Adverse selection and its consequences on medical and health insurance and takaful in Malaysia

Purpose – The purpose of this paper is to investigate first, the consumer buying behaviour and claims pattern of medical and health insurance (MHI)/medical and health takaful (MHT) policies and second, to determine whether moral hazard exists among policyholders at the time of application for the product and during claiming for compensation. Design/methodology/approach – The study was conducted on respondents from the insurance industry in Malaysia. Findings – It was found that most claims were rejected due to the discovery of some irregularities by the managed care organizations (MCO) while the Islamic insurer's claims experience, was otherwise. During the buying behaviour stage of MHT, there are fewer tendencies to withhold information but during the claiming stage, due to the generous level of compensation and their awareness of the coverage available naturally influence them to submit excessive claims. To a certain extent moral hazard is present when claims are made for longer disability durations than necessary, and having high average claims per person even for shorter duration disabilities. Research limitations/implications – The paper concentrates only on the MHI/MHT in Malaysia. Practical implications – The results provide insights on how the Malaysian insurance industry and other organizations of a similar structure could improve on their business performance. Originality/value – This paper is perhaps one of the first to address adverse selection and its consequences on MHI/MHT in Malaysia.