IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area
A Mumbai-based health insurer notices that its claims cost per policy has risen faster than general consumer price inflation for several years. An actuary is asked to explain this to the board. Which factor is the most widely recognised driver of this gap, known as medical inflation?
The main driver of claims cost outpacing general inflation is medical inflation: new treatment technology, rising hospital charges and greater utilisation of services. Growth in policy numbers, competitor pricing or investment returns do not explain a rise in cost per policy.
- AGrowth in the number of policyholders, which raises the cost per policy
- BAdvances in treatment technology, higher hospital charges and greater utilisation of servicesCorrect
- CA fall in premium rates charged by competitors
- DThe use of annual rather than multi-year policy terms
- Lower investment returns on the insurer's float
Explanation
Medical inflation reflects new and costlier treatments, rising hospital charges and increased use of services, so claims cost per policy outpaces general prices. More policyholders raise total claims, not cost per policy. Competitor premiums, policy term and investment returns do not drive the underlying claim cost per policy.
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