumulate within 3 years) or Liquid Fund or Ultra Short Term Funds are fine.

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