Is there a fortune at the bottom of the pyramid in health insurance in India? Aggressive bidding by insurers, both private and state-owned, for government contracts to provide health cover to people below the poverty line seems to suggest so.
State governments, which will implement the project, have received bids well below the price they are willing to pay as insurers scramble to get a slice of the expanding market, say executives from the general insurance industry and government officials associated with the project.
The government is willing to pay an insurer up to Rs750 a year to buy an annual health cover worth Rs30,000 for a family of five that lives below poverty line.
Delhi has already awarded the annual contract to state-owned the Oriental Insurance Co. Ltd, said an official from the Union government who did not want to be identified. Information on the value of the winning bid was not available, but a senior company executive confirmed the firm’s successful bid was less than Rs750. Details of the number of people covered under this scheme in Delhi were not immediately available.
The aggressive bids are based on the expectation that premia collected would be large on account of a huge number of people who need health cover, allowing insurers an opportunity to generate significant investment income, said a senior executive in the finance department of a state-owned insurer who did not want to be identified.
“Even if it’s a loss (health cover for a state), it’s worth it,” he said, referring to the advantage provided by annual bids, wherein the company has the option of making an exit at the end of the year.
The entire project, which is scheduled to be rolled out across India by April, plans to provide cover to about 50 million families below the poverty line. The insurers have been asked to follow market determined pricing as the Union and state governments will jointly subsidize the premium.
The Union government had worked out the annual premium at Rs750, of which it would pay 75% and the state governments 25%. Policy holders would be asked to pay Rs30 a year. “People will know (if they pay a nominal amount) that they are covered,” said a senior Union government official familiar with the project who did not wish to be identified.
Some experts saw a larger design to gain market share in the aggressive bids. “I would personally consider the rate offered by the government to be just adequate,” said K.N. Bhandari, secretary-general of General Insurance Council, an industry body. Bhandari, who headed India’s largest general insurer, state-owned New India Assurance, in 2001-02, said the government designated premium was based on rigorous calculation of the data provided by the insurers.
“It’s (the aggressive bidding is) to get a foothold, a strategy to gain market share. It necessarily has to be so in the absence of adequate claims data in health insurance,” said Samir Bali, director, global financial services, Ernst and Young, an audit and consulting firm. Pricing of insurance policies depends on a variety of factors, including previous data on health insurance claims, which isn’t available in India because of low coverage.
The aggressive bids could also be explained by the fact that low bids could impact a firm for just one year, and by the government’s plan to cover the entire below-the-poverty-line population of 250 million over five years, instead of at one go—giving companies an opportunity to recalibrate their bids for subsequent years.