CII and E&Y report on the insurance industry: Challenges, reforms and realignment
The CII and E&Y report offers steps to reform the insurance industry—revisit TPA agreements, implement better controls to prevent frauds and product design to protect policyholders
Confederation of Indian Industry (CII) and Ernst & Young (E&Y) report on the insurance industry details the challenges and reforms that can help alleviate the different issues plaguing the industry. Insurers need to strengthen their risk assessment and underwriting mechanisms. The claims and fraud monitoring process also needs to be simplified, strengthened by stricter guidelines for third party administrators (TPAs), says the report. Despite strong growth, the non-life segment also faces stiff challenges in distribution, pricing and claims management and these issues need to be addressed on a priority to sustain the growth. Here are important details from the report:
Reduce inefficiencies by revisiting the TPA agreements
TPA claims administration involves a lot of inefficiencies including improper dissemination of information, lack of motivation to control claims, minimal scrutiny of claims, and tying up with hospitals and service providers to inflate claims value. The Insurance Regulatory and Development Authority (IRDA) is proposing to implement a standardized format of service agreements to bring down inefficiencies. It is also considering banning services of TPAs from operating as intermediaries for government-sponsored health insurance schemes to ensure orderly growth of the industry.
Considering the inefficiencies in TPA services, fraudulent activities, increasing customer complaints against TPAs and regulatory stand against TPAs, insurers will need to revisit the service contracts with TPAs. In certain cases, there may be a need to reconsider their services to ensure high operational efficiency, fraud control and better customer service.
High claims ratio for health insurance during the year is attributed to:
• Low pricing of group health covers on account of high bargaining power of corporate organizations
• Non-standard rates of treatment due to absence of supplier (hospital) management (regulator)
• Frequent frauds
IRDA is expected to implement standardized rates for certain procedures and modify the claims management process for health insurance. This will help reduce the claims ratio further.
Better controls to prevent frauds
According to the E&Y survey on frauds in insurance, the Indian insurance sector incurs a loss of more than 8% of its total revenue collection in a fiscal year. Further, the study indicates that the average ticket size of a single fraud ranges between Rs25,000 and Rs75,000. Increase in frauds indirectly drives up the premiums collected from policyholders as insurers ultimately recover the losses by increasing the prices.
According to a survey by Star Health Insurance Pvt Ltd, the health insurance industry in India loses approximately 15% amounting to Rs6–Rs8 billion per annum on account of fraudulent claims. Fraudulent and dishonest claims are a major hazard not only for the insurance industry but also for the entire nation’s economy. Concrete proof as evidence including documentation, statements made by the customer and his family members and even neighbours are taken into consideration.
In order to reduce fraudulent claims, IRDA has mandated sharing of claims data and even blacklisting ‘tainted’ hospitals with a history of submitting inflated bills. Health insurers need to set up a detailed anti-fraud department to develop and implement a detailed program to combat frauds. Some insurers have put in place additional checks such as visiting the hospital during the insured’s stay or even his house to examine the case papers to prevent fraudulent claims. Insurers need to adopt a definite methodology to address and reduce risk of frauds within it.
There are numerous compensation-related challenges for insurers impacting the efficiency of their distribution models to deliver on objectives. Specific to tied agents, the compensation framework does not provide for treating a tenured and high-performing agent as different from others and allow payment of higher commission rates or support allowances to encourage such agents. Also, there is no mechanism, which allows compensation to an individual agent for any other services rendered by him to the insurer. Further, the regulatory compensation structure does not differentiate between a retail agent and an organized distributor such as a corporate agent or a broker. They are paid similar commissions. In addition, the commission rate decreases after 10 years of existence of an insurer, which imposes further burdens.
Products, Strategy and design
At a time when the highest NAV (net asset value) guaranteed ULIP (unit linked insurance product) were selling aggressively in the market, IRDA banned the product in order to keep a tab on life insurers resorting to riskier fund management to conform to their commitment of guaranteed returns. Not only did these products attract an increased premium, but they also offered little protection to policyholders. According to IRDA officials, “In most of these products, customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death), the benefits or the amounts are sometimes lower than the premiums. The basic underlying principle of a life insurance policy is it should have sufficient life risk cover”. The regulator is keen to oversee the product design more closely to better protect policyholders falling prey to ‘low’ or ‘insignificant’ life risk covers. The challenge for insurers, therefore, is to develop innovative products without crossing the boundaries of insurability.
Quick and frequent changes in regulations disrupt the business models of the insurers. The industry should be given time to adjust to regulatory changes in a phased manner aligned with a regulatory impact assessment. Regulations need to drive transparency and simplification of products and services. Insurance being a long-term product, customer servicing also becomes important as the individual claiming the benefits may be different from the individual buying the product. The regulator also needs to drive financial education and awareness about insurance products to create a customer pull.
Currently a majority of sales is accounted for by the tax incentives rather than any demand for insurance products. Increasing awareness and understanding the need and utility of insurance will drive growth in the industry in the long run.
For the first time, since the industry was liberalized and opened to private and foreign insurers, the life insurance segment witnessed a year-on-year decline (around 10%) in the first year premium collected. The non-life segment is still struggling with underwriting losses while health insurance is facing high claims ratio and inefficiencies in policy administration.
The non-life premium underwritten grew by 23% in FY12, reaching Rs530 billion from Rs430 billion in FY11, but the segment is saddled with considerable underwriting losses and pricing issues in addition to high claims ratio exerting increasing pressure on profitability.
In case of group health cover, claims ratio decreased in FY11 mainly on account of revision of prices in the overall industry (16%–20%), reducing losses to around 100% from 120%. In case of individual cover, the loss ratio was around 80% in FY11 due to some revision in prices. For government schemes, the loss ratio varied from state to state and was in the range of 60% to 120%.