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IRDA's newly issued guidelines beneficial for the consumer

All hail the IRDA for it has come to the rescue of consumers! According to new guidelines issued by the Insurance Regulatory and Development Authority (IRDA) on the 2nd of April, 2010, it has become mandatory for health insurance companies to now renew health insurance policies irrespective of the payments already made by the health insurance company against the claims.

In lay man’s terms this newly issued guideline will bar health insurance companies from refuting the renewal of a health insurance policy based on repeated claim settlement. This guideline put into action after the modification of three acts: the Insurance Act, 1938; the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999, will greatly benefit the older population which due to their advanced age requires repeated hospitalization, thereby repeated claim settlement.

Most of the times you forget to renew your policy by a mere 2-3 days, which causes the policy to relapse i.e start anew, wherein it is treated as a new policy and you lose the cover benefits given for the pre-existing diseases; put it simply you lose out on the waiting period already covered for pre-existing diseases and have to do with a new waiting period that is usually 4 years! The new guideline issued by the IRDA has cleared this fallacy up by making it clear that any delay in renewing the policy up to 15 days will have to be excused and the insurance company cannot revoke the benefits given for pre-existing diseases on the basis of non-renewal of the policy up to 15 days.

Moreover the IRDA has made it clear that insurance companies should not force consumers to shift from their current health insurance policy to another, except for when their policy is to be upgraded or discontinued with permission from concerned authorities.

IRDA has also stated that Health insurance companies should provide complete details about the renewal of a policy to the consumer, along with stating in clear terms if there are any changes in the payment of the premium by the consumer; these steps are to ensure that the consumer can make an informed decision whenever he opts to buy or renew his current health insurance policy.   

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Intermediary is often-used-management-jargon for simple word “Agent” or “Broker”. In India, we are aware of insurance/estate agents and share/estate brokers. Generally, these are those tie-wearing, persistent people who sell you insurance (Please note, you never BUY insurance, it’s always SOLD to you) or those mobile chattering, cigarette-smoking ones who help you find buyer for your house or find you a house for renting. That’s the image you have about them. So it’s quite natural that you look at a Broker or Agent as Seller’s representative. But there is huge difference between an Agent & a Broker when the context is Insurance industry.

An Agent is a representative of a single insurance company who is authorised to sell only one insurance company’s products while a Broker is buyer’s sole representative who can help you buy insurance from multiple insurance companies. An agent’s paramount concern is to safeguard Insurance Company’s interest while a Broker must ensure that his Client’s welfare is taken care of first. That’s why you often find an agent pushing certain products to you even when you are not convinced that they are the right fit for your needs. Generally, the drivers of push in such cases are the targets of insurance company or higher percentage of commission for agent. But a broker’s primary responsibility is to understand your needs, use his market knowledge to identify correct product, negotiate the rates (generally, for group insurances), obtain the cover for you & help you in case of a claim. An appropriate way to summarise his role is to say that “a broker helps you buy an insurance product & service it during its lifespan”.

The fundamental principle on which the “intermediation” started in the world was “Information Asymmetry”. In simple words, the buyer didn’t know what’s available in the market & the seller didn’t know who wants to buy a product. The “Intermediary” or “Agent” or “Broker” brought these two together and made a sale, albeit by earning some commission. If you look around all the agents or brokers till the internet exploded, they were focused only on bringing you information about what is available. But when internet came in common man’s life, searching for products & services became easy on web & the “Information Asymmetry” collapsed. Now, simply by typing some search terms, one could find out what he needed, also get some detailed information about the product & then make his decision. Thus internet has simply changed the rules of the game for Brokers. Now, the Broker cannot simply rely on information that he holds to win a client. It’s possible that a smart client knows more than him thru internet.

So what’s that broker should do now to remain relevant in the changed business scenario? Now the broker needs to “add value” to services offered by him than just get product information & quotes to a client. There are three areas where we can see value offering happening.

