What!? But you’ve heard that health insurance industry was growing like never before, didn’t it just record a growth of 20% in premium collected last year and there was also news of more foreign health insurance companies coming to India… While all you heard is true, it is also true most of health insurance companies which are general insurance companies, in are in fact in losses, the underwriting losses which states the premium collected against claims, for New India Assurance was a whopping 117% this year. A similar story follows for other health insurance companies too.
The other side of the story
The reason for the losses is the amount claimed, is higher than the amount of premium collected, in fact, according to health insurance officials, the claims to premium ratio is 180% in group health insurance. Which means that claims are 180 percent of the total premium collected, with such a loss rate, it is surprising to see rosy pictures represented in the newspapers.
The reason why this side of the story wasn’t gaining importance earlier is because most of the general insurance companies make investments that offset some of the underwriting losses but last year’s recession took its toll and the underwriting losses of general insurance industry increased by 37 per cent to Rs 5,326 crore against Rs 3,899 crore in 2007-08.
For the Public sector companies (National, United, New India and Oriental), the underwriting costs increased by 28 % and investments fell by 23%. For the private insurers, the losses were a whopping 84% which was offset by a growth of 47% in investments in the year 2008-2009 according to a report in Hindu Business line.
The Reasons behind the losses
Most of the Insurance companies see the group health insurance as the reason behind the losses. They claim that few limits and conditions on group health insurance as well as clauses like coverage of pre-existing diseases have added to the high claims ratio of health insurance policy.
The PSUs assert that large volumes and large share of group health insurance as the reasons for the losses. The other cause which is often stated by health insurance companies is that, TPAs, the representatives of the Insurance companies which are responsible for settling the claim, are not doing a good job managing the costs.
We asked health insurance experts K S Sankar with more than 30 years in Health Insurance industry and Sudhir Sarnobat, founder and director of Medimanage health insurance Broking firm, about their take on this trend.
Are the Hospitals to blame?
K S Sankar feels “No regulation/standardization of the rates charged by health service providers or hospitals” is to be blamed for the losses. Another reason he states is that the current system allows hospitalization in any hospital which fulfills a very basic definition of a hospital like having minimum number of beds, basic amenities available.
The solution he thinks by enlisting a restricted number of health service providers to whom the insured population will be given access. He also suggests that there be a reward and deterrent process where in you reward by having less or no co-pay in network hospitals (hospitals in which insurance company have a tie up) and deterrent by not offering cashless in non network hospitals.
Health insurance companies can better negotiate with these hospitals now that larger volumes will flow in the hospitals. Insurance companies can also review the service of these hospitals to bring in fresh hospitals and delist those who fall short of the standards, he reasons.
Bad Premium Pricing also plays a part!
Sudhir Sarnobat, however disagrees with the statement that hospitals are to be blamed for the losses suffered; he draws parallels with the hospital expenses abroad and in India to compare the premiums. He says that since the hospitals’ major cost are equipments and consumables and taking the cost of living, the hospital expenses aboard would only be higher marginally however the premium rates in India are very low compared to other nations. He gives the example of US and says “In US, an individual pays around 600-800 US dollars per month for coverage, In India, for a cover of 5 lakh; the annual premium is around USD 500. That is less than 1/10th whereas the cost of care is not 1/10th.”
Thus, he thinks that the losses faced by the health insurance companies is not just due to non- standardized rates in the hospitals but also due to wrong premium pricing.
How to control the losses?
K S Sankar feels that if the health insurance companies charge the premiums according to compliance of the insured to remain healthy, (less premium if you are healthy and loading if you are not), they could effectively tackle the situation. He thinks that health insurance companies can get the inputs through IT driven health insurance broker to drive this reform.
Sudhir feels that the health insurance companies should start by refraining from pricing the current year’s premium based on last year’s claim amount. He says that they should do what any other manufacturing company would do, that is, by looking at the cost of inputs, spending capacity of the market and cost of marketing initiatives. The lack of scientific methods to decide the pricing of the premium is what he claims is the reasons behind the losses.
When would the correction happen?
About when the correction of premium pricing will occur, K S Sankar feels that insurance companies till date have a knee-jerk reaction to new challenges and it requires efforts of outsiders with close association to insurance industry like brokers to drive a change. Sudhir Sarnobat feels that the correction is currently happening in the corporate sector and will come in the retail industry at least 5 years down the line.
We would hope for the industry to start correcting the premium prices because another bad financial year would again throw the insurance companies into losses which in the end would affect the customer!