Can the new Irdai chief bring in much-awaited reforms in insurance sector?

For Irdai Chairman Debasis Panda, LIC's fortune and reforms in health insurance sector will be the two most difficult tests to pass

Tales of overcharging by hospitals are not only common on social media but also elicit major support. These tales have become more strident in the post-Covid phase. Some changes could be happening with the current wave of orders from the sector regulator, the Insurance Regulatory and Development Authority of India (Irdai). “The regulator has made recent moves to think about managed health care as a possible idea. It is an opportunity to move forward from indemnity insurance, which is only what health covers in India currently offer”, said Nachiket Mor, eminent economist and currently Commissioner on the Lancet Citizens’ Commission on Reimagining India’s Health System.

At the other end of the insurance market, Life Insurance Corporation (LIC) has said the worst of the death claims due to Covid are now behind it. “There is a decline of nearly 20 per cent in death claims in the first quarter of this fiscal with the Covid impact seen to be ebbing, though the amount is still higher than pre-2020 levels”, said chairman M R Kumar in the post-earnings call with analysts this week. LIC was listed in May this year and despite downbeat expectations, has not done too badly. True, the scrip is down 17.3 per cent, but analysts have now issued an upbeat note on it.

 
For Irdai chairman Debasis Panda, LIC’s fortune and reforms in the health insurance sector will be the two most difficult tests to pass.
 
If, as the analysts believe, the LIC share price begins to do well from here, Panda will have room to breathe. Reforming the health insurance is difficult. Despite issuing a flurry of orders to relax regulations in the health and other sectors along with oral directions on annual targets for the life and non-life insurance companies to comply with, the pain points in this line of business are proving tough to deal with.
 
Health pains
 
“People sometimes bear the brunt of exorbitant bills. There are service providers (hospitals) where there is no regulator — they have a free hand in pricing”, said TL Alamelu, former member (non-life) at the Irdai had said, at an industry event last year. Insurance companies also admit those complaints are correct but are unwilling to come on record. The usual complaint about policies is that either the insurance payout is too low or the hospital blew a hole in the purse.
 
Health insurance is the product that non-life insurance companies sell the most. It accounts for 39.1 per cent of all premiums collected, with motor insurance a distant second at 28.9 per cent (Q1FY23). Often thanks to the mis-selling by hospitals, health is also the product with the most complaints. Insurance Ombudsman data shows complaints about health insurance outscored other sectors 4:1 in FY22. For them, this is what is missing is tangible changes in the way hospitals charge them.
 
The complaints are not just any industry problem. They underscore why many Indians are reluctant to buy any insurance products. India’s insurance penetration for non-life is 1.7 per cent, significantly low than what per capita income warrants. But this does not disturb the companies since, despite the constraints, the non-life insurance industry is continuing with its growth momentum reporting more than 1.5x growth than in Q1FY22. These are heady numbers.
 
Irdai chairman Panda’s key problem is that the hospital industry is not under the thumb of the insurance regulator. The industry is hardly under any central law to contend with, only a clutch of municipal laws.
 
Despite what Alamelu said, the regulator is nowhere near enforcing discipline in the rates charged by hospitals. To its credit, the Irdai has created a Preferred Provider Network of hospitals, a ring of medical centres, which are willing to coordinate their rates. This is supposed to encourage insurance companies to guide the insured to take services from only these hospitals. “It has had a limited impact as hospitals do not advertise the advantages and the rates hardly match”, said a top health insurance manager in a public sector insurer.
 
While many states have signed on to Prime Minister Jan Arogya Yojana (PMJAY), a health insurance scheme, partially funded by the states and the central government, they are finding it difficult to locate insurance companies to apply. One reason is the low premium the states are willing to pay from their budgets. Mor said with thin expenditure state governments are launching new purchasing package in addition to their already underfunded schemes. Under PMJAY— touted as the world’s largest health insurance policy, covering 107.4 million people — a family gets an annual limit of Rs 5 lakh as health insurance cover for secondary and tertiary care in hospitals across public and private empanelled hospitals in India.
 
Claims are naturally high, because of which the insurers are reluctant to bid for the business from the state governments. Almost none of the standalone or other non-life private sector companies have bid, leaving only the government-run insurance companies as bidders. Compared to the 22.5 per cent growth in the overall health portfolio in Q1FY23, the growth in government business was a third at 8.1 per cent in the same period.
 
Two other similar schemes, Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), that offer a social security net for those at the bottom of the pyramid have also been dependent only on LIC and the state-run general insurers.
 
Agreeing with Mor, Winnie Yep, professor of Global Health Policy and Economics in the department of Global Health and Population at the Harvard T.H. Chan School of Public Health, said the solution is to offer government financed outpatient care. It will encourage the public to go in for early treatment, cutting the load on inpatient and insurance services. “India has instead decided for slicing the population with a public insurance for inpatient services which is expensive and asks the public to pay from their pocket for outpatient care. It is like China, costly”. Both were speaking at a seminar, Health System Dialogues organised by Delhi based, Centre for Social and Economic Progress.
 