  1. Underwriting Expertise where the broker can help client buy right product by explaining him the policy conditions, its impact on claims, providing alternatives which will reduce premium but not affect the benefits much etc. This is very important support needed by clients for all types of Insurances but matters most for Liability & Health Insurance.
  2. Service Expertise where client’s all insurance related processes are managed by the broker thus client having minimal interaction with Insurance company or its outsourced agencies. Health or Motor insurance, due to high claims, are service intensive & hence, this aspect is very important for these two lines of insurance business.  
  3. Complementary Domain Expertise & value add is what separates a good broker from an excellent broker. A Motor insurance broker adding value to client about how to minimise accidents, more help on Automobile care and assistance to get best service (both preventive or breakdown) would be always preferred than one who helps you in just first two aspects. A Health Insurance Broker, who educates you about better Lifestyle, not only helps you live healthy but also supports you completely when you get hospitalised, will be always preferred by clients.

Unfortunately in India, the brokers came on the insurance scene pretty late i.e. in 2003 (time when insurance industry was opened to private players too). Till then, as clients were aware about only insurance agents, it took lot of time for brokers to position their services in correct manner. Most of the brokers did not have patience to educate their clients & hence, started operating like an agent by just getting quotes from the insurer & placing the business. Also many retired (compulsory or voluntary) insurance officials got into broking business on strength of the captive business that they were handling as insurance officials & continued managing those clients now as brokers. On top of this, by end of 2009, there are around 300 licensed brokers, operating mainly in major cities & vying for the business that other brokers are currently managing. This has brought intense competition in the market where for a single client, there are multiple brokers appointed to get better premium rates. Here, the competition is not between multiple insurers but truly between different brokers.

Worldwide, it’s standard practice that a Broker evaluation is done first where client evaluates various service aspects & capabilities of 2-3 short-listed brokers & selects one of them as Authorised Broker who then helps the client buy the most appropriate product. This broker then also services those products for the period of insurance. Generally, these broker appointments are for 3-5 years tenure where a broker can design a medium to long term insurance program & execute the same in the best interests of client. But in India, due to clients’ perception of brokers as “agents of insurer” as well as brokers’ focus to root out current broker & win the business solely on basis of obtaining “lowest quote”, client are being misguided in appointing multiple brokers for single insurance contract. This logically has led to unethical practices as well as falling service levels for the insurance contracts. Following are the logical fall-outs of this faulty practice.

  • When the competition is between the brokers & not insurers, the broker tends to fudge the claims & other related data while presenting to insurer to enable him obtain a lower quote. This is simply “misrepresentation of client’s information” which most of the clients may not be aware of. Many clients are strict about their corporate code of conduct, ethics & values but ignore such wrongful conduct by their authorised representatives. Ethical conduct is the first casualty of multiple broker arrangement.
  • Misrepresentation of data may help a broker get lower quote but when insurers come to know about this, they either ask for more premium OR are ready to cancel the policy as the claims ratio is high (this is bound to be high when the premium underwriting is faulty). The ultimate sufferer in such case is always the client.
  • Faulty underwriting, over a period of time, results into continuing losses for insurers & hence, insurers tend to behave extra-conservative. Insurance is about calculated risk-taking to arrive at moderate premium rates but with continuing losses, the premium rates harden which ultimately results in higher costs for clients.
  • When insurers make losses, they look at various options to cut down the costs. The brokerage gets cut first which results into lower incomes for brokers. Brokers then look at providing minimal service & tend to make same revenues by increasing volume. This further deteriorates the service levels of the broker.
  • As the broker who now has understood his client’s philosophy of using multiple brokers every year, has no interest in looking at the client’s insurance program for more than 1 year horizon which results in short-term approach. This tends to make the insurance program undergo changes every year which results in inconsistent user experience.

As the broker is supposed to be Client’s representative, the change must be initiated at clients’ end. The clients are not under the purview of Insurance Regulatory & Development Authority (IRDA) & hence, IRDA really can’t do much about this except for occasionally fining an errant broker. I have high hopes that over a period of time, clients would realise the fault in “Multi-Broker” theory and would change for better. It would need lot of education & counselling of clients by the Insurers & Brokers. To put it appropriately, Monogamy is the law of marriage & that applies to Insurance Industry too.

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