The COVID-19 pandemic is challenging for the health insurance industry on various fronts; at the same time, it represents an opportunity.
India is among the top worst-hit countries by COVID-19, which has impacted almost all industries and sectors across the world, including the insurance industry.
For instance, the pandemic and lockdown may have a significant impact on the automobile insurance sector, which is one of the largest revenue sources for the general insurance industry. Similarly, the hospitality and events industries, which avail of event, liability and property insurance, are also set to take big hits. Reduced travel may hit the airline industry badly and will lead to a considerable decline in the travel insurance segment, which was very profitable, according to a recent report by PwC India.
Impact on health insurance industry
While the demand for health insurance is expected to increase considerably, underwriting thresholds may also go up and thus the negative movement may not be offset.
It may be noted that India has traditionally been an underinsured country, with private health insurance schemes covering only 18% of the population in urban areas and a little over 14% in rural areas. Although the gap has been bridged somewhat by Ayushman Bharat, which has attempted to insure the poor and vulnerable, most of India continues to be underinsured when it comes to health.
Due to the widespread COVID-19 pandemic, health insurance companies are facing various challenges and are foreseeing an impact in the following areas:
1. Claim payout and liquidity
In order to dispel any general misconceptions about the applicability of health insurance policies to cases of COVID-19, the IRDAI has instructed insurers to accept COVID-19 related claims under active health insurance policies. Since the risk of COVID-19 is not currently priced under active products, these claims may cause an additional burden on the books of insurers if treated outside government hospitals.
Apart from various other things, a nationwide pandemic can result in a significant increase in claims for health insurance companies beyond just COVID-19. Some studies have shown that COVID-19 affects those with co-morbidities such as diabetes, renal and other chronic diseases adversely, and hence prolonging of such co-morbidities can result in a longer trail of non-Covid-19 chronic claims for an extended period beyond COVID-19, says the report.
Moreover, the Ayushman Bharat scheme may see a greater number of claims compared to private health insurance companies due to widespread coverage. This scheme may not have factored in the cost of setting up isolation wards. Given that isolation of hospitalised patients is crucial to prevent further community spread, this cost will create an additional burden which has to be borne by the government. Many insurers are running the scheme with a PPP arrangement with the government and they will have to recalibrate their financials.
Also, in view of the country-wide business disruption owing to the pandemic, the IRDAI has advised insurance companies to extend the grace or delay period by 30 days in case of policy lapse or renewal. This might pose some immediate liquidity challenges for insurance companies.
2. Product development
In the wake of the pandemic, there has been greater concern and awareness about health, and enquiries about health insurance policies have increased by 30–40%. The pandemic also provides an opportunity for insurance companies to innovate and serve the evolving needs of a more informed population. Several insurance companies have launched COVID-19 insurance products in March 2020. Other companies may follow suit and introduce such products. These products tend to be short term and carry fixed benefits, covering a fixed amount in excess of the hospitalisation schemes. The IRDA Sandbox has been useful at this time as many companies had filed and obtained approvals for risk cover in special situations.
A few product considerations for health insurance companies are discussed below:
a) Since details around COVID-19 treatment and prognosis are still emerging, insurance companies do not have data related to patient profiles, morbidity rates, cost of treatment, etc. This data is required to underwrite the risk and determine the premium for products specifically targeting this disease. Companiesare consequently at risk of under or overpricing their products.
b) Based on clinical research and in conjunction with the healthcare and pharma industries, insurance companies should calculate the possibility of a long trail of chronic disease escalation which may require health insurers to reprice their existing hospitalisation products. As of now, insufficient data may hinder such research but collaboration between insurers and their actuaries and healthcare professionals and institutions can create models which had not been attempted until now.
c) There is a clear opportunity for insurance companies to partner with their corporate customers for employee benefits to be fortified with healthcare activities in order to increase the health quotient as well as improve the possibility of weathering the COVID-19 situation better.
As a result, the value of policies will be increased, and claims will tend to go down with an increased level of awareness of the situation as well as chronic diseases and co-morbidities. Many corporate customers of employee health insurance are investing separately in such activities. Insurance companies can use this opportunity to increase client stickiness as well as improve their portfolio and retention ratios.
3. Reserves requirement
Due to the pandemic, the government has taken actions towards reducing bond interest and repo rates, which will lead to challenges for insurers in terms maintaining higher reserves (higher for a life insurer compared to a health insurer), liquidity risk, credit risk, etc. In view of these challenges, the regulator may have to provide some
temporary relaxation on the reserving requirement for insurers who were very close to the margin of solvency.
Here are a few considerations related to the fiscal status of health insurance companies:
a) If COVID-19 has an impact on the profitability of insurance companies due to an increase in claims and policy liabilities, etc., resulting in a lower tax liability, then that could affect their ability to declare dividends to shareholders. Where insurance companies choose to claim a deduction for dividends received under the proposed section 80M of the Income-tax Act, 1961, their inability to in turn declare dividends to their shareholders could constrain the quantum of deduction that the insurance companies may be able to claim in their income-tax returns. This could result in higher tax leakages for insurance companies
b) Since the level of regulations for both policyholder protection as well as solvency and governance of insurance companies is very stringent, no governance failure or structural difficulties are anticipated in the industry as yet.
c) The profits of the health insurance industry in the long term are dependent on portfolio profitability. This can be impacted in both ways.
d) The collapsing bond rates would have a cascading effect on the business of insurers and their balance sheets. A decrease in their value will result in a realised loss as insurers may end up selling these investments to manage increased claim liabilities. For investments that companies continue to hold, they may still have to record a provisional loss for a decrease in the value of the assets, the PwC India report says.
The COVID-19 pandemic, thus, is challenging for the health insurance industry on various fronts; at the same time, it represents an opportunity. Health insurance is expected to cushion the blow that this pandemic will deal. While being extremely relevant to society, using appropriate mitigation strategies, insurance companies may be able to support it further though product development activities and ensuring their reach is extensive.