Need of the Hour for the Health Insurance Industry in India

This interview was first published in the IIB Bulletin, Vol 1, Issue 4
https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q4%202014-15.pdf

Mr. Sanjay Datta is Chief - Underwriting & Claims, ICICI Lombard General Insurance Company Limited, the largest private sector General Insurance Company in India. With over 24 years of experience in General Insurance, Datta was a part of the startup team at ICICI Lombard in 2001 and has since then grown the business into a market leadership position.

At ICICI Lombard, Datta is responsible for underwriting and claims division across the organization. He heads customer service for all product lines of the business and spearheads underwriting discipline, operational excellence, product development and pricing across Wholesale and Retail products. Datta also drives company's foray for quality service delivery across all products.

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Datta talks about the business of Health care in India, the role of the Insurance Industry and the things that the Industry as a whole needs to do to be able to serve the population.

An evolved Health care system in a way represents the quality of life in a nation. How evolved is India, relative to the developed and the developing nations, in terms of Health care system?

India has made significant progress in terms of economic growth and overall development. But not much has changed on the healthcare front. Basic measures of health standards remain at alarmingly low levels even today. India spends between 1-3% of its Gross Domestic Product (GDP) on healthcare which is among the lowest in the world. A large percentage of Indians are still deprived of adequate healthcare facilities.

Can you give a few examples?

Bed density or number of hospital beds per 1000 remains below World Health Organization (WHO) standards of 1.5 beds. Doctor density or number of doctors per 1000 patients stands at 1.8. Comparisons with other developed and many developing nations show that we are lagging far behind.

An average Indian still pays around 60% of his or her healthcare expenses from out of pocket, much higher than even Lower Middle Income countries where individuals pay not more than 37% of healthcare expenses from their own resources.

For the poor, this self-funding has a crippling effect - various studies including those conducted by the (National Sample Survey Office) NSSO have shown that 64% of the poorest population in India gets indebted due to health related expenditures. Still only a small percentage of the Indian population is insured.

Is there anything specific in any of the Developed nation, which you would like to highlight, that can be emulated in India?

If you were to look at Japan, you will realize the current issues and get a sense of what needs to be done. In India, the cost of treatment varies widely between public and private hospitals due to the lack of a regulating body. In case of Japan, a patient pays more only if he or she is not insured, thus promoting insurance purchase.

The other key difference is in terms of the insurance approach. While in India, primarily In-Patient Department (IPD) expenses are covered for the majority of population; Japan allows virtually all access to preventive, curative and rehabilitative services at an affordable cost.

In India, there is no metrics defined to assess quality of care provided, in Japan it is all about care. A doctor in India spends minimal time on each patient, there is no set protocol or pathway to report medical fraud or exaggerated bills and the country doesn’t practice evidence based medicine which is common in developed nations. Indian healthcare system has started using technology. However, it is leading to expensive treatments. The concept of telemedicine too is at the pilot stage.

In fact, the Japanese healthcare system is perceived as an exemplar by many countries. Hospitals, by law, are run as non-profit and managed by physicians in the country. Medical expenditures are strictly regulated to keep them affordable. Measures have been taken to promote insurance and price them depending on the family income and age of the insured. Also, models like activity-based funding, where hospitals are paid based on the services provided and Diagnosis Related Group (DRG) type financing have resulted in reduction in the days of hospitalization and total average claim size, thus reducing costs.

This clearly shows that it is time for India to take stock, improve access to and raise the service standards of its healthcare system to truly harness the power of its billion strong population.

Including the Government schemes, based on optimistic estimates, about 25 percent of India's population has access to some form of health insurance. But the balance 75 percent are yet not covered. Can the Insurance Industry do much in a country where nearly one million Indians die every year due to inadequate healthcare facilities and close to 700 million people have no access to specialist care?

India’s health insurance sector is growing at a CAGR of 25 -30 % for the past 8 years. Despite this there is a significant shortfall in terms of health coverage with majority of individuals struggling to meet their healthcare needs. As you rightly pointed out, a meager 25-26% of the population is covered through some form of pre-paid scheme, including General Insurance Companies, Employees' State Insurance Scheme (ESIS), Central Government Health Scheme (CGHS), schemes for Railways and Defense employees.

Amidst this low penetration, availability of wide variety of products and government incentives are key drivers. In India, providing affordable quality healthcare is a challenge with 80% healthcare centers located in urban areas and catering to only 30% of the population. To achieve the goal of Universal Health cover, efforts should be made towards developing an integrated system that ensures affordable, accessible and equitable care for all.

Encouraging public private partnership model to address these challenges can be the first step. Insurers can help by supporting the government in network management, cost control, data and analytics etc.

It may be argued that bringing Insurers in the fray would add a layer of intermediation, resulting in high healthcare cost inflation.

Yes, some may argue that. However, it must be understood that the interest of insurers and the individual is aligned, with insurers wanting customers to stay healthy and avoiding hospitalization, thus keeping treatment costs low. The starting point would be to customize diagnosis, care and cure while engaging patients before, during and after the ailment and its treatment.

There is a clear need to pursue a model which ensures operational efficiency and cost effectiveness. 

Here, it would be worthwhile to evaluate the framework adopted for certain mass health insurance schemes such as Rashtriya Swasthya Bima Yojana (RSBY).

