In 2006, Reliance General Insurance Co. Ltd’s HealthWise policy was the cheapest in the market. For a cover of Rs1 lakh for a 35-year-old, it charged around Rs900, almost half the amount that other insurers charged for a similar policy. However, a year ago, the story changed. Reliance General’s premiums saw a sharp increase—between 60% and 800%—putting at least 300,000 customers in a spot and making its HealthWise policy one of the most expensive in the market.
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According to Reliance General, only 40% of them are expected to renew the policy— health covers need to be renewed every year. The industry average is a healthier 60-65%. For the company, it is a strategy gone wrong but for the body that regulates the industry, it is a lesson in the basics.
When Insurance Regulatory and Development Authority, or Irda, approved Reliance’s HealthWise policy in 2006, it clearly didn’t foresee the consequences of allowing a policy that pitched premiums at least 50% below the industry standard. While insurers operate in an open market and can price policies as they choose, the regulator is entrusted with the job of ensuring that insurers validate the long-term viability of premium pricing before giving a policy the green signal.
The industry norm is that premiums move up or down in a band of about 20-30% around the first-year premium. The 60-800% increase in premiums proposed by Reliance General and accepted by Irda shows that both made a serious error in pricing this policy. Irda cites lack of data as the reason why it agreed to the pricing in the first place. An Irda official from Hyderabad, who is not authorized to speak to the media, said: “The insurance industry is fairly nascent and we were not equipped with data or know-how to assess the viability of the pricing.”
With its losses mounting and unsustainable premiums, Reliance General had to knock on the doors of the regulator once again. The Irda official explained: “We had to approve the hike, otherwise the losses in the health insurance portfolio would have impacted other lines of businesses too. The loss ratios were unsustainable. The option was to either increase the premium or close the product altogether. However, we have ensured that the pricing is on a par with market prices.”
Across insurers, health insurance premiums have seen a hike in the last couple of years, primarily due to rising medical costs. Another reason: when the industry got detariffed in 2007, insurers couldn’t cross-subsidize health insurance premiums with other lines of businesses. But the hike has been around 30%. Said Subrahmanyam B., vice-president and head (health vertical), Bharti AXA General Insurance Co. Ltd: “If you have priced the premium appropriately, then any hike will primarily reflect medical inflation. Medical inflation has been around 20% and hence insurers have also hiked premiums by 25-30%.”
However, in the case of Reliance, rise in medical costs wasn’t the most pressing problem. The poor claims ratio, owing to low premiums, quickly undermined the company’s finances. The claims ratio is the net amount claimed divided by the net premiums earned. A claims ratio of over 100 means the premiums that the insurer earns is not enough to settle the claims; Reliance General had a claims ratio of 116% last fiscal.
Said Deepak Mendiratta, director, Health and Insurance Integrated, a insurance consulting firm that also provides advice on health insurance solutions for corporate clients: “A high claims ratio in the health portfolio is typically because of group policies. However, in the case of Reliance, even individual health portfolio was adverse.”
Unlike telecom, where predatory pricing can win over customers, insurance is a business that has to pay out claims. Says Neeraj Basur, chief financial officer, Max Bupa Health Insurance Co. Ltd, a stand-alone health insurance company: “Poor claims ratio is not the basis of pricing a health policy. We take into account factors such as medical inflation, claims record, benefits and the benefits a policy offers. If these factors are taken into account then pricing of a product becomes sustainable over the long run with any increase instituted to only account for medical inflation.”
Reliance General refused to answer specific questions related to HeathWise and gave a general statement: “After taking requisite regulatory approvals, Reliance General Insurance has reprised its healthcare products for the first time in the last four years to ensure continuity, sustainability and viability of these products. Our products continue to be competitive with comparable in the industry.”
However, in order to make the hike less damaging for the policyholder, Irda announced guidelines on health insurance portability, effective 1 July. Said Irda chairman J. Hari Narayan: “We are aware that the hike has been rather steep hence we simultaneously worked on health insurance portability that would enable a customer to change his insurer at no loss of benefits.”
This will allow policyholders to move from one insurer to another and port their benefits such as waiting period on specified illnesses and pre-existing disease to the new insurer.
Graphics by Yogesh Kumar/Mint