Onsurity Editorial
February 28, 2025
7 min read
982Table of Contents
People often say “Time is money,” and that’s true. But I believe “money is money,” and its importance can’t be overstated. Today, everything from fulfilling our basic needs to our wildest desires involves money. It’s become a necessity, an addiction, that drives our daily lives. Whether we’re talking about minimal or premium lifestyles, money is always a factor.
When we think of “premium,” we often associate it with luxury. However, in the context of health insurance, a premium takes on a different meaning. It’s the cost we pay to an insurance company for the coverage they provide but sometimes understanding the costs involved gets confusing for employees or employers, especially how premiums are calculated is essential for effective financial planning.
Group health insurance is a key benefit that employees value highly, offering both security and health support. However, it’s also a major expense for businesses, impacting the bottom line significantly.
In the year 2022-23, general and health insurance companies in India collected ₹89,492 crore in health insurance premiums, representing a growth of approximately 23% over the previous year. Specifically, the group health insurance segment saw its premiums increase from ₹36,890.58 crore in 2021-22 to ₹46,245.87 crore in 2022-23, reflecting a substantial growth rate of about 25.36%. These statistics underscore the rising costs and growing importance of group health insurance for both businesses and their employees.
#Source: IRDAI Annual Report 2022-2023
In this comprehensive guide, we will delve into how group health insurance premiums are calculated, shedding light on the different factors involved. Understanding these factors helps employers make informed decisions and manage costs better, while employees can appreciate the real value behind their health benefits.
Let’s break down the mystery of group health insurance premiums and find out what goes into determining these costs.
What are Group Health Insurance Premiums?
Group health insurance premiums refer to the amount paid regularly typically monthly or annually to keep the insurance policy active. In most group health plans, these premiums are often shared between the employer and the employees. For employers, premiums represent a major portion of employee-related costs, and for employees, the contribution often comes directly out of their paychecks.
But in some cases employers pay the full premium as well depending upon the type of plan selected. Also at some organisations some employees pay full premium or can get it deducted from their salary.
The concept of shared costs ensures that both parties have an interest in maintaining the health of the insured group.
Understanding the importance of premiums can help businesses budget better and employees manage their finances more effectively. Not only do these premiums provide coverage for unexpected medical costs, but they also form a part of the overall employee compensation package that can drive employee satisfaction and retention.
How are Group Health Insurance Premiums Calculated?
The calculation of group health insurance premiums is influenced by several factors, let’s explore the major factors that influence these costs:
1. Demographics of the Workforce
The demographics of the group significantly impact the cost of health insurance premiums. This includes factors like age distribution, gender, job roles, geographic location, and lifestyle habits.
2. Age Distribution
Age is one of the biggest determinants of health insurance premiums. A workforce with a higher average age tends to have higher healthcare needs, which increases the premiums. Older employees are statistically more likely to require medical care, which results in higher costs for insurers, and thus, higher premiums.
3. Gender Mix
The gender composition of the workforce also influences the cost of premiums. For example, women are generally more likely to use healthcare services, especially during childbearing years. Insurers take these utilisation patterns into account when calculating premiums.
4. Industry Type
The type of industry a company operates in also affects group health premiums. High-risk industries, such as construction or manufacturing, tend to have higher insurance premiums due to a greater likelihood of workplace accidents or occupational health issues.
5. Types of Plan and Coverage Options
The specific benefits and coverage options that an employer selects play a crucial role in premium calculations. More comprehensive coverage and lower deductibles typically lead to higher premiums. For instance, plans that include dental and vision care or offer mental health services will have higher premiums compared to basic plans.
6. Geographical Location
Geographical location is another important factor in determining premiums. Healthcare costs can vary greatly between regions due to differences in medical costs, provider fees, and state regulations. Urban areas with higher costs of living usually have higher insurance premiums compared to rural areas.
7. Total Sum Insured
The total sum insured is the overall coverage amount that the insurance plan offers. Higher coverage limits mean higher premiums, as the insurer’s potential risk increases.
8. Claim Settlement History
The past claim history of a group can also affect premium calculations. If a company has had high healthcare claims in previous years, insurers are likely to charge higher premiums to offset the increased risk. On the other hand, if the claim history is minimal, premiums can be relatively lower.