In a brief period of time, social insurance schemes led by RSBY have made commendable progress and covered over 300 million people – mostly the poorest - of the population. RSBY, the flagship scheme of the Central government in particular has achieved tremendous success in terms of coverage and won international recognition for its design and architecture, including adoption of technology; paperless & automatic claims settlement processes, coverage of pre-existing diseases, competitive package rates for treatment, price discovery through bidding, customer choice, etc. 

Can you elaborate on the model adopted by RSBY and the role of Insurers?

Moving away from its traditional approach, the government, in the case of RSBY, focused on the role of ‘Payor’ while allowing private entities including Insurers to take up the responsibility of provisioning.

Without insurers, the government as a ‘Payor’ would have to ‘buy’ the services of the providers directly – a model fraught with obvious risks. Even if the procurement process was managed efficiently, it would be difficult for the government to control leakage and misuse without the fraud control and analytics capabilities of insurers, resulting in cost inflation in the long term.

Insurers can further facilitate specialist and adequate care by offering primary care and out-patient (OPD) benefits to help beneficiaries get essential cover at the diagnosis or early stage of ailment. Primary care facilities will act as a gate keeper to limit instances of high expense in-patient treatments.

Second, like the Government, it is in the interest of the Insurer to reduce the cost of treatment. This is because treatment expenses directly influence the quantum of claim. As such, cost effective treatments can help reduce amount of claims paid, the benefit of which can be passed on to consumers in the form of reduced premium.

Third, use of insurance will give flexibility to the Government to design different levels of financial support across economic strata of the society and over time as families move up the income brackets.

Insurers can also play a significant role in driving awareness and influencing change in terms of health status of the community at large. Finally, insurance will provide an individual choice without tying the patient to a provider.

Inadequate healthcare facilities are a bane in India. How can the Insurers ensure that a hospital meets the basic minimum requirements to treat a patient?

Insurers first and foremost should ensure that a hospital holds accreditation from a reputed association before empanelment. Quality Council of India provides the necessary accreditation. National Accreditation Board for Hospitals and Health care Providers (NABH) is another constituent board of Quality Council of India, which is set up to establish and operate accreditation and allied programs for healthcare organizations.

A large number of hospitals face challenges and difficulties in implementing all the Accreditation Standards. NABH has developed Pre Accreditation Entry Level Certification standards, in consultation with various stake holders in the country, as a stepping stone for enhancing the quality of patient care and safety. The aim is to introduce quality and accreditation to the Health Care Organizations (HCOs) as their first step towards awareness and capacity building.

Currently, accreditations are not necessary and are just add-ons to build trust amongst patients. National registry of hospitals can be another good initiative which can help classify the list of hospitals that meets minimum standards.

Insurers can evaluate them on the basis of factors like infrastructure (bed capacity, strength, speciality, age of the building, infection control, patient safety, staff and accessibility, laboratories, ambulance, dietary service, housekeeping, laundry and linen, fire safety, pharmacy, power backup, operation theatre etc.). In the long run, insurance companies can follow these standards and ensure that no hospital is empanelled without necessary certifications leading to quality healthcare facilities for all.

Apart from the basic facilities mentioned by you, what are the other attributes that the Insurers look for before empanelling a hospital for Cashless facility?

There are various other factors which insurers look for before empanelling a hospital for cashless facility. Features which help in reduction of medical inflation such as package rate for procedures, discounts offered by providers for various medical treatments and infrastructure costs for ICU, biomedical gases, laboratories, radiology etc. play a major role while empanelling a hospital. Location and demography is also considered as an important factor. However, these are not the sole parameters for selection of a hospital by insurers.

It is also taken into account that any of the above factors is not leading to increase in operational costs and grievance with regards to the hospital. Insurer’s internal teams empanel a hospital post sound background check and audit. Popularity, trust, group identity and background of the medical institution stand out to be the most important parameters for any health provider.

The Health Insurance Business in India is mostly unviable as of now, with claims and costs being higher than the premiums collected. What are a few steps that need to be taken to make the business more viable?

Increasing incidences and claim size is a challenge faced by the Health Insurance industry today. The Net Incurred Claims Ratio for FY 2012-13 and FY 13-14 has been as high as 97% and 101% respectively. While unregulated medical inflation and hectic lifestyle is the primary reason behind the increase in the claims size and incidence; the industry is also confronting the issue of predatory pricing.

Insurers will have to collectively take a step forward to stop such pricing practices. The Insurance Regulator’s step directing insurers to claim above previous year’s claim is an effort which when implemented will bring in some solution.  This proposition will also compel insurance companies to undergo regular reviews of their Health Insurance products.

The other viable steps will be to manage the network effectively and prevent leakage.  Efficient network negotiations can result in less claims outgo through cashless transactions, helping almost 55% cases. While, leakage - which is of two types’ leakage due to fraud and leakage due to inefficiency- can be prevented with strict control on operational efficiency.

Exaggeration of expenses like adding emergency visit, unnecessary doctor rounds, needless tests are soft frauds, which along with many hard frauds- where the case claimed is completely false- eat up approximately 20% to 25% of an organization’s premium. While soft frauds can be addressed by defining proper care procedure and protocols, hard frauds can be tackled with the help of data analytics and regular audits of the hospitals.

