Rising Medical Insurance Premiums (2) – Why Small Claims and Big Tails Matter?


Bank Negara Malaysia has announced interim measures to address rising medical insurance premiums. While I can’t foresee how some of these measures will resolve the underlying issues, I am particularly curious to see how the Diagnosis Related Group ("DRG") payment model might help tackle the root cause.  

Reflecting on my experience with my first actuarial employer, I recall being responsible for preparing claim analyses for individual medical insurance. One of the more interesting aspects of this work was constructing claim distributions based on actual experience. While the results were typically presented in tables, I often created histograms to better illustrate the distribution – in my opinion, the visual representation provided deeper insights into the claim patterns.  


A Right-Skewed Reality


So, what did the histogram reveal?  

It consistently showed a right-skewed distribution. In simpler terms, most claims were for relatively small amounts, often tied to minor ailments. Picture this – the bulk of claims fell into categories like “below 1,000” or “1,000 to 2,000.” (Of course, these thresholds have likely shifted over the past 20 years.)  

At first glance, having lower average claims might seem like good news. But don’t celebrate too quickly. This pattern can sometimes indicate potential abuse of medical insurance – which is precisely why sufficiently high deductibles are essential. For instance, patients might opt for hospitalization solely to qualify for claims. When this type of abuse becomes prevalent (reflected in higher skewness), the cumulative claim amount that needs to be spread across all policyholders increases significantly.  


The Tail That Stings 

Another challenge in medical insurance lies in the "TAIL" of the claim distribution – those large, infrequent claims that can disrupt the entire portfolio. Unlike other insurance products, where catastrophic claims are rare (perhaps once or never in our entire career), large medical claims are far more common. 

I vividly remember encountering a claim that instantly maxed out the annual limit of the highest plan at the time. Back then, the limit stood at 80,000, but this particular claim exceeded 100,000. 

Was it a one-off case? Unfortunately not. I encountered such claims more than once.  

In theory, annual limits should help control these tail-end risks. However, the current trend in Malaysia’s medical insurance market tells a different story. Today, annual limits of 1,000,000 are fairly standard – a direct result of market competition. While this high limit doesn’t affect most claims (since the average claim amount is far below 1,000,000), it significantly increases exposure to large claims.  

Consider this example:  

  1. The average premium per policy is RM1,000.  
  2. A single large claim of RM500,000 could deplete premiums from 500 policyholders.  


At this point, you might wonder – shouldn’t larger portfolios benefit from economies of scale?  

Logically, yes. But based on past observations, I’m not convinced this holds true for medical insurance. In fact, I found out that the number of policies in the portfolio grew, I noticed an odd trend – the loss ratio increased.

Strange, isn’t it? Unfortunately, I didn’t get the chance to fully investigate the root cause at the time.  


Further reading:

  1. Rising Medical Insurance Premiums (1) – Is Emotion Clouding the Discussion?
  2. Rising Medical Insurance Premiums (2) – Why Small Claims and Big Tails Matter?
  3. Rising Medical Insurance Premiums (3) – Is Medical Inflation in General a Fair Benchmark?
  4. Rising Medical Insurance Premiums (4) – Additional Metrics in Claim Analysis


Note: The first image is generated using Grok AI.

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