Health insurance companies are quietly bringing back claims-based loading

The move is taking the form of a reduction in discount on next year's premium once a policyholder has made a claim

A health insurance claim is supposed to protect you from financial shock — not quietly raise your future costs. Yet some policyholders are discovering that making a claim can make their insurance more expensive, even though regulators explicitly prohibit claims-based loading.

 

What is claims-based loading?

 

Claims-based loading refers to an increase in premium solely because a policyholder made a claim in the previous policy year. The Insurance Regulatory and Development Authority of India (Irdai) Health Insurance Regulations, 2016 clearly prohibit this. Insurers cannot raise premiums merely because a claim was made.

 

Premiums can rise due to age-related factors or a general revision in underwriting policy, but such increases must apply uniformly to all policyholders under the same plan. Selective hikes for claimants are not allowed.

 

However, while disallowing penalties for claims, Irdai permits insurers to reward policyholders for favourable claims experience. This distinction has created a loophole.

 

Using rewards to penalise claims

 

Insurers cannot penalise policyholders for making a claim. But they can reward those who do not. In practice, this distinction is being used to reintroduce claims-based loading under a different label.

 

During a recent policy renewal, I noticed a new line item in my premium receipt:

 

“Favourable claims experience discount”: Rs 16,000

 

This discount accounted for nearly 50 per cent of the final premium. Without it, the premium would have been almost 100 per cent higher. The previous year’s receipt did not include any such component, indicating a recent change.

 

While the overall premium increase compared with last year was marginal — partly due to a goods and services tax (GST) reduction — the discount amount appears to have been adjusted to keep the headline premium stable.

 

How the mechanism works

 

The policy document did not explain how the “favourable claims experience discount” was calculated. However, an insurer’s website described a similar structure for another plan, which likely applies here as well.

 

The approach is not binary. A claim does not eliminate the discount entirely at the next renewal. Instead, it follows a laddered structure, where policyholders begin at a certain discount level — 30 per cent in this case —  and move up or down depending on claims experience.

 

According to this grid, making a claim above Rs 1.5 lakh results in a 10 per cent higher premium, assuming all other factors remain unchanged. The increase arises solely because a claim was made. In substance, this is claims-based loading, even if implemented through a reduction in discount rather than an explicit charge.

 

This approach is gaining wider acceptance among insurers, though structures may differ.

 

The hidden cost of complimentary benefits

 

The impact extends beyond hospitalisation claims. Many insurers offer complimentary annual health check-ups. These are now treated as claims, regardless of cost. Availing such a check-up can reduce the claims-experience discount and raise the next year’s premium.

 

In effect, the benefit is no longer complimentary. Policyholders pay for it through higher future premiums.

 

Scope for misuse

 

Insurers can revise underwriting assumptions and raise base premiums across the board while simultaneously offering large claims-experience discounts to non-claimants. Those who make claims end up paying more.

 

This creates significant scope to disadvantage policyholders, while remaining formally compliant with regulations.

 

The insurer’s perspective

 

From an insurer’s standpoint, sustained losses in a health insurance plan require corrective action. The insurer can close the plan and migrate policyholders to a costlier one, or raise premiums uniformly. Both options affect all customers.

 

Charging higher premiums from those who made claims may appear more palatable, particularly since they have already benefited from the policy. Moreover, the reduction in discount is not permanent. If no further claims are made, the discount can gradually be restored over time.

 

Consider a simplified example. A base premium of Rs 50,000 attracts a 30 per cent discount, resulting in a net premium of Rs 35,000. After a claim of Rs 10 lakh, the discount falls to 21 per cent. The discount amount drops to Rs 10,500 and the final premium rises to Rs 39,500.

 

What this implies for policyholders

 

If the outcome mirrors claims-based loading, the distinction becomes semantic.

 

As policyholders, caution is warranted. If this practice becomes widely accepted, insurers may continue raising base premiums while also tightening claims-discount structures. The combined effect could materially increase long-term costs.

 

A case for regulatory clarity

 

Irdai needs to clarify its intent behind permitting incentives for favourable claims experience. While the provision was presumably meant to reward good health and lower claims, it is now being used to penalise those who claim.

 

If this practice is allowed to continue, clear rules are required. Insurers should not have unchecked discretion in designing discount ladders. There is currently no guidance on how sharply discounts can fall or how slowly they may be restored.

 

Given past experience, policyholders have reason to be sceptical. Irdai should closely examine whether these mechanisms undermine the spirit of health insurance regulation.

 

(The writer is a Sebi registered investment advisor)

Imposing claims based loading surreptitiously

 

Insurers introduce a claims-experience discount and later reduce or withdraw it after a claim, raising the effective premium without explicitly calling it a loading

They use laddered discount structures where even small claims push policyholders down multiple rungs, resulting in higher renewal premiums

Treat minor benefits, such as complimentary health check-ups, as claims, which erodes discounts and raises future premiums

Revise discount ladders and thresholds in ways that disproportionately penalise those who make claims