Heavy discounts in insurance segments such as group health would soon come under the scanner of the Insurance Regulatory and Development Authority of India (Irdai).
The regulator has come up with a new set of norms for maintaining the solvency ratio of insurance companies, based on each line of business.
For segments like health, motor and liability, the insurer would be required to maintain a higher solvency ratio since not only the premiums, the incurred claims are also high.
With the regulator asking insurers to maintain higher solvency for these segments, insurance companies would be required to reinvent their business strategies.
According to Irdai, available solvency margin (ASM) is calculated as, the excess of value of assets over the value of liabilities. Solvency ratio means the ratio of the amount of ASM to the amount of required solvency margin.
The higher the solvency ratio, the more financially sound a company is considered to be. The required solvency ratio, according to Irdai norms, currently is 150 per cent, which is the minimum amount to be maintained at all times.
Discounts on the premium being given in group health insurance continue to be a source of worry for the general insurance companies. Though Irdai has asked insurers to refrain from this practice, high premium-related incentives are still being given.
The chief executive of a standalone health insurer explained that several private insurers are exiting or cutting down on this business due to discounts.
Companies in the health insurance and general insurance space are also cutting down business in this space due to intense competition in pricing, which is often termed unviable.
Bigger insurers have made pricing so tough that it is difficult for others to offer such rates. Now with the regulator’s diktat, these practices would have to discontinue since additional solvency has to be maintained if claims are high, said the head of underwriting at a mid-sized private general insurer.
Earlier, Irdai had said that industry-wise loss cost (the actual or expected cost to an insurer of indemnity payments and allocated loss adjustment expenses) must be the starting point and should be considered for pricing a product.
It had also said non-compliance of norms, which included assessing the burning cost, would lead to penalties being imposed.
While this was made applicable to segments like group health from early 2015, insurers said discounts would continue.
Burning cost is the estimated cost of claims in the forthcoming insurance period, calculated from previous years’ experience, adjusted for changes in the numbers insured, the nature of cover and rate of medical inflation. This is a ratio used by insurers to protect themselves from larger claims that exceed premiums paid.
Experts said unhealthy competition is eroding the group health space with prices as low as 25-35 per cent less than the previous year.
Despite high claims, heavy discounts are offered to retain large corporate clients or to attract them with better rates.
Due to this, there is not just transfer of accounts from private to public, but also from one private non-life insurer to the other.
The incurred claims ratio in health insurance has seen a rise year after year to about 101 per cent. This means about Rs 101 is paid as claim for every Rs 100 collected as premium.
Curated from Heavy discounts in insurance to come under scanner