Preliminary leakages due to inefficiencies like approving claims above sum insured, providing claims to people who are not enrolled, missing a disease sub limit, paying for exclusions, paying above tariff, missing co-pay etc. can be controlled internally. Organizations can prevent such losses through prudent underwriting practices.

One way to make a business viable is to reduce costs. The other way is to price the risks better. What is the kind of data or analytics that can help the Insurers recognize and price the risks better?

Pricing risks better is indeed a prudent move towards the viability of the General insurance business.  However, risks can be priced better only at an industry level. Data analytics is the key and an anchor to better risk pricing. Industry data on claim experience with demography, disease with respect to age, incidence claim size, industry type and individual customer assessment for both retail and group health will help as parameters for the analysis.

While for the retail portfolio factors such as demography, morbidity tables and individual health profile will impact the pricing; for group health, past claim experience-generally considered as industry practice- will help in the evaluation. In case the group has no past experience, then data analytics on demography, industry category and related experience can be considered as an ideal practice.

The use of such data analytics will lead to defining and designing covers differently for the same premium as per the insured’s portfolio. Thus, pricing risks better. Analytics will also help insurers to offer exclusive provider network for cases such as cataract, chemotherapy or dialysis. It will also help in the selection of alternative and cost effective platforms - such as telemedicine for second opinion- for treating diseases and doing away with unnecessary treatments and procedures. This will have a huge impact not only in terms of risk pricing but will finally benefit the insured in terms of premium as well.

Lastly, According to Annual Report, to the people, on Health by the Ministry of Health and Family Welfare, Government of India (December 2011), about 71% of the total health care expenditure in the country was borne by households out of their pockets. Can the industry as a whole do something to increase awareness about the need for Insurance?

It is alarming that close to 71% of the total healthcare expense is still out of pocket in India. The expenditure can be bifurcated into in-patient department (IPD) and out-patient department (OPD). While, IPD can burn deep holes in ones pocket, OPD expenses makes it difficult to control finances on a day to day basis.

Industry, with the assistance of government, can play a major role to create awareness towards health insurance purchase. Introduction of Universal Health Care under the National Health Assurance Mission is a step in the right direction. While the government adopts the role of the ’Payor’, it will always face efficiency issues in view of the vast landscape and population of the country. Tax incentives linked to purchase and higher limit for senior citizens will propel insurance awareness and purchase. Along with the government, insurance companies can initiate activities like office on wheels creating community awareness on insurance and introduction of insurance in schools and colleges at a low premium, to boost insurance awareness.

As people buy insurance, more and more of the private healthcare space will be routed through insurance. Private insurance as the ‘Provider’ will thus have stronger control and thereby better chance of influencing the way healthcare delivery happens in India. It will be able to manage the healthcare space both in terms of quality as well as the cost of delivery. It will be in a better position to build a sustainable healthcare system which focuses on the preventive as well as curative aspects of healthcare. 

Insurance for all should become a reality

This article was first published in the business section of www.rediff.com on March 13, 2015

http://www.rediff.com/business/report/column-insurance-for-all-should-become-a-reality/20150313.htm

More than a decade ago, just after liberalisation of the insurance sector, India was the 12th largest economy in the world and had the 19th largest insurance industry. 

Come 2014-15, India is the fourth largest economy in the world (on the brink of becoming the third largest) but it is still has the 19th largest insurance industry. 

Talking in absolute terms, the premiums have grown, number of players has grown, claims have grown, and even the penetration has gone up. 

But relative to other nations, the insurance penetration in India is very low at 3.9 per cent as against the world average of 6.3 per cent. General insurance penetration is lower than one percent.

The low penetration is glaring especially because of the need for insurance. 

A few very obvious reasons for the need are:  

India is prone to natural disasters due to its climate and topography. The penetration is even lower for property insurance.

The economic losses due to events like Cyclone Hudhud and Uttarakhan Floods run into thousands of crores. Insurance helps in rehabilitation and reduces the burden to the victims.

The Environmental Burden of Diseases for India, as per a report of World Health Organization (WHO), is very high due to environmental factors like water, sanitation, air pollution and hygiene.

Chronic Obstructive Pulmonary Disease (COPD), vector-borne diseases, diarrhoea, respiratory infections and cardiovascular diseases are all very common in India. Lack of insurance results in very high out of the pocket expenditure.

Road fatalities in India are among the highest in the world, as per the World Bank. Road safety is a major concern in India. In spite of it, more than 50 percent of the vehicles on Indian roads do not even carry the mandatory Third Party Insurance, as per the Insurance Information Bureau of India. 

While awareness is one of the major reasons, lack of network and reach are also reasons for poor penetration. The government and the regulator, realises the need for a thrust to the insurance industry. 

T S Vijayan, Chairman, IRDAI, recently enumerated the need for capital infusion of about Rs 60,000 crore (Rs 600 billion) into the industry.

The Insurance Laws (Amendment) Bill, 2015 would certainly make that capital infusion easier by way of increased foreign direct investment from the current 26% to 49% (inclusive of foreign portfolio investments). 

The control, management and policy decision making would still reside with the Indian owners, as per the Bill.

The Indian partner in the joint venture, at least a few of them, would benefit from the infusion of further capital and technology. A few may not need the capital though as they are promoted by corporate houses with deep pockets.  

Apart from raising the FDI to 49 percent, the Bill has made health insurance a separate line of business. This would bring the much needed focus to the health insurance business. 

