December 19, 2008

Insurers pull the plug on group health policies

Employees of several small and midsized corporates may find themselves without health cover, with insurance companies serving

cancellation notices to group mediclaim policyholders whose claims are much more than the premium they pay.

With margins being squeezed following a crash in property insurance rates, insurers are taking a tough stance on group health claims. What this means is that many employees could find themselves without health insurance cover if the corporate fails to renegotiate a fresh cover in time. Bigger companies may be better placed to carry out such renegotiations.

The notices have taken many corporates by surprise, since it’s perceived that policies being annual contracts, the cover would be valid for a year. Insurers, on the other hand, are taking advantage of the fine print. The cancellation notice allows both sides to rescind the contract, with premium being refunded at a month’s notice.

The tough stand on claims is a reversal of an age-old strategy where insurers accepted group health business despite heavy losses as an incentive for the corporate to offer their property insurance business. But the removal of all pricing restrictions has resulted in property insurance rates crashing by 80%, leaving insurers with little room to cross-subsidise.

“We are not cancelling policies mid-term, but are carrying out a review of covers where the claims are already extraordinarily high,” said Sandeep Bakhshi, managing director of ICICI Lombard General Insurance.

In the past, companies with the worst claims experiences were able to buy cheap cover, as there was always another insurer willing to accept the business in order to build marketshare. But now, with margins in property insurance getting wiped out, losses are beginning to sting all companies. Brokers say, cancellation notices are being sent out by private as well as public sector companies.

“There are many instances where companies are cancelling group health insurance policies,” said Pavanjit Singh Dhingra, vice-president, Prudent Insurance Brokers. “We do warn clients of the risk of cover being discontinued when they get extremely low quotes. But we also have cases where companies have gone in for mid-term cancellation of policies, even with clients who have been with them for three years. We feel there is no justification for such cancellations,” he added.

Insurers may negotiate other loss-reduction measures


According to Shreeraj Deshpande, head of health insurance at Bajaj Allianz General Insurance, “The pricing of group health covers is on the basis of historical data supplied by companies. If the data is not correct and losses are off track, the insurer would be justified in cancelling the policy.” He added that at an industry level, a correction in the cost of group mediclaim was expected, because cross-subsidy from property insurance was no longer available. “The overall insurance bill for companies is unlikely to go up because the reduction in property insurance will make up for the increase in health insurance,” said Mr Deshpande.

According to Mr Bakhshi, the combined loss ratio (ratio of claims and servicing expenses to total premium) of group business is over 160%. Group premium, which is currently around Rs 3,000 crore, needs to go up by at least another Rs 1,500 crore, he added. Besides asking for higher premium, insurers are likely to negotiate other loss-reduction measures. These could typically include reduction in the minimum room charges or asking companies or their employees for some level of co-payment.

Insurance companies are expecting some rationalisation of benefits in the IT sector where employers have gone for the widest possible cover, including one for employees’ parents.

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