H 26,4 264 Humanomics Vol. 26 No. 4, 2010 pp. 264-283 # Emerald Group Publishing Limited 0828-8666 DOI 10.1108/08288661011090875 Adverse selection and its consequences on medical and health insurance and takaful in Malaysia Zuriah Abdul Rahman Faculty of Business Management, Universiti Teknologi MARA, Shah Alam, Malaysia, and Norzaidi Mohd Daud Research Management Institute, Faculty of Business Management and Institute of Business Excellence, Accounting Research Institute, Universiti Teknologi MARA, Shah Alam, Malaysia Abstract 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. Keywords Selection, Moral hazards, Malaysia, Medical insurance, Health insurance, Consumer behaviour Paper type Research paper Introduction Medical and health insurance (MHI) in Malaysia started in the early 1970s with the major industry players being foreign-based insurers such as American International Assurance, AETNA, and Prudential to name a few. In 1999, Malaysians have spent a substantial amount of their income towards health expenditures, to the tune of RM10 billion, RM6 billion by the Malaysian government and RM4 billion by the private sector. Although the government is providing and subsidizing the bulk of the public healthcare cost, the insurance/takaful industry is expected to play a complementary role in providing this service to meet the diverse needs of the increasing population and very sophisticated market. The Social Security Organization (SOCSO), another body providing treatment for accidents and occupational diseases, also extend some form of medical care services for The current issue and full text archive of this journal is available at www.emeraldinsight.com/0828-8666.htm