Health insurance in India has been growing at a cumulative annual growth rate of 17% in the last decade. 

Yet, the percentage of population covered by any form of insurance (including government schemes) would be only about 17-30%, depending on which report one would like to rely on. 

Focus on health as a separate line of business should bring in greater capital, competition and competence into the sector.

The Bill also states that agents can now be directly appointed by the insurers, without the requirement of licensing with IRDA.  This would ease the process of hiring agents. Insurance is very much a push-based product in India. 

Hence, agents play a very important role in selling. However, the challenge is to get the right people to avoid mis-selling! 

The provision for high penalties in case of contravention of the provision of the Act should ensure the recruitment of right people as agents by the insurers.

There is greater emphasis on rural and social sector obligations that should help increase the penetration amongst people who actually need insurance the most. 

Public Sector Undertakings like New India Assurance, United Insurance, Oriental Insurance and National Insurance (Companies where the central government has atleast 51 percent shareholding) would be able to raise their capital for increasing their business in rural and social sectors, to meet solvency margin and such other purposes.

The Insurance Laws (Amendment) Bill, 2015 was passed in the Rajya Sabha on March 12th, with the support of the opposition parties Congress, AIADMK, NCP and BJD. It was earlier passed by the Lok Sabha on March 4th. 

A similar bill was originally brought to the lower house of the parliament by the then ruling UPA government in 2008. However, it was not passed due to lack of consensus in the house. The seven years wait has finally paid off for the foreign partners of many private Insurance companies, who see great potential for the Insurance Industry in India.

The Insurance Laws (Amendment) Bill, 2015 amends the Insurance Act, 1938 (the Act), the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999 and will be deemed to have come into force on the 26th day of December, 2014, the day the Insurance Laws (Amendment) Ordinance, 2014 was passed by the President Pranab Mukherjee.

The Insurance Laws (Amendment) Bill, 2015, is a legislation that the Industry was looking forward to. And the government has done well to get it passed. 

It will soon be an Act. But really, this is no magic wand. Insurance should be made available for all. There is a need to create awareness for insurance. 

Innovative products must be introduced that will appeal to people. The insurance sector also needs specific skilled workforce. There is need for risk based underwriting. And much more!

To cut or not to cut: Tug of war between RBI and Govt

This article was first published in the business section of www.rediff.com on February 03, 2015; Co-Authors: Puran Singh and Prachi Patke (BITS Pilani, Goa Campus).

http://www.rediff.com/business/report/special-to-cut-or-not-to-cut-tug-of-war-between-rbi-and-govt/20150203.htm

Too less sugar means a bitter coffee, and too much sugar has health consequences. Both types have their patrons. Reserve Bank of India (RBI) likes its coffee bitter. Central government likes it too sweet. The twist is that there is a recipe sufficient only for one cup! RBI likes to see inflation under control and therefore does not like to cut interest rates when inflation is already at high. On the other hand, the central government bends more in favour of high economic growth and likes to see interest rates cut so that cost of capital goes down and economic activity picks up helping growth of economy.

For laymen, rate cut refers to reduction in interest rates charged by RBI on lending to commercial banks (Repo Rate). A high rate makes borrowings costly and reduces money supply to the markets. Reduced money supply in markets pins down demand in economy as a whole and helps prices come down. On the flip side, reduction in aggregate demand slows down economic activity and reduces growth in Gross Domestic Product (GDP) which is an indicator of economic growth.

For 16 months, Raghuram Govind Rajan, the Governor of the Central Bank of India, served the coffee bitter before finally letting the Finance Minister, Arun Jaitley, have a sip. The cries for rate cut had begun by the time he presented his third bi-monthly review for Financial Year 2014-15 in August 2014. Last year, the new Government, after its formation, persuaded Rajan to cut rates to provide a push that economy needed. Industry leaders as well pitched in favour of rate cuts.

Although Jaitley openly cited high cost of capital as the ‘one singular factor’ slowing down growth of the manufacturing sector, he did not come down hard on the RBI Governor to cut rates. In November 2014, Jaitley, was quoted saying "RBI, which is a highly professional organisation, in its wisdom decides to bring down the cost of capital, (this) will give a good fillip to the economy". Indian economy experienced less than 5% GDP growth rate during Financial Year 2013-14.

Rajan, on the other hand, had said, "Monetary stimulus will not do. The government needs to work on infrastructure". Apart from credit availability, constrains on inputs such as power, land and infrastructure, and Government policies impact output of an economy. Stable output helps exports and, eventually, in controlling Current Account Deficit (CAD).

Rajan didn’t budge from his stand on rate cuts since he joined as Governor of RBI in September 2013. Now, with inflation (Consumer Price Index) under the targeted 8% for January 2015 and assurance from the Government to adhere to CAD target this year, he cut the rate by 25 basis points to 7.75% in January 2015 much to the delight of the Finance Minister who called it a “welcome decision”. Drop in commodity prices in international markets, crude oil in particular coupled with easing inflation in vegetables in domestic markets allowed enough headroom for Rajan to cut rates. Also, Inflation Expectations Survey of Household by RBI in September 2014 indicated a downward revision in inflation expectations in coming year.

