Cohort-Based Pricing In Health Insurance: What Is It? How Does It Work? What Are Its Pros And Cons?

Cohort-based pricing in health insurance is a strategy where premiums are determined based on the risk profile of a specific group, or cohort, rather than individual characteristics. It works by pooling individuals with similar risk factors together and pricing their insurance accordingly.

Says Bhaskar Nerurkar, head of – the health administration team, at Bajaj Allianz General Insurance: “For example, a group of young, healthy individuals may be grouped and offered lower premiums compared to an older group with more pre-existing conditions. This allows insurance companies to offer more competitive rates to lower-risk groups while still providing coverage to higher-risk groups. Cohort-based pricing can help make health insurance more affordable for certain groups of individuals, but it can also lead to disparities in pricing for individuals who fall into higher-risk cohorts.”

According to experts, the concept of cohort-based pricing appears to be similar to claims-based loading that existed in health insurance long back.

The concept appears to be proposing separate premium pricing for individuals who make claims versus those who don’t, in a way punishing policyholders for utilising the health insurance they are already paying for.

“Under this concept, the cohort that will claim in a particular year will see their premium going up by a certain percentage for a specified period. This could lead to health insurance premiums of individuals making claims extremely high, making health insurance unaffordable for them over the years. For example, if someone has any chronic illness, they might make a claim every year or every alternative year. Bumping up the premiums of such individuals every time they make a claim will make health insurance unaffordable for them. This will defeat the entire concept of health insurance, forcing such people to go outside the ambit of health insurance,” explains Adarsh Agarwal, Chief Distribution Officer, of Digit General Insurance. 

However, there has been a proposal to further bifurcate the cohort and link the premiums to the actual claims experience of the customers i.e. policyholders who claim within a group are charged additional premiums as compared to those who do not make any claims.

“This aspect of cohort-based pricing wherein the actual claims experience of the policyholders is taken into consideration will make insurance unaffordable for people with chronic conditions / senior citizens and goes against the principle of insurance. Typically in health insurance wherein less than 10 people out of 100 claims in a given year, the claims loading required on the people who make a claim will make the insurance product quite unaffordable, especially for senior citizens and people with chronic conditions,” says Parthanil Ghosh, president – retail business, HDFC ERGO General Insurance company. 

How Does It Work? 

The idea behind cohort-based pricing is that individuals within a particular cohort have similar risk profiles and therefore should pay similar premiums.

This can help insurance companies better estimate and manage risks associated with insuring certain groups of people.

For example, older individuals may be placed in a higher-risk cohort due to their likelihood of requiring more frequent and expensive medical care.

As a result, their premiums may be higher compared to younger individuals who are placed in a lower-risk cohort.

“Cohort-based pricing allows insurance companies to tailor pricing and coverage options to specific groups, which can help them more accurately predict costs and set competitive premiums. However, it can also lead to higher costs for individuals who fall into higher-risk cohorts. For example, cohort pricing can be done for employees of a particular bank, as they share the same work profile which is the common characteristic of this cohort,” adds Nerurkar. 

Pros: 

“It enables insurers to spread risk among a group, promoting more stable premiums over time. Secondly, by focusing on groups with similar risk profiles, insurers can make more accurate predictions regarding claims, potentially leading to cost savings for both insurers and policyholders. Lastly, this approach enhances accessibility to health insurance by extending coverage to individuals who may have been previously deemed high-risk or uninsurable,” says Rakesh Goyal, director, Probusinsurance.com. 

Here are some of the pros: 

1. Cohort pricing can provide a more accurate pricing model based on the specific risk characteristics of each group.

2. It allows for more customization and flexibility in pricing based on the unique needs and demographics of each cohort.

3. Cohort pricing can help to better manage risk and control costs by ensuring that each group is charged an appropriate premium.

4. It can promote transparency and fairness in pricing, as each cohort is treated differently based on their individual risk factors.

5. Cohort pricing can lead to more efficient and effective use of resources, as resources can be targeted to specific cohorts based on their needs.

Cons: 

“This may raise concerns about fairness, as individuals within a cohort may have varying health risks but pay the same premium. Secondly, this pricing model can limit the ability of individuals to customize their insurance coverage according to their specific needs and circumstances. Lastly, there is a risk of adverse selection, where healthier individuals opt out of higher-priced cohorts, leaving sicker individuals to bear higher premiums, potentially destabilizing the insurance system,” adds Goyal. 

1. Cohort pricing may result in higher premiums for certain groups that are considered higher risk, such as older individuals or those with pre-existing conditions.

2. It may be difficult to accurately predict the risks and costs associated with each cohort, leading to potential inaccuracies in pricing.

3. Cohort pricing could lead to disputes or dissatisfaction among customers who feel they are being unfairly charged based on their group classification.

4. Cohort pricing may limit choice and flexibility for individuals who do not fit neatly into a specific cohort category.