LM: Health cover for life, but at high premiums?: June 12, 2012

 

If you worry that you won’t be able to use your health insurance policy when the chances of actually using it are the highest—when you are above 70-75 years of age—you may soon be able to keep your policy for life. The Insurance Regulatory and Development Authority’s (Irda) recent draft guidelines propose lifetime renewal among other things. Additionally, the recent draft guidelines also allow even senior citizens up to the age of 65 years to buy health insurance.

 

The guidelines seek to give definite direction to insurers in terms of product design, pricing, and servicing and are expected to usher in transparency. However, a possible trade-off could be increase in premiums. Read on to know how you will benefit and how much extra you may end up paying for these benefits.

 

According to the draft guidelines, once you have bought a policy, the insurer will need to insure you for the rest of your life as long as you keep renewing your policy or pay all the due premiums. So once you have bought a policy you don’t have to worry about the expiration of the benefits as is the case currently.

 

Barring a few companies, including Apollo Munich Health Insurance Co. Ltd, Max Bupa Health Insurance Co. Ltd and ICICI Lombard General Insurance Co. Ltd, most other companies cover you only up to a certain age. In insurance parlance, this is called the exit age and is typically in the range of 70-75 years. The problem with having an exit age is that despite paying premiums for so many years, you find yourself vulnerable when you need health insurance the most.

 

This clause however doesn’t extend to customized policies. For example, if in a floater plan, that covers the entire family as one unit, the children are covered till age 18, the cover will cease at 18 and will not continue for lifetime.

 

Pricing is the next game changer. The intention of the regulator is clear: to minimize the element of surprise in product pricing. Therefore, the emphasis is on sustainable pricing and making customers aware of future premiums and also the extent of loading on renewal premiums.

 

The guidelines state that once the pricing is approved, the premium can’t change for a year at least. Subsequently, the insurer will need to provide justification for the revised pricing—the recent three years’ claims experience on the original pricing along with the expected experience and the reasoning.

 

The guidelines, however, don’t stipulate a cap on the increase in premiums every year. Explains J. Hari Narayan, chairman, Irda: “We don’t want to get into managing pricing but some insurance companies have been following the practice of hiking premiums of an individual just because he made a claim. The premiums should increase not on the basis of one person but on the basis of macro factors and consolidated claim record.”

 

But the guidelines allow insurance companies to load your premiums even individually in case of an adverse claim record. If in the past three years, you have made a claim amounting to more than 500% of the total premium paid by you, the insurer can load your policy as per a pre-determined table. But the insurer needs to tell you at the time of buying the policy when and by how much your policy can be loaded.

 

But what has not gone down well with the insurance companies is Irda’s stipulation that an insurer will have to disclose the estimated premium for future renewals of the policy. Says Mukesh Kumar, head–strategic planning, HDFC ERGO General Insurance Co. Ltd: “If I have to disclose to the customer what the premiums could be one year from now that’s possible, but if I have to give him an indication of what his premiums will be 15 years from now, it will be impossible. Factors such as medical inflation and claims record will have to be taken into account, which can’t be computed over the long term.”

 

The regulator however is willing to consider the roadblocks, “These are just draft guidelines and we are waiting for feedback. However, in case of long-term products, the future estimate of premiums becomes important.”

 

The guidelines have made no-claim bonuses more customer friendly. According to the guidelines, insurers will have to devise mechanisms to reward policyholders for early entry, continued renewals and favourable claims experience with the same insurer. One way of rewarding you in case of favourable claims experience is by offering you a no-claim bonus. Currently insurers offer a no-claim bonus of around 5% of your sum insured per annum if you don’t make a claim. In other words, the sum insured increases by 5% every year up to a maximum of 50% during no-claim years. But once you make a claim, the insurer can take away the entire bonus from you.

 

As per the new guidelines, the insurer can either take away the bonus sum insured at the same rate at which it accumulates or it can charge the customer. For example, if on a sum insured of Rs.1 lakh a no-claim bonus of 5% per annum will jack up your sum insured to Rs.1.1 lakh in two years. So in the third year, if you make a claim, the insurer will only take away 5% and not 10% of your no-claim bonus. Alternatively, it can charge you for the 5% and keep your bonus intact at 10%. Not only that, the insurer will have to increase the sum insured even on the sub-limits.

 

But these benefits may not come for free. Insurers say that the guidelines will have an impact on pricing. Explains Subrahmanyam B., senior vice-president, health and commercial lines, Bharti AXA General Insurance Co. Ltd: “Till now, our sub-limits were clearly defined and didn’t increase due to a no-claim bonus. But going forward, a proportionate increase in sub-limits will impact our pricing and we will have to factor that in.”

 

What will also hurt the insurer is that now an insurer can’t force the insured person to invoke policies of other insurers to share the claim burden at the time of making a claim. So in case you have an indemnity policy from, say, two insurance companies and you want to use only one policy, the insurer can’t force you to invoke the other policy. Says Subrahmanyam: “In case of indemnity policies, insurers currently have the option of asking customers to claim from all the companies wherever multiple policies are involved but the proposed guidelines prohibit that.”

 

Additionally, an outer limit of 30 days to settle the claim may also hurt. Says Subrahmanyam, “At times, 30 days are not enough because the insured is not able to give us all the documents to process a claim. There may not be enough information or we may need to investigate but a strict implementation of outer limit of 30 days for claims settlement may impact our loss ratios.” These factors, Subrahmanyam says, may result in a hike in premiums. “A hike of about 10-15% is expected.”

 

But not all share the same view. Says Neeraj Basur, chief financial officer, Max Bupa Health Insurance Co. Ltd: “The regulations seek to put best practices already being observed by some companies including ours into law. This is a good move by the regulator and for those who are already observing these practices there will be no impact on premiums.” It may be noted that the premiums in case of Max Bupa is on the higher side in the industry.

 

These guidelines are up on www.irda.gov.in and comments are welcome until 30 June.

 

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