Pay higher premiums on making claims: Why this new health insurers’ proposal is anti-consumer

cohort-based pricing proposal can push up health insurance for premiums for the elderly and the sick

The health insurance space is split down the middle on a proposal to link renewal premiums to claims made by policyholders.

Some companies — primarily, standalone health insurance firms — have floated a proposal to introduce a concept called `cohort-based pricing’ to contain claim costs. The stated objective is to ‘make health insurance affordable’. However, others feel this is just a ruse to reintroduce the now-abolished claim-based loading, which essentially punished policyholders for making claims once they grew older and fell sick.

General insurance companies that also offer health covers have largely opposed this proposal. “It is horrendous,” Kamesh Goyal, Chairman, GoDigit Group of Insurance Companies, told Moneycontrol in an exclusive interview. “Someone over the age of 55 today pays a yearly premium of, say, Rs 40,000-60,000. If the proposal goes through, their premium will grow to about Rs 2 lakh in three-four years if they make a claim. This is completely illogical and immoral,” he said.

Also read: Senior citizens and the seriously ill would suffer if insurance companies fix renewal premiums based on claims: GoDigit Chairman

According to people with direct knowledge of the matter, standalone health insurers have approached the regulator with a request to consider their proposal. Here's an explainer:

What arguments does the proposal make for linking renewal premiums to claims?

The parleys have largely taken place via email among insurers, and not formally through industry associations such as the General Insurance Council. Documents related to the proposals that Moneycontrol has accessed are unsigned, though it is reliably learnt that the pitch has come from a standalone health insurance company.

“Majority of customers in the health insurance pool do not make claims in any one year. However, a small ‘claiming’ population makes the claim ratio adverse, necessitating periodic premium increases to maintain sustainability,” the proposal says. The chief objective is to control the insurers’ claim costs and claim ratio (premiums received versus claims paid).

According to the proposal, cohort-based pricing is needed to address two key issues: one, that the non-claiming, ‘healthier’ insured members feel the premium increase is unfair to them. The proposal argues that those who make regular claims must be treated differently from those who do not.

Secondly, new customers cancel or defer health insurance purchases due to the higher premiums. “A very small claimant population, which realises the value of health insurance (makes regular claims for their hospital bills), should not affect the sustainability of the whole product,” the insurers’ pitch argues.

They feel the section that makes a claim will exhibit similar behaviour going forward as well. “However, their premium doesn’t reflect the enhanced risk,” it says.

Also read: Facing a massive hike in health insurance premiums? Here’s what you can do

How will cohort-based pricing work?

Insurers who have come up with the proposal want to charge “a little” higher renewal premium from policyholders who made claims in the previous year. This will not continue forever but will be time-bound.

This is how it is proposed to pan out: let’s assume policyholder A and policyholder B pay annual premiums of Rs 100 each in year one when they bought the policies. The renewal premium in year two remains the same. In year two, policyholder B files a claim, while policyholder A doesn’t. So, policyholder B’s renewal premium will go up to Rs 110, while policyholder A’s remains unchanged at Rs 100.

In year three, neither of them files a claim, so the premiums stay as is. However, because policyholder B had filed a claim in year two, she will continue to pay the relatively higher premium of Rs 110. She will pay a higher premium for three years – until year five – after which, it will be the same as that of policyholder A.

“The additional premium and the maximum period will be determined by technically sound actuarial calculation. After the defined period, the customers will revert to the premium levels that similar non-claimants pay. Every time a customer makes a claim, the same cycle will repeat for the defined period,” the pitch says.

Didn’t IRDAI abolish this practice in 2013?

Unlike claim-based loading, which the Insurance Regulatory and Development Authority of India (IRDAI) put a stop to in 2013, the percentage of premium increase will be the same for all those who make claims during the period. It will not vary per the individual’s claim size or type of ailment, for instance. That is the difference between what IRDAI abolished in 2013 and what is being proposed now. The insurers in favour of cohort-based pricing believe this will eliminate the scope for discrimination.

Under claim-based loading (the earlier practice), the renewal premiums were computed per the insurer’s discretion, though they had to disclose the loading structure upfront in their policy documents. The additional premium was linked to the individual policyholder’s claim history, the company’s claims ratio, and so on. Put simply, the percentage of renewal premium hikes could vary for every policyholder who made claims, and there was no defined period after which this ‘penalty’ would cease.

Despite the differences, however, cohort-based pricing is claim-based loading in another form.

Why is cohort-based health insurance pricing being seen as an anti-policyholder move?

While official discussions are yet to take place, this is an unethical proposal that ought to be nipped in the bud, even before it lands formally on the regulator’s table, top industry officials who are opposing this said. Even claim-based loading was done away with due to its inherent anti-customer nature.

That is because, in simple terms, the approach will punish policyholders for using the very facility they bought the product for — filing claims when they fall sick — defeating the purpose of buying insurance. Over a period of time, premiums could become unaffordable for the sick and the old, leading to their exit from the insurance net. This is the biggest concern.

While making a distinction between a ‘claiming’ and ‘non-claiming’ population, cohort-based pricing fails to recognise that falling sick – and filing claims – is not a matter of choice. It is not a planned activity that claimants have any control over. The creation of two cohorts – ‘claiming’ and ‘non-claiming’ – implies that one section is probably benefitting unfairly at the cost of the other when the fact is that illnesses cannot be predicted.

“If I'm driving a car (and meet with an accident), it can be argued whether I was negligent or careful. Have you met any person who says that they want to contract cancer, cardiac illness, or kidney problems? I have not heard anyone complain that their premiums got wasted as they didn’t fall sick. Who wants to fall sick? Who wants to get admitted to a hospital because they have health insurance? Nowhere in the world does any health insurance regulator allow any sort of loading on claims, because the whole logic is that you are distributing the risk of a few among many,” said Goyal.

Insurers will increase premiums of all policyholders in line with health inflation and then load more premium for people who are filing claims. “The idea is you want to work with a 20 percent loss ratio. Now, how logical or reasonable is this?” he asked.

As for incentivising policyholders who do not make claims to continue paying premiums, there is already a mechanism in place – the no-claims, or cumulative bonus – that enhances the sum insured for every claim-free year. Goyal feels that insurers can introduce a small discount in premiums, though the cumulative bonus is better as they get an additional cover that will come in handy in the future.