In ballroom dance, the couple has to learn the art of stepping forth and back in coordination and be careful not to step on partner’s toes. At the moment, RBI has stepped back and let the Finance Minister have his way by cutting rate. And this could be first rate cut in a series of few more if inflation hovers around 4.5%-5% on an average during the next one year, giving Rajan room to offer a gradual 100 basis points rate cut at the most.

In a multiple-shot game, players need to understand unsaid rules, gain trust of competitor with conflicting interest, act in coordination to win one by one, and not scare away the prey. The ball, therefore, is in Finance Minister’s court to make hay while the sun shines and push growth agenda in budget to be presented on February 28th 2015. And, as for that one cup of coffee, split it in two and add sugar to taste, serve hot.

Nat Cat Modelling

This article was first published in the IIB Bulletin, 2015, Vol. 1, Iss. 3, pp10-12 

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q3%202014-15.pdf

Co-Author: Pushpendra Johari (RMSI Private Limited)

Images of destruction caused by the Uttarakhand Floods, Cyclone Hudhud or the Bhuj Earthquake are still livid in the minds of most of us. While loss of lives and property are always painful, the scale of destruction during a natural disaster hits us with a sense of despair at the helplessness of human beings. Advances in technology and development in economy could not prevent the Tsunami or the Katrina.

India is prone to natural disasters due to its climate and topography. As per the research done by Mishra (2014) during the past 100 years (1913-2013), 51.4 percent of the natural disasters in India were due to floods, 32.7 percent from storms, 7.4 percent from landslides, 5.6 percent from earthquakes and 2.9 percent from droughts.

The economic losses to the nation are huge; to give a perspective, in a report in 2003, World Bank estimated that the Economic losses to India due to natural disasters were around 2 percent of the Gross Domestic Product (GDP), per annum.

“Reported direct losses on public and private economic infrastructure in India have amounted to approximately $30 billion over the past 35 years [up to 2001] (nominal values at then applying exchange rates). Since less than 25% of the registered loss events actually provide any loss estimates, the official numbers substantially understate the true economic impact of direct losses. A crude grossing up for reporting frequency indicates that direct natural disasters losses equate to up to 2% of India's GDP and up to 12% of federal government revenues”...Pg 8, The World Bank Report (2003).

The stakes could be as high as 4.4% and 6.5% of the States GDP in states like Gujarat and Orissa. The report also noted that the official figures are generally lower than the actual losses and it also observed a rising trend in the losses over the years. It must also be noted that these figures do not include the cost of rehabilitation and restoration.

According to a report on “Natural Hazards, UnNatural Disasters” by the World Bank and the United Nations, the impact of natural disasters on the GDP is 20 times higher in developing countries than in industrialized nations.

The years 2013 and 2014 have seen catastrophes like the Uttarakhand Floods and the Cyclone Hudhud, which have resulted in large losses, both of lives and property (Table 1).

Event	No. Killed	No. Total Affected	~Economic Losses (in Rs crores)	~Insured Losses    (in Rs crores)
Uttarakhand Floods	6054	504473	6600	3000*
Cyclone Phailin	47	13230000	3800	600*
Cyclone Hudhud	109	10000000*	65000*	4000*

Source: EM-DAT: The OFDA/CRED International Disaster Database

*Estimate based on news reports

The irony is that the General Insurance penetration in India is very low, especially for personal property. The gap between people who need Insurance most and the penetration of Insurance amongst them is huge. The pace at which the economy of India is growing is indicative of a huge potential for increasing the insurance penetration.

The government of India is desirous to make Insurance as the primary mechanism for disaster risk financing in India (Ref. Disaster Relief and Risk Transfer through Insurance, IRDA-NDMA July 2013). A panel including NDMA, IRDA and general insurers in India is considering several options including:

·         Setting up a pool for states, NDRF, etc.

·         Parametric insurance solutions for NDRF

·         Optional simple Indian Natural Catastrophe Insurance Policy

·         Mandatory property insurance in highly prone urban areas

However, there are several questions that need to be answered before such schemes could be launched. Some of these questions are:

·         How much fund is needed for the pool

·         Who would fund the pool

·         Categories of population to be covered under the Indian Natural Catastrophe Insurance policy

·         How to price the coverage of such policies

·         What should be the triggers and how much payment should be associated to specific triggers for parametric insurance solutions, etc.

Natural Catastrophe modelling is the science that can help in finding the answers to several of these questions.

Probabilistic NatCat modelling can be used to arrive at the possible economic loss scenarios associated to various return periods, the impact of specific historical or latest hazard events, as well as the average annual direct economic loss by state or any other resolution at which the pool needs to be setup. Figure 1 shows the impact of cyclone Hudhud based on RMSI CycloneRIsk Model. 

Figure 1: Cyclone Hudhud wind and surge estimates using RMSI’s CycloneRIsk model.

Based on return period scenarios various categories of population that are under high risk zones could be estimated. Return period losses and average annual loss could be estimated for all these population categories thereby giving insights into the coverage pricing for various population categories. Based on the income levels and sample surveys eliciting willingness to pay for various population categories, an estimate of insurance affordability could be arrived at. This information could be combined with the NatCat modelled loss estimates to decide if the entire burden of the insurance could be passed to any specific population category or not.

