Key drivers of IPMI Inflation
One interesting change we’ve made to this year’s report is the inclusion of two new key drivers of IPMI inflation, which were identified in our preceding annual report as “emerging” trends. Hence, we have included two subsections in the Inflation Drivers section of this report:
- Four longstanding drivers of international health insurance inflation
- Two new key drivers of international health insurance inflation
Four longstanding drivers of international health insurance inflation
Globally, Willis Towers Watson projected an average medical trend rate (inflation of medical costs) of 7.8% in 2017. The actual 2017 global trend rate, according to Aon’s Global Medical Trend Rates Report, was put at 8.2%. Both the projected and actual medical trend rates in 2017 are, as we’ve said in previous reports, within 1 to 2 percentage points of IPMI inflation. This again proves our long-held belief that the largest driver of IPMI inflation is the cost of healthcare, which in turn is driven by the below longstanding inflation drivers:
New medical technology
It’s widely known that the healthcare industry ranks among the top in terms of demand for new technology. From 3D printing equipment to advanced glucose sensors used to monitor and treat Type 2 diabetes, numerous technological developments were made in 2017 with a clear focus on transforming the future of healthcare.
The costs for such technology, however, can be sky high. For instance, due to increased demand for surgical, rehabilitation, and hospital robots, projected spending on medical robots is set to reach USD 2.56 billion by 2021, according to research by Deloitte.
To pay for costly medical equipment, healthcare providers usually pass these costs on to patients through increased medical fees. In fact, 63% of insurers attribute escalating medical costs to the higher cost of new medical technologies. This subsequently leads to inflated health insurance costs.
An imbalance of health resources
Most developed and developing countries are experiencing an imbalance between the supply and demand for healthcare. For example, new research shows that the US will face a shortage of between 40,800 and 104,900 physicians by 2030.
In addition to the shortage in supply, demand for care is also skyrocketing due to many different reasons, chief among them being the aging population. This has resulted in increased costs of care and claims, which in turn has led to increased premiums.
Did you know? Of the USD 4 trillion the world spends on healthcare every year, almost 60 percent is spent on the medical workforce - the doctors, nurses, pharmacists, and other staff who provide care.
Doctors are among one of the highest paid skilled professionals. In the case of Hong Kong, a consultant doctor earns a monthly salary of around HKD 136,550 (USD 17,493), and receives a monthly allowance of around HKD 47,047 (USD 6,027).
These salaries aren’t just high, they’re also increasing. Explanations are not hard to find. Main reasons behind increasing compensation include ever-increasing medical professional salaries, as well as rising education, licensing, and practicing costs. This in turn also impacts the cost of care and, subsequently, the cost of all health insurance, including international cover.
Healthcare overutilization (care provided with a higher volume or cost than is appropriate) is one of the main drivers of escalating medical costs. In fact, anywhere from USD 158 billion to USD 226 billion in losses each year can be attributed to healthcare overutilization.
The trend towards overutilization is especially observable in locations where health insurance is mandatory. For example, in 2020 the demand for hospital beds in Dubai is projected to increase by over 50% from 2015.
Increased utilization leads to increased claims to insurers. This means that, if the number of claims increase in a particular location, you will likely see premiums adjust to take this increase into account.
Two new key drivers of international health insurance inflation
In this report, we have also identified two additional key drivers of IPMI inflation - factors that were previously listed as “emerging” in our 2017 IPMI inflation report. Based on our extensive research and in-depth knowledge of the industry, recent changes have led to two key trends - changing population dynamics and increasing availability of technology - becoming key insurance inflation drivers.
We have included an in-depth overview of these two new key health insurance inflation drivers in the PDF version of our report. Click here to download your copy of the full report.
Emerging health insurance inflation drivers to watch for 2018 and beyond
In addition to the key drivers, there are two emerging trends that we have identified as having had an impact on premiums in 2017, and most likely 2018 as well:
- Increased compliance and regulations
- A more favorable global economy
All of these contending factors have had a part to play in 2017’s slightly lower IPMI inflation figure of 7.0%. While it goes without saying that there are more factors at play than the below two trends impacting IPMI, Pacific Prime believes that there’s enough potential in these trends to delve into them in this report for further consideration.
