Skyrocketing Premiums Part I; Why they rise.

General Finances
By hiveup,

It’s that time of the year again. We’ve all been there before; you have a health insurance policy is coming up for renewal, and you are praying that your already expensive premium doesn’t skyrocket any more than it already has. As you anxiously scan the bill, you see an increase of eight, ten or maybe even twelve percent and wonder, “Could this just be a blatant money grabbing scheme?” Or is there something else behind the increase in premiums. In the first instalment of this series, we will delve deeper into the reasons behind rising health insurance premiums, while looking at the potential to disinflate these costs.

In the quest for answers, I was scouring the internet in disdain, desperately trying to figure out the root cause of our exorbitant premium hike. This is where I came across Aon Hewitt. These guys are a consulting, outsourcing, and insurance brokerage firm, who have captured Singaporean data over the 2016 – 2017 financial year. The Hewitt report highlights how the inflation rate was a relatively low 1.3% while the gross medical inflation rate was touching 10%. This was a real shock, but after further research I began to understand the three major reasons why relative medical inflation was so high.

  • You see in today’s modern world, more and more funding is granted to medical researchers to discover more effective processes and treatments. This advancement in medical technology is an exhausting, time consuming, expensive process.
  • Speaking to my grandparents has illustrated how reactive people used to be when it came to maintaining their health. You would not go to see a doctor for any check-ups or precautionary matters, but only when you were really ill. This was especially true in smaller localised villages. This is a sharp contrast to today’s modern world, where education and the importance of maintaining one’s health is heavily emphasised. This results in an increase in the demand for medical services, which year on year only adds to the cost of healthcare.
  • Many developed countries around the world including Singapore are currently suffering from an ageing population. As people get older their medical needs rise correspondingly. With the average age in Singapore being 3.5 years above the world wide average, and with that figure rising, we can see how medical costs will rise too.

I was pleasantly surprised to see how a vast majority of my skyrocketing health insurance premium could be put down to the high level of medical inflation and not a shrewd money making tactic by my insurance agency. Now along with medical inflation, there is one other basic factor that pushes up the cost of your premium. This is a cost pressure caused by the increasing number of and value of claims. When the total cost of claims rise, insurance premiums would naturally rise due to these increased payouts. As costs from claims goes up for the insurer they are bound to increase the cost of future premiums, in order to maintain their profit margin. The insurance companies can’t pay you out if they don’t have money. Another large point is that of your personal profile. As you get older, and get less healthy with a growing number of medical conditions, your risk to need a payout increases. To balance this risk, premiums increase.

With rising medical and claim costs, and a lack of incentive for insurance agencies to reduce their profit margin, the only way to disinflate health insurance premiums would be through a reduction in administration costs. This is where the financial technologies (fintech) industry comes in. The evolution of this high growth, highly innovative sphere of knowledge, has seen many recent innovations. This includes the advance of robo-advisory software. These programs offer financial advice and perform portfolio management based on mathematical rules or algorithms. Although these systems are not currently performing a significant role in the insurance sector, there is scope for it in the future. The digital processing of insurance claims, could see another decent reduction in operational costs. In today’s landscape most people will either call the insurer directly or get their insurance advisor to file a claim on their behalf as their is not an easy and effective digital alternative. This digitalisation process is something we at Hive Up are very excited about, as it is has the potential to be integrated into our systems.

Perplexing as it may have once been, it is now clear that insurance companies on the whole are not jacking up health insurance premiums for their own hip pocket. There are unique aspects in the health industry that constantly cause healthcare costs to inflate above the regular inflation rate. There is the hope of a slow down in the rise of premiums in the future, as the fintech industry is stepping up to help make the process as cost efficient and effective as possible. In the second and final part of this series, we will take a look at how insurance companies actually decide what to charge a client. Further examining the factors that influence their decisions, and the hurdles they face when determining an appropriate premium value.

 

This article is written by Chandan Hedge, Hive Up. For more information on anything finance, please visit Hive Up.

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