Using probabilistic NatCat modelling, homogeneous risk zones could also be created , that associate hazard intensities to average losses within every homogeneous zone and provides a hazard risk score. Specific rates could be developed by risk zone for taking into account the NatCat risk in pricing of policies. Figure 2 shows the flood hazard risk score zones. This could serve as a basis for the definition of the triggers for specific areas along with payouts associated to the trigger. For every such homogeneous zone, an authentic source that provides the hazard intensity values at the time of the event will have to be setup to ensure success of parametric insurance. So, NatCat modelling not only helps to setup the triggers and associated payouts but also the number of  trigger monitoring stations and areas where these should be setup.

Figure 2: Flood Risk Score Map categorizing every pincode in India flood risk categories

The models could also be used to test out various insurance penetration scenarios and how various levels of penetration could impact the risk as well as pricing of the coverage.

Health is the greatest wealth

This article was first published in the IIB Bulletin, 2015, Vol. 1, Iss. 3, pp6-7 

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q3%202014-15.pdf

Of late it has been noticed that the trend has been shifting from communicable diseases to non-communicable diseases. As the IRDA Chairman, Shri T.S. Vijayan pointed out in FICCI’s 7th Annual Health Insurance Conference: Health Insurance 2.0: Leapfrogging beyond Hospitalization on December 5, 2014,

“The shift to non-communicable diseases is profound and impacts the elderly more than the average person, particularly in India”.

We found that people above the age of 60 had the maximum number of claims for Circulatory diseases. This category of diseases not only has a higher average claims paid, it also results in higher number of days spent in the hospital on an average. Arthropathy and Nervous are other category of diseases which result in high claims amount paid but the number of claims are not very high.

While Circulatory diseases result in higher average claim paid, the number of claims for infectious diseases is the largest. Number of claims was found to be the highest for children below 5 years of age under the infectious diseases category.

India has one of the highest reported cases of communicable diseases amongst the BRICS nations. According to a report by the Organization for Economic Co-operation and Development (OECD), India witnessed 253 deaths per 100,000 persons, in 2012, due to communicable diseases alone. This is much higher than the global average of 178 (Source: OECD Health Statistics 2014).

Top 10 Diseases for FY2012-13: Number of Claims, Average Claims Paid and Total Claims Paid 

Source: IIB Data

Clinical Findings refer to ICD10 code R00-R99- Symptoms, signs and abnormal clinical and laboratory findings, not elsewhere classified.

Only claims where the amount of claims paid is greater than Rs5,000 are considered for this study. For a large number of records, disease codes were not filled appropriately and hence they were ignored.

Tuberculosis, Malaria, Dengue, Hepatitis and many other infectious diseases are a major threat in India. Many of these are “zoonoses”, that is diseases which pass from the animals to the humans. Lack of toilets leading to defecation in the open, open sewers, general lack of sanitation, clean drinking water, food and surroundings are some of the main reasons for the spread of such diseases.

Out of pocket expenditure on healthcare in India is very high when compared to other nations, at about 60-70% of total health spending. The government spending, as a percent of Gross Domestic Product (GDP), was only about 4.8 percent in 2012, in India. People who are most prone to infectious diseases are the ones who are the least aware about the need to buy Health Insurance. This might explain the high average number of deaths due to communicable diseases in India, as reported by OECD.

Better awareness and improved GDP per capita income is leading the growth of the Health Insurance industry. The industry has grown at a Cumulative Average Growth Rate (CAGR) of over 30 percent in the past seven years and is expected to continue growing at a fast pace in the coming years too. However, a concerted effort on the part of all stakeholders is required to spread awareness about not only Health Insurance, but also the need to maintain better hygiene standards. In large cases, development of basic infrastructure would be required before basic hygiene standards can be met.

The Complement of Credibility

This Research Summary was first published in the IIB Bulletin, 2015, Vol. 1, Iss. 3, pp8-9 

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q3%202014-15.pdf

Co-Author: Vishnuvardhan Pallreddy, IIB

Joseph A. Boor, FCAS, Ph.D. has been a working casualty actuary since 1979 and a Fellow of the Casualty Actuarial Society since 1988. Over a long and varied career he has had roles as diverse as regulator, Chief Actuary, consultant, and regional actuary. Currently, he works as an actuary for the Office of Insurance Regulation of the State of Florida in Tallahassee, Florida. He is the author of several published articles, including theoretical contributions to the theory of credibility and the optimum weightings of years of data and single-topic ratemaking papers on the complement of credibility in pricing and tail factors in loss reserving. He has a Bachelor’s of Arts degree in Mathematics from Southern Illinois University in Carbondale, a Master of Science degree in Mathematics from Florida State University, and a Doctor of Mathematics degree from Florida State University.

Complements have a special role in ratemaking exercises where the data is sparse or has high deviation from the mean over the years and hence has low credibility. “The Complement of Credibility” paper by Joseph A. Boor (1996) provides a good overview of the qualities and effectiveness of a good credibility complement and explains different credibility components commonly used. The paper also looks at the practical aspects of selecting a complement.

Overview

According to the paper, “The complement of the credibility deserves at least as much actuarial attention as the base statistic (historical loss data)”. Special attention should be given to its unbiasedness and accuracy. In some cases, interdependence must be avoided. Ease of computation and implementation must be reasonable. Explainability of statistics used must be considered, too.

