Health insurance proposals: Few hits and misses

How would you like it if your health insurance premium decreased if inflation eased? Or if you could build a corpus for future use through your health insurance policy?

Or if you got a discount on your premium because you are healthy?  

These are some proposals in the Insurance Regulatory and Development Authority of India's (Irdai's) Health Report. A look at their feasibility and impact:  

Entry age-based pricing

One recommendation is to calculate premia based on not only the age of the policyholder at the time of buying the policy but also on whether he or she is a first-time buyer or not.

For instance, two people are buying the policy at the age of 40 years. One is buying for the first time and another has had one for 10 years.

By this recommendation, the one who has been a policyholder for longer will be entitled to lower premium.

Hit: "Today, most people buy insurance only by the age of 45-50 years. While there is an incentive for enrolling earlier like a no claim bonus (NCB), that is not enough. Entry age-based premium will encourage people to enroll earlier," says Arvind Laddha, chief executive officer, Vantage Insurance Brokers & Risk Advisors.

From insurance companies' point of view, entry age-based pricing would result in a higher proportion of the younger population in an insurer's portfolio.

"A wider pool of lives would also help keep claims cost in control, thereby helping older lives and resulting in better premium rates at the portfolio level," says Somesh Chandra, chief operating officer, Max Bupa Health Insurance.

Miss: However, operationally, it could become a challenge for insurance companies. The consequence is multiple premium tables across the same age. "If two people of the same age and health background are offered different premia, will it amount to discrimination? A reasonable amount will have to be worked out. It could be a complex procedure," admits V Jaganathan, chairman and managing director, Star Health and Allied Insurance.

While data related to age and risks exist, insurance companies will have to work around the data to arrive at appropriate pricing. "It is possible that a first-time buyer will end up paying a significantly higher amount. But the aim is to give incentive to buy insurance earlier," Laddha says.

Savings component

The aim is to create a fund to pay for long-term health care expenses. This involves a mix of savings and indemnity health insurance.

"It is recommended that the regulations may enable all insurers to offer Health Savings Products which allow customers to build up a fund to pay for long-term health expenses," Irdai says.

Hit: "In India, people typically buy insurance as an investment. The savings component in health insurance will be similar.

These products will have to be long-term and lifetime products. Unlike an indemnity product where if you claim Rs 200,000 the policy comes to an end, here there is incentive for the policyholder to continue. Covers like Out Patient Department may be introduced," Ladha says.

The draft also recommends that pricing of premium should be three years and forward looking.

Since the period for which companies have to guarantee returns is not very long, there is predictability and the risk is not very high, adds Ladha.

Miss: However, if the aim is to encourage youngsters to start saving early for their future, it might not be the best option, says Jaganathan. "A younger person will prefer to save in instruments that offer higher returns," he notes.

Just as it is advisable to buy a pure term life plan and save in life insurance through instruments like mutual funds, in health insurance, it would be better to opt for an indemnity policy and save through instruments, like fixed deposits for future expenses.

Linking premium to CPI

The committee recommends companies raise the premium annually up to a cap of Consumer Price Index (CPI) inflation plus an additional three per cent.

If allowed, this could lead to premia increasing annually, instead of every three years or so, the current practice. The increase would be more gradual and consumers not feel too much of a burden.

Hit: "Currently, if the company wants to increase the premium, it has to refile the product and wait for approval. Approval can take one to two years.

So, the insurer buffers it by increasing the pricing.

That is why premiums suddenly rise by as much as 30-35 per cent. This is because the company is unable to increase premiums for five years and then tries to catch up when the product gets approved.

By linking premium to CPI, the increase will be gradual. So, premiums may increase by 5-10 per cent every year," explains Ladha.

Miss: With health care costs rising at a faster pace than CPI, will it help to link the premium to the latter?

"I have my reservations. New medical advancement, such as absorbable stents, comes at an exorbitant price. Ideally, premium should be revised accordingly. Also, if CPI falls, will companies reduce their premium?" asks Jaganathan.

Wellness and prevention-based incentives

The report recommends incentivising customers to actively manage health by offering a discount in premium. Not only would it lead to people being healthy but also reduce the claim cost in the long run for health insurers, says Irdai.

Hit: "Medical checks would help in bringing to light any medical concern in the initial stages and thereby getting treated early. For insurers, this would help in bringing down the treatment cost, as the illness would get treated at a much earlier stage," says Chandra of Max Bupa.

Jaganathan says some companies already offer a 10-15 per cent discount to customers who undergo regular health checks and this proposal could make the practice more widespread.

Implementation will depend on insurers' ability to track consumers' healthy behaviour, says Ladha. For this, the company could tie up with a fitness centre chain or depend on wearable devices for capturing data on the insured's health behaviour.

If inflation eases, insurance premium may ease too: Sanjay Dutta

Sanjay Dutta

Sanjay Dutta, chief, underwriting and claims, ICICI Lombard General Insurance, who contributed to the report, explains how linking of premium to inflation will allow companies to increase or decrease rates easily.

Will companies reduce premia if inflation falls?

Today, if I want to increase my premium, I have to file it and wait for regulatory approval. If this cycle of regulatory rate filing becomes prolonged, then premia goes up by a huge chunk and the consumer gets a shock. That is why companies should be allowed to increase the price up to, say, 10 per cent (assuming CPI of 7 per cent + 3 per cent) without regulatory approval.

Similarly, if inflation falls or if competitors bring down the price then I will bring down the price. Today we have to go also to the regulator for reduction in price. This, too, should be moved out of the regulatory rate filing cycle.

Will first-time insurance buyers who are older see premia rising by a huge amount if entry-age pricing is introduced? How can it be implemented?

Premiums could go up for older people who are first-time buyers. As of now, everybody at any entry age is given the same premium, whether you have a 10-year policy or are buying insurance for the first time. Going forward, there could be different premia for same age. With technology, implementation is not an issue. This will encourage people to buy insurance early.

What is the rationale behind introducing a savings component in health insurance?

There will be a savings element to your premium which keeps adding to your kitty. You can use the savings component as long as it is for a health requirement.

That will care of two things: One, paying for components that are not payable as part of the policy. For instance, if your policy pays only for in-patient hospitalisation, you can use the savings component for out-patient treatment, medical tests and so on.

Two, while insurance companies give lifetime renewability, policyholders need to have the premium paying ability for lifetime renewability. But gets impacted after the earning days are over. So, the savings element will help build a corpus. You can decide not to touch the savings component when you are young and use it when you grow old and are unable to pay premia.

How will companies incentivise consumers for good health behaviour?

Insurance companies want customers to stay healthy because any kind of care costs money. So, we will reward healthy behaviour. For instance, you are a diabetic but your sugar level is low.  

Insurance companies can have wellness plans and if consumers stick to those they may offer a discount in premia or increase in sum assured.