The youngest player on the block in the Indian health insurance business, Apollo DKV Insurance Co., wants to sell health insurance, but it would rather customers stay healthy through its “wellness prescriptions"—a first for an insurer and the way forward for all, say experts.

Apollo DKV, which is set to roll out its individual and group health policies in a month, is a 74:26 venture between Chennai-based health care chain Apollo Hospitals Enterprise Ltd and German insurer Deutsche Krankenversicherung (DKV).

Apollo chairman Prathap C. Reddy

The goal—a bit of a marketing edge and a hope that the effort eventually will reduce claim payouts.

“Ideally a policy should look at wellness, disease, recovery and lifestyle management," says Apollo’s chairman Prathap C. Reddy, whose health insurance venture is just the second among so-called ‘stand- alone health insurers (SAHIs)’ starting businesses in India.

Health insurance in India has been a tough business so far. For every Rs100 collected in premiums until a year ago, health insurance firms say they were typically paying out claims of Rs120-140.

Such losses stemmed from actuarial tables that set out cost of coverage as a function of the risk involved, policyholders colluding with willing doctors and clinics for claims, and overcharging by hospitals.

Until early 2007, pricing of several arms of general insurance were controlled.

In addition, although fire insurance could be offered at low premiums because it generated a very low claim ratio of 20-30%, tariff rules forbade pricing it lower.

To get around the restriction and in a bid to promote their fire insurance policies to large corporate houses, general insurers offered discounts on group health insurance covers (which weren’t tariff bound), says Deepak Mendiratta, managing director of consultancy firm Health & Insurance Integrated. This cross subsidization for group health policies distorted health insurance premiums and made the business a loss-making segment, he adds.

The fact that Indian hospitals have no regulator and the sector lacks clearly defined and widely accepted standards of care and pricing, or good databases, which can be shared, also made matters more complicated in health insurance than other areas of insurance. “There is a need to create mechanisms that ensure it pinches the patient too if he is not diligent about his health care expenditure," says Shivinder M. Singh, group managing director of hospital chain Fortis Healthcare Ltd, adding that health insurance practices are challenged by corruption in many parts of the world.

Despite all the issues, India’s low insurance penetration, which is less than 2% of the population, continues to attract new players. According to a sector study by consultant Ernst & Young and industry body Federation of Indian Chambers of Commerce and Industry, the Indian health insurance sector is likely to grow to $3.8 billion (Rs14,972 crore at current exchange rates) in collected premiums by 2012 from $711 million in 2006.

Premium collections have been increasing 35% annually for the last three years, according to industry estimates.

Since the beginning of the year, SAHIs, such as Apollo DKV and pioneer Star Health and Allied Insurance Co. Ltd, are looking at market-based pricing of products, which translates into higher health insurance premiums, as well as other methods to help overcome their inability to lose money in one area and make up in another, the way general insurers can.

“Some insurance companies have a larger exclusion period and some have raised the minimum amount of cover," says Mendiratta, adding that companies have begun to increasingly insure the lowest risk category, which comprises groups such as young adults and “discourage higher risk categories."

For example, ICICI Lombard General Insurance Co. Ltd, has set a two-year exclusion period for diseases such as cataract, hernia or gastric ulcers. Royal Sundaram Alliance Insurance Co. India covers heart, kidney and circulatory disorders due to pre-existing hypertension or diabetes only after five years of a policy being in force.

From an insurer’s viewpoint, a larger minimum cover, say Rs1 lakh instead of Rs50,000 assures larger premium without changing the statistical probability of servicing the claims.

“We would recommend a Rs3 lakh cover to someone rather than a Rs2 lakh one because the premium per lakh is lower that way," says Kartik Jain, head of marketing at ICICI Lombard. “Secondly, the bill for any surgical procedure may easily run up to that amount and people are better off being adequately covered."

ICICI Lombard seeks to reduce its claims on corporate health policies down to 100% in six months, while the individual or retail health claims already are at profitable levels of 50-60%, according to Jain who adds, “A full year has to elapse after de-tariffing, to know the actual impact. Policies will be renewed and claims ratio may dip further thereafter."

At Star Health, V. Jagannathan, managing director, says, “We are very careful at the time of accepting risk (insuring) and we administer our own claims."

The firm, which has a claims ratio of less than 60%, has tied up with the Andhra Pradesh government and has covered 6.2 million families across eight districts in the southern state.

The insurer also has introduced a ‘co-pay’ policy, which asks customers to pay, say 10% or 15%, of a claim with a goal to reduce the risk of over-inflated medical bills.

Apollo DKV is also looking at risk-equated premiums. “We will not chase volumes," says Apollo’s Reddy. “We will price in a way so as to remain profitable." Apollo is banking on its “wellness" strategy to reduce claims.

A hospital chain with long years of experiences in the healthcare business, Apollo is hoping to draw on its experience to map disease patterns in the population and corresponding hospital expenses to feed into its actuarial models.

Such data, says Pervez Ahmad, executive director of Max Health care, is invaluable and he recommends the setting up of an repository, contributions to which must be made mandatory.

But there are sceptics, too. Mere good counsel on wellness will not force people to stay healthy. “You have to link it with a financial parameter like premiums," says Mendiratta.

“An obese person could be charged a lower premium over time if they follow the ‘wellness prescription’ and lose weight."

For instance, ICICI Prudential General Insurance Co Ltd, a life insurer, has a policy for diabetics that links yearly premiums to the state of the insured’s health, with lower premiums charged for a better disease management.

Meanwhile, there are many sitting on the fence awaiting changes in government policy. Aetna Inc., the world’s largest health insurance player, along with Cigna Healthcare and Bupa Healthcare have been surveying the market and been in touch with hospital chains in India. Fortis and Max India Ltd, which already are into life insurance and hospitals, are also keen but watching the rapidly evolving scenario.

Fortis’ Singh says he is looking at halving the capital requirement to Rs50 crore and a separate licence for health insurance that will enable them to offer “a longer term product that goes beyond a year."

The segment currently is clubbed under the ‘general insurance’ licence, preventing SAHIs from offering policies for more than a year.

The foreign players, on their part, want a larger share in any venture and are waiting for foreign direct investment norms to allow up to 49% fund infusion—up from 26% currently.

“The top five global health insurance companies are sitting on the fence, awaiting clarity on regulatory issues from ministry of finance and insurance regulator," says Shashwat Sharma, associate director with consultant, KPMG. “Until then, it will be tough to say who’ll enter and when, as the entire feasibility of this business hinges on these issues."

The insurance watchdog, Insurance Regulatory and Development Authority (Irda) is mulling the recommendation of standards, which can regulate the system.

Irda already has set up four sub groups—one with representatives from hospitals to look at health care delivery standards, another with insurers for standardizing claims, the third with Irda officials for data standards, and the last for creating public awareness. D.V.S. Sastry, director general of research and development at Irda, says there is a need for an identification number for each insured person to help insurers track customers.