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Price insurance correctly for it to work properly – Here is why

Using insurance to solve a lot of problems is a good idea, but it won’t work if insurers are out of pocket

The current medical insurance, Rashtriya Swasthya Bima Yojana (RSBY) that has been bought by 3.6 crore families, has been ineffective in reducing the burden of out-of-pocket spending on poor households precisely because it is under-provisioned for. (PTI)

Even though the mega-medical insurance scheme—Modicare?—for 10 crore households announced in the budget cannot possibly be a substitute for good primary care facilities in rural areas, there can be little doubt the scheme will do wonders once it takes off since it is well known that medical emergencies drag even non-poor families below the poverty line. Interestingly, it is not just the massive Modicare that will rely on an insurance cover, the government is already using insurance in a big way in other areas as well. The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY is for life insurance) has been purchased by 5.3 crore people at an annual premium of a mere Rs 330 per person, and Pradhan Mantri Suraksha Bima Yojana (PMSBY covers personal accidents) has been bought by 13.37 crore persons at an annual premium of Rs 12 per person. And though the overall area insured under the Pradhan Mantri Fasal Bima Yojana (PMFBY) has increased by a modest 6.5% between 2015-16 and 2016-17, the number of farmers insured has increased by 20.4% (from 47.5 million to 57.2 million) and the sum insured by 74% (from Rs 115,430 crore to Rs 200,620 crore) over the same period.

But if the various insurance plans are to succeed, the government has to relook some of these schemes to ensure they are priced correctly—if they are not, insurers are certain to be out of pocket and the scheme will then die a natural death. A report in Business Standard points out that while the government has estimated Modicare will cost around Rs 1,000-1,200 per family per year, 30 non-life insurance firms in the country have written to the finance ministry saying the premium needs to be at least Rs 2,500 for the scheme to be viable. The report is not surprising since, as this newspaper has pointed out in the past, most schemes are either terribly under-provided for or are simply not delivering. The current medical insurance, Rashtriya Swasthya Bima Yojana (RSBY) that has been bought by 3.6 crore families, has been ineffective in reducing the burden of out-of-pocket spending on poor households precisely because it is under-provisioned for.

In the case of the PMJJBY, while LIC charges a premium of Rs 1,529 per annum to a 20-year-old for a 20-year cover for Rs 6 lakh—going up to Rs 6,273 for a 45-year-old —this scheme charges a mere Rs 330 for everyone between 18-50. And as compared to Rs 100 per Rs 1 lakh of personal accident cover from non-life insurers, the PMSBY charges a mere Rs 12 per year for a Rs 2-lakh cover. As compared to a premium of Rs 1,028 crore for the life policies in FY17, its second year of operations, the claims were for Rs 1,249 crore, giving it a claims ratio of over 120%. In the case of the personal accident policy, the premium collected was Rs 120 crore and the claims Rs 205 crore, giving rise to a 171% claims ratio.

Ironically, while these schemes are under-provided for, some health insurance schemes such as the ESIC that blue collar workers have to mandatorily pay for, ESIC’s reserve fund was Rs 49,358 crore as on March 2016; in FY16 alone, the surplus was Rs 6,497 crore—for a person whose average income is Rs 10,000 per month, the ESI costs Rs 7,800 a year for hospital expenses while a group insurance cover of Rs 2 lakh would cost Rs 5,000 a year and will cover both out and inpatient costs. While premiums on the various PM schemes need to be raised—and maybe even get citizens to pay more—workers need to be given cheaper alternatives to schemes like ESIC.

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