Will be difficult without common underwriting methods
Portability has been, for a very long time, the textbook solution to generating competition in areas of natural monopoly such as electricity. So, in a situation where a consumer buys electricity from firm A which also owns the wires going into her house, the consumer can ‘port’ to firm B which will pay A for using its wires to deliver the electricity—the charge for using the wires is determined by the electricity regulator. In the case of mobile phones, there are no wires, but this portability is assured by allowing a customer to retain the same phone number while moving from one service provider to another. In the case of life insurance policies, according to a news report in Mint, the regulator is looking at introducing portability—it was done for health insurance in 2011—to improve the quality of service. Right now, consumers are free to terminate old policies and buy new ones from different insurance companies—there are 24 of them—but the ‘surrender charge’ can be as high as 70% of the premium paid. Also, depending on how old the insured are, buying a new policy can also increase the age-premium—if a 38-year old terminates a policy with firm A after three years to buy a policy from firm B, she will have to pay a higher premium since the rate rises above the age of 40.
That consumers will want to change insurers is obvious given that, in FY16, 12 of the 24 firms selling life insurance had a claims ratio of less than 90%. And among those with a claims ratio of over 90%, half the claims were pending for over a year—in the case of LIC which has a claims ratio of over 98%, a fourth of claims had been pending for more than a year. Since each insurance company has a different model for insuring people, porting will not be very easy even after there is a central repository that has all the details of each customer. While it is possible to leave the porting charge to be decided bilaterally between insurance firms, if the rates are very high, no porting will take place. A very low rate, on the other hand, could hurt an insurer if the most unhealthy tend to port to it. To make it work, the regulator will have to come up with a porting charge after studying the claims ratios and models of all companies. If, despite this, firms are willing to port at even lower rates, so much the better—the regulator, however, has to set the maximum charge.