Premiums are calculated based on the insurance product (or plan) purchased by the individual. These insurance products may be packaged in various ways to either provide a general coverage or may meet the needs of a particular age group. To decide on the amount that one would need to shell out, the insurance company takes all costs into considerations. Some of these factors are enlisted below:-
a) Personal History: It takes into consideration the individual’s health, present health status, past medical history, family history, age of the individual, personal habits (e.g. smoking, alcohol addiction etc.). For purchasing a health insurance cover, the insurance companies may/may not conduct an initial medical examination of an individual before issuance of health cover.
b) Mortality Rate: These are charges incurred by an insurance company to cover the risks incase of any eventuality to an individual. The mortality expenses differ depending on the age and the ‘Sum Assured’ being availed by an individual. Important points to be remembered in co-relation with mortality rate are:-
i) Premiums increase, as you grow older.
ii) Premiums increase in co-relation to hereditary or lifestyle ailments such as Diabetes, Hypertension, Obesity etc.
iii) In principle, premiums increase by availing higher Sum Assured by an individual.
c) Administration and marketing expenses: Such expenses are incurred by the organization as part of their operational expenses. These operational expenses are recovered in the form of premium that a policyholder pays while purchasing an insurance product.
Administration and marketing expenses also incorporate the costs incurred on designing the insurance product, market publicity, advertisements, brochures, leaflets, booklets, pamphlets etc to create awareness amongst the public regarding the option of various insurance products and services in the market.
Under this heading, expenses pertaining to payment of monthly salaries to their employees, commission to insurance brokers, insurance agents, marketing and sales of insurance products and overhead costs are included, that constitute payment of premium by the policyholder. It also incorporates the costs required to meet the operational expenses on daily basis.
d) Savings component: This portion of the premium is invested in various public investments approved by the Government of that country. Investments in private sectors are generally not practiced. This is based on the guidelines issued by the Regulatory Body which is approved by the government of that country.
In India, IRDA (The Insurance Regulatory and Development Authority), at Hyderabad is the regulatory body and it controls the activities and functioning of Life and Non-Life (General) insurance organizations.
e) Medical Underwriting: Underwriting of various insurance products is done to create a balance between an organization and an individual. This is done with a view to analyze risks from various angles and broad-spectrum factors so as to contain fiscal bleeding and containment of losses in the insurance sector. It takes into consideration the number of individuals covered under the health policy and conducts a review pertaining to any claims history pertaining to that individual or that group or an entire organization.
Medical Underwriting is done with a view to establish eligibility, set premiums or deny coverage. For example premiums can significantly increase in case there is an individual with a past medical history of any chronic ailment or with a long-standing prevailing illness or has had a severe Road Traffic Accident etc.
In case, a group or an organization is involved, medical underwriting is done uniformly for that particular group taking into consideration a host of factors.
f) Adjusted or Modified Community Rating: This factor takes into consideration the geographical location, topography, physical factors of the region, economic factors involved in that region, financial stability, political stability, industrial development, trade activities, lifestyles and other varied factors.
For example developed regions have to shell out higher premium in comparison to regions with minimal development, for example a village area.. This means that if you live in metropolitan city like Kolkata, Mumbai, Delhi or Chennai, you have to pay higher premium in comparison to people living in Tier-II and Tier–III cities, as your risks are higher of falling sick or being injured in an accident.
In addition, recently another method of calculating premium has evolved called as Experienced Rating. In this method, usage of historical data is used to decide upon the rates based on the number of claims and the claim amount made during a given period. As a result, the data that is generated is used to calculate and predict the probability and potential for claims in the future. With extensive data that is now available on Internet, the experienced rating method has proved to be a boon for the underwriters and the insurance companies. The method uses a comparison of past or historical data. This data forms the ground-work for analyzing the future premiums.
g) Rating Bands: Under this category, the insurance company fixes a base rate that can be charged for a particular group possessing the same characteristics. The case characteristics include factors such as age, gender, geographical region, family composition, group size, occupation details, industry etc. For example a workforce comprising of healthy employees who are in their youth in the age group of 25-30 years will pay less premium as compared to the workforce who are in the age range of 45-60 years.
We have given only broad guidelines to educate you about how a health insurance company is likely to decide what you will end up paying as premium to insure your health against disease and accidents. Companies that take group insurance are likely to benefit by getting a group discount, depending on the numbers of the staff that they may wish to insure,
Disclaimer:- Note that the methods involved in calculation of premium can vary from company to company and can change with time. The author does not take responsibilities in case of alteration/modification/deletion/additions in calculating premiums on health-insurance policy covers that occur.
Latest Publications and Research on Premium Calculation by Health Insurance CompaniesAdvertising and Risk Selection in Health Insurance Markets. - Published by PubMed
Risk of retinal artery occlusion in patients with diabetes mellitus: A retrospective large-scale cohort study. - Published by PubMed
Inaccuracy of asthma-related self-reported health-care utilization data compared to Medicaid claims. - Published by PubMed
Health Care Sharing Ministries: What Are the Risks to Consumers and Insurance Markets? - Published by PubMed
Do Larger Health Insurance Subsidies Benefit Patients or Producers? Evidence from Medicare Advantage. - Published by PubMed