8 Key Factors How Insurers Price Their Products
23 March 2020
Many of us are unaware how insurers price their products. Insurance companies aim to ensure that the premiums charged correspond closely with the risk each policyholder represents. This is where the skill of underwriting comes into play. It is the process by which an insurer decides whether or not to accept an application, and if so, under what terms of coverage.
Here are eight key factors used in computing health insurance premiums.
1. Morbidity Rate
The morbidity experience is an essential factor in pricing insurance coverage. It refers to the number of cases of sickness and injury occurring in a given age group. All things being equal, the morbidity rate for women is higher than that for men. That is why they pay higher premiums than men for most health insurance policies.
2. Operating Expenses
The cost of running an insurance company include salaries, commissions, taxes, rent, advertising, computer systems, supplies and so on. All of these expenses must be added to the cost of insurance.
3. Investment Income
Investment income is earned when an insurer invests the premiums it receives from policyholders. This is an additional source of funds for the insurer and helps reduce the amount they have to charge for providing cover. If insurers expect to earn greater investment income, the premiums they charge will be lower.
4. Scope of Benefits
To attract more customers and retain them, insurers offer innovative product designs, efficient distribution channels and good before-and after sales service. Providing a wide range of benefits under one policy is a way of appealing to customers. However, adding each benefit increases the final premium.
By tailoring health products with different benefits like deductibles, co-payment, exclusions and benefit limitations, insurers can offer lower premium options for customers who are willing to absorb some risks themselves.
The most common type of hospital and surgical insurance policies here are Integrated Shield Plans (IPs) that are paid using Central Provident Fund Medisave Savings. The benefits are similar among IP insurers.
Generally, policyholders who prefer to stay in private hospitals buy plans that cost more than those that cater for only Class A (restructured hospitals) wards and below.
5. Insurer’s Profit
Insurers include loading in the net premium to provide a profit margin. The amount of loading added is dependent on the insurance firm’s profit target and strategy, as well as the nature of the business. For example, an insurer going for market share may settle for a thinner profit margin. In contrast, a line of business that is volatile or requires more capital support will result in an increase in the amount of loading.
6. Past Performance
The historical performance of similar products will have some bearing on an insurer’s pricing decisions on new products. Having a track record on the demand, customer profile and claims experience is a valuable learning experience for the insurer when it plans to launch new, similar products.
7. Medical Inflation
Medical inflation has been rising at a much faster rate than consumer inflation. In Singapore, there has been an escalating trend in healthcare claim costs experienced by both individual and group plans. The primary driver of medical inflation is inpatient costs, boosted by surgery charges. Other contributing factors are diagnostic procedures, drugs, prosthetics, and room and board.
To ensure that they can meet their obligations, insurers take into account the medical inflation factor so that the premiums charged will be adequate to cover rising costs.
8. Premium Payment Modes
The mode of premium payment refers to the frequency with which the premiums are payable. Payments may be made annually, biannually, quarterly or monthly. Generally, insurers calculate premiums on an annual basis. Note that if you opt to pay via any of the other modes, the premium increases slightly as the frequency increases.
The increase allow the insurer to recoup the additional billing and handling costs, and the lost interest that the insurer could have earned by having the full annual premium to invest all at once.