Insurers offer unviable bids for state-run health plans

In their over-aggressiveness to capture a bigger slice of the market, insurers have been underwriting risks for various state-run health insurance plans at an unsustainable premium.

The state governments choose an insurer for running such schemes through a tender process where the lowest bidder gets the business.

Normally, such schemes are profit making for the insurer in the first year as lower awareness generates lesser claims but becomes a loss-making proposition from the second year with a rise in claims since the risk was underwritten at an unsustainable premium.

"The affected insurance company quotes a higher premium the next year but loses business to another player which quotes a lower price. The second insurer too goes through the same process," says an industry source.

On an average, the claim frequency is 6 per cent to 8 per cent and the average claim amount is Rs 25,000 in metros, Rs 15,000 in semi-urban and around Rs 7,000 in rural areas.

"To make it a viable business, for a 10 lakh population, the risk should be underwritten at Rs 9 crore if the scheme is in a semi-urban area. However, risks are normally underwritten at an unviable premium," said an industry source.

The Jammu and Kashmir state government's health insurance scheme for state employees, launched in 2003, was initially run by National Insurance Company.

The state-run insurer had offered a health insurance cover for a premium of Rs 1,400 per person for a sum insured of Rs 3 lakh for an employee (and his eight dependents).

The cover included pre-existing diseases as well as maternity benefits. ICICI Lombard stepped in the third year offering the cover for Rs 1,000 premium per person along with four dependents for a sum insured of Rs 5 lakh.

Between October 2005 and March 2006, ICICI Lombard had given authorisation of around Rs 15 crore for the cashless scheme against a premium collection of Rs 3.5 crore. Consequently, there is delay in settlement of claims with hospitals.

The Assam state government's accidental death and serious illness cover for its 30 lakh BPL families last year also had a similar fate.

Sources close to the Assam scheme said public sector companies had made bids for Rs 300 crore but ICICI Lombard won the bid with a Rs 29 crore offer.

Sandeep Bakshi, CEO and managing director of ICICI Lombard General Insurance Company, admitted that the company was losing money in some schemes but refuted allegations that it had compromised on its service.

"You make money in some schemes while lose money in some schemes. We are committed to our policyholders and taking health to remote areas, where no one wants to go. Health infrastructure is underdeveloped, insurance will develop health infrastructure," he said.

A senior official of a leading state run insurer pointed out that people in Assam have been exposed to a lot of risk factors.

"We discussed the risks involved and the scope of the cover. State-run companies had an edge over private insurers in terms of infrastructure but the Assam government overlooked these factors," he said.

According to Alam Singh, assistant managing director of Milliman, a global actuarial company, states should strive to provide insurers all possible data at their disposal to assist in accurate risk profiling.

"The risk projected by an insurance company should be thoroughly evaluated and bids that are viable in the long term rather than the lowest bid should be accepted," he said.