Fundamental Principles

The paper explains a few issues that an Actuary must consider before selecting the complement of credibility:

Practical Issues: Complement should be readily available. The best possible statistic to use is the next year’s loss costs which are unknown. It has to be chosen from the available statistics. Ease of computation would also be a factor to consider as it involves time, costs and also increased chances of error.

Competitive Market Issues: The rates that are eventually produced will be subject to market competition. If rates are too high or too low, the outcome will not be desirable. So, the rate should be neither too high nor too low over a large number of loss cost estimates (unbiasedness) and the rate should have as low an error variance as possible (accuracy).

Regulatory Issues: Regulators typically require that the rates are not inadequate, not excessive, and not unfairly discriminatory. This implies that rates should be as unbiased as possible. It could also be implied that rates should be as accurate as possible, as highly inaccurate rates pose a greater risk of insolvency through random inadequacies.

Statistical Issues: For greater accuracy, error variance should be lower. If complement of credibility has low error variance in its own right and relatively independent of base statistic (which receives the credibility), the resulting rate will be more accurate.

When both the base statistic and complement are unbiased, the predictions are generally best when there is actually a negative correlation between the two errors (that is, they offset) but this rarely occurs in practice. So, a complement of credibility is best when it is statistically independent of the base statistic.

Based on the above four issue that must be considered by an Actuary when selecting a complement, Boor summarizes the desirable qualities that a complement of credibility should have:

1.       Accuracy as predictor of next year’s mean loss costs

2.       Unbiasedness as a predictor of next year’s mean subject expected losses

3.       Independence from the base statistic

4.       Availability of data

5.       Ease of computation

6.       Explainable relationship to the subject loss costs

Commonly used Components

Boor goes on to compare different types of complements used by Actuaries for First Dollar Ratemaking and Excess Ratemaking. Few often used methods for First Dollar ratemaking discussed in the paper are:

·         Using loss costs of a larger group including the class-Bayesian Credibility

·         Using loss costs of a larger related class

·         Harwayne’s method

·         Trending present rates

·         Applying the rate change from a larger group to present rates; and

·         Using competitors’ rates

For Excess Ratemaking, the four methods discussed in the paper are:

·         Increased limits factors

·         Derivation from a lower limits analysis

·         Analysis reflecting the policy limits sold by the insurer; and

·         Fitted curves

The use of the complement of credibility may differ from case to case, depending on the “availability of data” and reasonability of effort. For example, in the case of excess (or large) losses, fitted curves uses data available with the Insurers and is generally unbiased, but is complex to compute and may be difficult to communicate as well.

For pure premium ratemaking, using competitors’’ rates may be easy to use, especially for new companies or companies with low experience, but may suffer from inter-company difference in portfolio mix and may be harder to obtain.

“In Harwayne’s method, actuaries use countrywide (excepting the base state being reviewed) class data to supplement the loss cost data for each class, but they adjust countrywide data to remove overall lost cost differences between states (or provinces)”.

Many such practical insights on the above listed methods are provided in the paper along with the model itself and examples. As the Indian market moves towards an era of ratemaking, his paper is a valuable guide to the choice of a complement of credibility. The paper can be read at the following link: https://www.casact.org/pubs/proceed/proceed96/96001.pdf

Reference:

Boor, Joseph. A., “The Complement of Credibility" (Proceedings of the Casualty Actuarial Society,  Vol. LXXXIII, Part 1, No. 158, 1996, 32p; https://www.casact.org/pubs/proceed/proceed96/96001.pdf

Where is the Indian Market headed?

This interview was first published in the IIB Bulletin, 2015, Vol. 1, Iss. 3, pp4-5 

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q3%202014-15.pdf

Bruce A. Howe is the Chief Operating Officer, QBE Insurance, for Asia Pacific. In a career spanning more than three decades in Insurance, he has worn many a hats. He has handled valuations of Insurance companies, been an Appointed Actuary, undertaken benchmarking exercises, has been involved with risk management and governance, has led teams to devise entry strategies into India, China, Korea, Taiwan, Indonesia and Vietnam for HSBC Insurance. He was the Chief Executive Officer of HSBC Insurance UK, Europe and Middle East before joining QBE in 2013.

Howe is a Fellow of the Institute of Actuaries of Australia and holds a Masters of Economics degree from the University of New England, Australia. He has authored and co-authored several books in the area of General Insurance.

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Howe talks about his experience with the Indian Insurance Market, from the perspective of a man who has worked in many different markets.

What is your take on the Indian Insurance market?

The first thing that strikes me is that it is difficult to sell insurance in India. People are willing to take the risk of not being insured. Even Life insurance is challenging.  My current focus is general insurance.  The Indian market is structurally unsound with industry Net Combined Operating Ratio (NCOR) in excess of 150% in recent times; even with investing the ‘float’ aggressively it is not possible to be profitable.

General insurance companies should be making money from accepting underwriting risks and therefore are uncorrelated with market risks.  When NCOR rises above 100, GI companies become asset managers correlated with markets.

What according to you are the strengths of the Indian market?

If we look at the S-curve relation between per-capita income and insurance penetration, India still has very low penetration. The Life business has a penetration of about 3% and the Non-Life business is less than 1%. As the middle class emerges with the penetration rising to 8-9%, the Indian market will be very big.

What are some of the challenges that you face while working in the Indian market?

There are several.  In my view low FDI inhibits innovation.  Retaining state-owned insurance companies with large market shares inhibits the development of sound competitors with rational pricing.

