The health insurance industry in India started back in 1986. Ever since then, the Indian healthcare market has kept growing and recently it has surged exponentially. Over the years, people have become more aware and conscious of the need for health insurances:
The reason being that earlier, people were not quite literate about healthcare expenses and thought that health insurances are rather unnecessary. In case of critical accidents or illnesses, the medical bills and other healthcare costs could pile up and a common man might not be able to afford all that.
Hence, people have finally realized that health insurance companies are necessary. In 2020, we have 31 health insurance companies in India out of which 24 are General Insurance companies and the rest 7 are Standalone Health Insurance Companies.
With the COVID-19 pandemic, the awareness about health-related expenses has reached exponential heights. The cases of Coronavirus patients are rising every day and more and more people are buying health insurances plans to stay safe with the insurance coverage.
Due per statistics, the sales of health insurance has risen to 30% in 2020.
You must have wondered how do health insurance companies manage to pay out the entire hospitalization, treatment, and other medical costs in case of reimbursement or cashless claim. Sometimes, they even have to pay out around double or triple of the premiums they take from an insured person.
Some people even have the bizarre idea that insurance companies make zero to minimal profit!
Well, that’s laughable because it turns out that health insurance businesses are one of the top-earning business models.
Keep reading to find out how!
How Do Health Insurance Companies Make Profit?
Health Insurance Companies and all other insurance companies are businesses and they have to make a profit to survive. They follow the inverted production cycle model. This means that the insured pays the premiums upfront and the company needs to pay out only when a claim is made.
There are several ways insurance companies like life insurance companies, health insurance companies, etc. earn money. But, there are a few extra aspects on which a health insurance provider capitalizes as compared to other insurance businesses.
A health insurance company has several customers and it collects regular premiums from all of them in return for insurance coverage. Now, only a small portion of the insured people claim the insurance. Hence, we can see that not the entire premium collected is spent to pay the claims.
So, this is of the several profit plans of the insurers and their chief source of revenue. Most insurance companies try to design their policies as such the annual premiums collected every year are equal to the total claim paid out plus their expenses. Also, most people do not have any major claims throughout the year.
Underwriting Income = Cash Collected on premiums – Cash paid out on claims and for running the company
For example, an XYZ health insurance company collects INR 50 lakhs from the premiums of its customers in a year. Now, suppose, it has to pay out INR 40 lakhs worth claims in that year. So, the company’s underwriting income is INR 10 lakhs.
If you think that the underwriting income of a health insurance company is might not be sufficient, then you are mistaken.
The insurance companies have underwriters and they go to great lengths to ensure that the math works for the company’s favor.
An insurance applicant’s metrics are thoroughly analyzed like their gender, income, credit history, health, etc. Then a final premium cost is set in a way that the insurer benefits the most even if there is a high risk associated.
Sometimes, the demand for health insurance increases such as in the ongoing Coronavirus pandemic. So, the insurance companies utilize such opportunities and they increase the premiums to a rate higher than what is necessary. This way they earn more premiums for the same claim payouts.
Currently, the health insurance premiums are all set to rise by 5% to 25% from October 2020, as per Policybazaar.com.
Unlike other insurances such as life insurance, the premium levels of health insurance fluctuate every year or so due to several factors like inflation.
3.Short-term Investment Income
The insurance companies collect the premiums every month from the beginning of policy but the claim amount is paid out after several months (if a claim is made). The point is that the insurance company does not need to pay out the claims in the same year the policy starts.
So, the insurers generally put this collection of premiums in short-term investments and other investment pools.
The premiums collected are also used in low-risk or guaranteed investment instruments like bonds, real estates, etc.
Hence, the insurance providers earn money from the interest and the return of investment from the investment pools. If the premiums received and the money made from such investments exceed the claims and expenses, then the rest can serve as profit.
4. Not all Policies are paid out
A health insurance company does not always need to pay out on the healthcare policies they sell and make extra money through this. The underwriters of the company ensure that this happens.
It is interesting to note that the insurance providers work hard to chalk out ways to find the risk of the need to pay out a claim.
If the data collected suggests that the risk is high for them, then they will charge a higher premium for offering the same health insurance. But, when the risk of paying out is low, then the company will be very happy to provide you with a health policy because that might lead to the company making extra profit.
5. Lapsed Policies
A policy lapse is when an insurance policy gets expired without any benefit claimed. In other words, when people cannot afford to pay their policy premiums any longer, then the policy lapses or ends. As per statistics, policy lapses happen quite a lot many times.
This, in turn, triggers a profitable opportunity for the insurer. In such a situation the company will keep all the premiums collected and would not have to pay out anything at all.
Also, such lapses occur before the end of the policy tenure, so it becomes a big win for the insurance provider.
6.Not All Claims Are Settled
If your claim is legitimate and all of your documentation needed for the claim is available, then you will get your claimed amount reimbursed for sure.
If you lie in your documents or set up a false claim, then your request will stand canceled. Suppose an underlying medical condition comes up that you had not told your insurer at the time of purchase, then the claim might get rejected.
There are several reasons for which health insurance claims are rejected. This way the insurance company can pocket your paid premiums without having to pay out anything.
For example, a claim made after the policy tenure ends will be rejected. Other reasons include injury due to self-harm, no proper justification for hospitalization, treatment not covered under the policy, inconsistencies in medical bills and other documents, etc.
More or less all insurance companies have a claim settlement ratio above 90% every year. But, it is never 100%, so that extra money stays with them as profit.
Health Insurance Companies keep track of their yearly claim ratio, loss ratio, and other things.
Claim Ratio = (Total claims paid out + Adjustment Expenses) / (Total amount collected via premiums)
The premiums for the upcoming years are decided based on this. The health insurers keep in mind all expenses like the management costs, commissions, etc. and then keep a profit margin of 2 to 3% on that as well.
When the year ends, this estimation is compared to the original costs incurred and then the future premiums are adjusted accordingly.
A health insurance provider will consider several factors like your age, medical condition, alcoholic or not, smoker or not, inflation, etc. and then finalize your premium. For example, the same policy’s premium would be higher for a smoker when compared to that of a non-smoker.
So, such selection is carefully handled by the health insurance company so that it does not harm the ultimate business model of the insurer.