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?
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.