Do health insurers get the benefit of charging higher policy premiums? Experts say there's more than meets the eye

Health insurance sector in India is facing a paradox.

While premium collections have surged dramatically, insurers are grappling with a slowdown in the number of new policyholders, reported ToI.

The sharp rise in premiums has led many customers to either drop their coverage or avoid signing up altogether. This is further complicated by the fact that a higher penetration of health insurance could, in theory, drive down premiums for all.

So, what exactly is causing this dilemma for both insurers and insured alike?

Premium collections surge, but sign-ups lag

In the fiscal year 2023-24, premium collections for health insurance skyrocketed by 20%, but the number of individuals purchasing personal health policies only grew by 5%.

This modest increase was largely due to the expansion of the workforce.

By March 2024, health insurance premiums had crossed Rs 1 lakh crore, making health insurance the fastest-growing segment within non-life insurance.

However, insurers are facing the challenge of increasing premiums while struggling to attract new customers at the same pace.

The premium hurdle: Why are rates going up?
One major concern for policyholders is the significant rise in renewal premiums, which often come as a shock.

In some instances, policyholders have received renewal notices with hikes of up to 30%. Insurers, however, argue that these increases are unavoidable. According to them, these hikes are in line with rising medical inflation (14%) and the growth in average claim sizes (11.35%) for 2024.

Additionally, insurers face the pressure of maintaining an acceptable ‘combined ratio’ — the cost of claims plus management expenses. If this ratio increases, insurers must raise premiums to stay financially viable. Furthermore, insurers must contend with the 18% GST imposed on premiums and the 15% commission paid to agents, further inflating the final cost for consumers.

“Companies are aware of the impact of reduced affordability on renewals,” said a spokesperson from Policybazaar. According to their data, 5% of policyholders whose premiums increased by 30% allowed their policies to lapse, while another 5% opted for cheaper policies with more restrictions.

A challenge to affordability

The problem, as many customers see it, is the lack of predictability. Unlike life insurance, where premiums remain relatively stable, health insurance premiums can change significantly year to year. For example, the rise of a 10% annual inflation could mean that a Rs 10 lakh policy amount might need to increase to Rs 1.74 crore in 30 years, which could be unaffordable for many policyholders.

Rajesh Jain, CEO of Reliance General Insurance, emphasises the need for an increase in the policyholder base, particularly among younger individuals, to balance out the rising costs for existing customers. He pointed out that “increasing the policyholder base with new/younger people along with an adequate sum insured can support the depletion of premium adequacy towards rising claim costs of existing customers."

To address the problem of escalating premiums, insurers are exploring new models.

For instance, Niva Bupa has introduced a policy that allows customers to freeze their premiums if they buy early, while Narayana Health Insurance, led by Dr. Devi Shetty, aims to mimic the US-based Kaiser Permanente model. This approach offers low premiums for customers who agree to receive treatments within a network of the insurer's partner hospitals.

Policybazaar is also taking innovative steps by investing Rs 696 crore in PB Health, with plans to acquire and build hospitals that will provide care exclusively to its policyholders.

Tapan Singhel, MD & CEO of Bajaj Allianz Health Insurance, has suggested that the government could intervene to create a more affordable system. His proposal calls for a universal health cover, where employers would be required to provide health insurance to their employees.

To incentivise this, companies could use their CSR funds for health insurance, and individuals could receive tax breaks for covering domestic help. This could not only broaden the reach of health insurance but also make it more affordable for the common person.

A longstanding issue between health insurers and hospitals concerns the pricing of treatments. Some hospitals charge inflated rates for cashless treatments, where insurers settle the bills directly.

Recently, an association of hospitals in Ahmedabad threatened to stop honouring insurance policies from three major insurers, citing unfair practices and blacklisting of certain members.

Health insurance as the right model
While private investment in healthcare has increased due to rising health insurance penetration, the model itself is under scrutiny.

Some experts argue that the push for cashless services may ultimately hurt smaller healthcare providers, particularly small nursing homes that cannot afford to network with insurers for immediate claims settlement.

Moreover, some states have opted for a trust-based health insurance model, citing the higher administrative costs associated with traditional insurance.

The health insurance sector in India is caught in a bind, with premium hikes causing affordability issues, especially for long-term policyholders.

While the sector’s growth is evident, the question remains: will the benefits of higher premiums reach the policyholders, or will they remain caught in a cycle of rising costs and declining trust?

Industry experts suggest that a more inclusive model, increased wellness initiatives, and better regulatory oversight could be the key to making health insurance more affordable and accessible to all.

(With inputs from ToI's Mayur Shetty)