What are the kinds of innovations that the Indian market needs right now? What would you like to see the market doing that it is not already doing?

By definition, innovation is difficult to predict and it has a 'non-linear' effect on markets. But the existing trends are clear and have a long way to go yet. Customers increasingly are accessing all services through mobile technology and this is equally applicable to all forms of insurance. Secondly, providers of services, including insurers,  seek at least some customisation and timeliness to their product offering based on the unique characteristics of the customer and what they happen to doing at that moment in time. To give some reality to these abstract ideas, imagine a customer is purchasing Canadian dollars at their bank in January. There is a fair chance they are considering skiing on a holiday. There is a need to check the bank's records for whether the customer has travel insurance and if it currently covers skiing. The right offer in real time, by mobile or by the banking staff if in the branch, is the need of the hour. It could be a travel policy covering skiing or an extension to an existing policy to cover skiing. GEN Y is already thinking this way.

Do you have a view on the Insurance Amendment Bill which has been referred to the Select Committee of the Upper House of the Indian Parliament? Does 49% Foreign Direct Investment interest you?

The short answer is yes. The long answer reflects the need for sound development of the industry for meeting the insurance needs of Indian consumers and businesses.  Insurance has a significant role to play in the further economic development of India.

So where is the market headed?

Things have changed a lot since 2005-2006. Good thing about India is that it is flexible in dealing with Governments. It moves forward, in spite of the political party at the helm.

Infrastructure has improved. People are getting a taste of the digital experience. New businesses are making progress, like travel insurance and medical coverage. There is a lot of introspection happening. Market has started talking about cost of distribution and expense ratio management.

These are all steps in the right direction in my opinion.

Slow moving insurance sector needs a push from the new Bill

This article was first published in the business section of www.rediff.com on November 05, 2014

http://www.rediff.com/business/report/perfin-slow-moving-insurance-sector-needs-a-push-from-the-new-bill/20141105.htm

As the industry awaits amendments in the existing Insurance Bill, Nupur Pavan Bang walks us through the ups and downs in the sector since its liberalisation in 1956, and impact the new Bill will have on various stakeholders. 

The proposed new Bill is considered to be the first major economic reform by the Modi government and over 90 amendments have already been finalised in the existing document.

The Bill will come up for discussion in the upcoming winter session of the Parliament.  

A brief history of how the insurance sector evolved with the times.  

The life insurance sector was nationalised in 1956 and Life Insurance Corporation (LIC) of India was formed then.  

The sector opened up for private participation in 2000, and the country’s  largest insurance firm (LIC) commands 73 per cent market share in the life business segment presently.  

The general insurance sector was nationalised in 1973, with the formulation of the General Insurance Corporation (GIC) Act.

Under this Act, GIC became the parent company of four separate companies including the National Insurance Company, the Oriental Insurance Company, New India Assurance Company and United India Assurance Company.  

In 2002, the control of these insurance companies was handed over to the central government, while GIC was made the sole re-insurer in India.

Today, all the four companies control about 55 per cent of the general insurance market and the remaining 45 per cent is dominated by private players. Like life insurance, the general insurance market too opened up in 2000.  

Inception of Insurance Regulatory and Development Authority (IRDA)  

As a part of the economic reforms in early 1991, RN Malhotra Committee recommended the formation of an insurance regulator.  IRDA was thus formed under the Insurance Regulatory and Development Act in 1999.  

Among the first set of regulations by IRDA, was the opening up of the insurance market for private players. It also allowed foreign companies to own up to 26 per cent stake in private companies.  

Currently, there are 23 private companies, apart from the state owned LIC, in the life insurance sector which command 27 per cent of the market, Being the largest private sector player, SBI Life dominates 4.8 per cent of the market share for first year premiums (Source: IRDA 2012-13).  

Industry break-up

There are 17 private companies, apart from four state -owned general insurers, in the non-life sector (excluding standalone health insurers). ICICI Lombard is the largest private sector player with 9.4 per cent of the market share (Source: IRDA 2012-13).  

A brief synopsis of the New Insurance Bill; its beneficiaries  

The new Bill proposes to increase the FDI limit to 49 per cent from the current 26 per cent. This clause will attract more foreign players to pick up stakes in Indian firms.  

On the other hand, the Indian counterparts, at least a few of them, would benefit from the infusion of further capital and technology.

Some of them may not need the capital as they are promoted by corporate houses with deep pockets.  

Why is there a delay in amending the existing Bill

The Insurance Laws (Amendment) Bill, 2008 was brought to the Rajya Sabha first by the then ruling UPA Government in 2008.

Then in opposition, Bhartiya Janta Party (BJP) did not support it.  

Now the Bill has been brought to the Upper House by the current government, and now in opposition, the Congress is not supporting it.  

Current status

The Bill has been referred to a select committee, which is a committee comprising of members from political parties in proportion to their strength in the house.

Such a committee is an ad hoc committee which may be appointed from time to time to look into specific issues.  

One of them is special economic zones for Insurers, another is that agents would be directly appointed by the Insurers, without the requirement of licensing with IRDA.

Greater emphasis on rural and social sector obligations would help increase the penetration. 

The 15 member Select Committee, headed by Chandan Mitra of the BJP, will give its report on the last day of the first week of the winter session of Parliament. The report will be binding on the government.