Ratings company CareEdge report shows companies market health insurance only to salaried segments. “It has the largest market share at 57 per cent with a retail long way down at 33.7 per cent”, an officer handling the sector in a private sector company said.
 
In this context, the Irdai offer to companies for use and file policies will encourage the move towards managed health care. Companies can pilot policies that are preventive instead of those which only pay for incurred medical care. , Companies can now launch a new health policy and then apply for registering it. Mor, however, warned this could only happen if Irdai brought down entry barriers. “Commercial health insurance has a entry barrier in India. It requires six times more capital than EU, say France to set up a company. There is no logic”.
 
Growth pains
 
It is also a demand from the industry generally. They want to Panda to ease the rules for raising capital. Foreign investors are chafing at the 74 per cent limit for foreign direct investment (FDI) in the sector. They want the limit to be raised to 100 per cent. Since the domestic partner in most cases is unwilling to put in more money, it has proved difficult for the existing insurance joint ventures in life and non-life to expand. If the FDI ceiling is done away with, foreign ventures will not need to form joint ventures with the cash-strapped domestic companies. Irdai has made some halfway changes here, like doing away with segment-wise reporting of business for all companies. In a blitzkrieg of sorts, it has also allowed more marketing freedom to the companies, relaxing the rules of where they can invest their money.
 
“One way out could be to relax the rules for raising money for the specialised insurers”, said an informed source. Other than health there is a clutch of insurance companies at the bottom of the pyramid that have thin capital selling specialised products. Current regulations insist they also have to sell motor and health policies in the same proportion as the larger companies that have larger purses.
 
“Unless the headline investment orders are relaxed, changes like allowing banks to become corporate agents of nine insurance companies in each line of business, from the current limit of three will not help”, a reinsurance company chief said. “However, as more companies have been handed out first stage licenses for doing underwriting business, the pressure to perform will rise”, he said.
 
“The smaller companies were trying out many alternatives to reach the regulatory goal posts. Irdai has simplified matters”, said a CFO in one of the insurance companies.
 
S Mohan, Managing Director of Paavana Insurance Brokers, however, while welcoming the expansion said a larger number of insurance underwriters offering insurance under the brand of the same bank, “would raise the costs for the insurers. Their gross realisations could be less and so the payouts for the corporate agents could be less”. The math could change if the market expands widely.
 
Hopefully, analysts expect, these will bring more transparency in the reporting of accounts by the companies, making it easier for the shareholders and policyholders to take informed decisions on the health of the companies.
 
Target
 
Irdai wants the scope of the sector to expand from the puny $108 billion as it exists in India. To balance the approach, the regulator has also issued a series of orders making stricter anti-money laundering guidelines.
 
To support the regulator, the finance ministry has decided to raise the premium rates for two government-run insurance schemes that provide life and accident cover for India’s poorest. The premium for PMSBY was raised to Rs 20 from Rs 12, annually — a two-third rise, while the premium for PMJJBY, a life insurance scheme, jumped to Rs 436 from Rs 330, a 33 per cent rise.
 
“No revision of premium rates was made in the last seven years since the inception of the schemes in spite of recurring losses to the insurers”, noted a government press release. A finance ministry data set notes there are 64 million policies under the life cover and 220 million for the accident cover, as of March 31, 2022. The government aims to double the life cover to 150 million and for the accident cover to 370 million in the next five years.
 
The schemes are administered by the state governments with the banks as intermediaries. The insurance companies, life and non-life, bid for the business. The claims are paid by them to the accounts of the beneficiaries held in the banks.
 
The new revisions in premiums will pull down the costs for the insurance companies. Over the years, as the number of those covered has risen, the revenue model has come under pressure. As Irdai data put up to the finance ministry shows, the combined ratio (sum of claims ratio and expense ratios) has reached 163.98 per cent for PMJJBY and even more steep 254.71 per cent for PMSBY (March 2022). Insurers consider a business unviable if the losses exceed 100 per cent.
 
“The current premium rates were decided upon when the scheme was launched in 2015, without any actuarial inputs”, said a government official. While there was a plan to draw up studies based on the claims experience, within a couple of years, it did not happen, the source added.
 
"India is moving towards a mandatory basic coverage like PMJAY and then offering a voluntary insurance cover to top it up”, said John C. Langenbrunner, a Health Economist and a former senior officer with the Bill and Melinda Gates Foundation. To make the transition smooth, India needs to dovetail policies for a managed competition model he added. Health policies with price and benefits need to be updated every year. Langenbrunner, who has co-authored the NITI Aayog book “Health System for a New India: Building Blocks”, suggested transforming the National Health Authority as a central board to do all that.