One big reason to buy shares in health insurers like Medibank Private Ltd

NIB Holdings Limited (ASX:NHF) and Medibank Private Ltd (ASX:MPL) reported annual premium increases of 4.5% today.

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It's that time of year again – health insurers are reporting how much they are allowed to lift their premiums by for the coming year.

NIB Holdings Limited's (ASX: NHF) premiums are going up by 4.48%.

For Medibank Private Ltd (ASX: MPL), it's a 4.6% increase.

It's Medibank's lowest premium increase in 15 years, and NIB's smallest increase in the past 14 years. That's partly due to the work that both companies have done on restraining costs, and partly due to the rising pressure on customers, with both companies commenting that health insurance affordability is becoming a crucial concern for members.

Now, it's not hard to see why investors love the health insurers. Premiums go up every year, like clockwork. It's not just that healthcare costs more – it's that Australians are consuming more of it. Health insurers 'clip the ticket' as a kind of middleman in between customers wanting insurance, and hospitals providing healthcare.

Money that is left over from claims and operating expenses is kept by the insurer as profit, and invested or paid to shareholders as dividends.

It's a good business, and since healthcare demand and premiums just keep going up, investors think they're on to a good thing. They are, but in my opinion the market has become a little too enthusiastic about the prospects of Australia's health insurers.

Both have been bid up to prices that reflect ongoing growth, without any rainy days. I'd be concerned about paying today's prices because both NIB and Medibank have been telling investors for a while that healthcare insurance is becoming unaffordable, and that they need to reinvest to provide better value for members.

Medibank in particular is more susceptible, as I wrote here, but both companies have been warning investors for a while and to my mind today's prices don't adequately factor in the possibility of a downturn.

That said, I don't think investors need to race out and sell their insurers. Both companies have good businesses and strong long-term demand for their services. I think it is more likely that there could be a period of mediocrity coming for both insurers, which means it is important to be disciplined with the kind of price you are willing to pay. I would not pay today's prices for either Medibank or NIB.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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