1. Increased compliance and regulations
In 2017, key regulatory changes in our report’s feature locations pervaded the health insurance industry, many of which have a direct or indirect impact on IPMI inflation.
Mandatory health insurance in Dubai
One example of this is in Dubai, where the final roll-out of mandatory insurance coverage requirements in 2017 meant that all individuals including expats living in the Emirate must hold a minimum level of health cover.
The impact this has had on the IPMI insurance market was wide-ranging. For one, insurers who wanted to continue selling plans in Dubai must implement drastic changes to their policies so that they are in line with Dubai Health Authority (DHA) requirements.
As of 2016, IPMI providers in Dubai implemented completely new plans, with different coverage levels. These new plans, coupled with ever-increasing healthcare utilization in the region, forms a large part of the explanation behind the increase in Dubai’s inflation rate in 2017 (go to the Dubai section to learn more).
Major regulatory changes are also occurring throughout many locations in Latin America and the Asia Pacific. Most notably, a growing number of regulators are introducing Risk-Based Capital (RBC), which is a risk-based approach to assess capital requirements depending on the size and degree of risk taken by the insurer. For example, Hong Kong is currently laying the groundwork for its RBC framework, which will be implemented in 2018.
A number of countries have also started revisiting their existing RBC frameworks. Singapore, for example, has consulted with the industry to establish their second generation RBC framework. The Monetary Authority of Singapore (MAS) published its third RBC2 framework revisions in 2016.
What do these new regulations mean for the IPMI industry? Ernst & Young foresees a number of implications, some of which include:
- Robust regulatory frameworks will positively influence the financial soundness of the insurance industry. That said, the cost of regulatory compliance is set to increase.
- Better-managed companies may potentially benefit from lower capital requirements, making their products more attractive.
- The convergence of regulations toward a global standard will mean there’s less disparity between local and foreign players. Customers may benefit from new products and solutions from both foreign and local insurers.
2. A more favorable global economy
In 2016, the majority of the report’s feature locations experienced their share of economic challenges. Main contributors to global economic uncertainty in 2016 included the Brexit referendum results, uncertainty about the outcome of the US presidential elections, and falling commodity prices seen in many countries including Indonesia.
2017, however, saw a more favorable economic outlook. Against an improving international backdrop, GDP growth in emerging and developing economies (EMDEs) gained momentum in 2017, strengthening from a “post-crisis” low of 3.5 percent in 2016 to a projected 4.1 percent in 2017, and 4.5 percent in 2018. According to International Monetary Fund (IMF), GDP growth in advanced economies reached 2.2 percent in 2017 - higher than the World Bank’s projected GDP growth rate of 1.9 percent.
With a continued strengthening of the economy, insurance companies are experiencing the benefits of robust balance sheets and overall growth. While international health insurance providers continue to struggle with ever-rising claim costs, more favorable operating conditions in 2017 enabled insurers to:
- Implement lower premium increases, or even price reductions: Cigna Global, for example, has implemented price reductions in several locations featured in this report (e.g. UK).
- Better predict risk: A more favorable economy means less uncertainty for insurers, who are more likely able to predict their financial operating environment.
- Better focus on improving business practices: More favorable operating conditions allow insurers to focus on containing premium inflation. For instance, a tactic we’ve seen adopted by a growing number of insurers is to switch underwriters. Some underwriters may know specific industries better than others, which allows for more accurate premiums. This, in some cases, can even help insurers reduce premiums.
- Implement increased efficiencies: By being able to afford more, some insurers are investing heavily into digital technology (big data, for example), which can allow for unprecedented cost efficiencies if implemented correctly.
- Contain costs: The above four benefits can, in theory, allow insurers to better contain costs on all fronts of their operations. Beyond solely focusing on premiums, favorable economic conditions can help insurance providers better focus their efforts on optimizing and enhancing coverage in a cost effective manner.