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What affects the cost of health insurance?
For those without inside knowledge of the actuary industry, health insurance premiums can seem something of a minefield.
But the calculations behind them can just depend on a few key factors, the rate of claims being one of the most important.
The insurance premiums need to be high enough to cover the cost of claims. This doesn’t mean your own insurance premium needs to cover the exact cost of your own claims, it means the total cost of those premiums need to cover the total cost of claims by people with those premiums.
If the cost of healthcare increases year on year, and the number of people making claims increases, this will push up the cost of health insurance.
Net effect of hospital visits cost and frequency:
2016 1 hospital visit at US$50 = US$50
2017 2 hospital visits at US$55 = US$110
So even though the healthcare cost hasn’t increased significantly, the increased number of visits pushed the total cost up by 120%. Insurance companies need to take these increases into account, however small they might appear to the individual.
In recent years, countries such as Hong Kong and Dubai have seen increases in their populations, alongside significant investment in their health infrastructure. There’s a wider range of treatments available, as well as a more expensive range of treatments.
Statistics have shown that medical trend – the term used to describe the change in claims cost per insured person – is rising, pushing up the insurance premiums that need to cover these costs.
According to risk management consultancy Aon Hewitt’s 2016 Global Medical Trend Report, the gross global medical trend rate was 8.7% in 2015, and 9.1% in 2016. This demonstrates the increase in claim costs around the world.
Factors that affect the cost of health insurance
As well as the increasing cost of healthcare and greater number of claims, there are a number of other factors that influence insurance premiums: fraud, regulation and taxes, ageing populations and chronic diseases.
Fraudulent claims give a false impression to insurance companies of the rate of claims, contributing to a misleading – and ultimately more costly – medical trend prediction.
Changing regulations and taxes also affects medical insurance companies. New rules (such as mandatory coverage of chronic conditions in Dubai) can make it much more costly to insure people in a particular country or region because the claim costs are likely to be much, much higher.
Countries with the highest health insurance costs in 2016
(shows average cost)
Impact of chronic conditions
The International Diabetes Federation estimates that the cost of treating someone with diabetes is up to four times the cost of treating a healthy person. If an insurance company must shoulder this cost and a significant portion of the population has diabetes, it increases premium costs for everyone.
There has been a significant increase in these type of illnesses, and this has a corresponding impact on the cost of healthcare.
You will also pay more for your insurance premium as you get older and your healthcare needs increase. The older an individual is, the more likely they are to suffer from certain conditions – such as cancer, cardiovascular disease and respiratory problems – that are expensive to treat.
The premium is calculated in age brackets for example: 25 to 30 years, 30 to 35 years etcetera. So the premium will therefore increase each year to reflect health cost inflation and, when the member’s age reaches the next age band, it will go up to reflect the additional risk of age.
Pacific Prime – Cost of International Health Insurance Report – 2016 – https://www.pacificprime.com/cohi-2016/
Aon Hewitt – 2016 Global Medical Trend Report – www.aon.com
International Diabetes Federation – www.idf.org