CHENNAI : At a time when having a health insurance plan should have been a reason for comfort, Ram Manohar Reddy (48), an investment professional based out of Hyderabad, was in for a shock instead. Earlier this year, his insurer sent him a renewal notice for his health insurance policy. The premium hike was an eye-popping 200%—up from ₹21,762 to ₹66,667.
The insurer had discontinued the old policy and introduced a new product in its place with a few improved benefits. “I couldn’t immediately identify the benefits, but whatever it was, the premium was steep," Reddy said.
He had bought individual health insurance plans for himself and his parents back in 2002 (father is now 75-years-old and the mother is 66-years-old). The sum insured totaled ₹7 lakh. Having been a customer for nearly 17 years, Reddy decided to bite the bullet and renew the policy. “My parents are senior citizens and porting out at that age is difficult. I did approach the regulator who directed me to the insurer’s grievance cell. The insurer got back saying the rates were approved by the insurance regulator, so I just went ahead and renewed the policies," he said.
But the hike didn’t stop there. For FY22, Reddy has already received a renewal premium notice as the insurer is once again revising its rates. This time, the hike is a total of 64%, but for Reddy, this really crosses the comfort barrier. “I now have to pay ₹1.09 lakh for a collective sum insured of ₹7 lakh. Not only does this sound illogical and unaffordable, it looks more like a trap since older policyholders will not be able to port out that easily," he said.
Reddy is now contemplating lapsing his policies. “The insurer has given me the option to port to the cheaper Arogya Sanjeevani, but I am not sure," he said. With very few other options available, Reddy has been vociferously complaining via social media to anyone who would listen.
But there is no remedy in sight yet. And he is not alone. In response to multiple reports about steep premium hikes faced by policyholders, the insurance regulator clarified on 3 December that only 55 products out of a total of 388 products had hiked premiums by 5% in response to recent reforms in health insurance. Only 5 products hiked premiums beyond 5%. But thousands of people may be stuck in those products. And steep hikes are not without precedence, particularly for older Indians.
Although the Insurance Regulatory and Development Authority of India (IRDAI) doesn’t publish data on lapsation in health insurance, steep premium hikes on renewal do put policyholders at risk of lapsation. Medical inflation and age band pricing are two common culprits for steep hikes.
According to a white paper ‘Medical inflation and health insurance products in India’ by consulting firm Milliman, insurers tend to hike premium by 15%-35% every two to four years as health insurance pricing is extremely sensitive to medical inflation. This coupled with age band pricing—where premiums are set in age bands of 3-5 years and change as the policyholder moves from one age band to another—can make renewal premiums seem rather inflated. According to the paper, the two factors together can account for a hike of up to 50%.
But premium inflation akin to what Reddy experienced can’t be explained away by those factors alone. Predatory pricing, high commissions, and price signaling—where older cohorts experience a more taxing premium revision—are all prevalent in the Indian context.
Against this backdrop, and in light of the fact that covid-19 has popularized health insurance—it accounts for nearly 30% of premiums collected by non-life insurers—it is important for India to move toward a health insurance regime that is more affordable, consistent and transparent. And this calls for not just greater supervision but a comprehensive review of commissions and the creation of a healthcare inflation index in order to benchmark premium hikes.
Pricing pain
Predatory pricing, where premiums are initially at rock bottom rates in order to chase the topline, can, over time, make health insurance unsustainable and force insurers toward price correction. According to Hitesh Kotak, chief executive officer, Munich Re India, predatory pricing is a very myopic approach to a long-term product like health insurance.
“As people grow older, chances of using health insurance increases which impacts the claims ratio. The ageing book dynamics need to be appropriately factored at the pricing stage to avoid sharp price rises later," he said. Claims ratio is the ratio between the total claims paid and the total premiums collected.
Price correction can potentially lead to selective lapsation where the young and healthy move out, whereas, the not-so-healthy stay back. This would worsen the books further, warranting a hike and resulting in a vicious spiral.
While there have been several anecdotal accounts of predatory pricing, one of the most audacious events that ultimately forced the insurance regulator to intervene dates back to nearly a decade when policyholders who had bought health insurance at rock bottom rates saw their premiums go up by 60%-800%. Read about it here.
