Rising Medical Insurance Premiums (3) – Is Medical Inflation in General a Fair Benchmark?

In its recent announcement on medical insurance, Bank Negara Malaysia highlighted Malaysia’s medical inflation rate of 15%, which surpasses the average across global and Asia Pacific region. However, when I consider the rate of increase in medical insurance premiums, I question whether this 15% figure is truly a suitable benchmark – are we really comparing apples to apples?  

Before diving into my thoughts on this, I believe it’s helpful to explain the concept of "insured lives" experience.  

If you work in life insurance or family takaful, you may be familiar with terms like "M8388" or "M1115". These abbreviations represent mortality tables derived from claim experiences of insured lives in Malaysia’s life insurance industry. The numbers in these abbreviations aren’t secret codes – they simply refer to the years in which the mortality studies were conducted. For example, "M8388" reflects mortality experience observed between 1983 and 1988 (a 5-year period).  

Why Conduct Studies on Insured Lives?  

Why does the life insurance industry conduct these studies? Couldn’t we just rely on mortality data from the general population? The answer, by common sense and theory, is "NO". Insured lives typically experience better mortality rates because life insurance companies conduct underwriting assessments before approving coverage. If someone applying for insurance has a poor medical history or engages in a high-risk occupation, their application may be declined.  

This makes sense, right? Now let’s circle back to medical insurance. Just like life insurance, underwriting assessments are conducted before someone is accepted for medical coverage. Logically, we might expect similar results – that insured individuals should experience lower healthcare costs.  

The Reality: A Mixed Answer 

The answer to whether this applies to medical insurance is "YES"... and "NO".  

While underwriting helps filter out applicants with pre-existing conditions or high-risk occupations, there’s an element unique to medical insurance that’s harder to control – HUMAN behavior and decision-making.  

For products like term insurance, which covers death or total permanent disability ("TPD"), the insured events are generally random and independent. In most cases, people don’t actively seek to experience death or TPD to claim insurance.  

However, the opposite may apply to medical insurance. Individuals with coverage might incur higher medical costs simply because they are insured.

The Insured Lives, Hospitals, and Insurers Dynamic  

There’s an imbalance between insured individuals, hospitals, and insurers. When insurers lack the authority to adequately control claimable costs, the following scenarios often occur:  

1. Unnecessary medical exams, treatments, or hospitalizations – sometimes driven by a desire to qualify for claims.
2. Dual pricing – different rates are applied to medical services covered by insurance versus those paid out-of-pocket.  

These factors can drive medical insurance inflation at a higher rate than the medical inflation in general. Additionally, I wonder if the 15% medical inflation rate cited by Bank Negara includes areas like general practitioners ("GP") and dental services – areas typically not covered by individual medical insurance policies.  

I’m genuinely curious to learn more about how this 15% medical inflation rate was derived. 

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 image is generated using Grok AI.