Because insurance companies are businesses in themselves that are out to make profit for their owners and stakeholders, they must make enough money to stay viable. They make money by setting premium rates according to risk.

If most of the people covered by an insurance company end up not filing for claims because what they insured against (death, debt, illness, burglary, etc) didn’t happen, there is a good chance that a lot of money will be left over at the end of the day.

Setting insurance premiums is a complex science that is understood by only the experts that handle the process (they are called actuaries). Generally, factors that could expose the policy holder to higher risk are considered. For example, in the case of health insurance, factors such as previous illness, occupation, gender, and where you live will determine how much you will pay as premium on your insurance.

If insurance companies had their ideal situation, they would cover only individuals and businesses that are at no risk of coming down with what they are insuring against. This way, they would make huge sums of money from policyholders and never lose a cent. Fortunately, in some places, insurance companies are regulated by state or federal agencies.

However, there is a wide variation in how insurance companies are regulated. In some parts of the world, such as the U.S., insurance companies are regulated by the governments of the various states. In other parts of the world, such as Canada for example, the federal government assumes this regulatory role.

The regulation of insurance companies and the industry as a whole is perfectly done in some parts of the world. But the opposite is the case in most parts of the world, giving insurance companies the unchecked freedom to impose ridiculous rates on policyholders and take every action to deny them of their money when they file claims.

For example, in Texas, U.S., insurance regulation is really lax, which explains the lack of protection for consumers against the bad games played by insurance companies. On its website, the Texas Department of Insurance states that insurance companies set their own premiums and does not have the authority to regulate or approve health plan rates.

In Texas, health insurance rates are determined by the following factors:

  • Age. People who have clocked age 50 can reasonably be expected to require more frequent and more expensive healthcare. So, the health insurance premiums for older people will be more than those for younger people. This is why insurance companies seek to know the age of the policyholder during the time of obtaining the policy.
  • Gender. Young females, especially those in the breastfeeding years, incur higher medical costs than young males. This changes gradually with age until the medical costs for males begin to exceed those of females in the late 50s and early 60s. Plans with a large number of older males or young females are usually more expensive.
  • Geography. Differences in cost of living in an area, medical practices, amount of medical competition in the area and other related geographical factors determine the health insurance rates for policyholders in that area.
  • Claims experience. Policyholders who have filed claims in the past will generally pay more than those with a “clean record” will
  • Industry. Industries with jobs that are more dangerous and a higher number of accidents will have higher medical claims costs than others. High employee turnover can also result in higher administrative costs for the insurance company.

The declaration by the Texas Department of Insurance (that it does not regulate or approve insurance rates) and the use of ridiculous factors by insurance companies to calculate their rates are the two main reasons why Texas State has the highest number of uninsured people in the united states. But more people would have joined the train of insurance if the industry is well-regulated within the state and many flimsy factors are not used to calculate insurance premiums. The story is similar—or even worse—in many other parts of the world.

In an ideal situation, only necessary factors would be considered in calculating insurance rates. Health insurance rates, for example, would depend only on reasonable factors such as age, tobacco use, cost of healthcare in the area, and occupational exposure to risk. This ideal situation can only be found in places where insurance is tightly regulated.

So, if insurance companies are well-regulated, they will be compelled to calculate premiums using only strong risk factors. And they will be compelled to release funds promptly to policyholders who file claims. And there will be a limit to the amount they can charge as premiums. If this happens, the insurance company will gain consumers’ trust and will become more significant.

Ajaero Tony Martins