This will be the second of the three-parts articles explaining the increase in medical insurance’s premium. The first part explained the reason why there is a need for repricing. You may read it here. This article will talk about how the increase in premium will happen. Do take note that as this repricing of premium mainly affects investment-linked medical policy, these articles will be focused solely on it.
You know how we are generally annoyed with an increase in the price of our mixed rice when the price of petrol increase? If the increase in the petrol price is still bearable, your mixed rice aunty will usually bear the increase in her cost. But sometimes, the mixed rice aunty has no other choice but to pass the cost to us. The same happens here for medical insurance.
The increase in medical cost is not a sudden thing; it has been increasing every year in double-digit percentage. Insurance companies have simply been managing this increase for years. Like our mixed rice aunty, they are left with no choice but to pass some of the cost to us the policyholders.
To understand how insurance company pass the cost to you, you must first know how an investment-linked policy work.
Warning ahead! The following part might be too technical for some. I have tried my best to make it as easy as possible for readers to understand. In fact, I might update it from time to time if I feel that I can make this easier to digest.
How Investment-Linked Policy Works?
From the above diagram, you can see that in the beginning, a portion of your premium paid is put into investment funds. The fund is then used to pay for your insurance charges and other expenses. As long as you have sufficient investment fund, you will be able to pay for your insurance coverage.
When we talk about medical insurance premium increase, WHAT IS ACTUALLY BEING INCREASE IS NOT YOUR PREMIUM, BUT INSURANCE CHARGES. Hang on, why do we need the investment portion in our medical insurance policy in the first place?
Let’s look at the graph below.
As you can see above, your insurance charges are lower than your allocated premium in the early years of your policy. Simply speaking, you are “overpaying” for your medical insurance. As we grow older, our risk increases too. When our risk increase, so is our insurance charges (thus the upward sloping curve). The difference between your allocated premium and your insurance charges will be invested into an investment fund.
The investment fund actually serves as a buffer for the future increase in insurance charges. Once your insurance charges go higher than your premium as seen on Point X, the insurance company will automatically use the money in your investment fund to pay for the differences. Therefore, your insurance premium can actually remain the same even if your insurance charges increase.
But since increasing insurance charges will be covered by the investment fund, what is the difference this time around?
Okay, imagine you are planning a drive from Kuala Lumpur to Kuantan. The common route taken should be the East Coast Expressway. Halfway, you realize that there is a landslide ahead and you have no other choices but to take a detour. This detour is going to cost you more time and petrol. The same analogy applies here for your medical insurance plan.
The original insurance charges curve is your original route. The steady rain that causes the landslide represents the steady inflation of medical cost. A new route is your new insurance charges curve. When you choose not to increase your premium, it is as if you insisting to drive on the landslide affected route. Your journey will simply be cut short.
Looking at this new diagram, not adjusting your premium means your insurance charges will catch up to your premium sooner than previously planned. Without any premium adjustment, the insurance company will draw from your investment fund earlier. This effectively eats up your investment fund sooner than planned. And when your investment fund becomes zero, your coverage ends too.
If this happens, let say, at the age of 78, it is pretty reasonable to decide not to own medical insurance. At an older age, one might opt for palliative care instead of curative treatment when diagnosed with a critical disease. But if this happens at the age of 60, you might find yourself digging into what is supposed to be your retirement fund in order to fund for your treatment.
Now you know why and how medical inflation leads to an increase of premium, the next question will be; what should you do? Should you increase my premium? What other alternatives do you have? Read the last of the three-part articles here.