In order to combat predatory pricing, the IRDAI locked the premium for the first three years after a new policy launch and allowed for an annual revision thereafter. But has it helped? Retail policies come with a host of exclusions that are front-ended that keeps the claims ratio low initially, but as claims begin to pick up, insurers are forced into price correction. Therefore, predatory pricing and consequent premium corrections can’t be completely eliminated with the 3-year lock-in.
High cost of insurance
According to Aloke Gupta, a health financing specialist, retail health insurance is priced on the higher side. “When you look at the coverage of health insurance, which is very narrow in scope with many exclusions and disallowances built into the product, the premiums appear to be high. This is true especially for senior citizens for whom the contractual disallowances in the form of deductibles and co-pay are much higher and yet they shell out more than 10% of the insurance cover (sum insured) as premiums," he said. Gupta has worked with IRDAI as part of various committees on health insurance.
Even in the case of the Reddys, who paid just 2% of the sum insured as premium in 2002, the cost has gone up to 16% of the sum insured. This, Gupta says, is an indication of complete market failure.
“Anything over and above 2.5% is indicative of a market failure, where insurers are not able to increase the penetration of health insurance and price the product effectively," he said.
What lends weight to Gupta’s argument is the prevalent claims ratio of the health segment of insurance companies. An analysis of regulatory disclosures over the past five years indicates that the net incurred claims ratio for the retail book has been in the range of 50% to 70%.
A lower claims ratio is desirable for the sustainability of the insurer as it means it’s collecting more by way of premiums than it is paying by way of claims. The surplus then can be used for administrative and management expenses and also earns a profit for the insurance company. However, very low claims ratios give rise to concerns regarding consumer protection as it means products are overpriced.
In the retail bucket, health insurance products, especially from private and stand-alone health insurance companies. have been in the range that would invite concerns regarding overpricing. However, the story looks very different when one looks at the combined ratio, which reflects the claims ratio as well as the expense ratio.
A combined ratio of over a 100 means that the insurers are paying out more than they earn by way of premium (exclusive of any investment return). While insurers don’t report combined ratio segment-wise, some of the standalone health insurance companies are operating on a combined ratio of over 100%. The gap between the claims ratio and the combined ratio, therefore, reflects operational expenses—of which commissions comprise a huge portion.
Commission confusion
Regulations allow a 15% payout to insurance intermediaries, but this is not a one-time payout but a recurring one. The agent is entitled to 15% of the premium not just on sale, but every year on renewal as well.
This gets further exacerbated by the fact that the regulator allows a reward—30% of the commission—which increases the payout further. Furthermore, while the percentage of commission is fixed, the premium in health insurance increases with age and this works like an increasing annuity for the agent, potentially for life.
According to Joanne Buckle, principal and consulting actuary at Milliman, distribution costs are steep in India. “Commissions are usually structured differently across different economies but typically we have seen commissions to be in the range of 5%-10%. A 15% year-on-year commission can put a lot of pressure on cost," she said. As per Buckle, medical inflation, which is more a factor of the larger healthcare ecosystem in India, and distribution costs are the key challenges in retail health insurance from a sustainability point of view.
Antony Jacob, chief executive officer of Apollo 24/7, a healthcare app, says that reducing renewal commissions will effectively bring down expenses and, by extension, consumer costs. “Loss ratios or claims ratio in the first 2 years look good given how health insurance policies come with exclusions in the initial years. So, there is room to absorb higher expenses. But as claims ratio begin to increase and commissions remain high, there is a pressure on profitability," he said.
“Paying a higher commission in the first year and tapering off commissions in the subsequent years would make more sense from a sustainability point of view," he added. Also, give how renewals are now actively happening online, the rationale for a 15% renewal lifetime commission may need to be reviewed.
Pricing in health insurance needs greater monitoring, but a relook at incentives is important too for the long-term sustainability of the Indian health insurance market. The regulator also needs to work on creating a healthcare inflation index to which premiums can be benchmarked.
As per Milliman’s white paper, medical inflation index is emerging as a potential global best practice to peg premium hikes. “However, no such standardized medical inflation index is currently published in India, although the data exists to do so. Such an index would be extremely useful in providing a solid and robust benchmark and would allow insurers to compare their own experience against the market," noted the report.
With consumer interest peaking in the health insurance market in the shadow of a pandemic, long-overdue reforms can no longer wait. And undertaking those reforms before India shifts from being a young country to a middle-aged country would be critical.
Deepti Bhaskaran is a freelance writer
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