Related read: Claim Settlement Ratio in Health Insurance
9. Medical Inflation
Medical inflation is the rising cost of healthcare services and directly impacts health insurance premiums. As the cost of medical procedures, hospitalisation, and medicines rise, insurers adjust premiums to reflect these increased costs.
In the financial year 2022, the cost of healthcare goods and services, also known as medical inflation, reached approximately 13.6% in India, which was significantly higher than the general inflation rate in the country. In fiscal year 2023, medical inflation is forecasted to decrease to 10.3%. Additionally, Indians’ hospitalisation expenses have increased by 11.35% in a year, according to insurance company ACKO.
This increase was evident from the 60,000 health policy claims filed in FY 2023-24, where the average claim size rose from Rs 62,548 in the previous year to Rs 70,558 in 2023-24.
10. Additional Factors
Other factors that influence premium costs include the size of the workforce, employee turnover rates, and specific health conditions or risks present in the group. Lifestyle factors such as smoking habits and participation in wellness programs can also impact premium amounts.
11. Group Size and Employee Turnover
The size of the group also impacts premium calculations. Generally, larger groups tend to have lower premiums per member due to the risk being spread across a larger number of individuals. Additionally, employee turnover rates can affect premiums, as frequent changes in covered employees may lead to increased administrative costs for insurers.
12. Lifestyle Factors
Insurers may also consider lifestyle factors, such as the number of smokers in the group. Groups with a higher percentage of smokers may face higher premiums due to the increased health risks associated with smoking. Wellness initiatives that promote healthy lifestyles can help mitigate these costs by reducing overall health risks within the group.
How Employers can Manage and Optimise Premium Costs
Here are five key strategies employers can use to optimise costs:
1. Promote Preventive Care
Encourage regular check-ups, vaccinations, and screenings to keep employees healthier and reduce high-cost claims.
2. Implement Health and Wellness Programs
Introduce programs focusing on physical activity, mental health, and smoking cessation to minimise health risks and improve productivity.
3. Review Plan Options Annually
Regularly assess and adjust health plans to match workforce needs and budget, including options like higher deductibles for lower premiums.
4. Educate Employees
Help employees understand health plan options and the cost impact of their choices, which can lead to fewer claims and better utilization.
5. Encourage In-Network Provider Usage
Promote the use of in-network healthcare providers to benefit from negotiated lower rates, reducing costs for both employers and employees.
Conclusion
Understanding how group health insurance premiums are calculated is crucial for both employers and employees. Factors like workforce demographics, past claim history, and the type of coverage all contribute to determining these costs. By understanding these variables, employers can make more informed decisions, and employees can better appreciate the value of their health benefits.
Managing premium costs requires proactive strategies, such as promoting preventive care, implementing wellness programs, and regularly reviewing plan options. These measures not only help in reducing costs but also contribute to a healthier, more engaged workforce.
If you’re looking for more personalised insights or exploring competitive group health insurance options, consider reaching out to insurance experts or checking out providers like Onsurity for affordable, high-quality group health plans. Empower your business and your employees with the right coverage at the right price.
FAQs:
1. Who pays for group health insurance premiums?
Group health insurance premiums are typically shared between the employer and the employees. But it may also depend on employer to employer some might even pay full premium.
2. Can group health insurance premiums change annually?
Yes, group health insurance premiums can change annually. Changes are based on several factors such as the group’s claim history, changes in the workforce demographics, medical inflation, and adjustments in the plan coverage. Each year, insurers reassess these factors to determine if premium adjustments are necessary.
3. How does adding new employees affect group health insurance premiums?
Adding new employees can affect the overall premium, especially if the demographics of the new hires differ significantly from the existing workforce. For instance, if the new employees are older or have health conditions that increase risk, it may result in higher premiums for the group. Conversely, if younger or healthier employees join, the premium might stabilise or decrease slightly.
4. How can I find out the premium cost for my group health insurance plan?
To find out the premium cost for your group health insurance plan, you can review the policy documents provided by your employer or contact your HR for detailed information. Additionally, the insurer provides documentation that breaks down the premium costs and contribution requirements.
5. What factors can affect the premium rates for group health insurance?
Several factors can affect premium rates for group health insurance, including the demographics of the workforce, the group’s past claims history, the type of coverage chosen, the industry type, lifestyle factors, and medical inflation. Each of these factors contributes to the risk profile of the group, which directly impacts the cost of the premiums.
