Three simple factors. Despite the advancement of medical health, most insurance companies today still based their insurance premiums on simple factors that have been used for many years.
These factors are age, gender and whether a person is a smoker.
Why These Factors Are Used?
# 1 Age – The older you are, the more likely you might be diagnosed with an illness. Likewise, older people have a higher mortality rate. Hence, it makes sense that insurance premiums are based on age, with older people paying more.
# 2 Gender – Females tend to have longer life expectancy compared to male. In Singapore, the life expectancy for female is 84.9 compared to 80.4 for male. With all things being equal, insurance companies tend to offer more favourable rate for life insurance for female compared to male.
# 3 Smoker – We all know smoking is bad for our health and so do the insurance companies. Hence, insurance companies charge a higher insurance premium to insure smokers.
What insurance companies do is to get their actuary to measure the expected cost of insuring people in different groups based on these factors, and to then determine the average cost of insuring an individual.
The Limitations Of These Factors
If you were thinking how these factors appear overly simplistic to determine one’s health, you wouldn’t be alone. There are many other factors that can determine our health conditions and life expectancy.
For example, a 35-year old who exercise regularly, has a healthy diet and get sufficient rest each day would be healthier than a 30-year old who overeats, hardly exercise and does not sleep enough. Why then should the healthier 35-year old pay a higher insurance premium than the 30-year old?
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The Moral Hazard Problem
In the context of insurance, moral hazard refers to the situation where individuals, knowing they have insurance coverage, may not take as much personal care as they would have if they didn’t have insurance coverage.
For example, one can put forward the argument that an individual, knowing that they already have comprehensive health and life insurance coverage, may not worry too much about their future healthcare cost since it is already covered by the insurance companies. These lifestyle choices will cause an individual risk to be higher, though the risk will not be reflected in the insurance premium.
Reward People For Living Healthier Life
Insurance premiums should be tied in a way such that encourages people to live healthier life. This creates a win-win value proposition for both insurance companies and their policyholders.
An insurance company that is able to encourage its policyholders to live healthier life will have a business advantage over its peers, since a healthier client base would translate into lower insurance payout.
Some of the savings from the lower insurance payout can then be passed on to consumers in the form of lower premiums, or premiums rebate. This is similar to how insurance companies giving annual discounts for car insurance when there are no claims made.
One such company which has already introduced the concept of rewarding its members for living healthier life is AIA Singapore. Through its AIA Vitality programme, the company is able to encourage its members to take part in meaningful activities and lifestyle choices that will help them live healthier life. It provide incentives in the form of discounts for gym membership, cashback and lower insurance premiums as members become healthier.
What Else Is Important?
A natural question at this point would be to ask what other factors should be taken into consideration when it comes to calculating insurance premiums.
According to the World Health Organisation (WHO), a lot of the health issues that we face today can be linked back to the poor lifestyle choices that we made.
For example, lack of exercise, unhealthy diet, smoking and excessive alcohol can lead to illness such as cancer, diabetes, respiratory disease and cardiovascular disease. These 4 non-communicable diseases are responsible for about 60% of premature death worldwide.
The point here is that there are a lot of lifestyle choices that we as individuals can made to improve our own personal health, and that insurance companies should be finding ways to recognise these individual efforts in the calculation of their insurance premiums, rather than to just base premiums on traditional risk pooling methods such as age and gender.
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