Principles on charging premium for Health Insurance coverage

Yes, there are several principles and factors that insurance companies follow when determining the premium for health insurance coverage in India. These principles ensure that the premium charged is aligned with the risk profile of the policyholder, the type of coverage, and the insurer’s overall risk management strategy. Below are the key principles that influence the premium calculation:

1. Principle of Risk Assessment:

• Insurance premiums are largely based on the risk profile of the individual being insured. This means that the insurer assesses the health status, age, medical history, and lifestyle choices (e.g., smoking, alcohol consumption) to determine the likelihood of claims being made.
  • Higher Risk: If the policyholder has a history of medical conditions (e.g., diabetes, heart disease), or has an unhealthy lifestyle, the premium is likely to be higher.
  • Lower Risk: Young, healthy individuals with no pre-existing conditions and healthy lifestyle choices will typically pay lower premiums.

2. Principle of Age:

• Age is a significant factor in determining the premium for health insurance.
  • Younger Individuals: Younger individuals generally have lower premiums because they are considered lower risk.
  • Older Individuals: As you get older, the likelihood of health problems increases, and therefore, premiums are typically higher for senior citizens. Some policies may have age-based premiums, and health insurers may apply age limits (e.g., maximum entry age or renewal age).

3. Principle of Pre-existing Diseases:

• Pre-existing diseases influence the premium charged for health insurance. If a person has pre-existing conditions (like diabetes, hypertension, etc.), insurers may charge a higher premium or impose a waiting period before covering treatments related to those conditions.
  • Insurers often apply a higher premium for pre-existing diseases, especially if the condition is chronic or needs frequent medical attention.

4. Principle of Policy Type and Coverage:

• The type of health insurance plan chosen significantly impacts the premium. Policies with higher coverage limits, lower deductibles, or additional benefits such as maternity coverage, critical illness coverage, or room rent allowances will generally have higher premiums.
  • Comprehensive Plans: These plans that cover a wide range of medical conditions or offer higher coverage limits generally cost more.
  • Critical Illness Plans: These may have higher premiums compared to basic plans, as they specifically cover high-cost illnesses like cancer or heart disease.
  • Add-ons: Riders or add-ons (e.g., personal accident cover, hospital cash benefit) will increase the premium.

5. Principle of Geographic Location:

• Premiums can also be influenced by the location of the policyholder. If a person lives in an area with high medical costs or is more likely to seek frequent medical attention, premiums may be higher.
  • Urban Areas: Cities tend to have higher healthcare costs, so premiums may be higher.
  • Rural Areas: Healthcare services in rural areas are often less expensive, which can result in lower premiums.

6. Principle of Family Size:

• Some health insurance plans cover the entire family (family floater plans), and premiums are calculated based on the number of members covered under the policy.
  • More Members: The larger the family, the higher the premium, as the insurer has to cover more individuals with varying health risks.
  • Single vs. Family Coverage: A single individual may pay a lower premium than a family with several dependents (spouse, children, or elderly parents).

7. Principle of Sum Insured:

• The sum insured or the coverage amount directly affects the premium. Higher coverage means higher premiums.
  • Low Sum Insured: A policy with a lower sum insured (e.g., ₹3 lakhs) will have a lower premium compared to a policy with a higher sum insured (e.g., ₹10 lakhs).
  • Co-pay and Deductibles: Policies that involve co-payment (the insured pays a portion of the treatment cost) or deductibles (amount paid before the insurer steps in) usually have a lower premium.

8. Principle of No-Claim Bonus (NCB):

• A No-Claim Bonus (NCB) is a reward offered by insurers if the policyholder does not make any claims during the policy year. It can lead to a discount on the premium for the following year or an increase in the sum insured without an increase in the premium.
  • Impact: If you do not make any claims in a policy year, you may get a premium discount or added coverage for the next year.

9. Principle of Insurer’s Cost of Operations:

• The operational costs of the insurance company also influence premiums. The higher the insurer’s operating costs (such as claims processing, customer service, technology, etc.), the higher the premiums they will need to charge to stay profitable.
  • Brand Reputation: Established insurers with higher reputations might have higher premiums due to their broader network of healthcare providers and additional benefits.

10. Principle of Inflation:

• Medical inflation refers to the rising cost of healthcare over time. Insurance companies anticipate medical inflation and increase premiums accordingly to account for the future increase in medical treatment costs.
  • As the cost of medical services, hospital stays, and medications increases, premiums are adjusted to ensure the insurer can continue to provide adequate coverage.

11. Principle of Underwriting:

• Insurers evaluate the policyholder’s health and other details at the time of underwriting. Based on this assessment, the insurer may either accept the application, reject it, or charge a higher premium to reflect the higher risk.
  • Medical Underwriting: Some insurers may require medical tests for older applicants or individuals with certain health conditions, which could affect the premium.

12. Gender-based Pricing:

• Some health insurance policies may have different premiums for men and women. For example, women may face higher premiums for maternity cover or for specific diseases like breast cancer, while men may face higher premiums for conditions like heart disease.
  • Gender-based pricing is becoming less common due to regulatory changes and a push for gender-neutral pricing in some countries, though it may still apply in some cases.

Conclusion:

The premium for health insurance in India is determined by multiple factors, such as age, health status, policy type, sum insured, geographic location, and the presence of pre-existing conditions. Insurance companies use these factors, alongside underwriting and medical inflation, to calculate the appropriate premium. It’s important to choose a health insurance plan that balances coverage and premium costs based on your individual or family health needs.