Health Insurance: The Need To Innovate Microinsurance Solutions

By innovating microinsurance solutions, private insurers can help low-income families deal with their medical expenses

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The last two years of the COVID-19 pandemic have shown us the vulnerability of India's healthcare infrastructure. The capacity to tackle large-scale medical emergencies is limited while many struggle to access quality healthcare due to a lack of financial capability. Even when they do get access, out-of-pocket medical expenses can drive low-income families into poverty. The traditional solution to the problem, insurance, is flawed in multiple ways in India: coverage is limited and the market penetration is especially low. While the government is extending state-sponsored insurance to low-income families there is an opportunity for private insurance. By innovating microinsurance solutions, private insurers can help low-income families deal with their medical expenses.

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The need for micro-insurance solutions

India ranks as the 15th worst country in terms of out-of-pocket-expenses (OOPE) for healthcare, largely because of poor insurance coverage. At least 30 per cent of the population is not covered by government insurance while the market penetration of private insurance is less than 5 per cent. This is why it is not surprising that according to a 2021 report by the Finance Commission, nearly 70 per cent of healthcare costs in the country are borne by patients out of their own pockets. Before the pandemic, non-communicable diseases such as cancer, heart disease and diabetes accounted for the largest amount of expenses borne by households - with the largest being cancer. Accidents and injuries, whether traffic-related or not, also account for a large number of medical bills.

This is why pre-2020 studies show that nearly 60 million people fell into poverty each year as a result of onerous medical expenses. These figures would only have become larger after COVID-19 where comorbidities would have been highlighted and many struggled to pay for healthcare in overworked hospitals due to the economic slowdown. COVID-19 showed just how many people were vulnerable, especially from a financial planning perspective and highlighted the areas of India's healthcare infrastructure like insurance that need additional capacity.

The problems with health insurance in India

The market penetration for insurance in India is amongst the lowest in the world, with as many as 30 per cent of Indians being devoid of any health insurance. That said, this is an area that the government, specifically the Insurance Regulatory Development Authority of India (IRDAI) have been focusing on. In 2020, the IRDAI announced new guidelines to help encourage the standardisation of health insurance policies and make it easier for customers to understand and compare different policies. However, there is still much work to be done to improve the state of health insurance in India.

A good place to start looking is the claims ratio, which is defined as the percentage of the total premium collected by the insurer that is paid as claims. A ratio just under 100 per cent indicates that the insurer is a highly efficient one, with low operating costs. However, if the ratio is above 100 per cent it shows that the number of claims paid out exceeds the number of premiums collected - clearly, an unsustainable business model that is likely to lead to insolvency and bankruptcy. Similarly, if the claims ratio is significantly below 100 per cent it indicates that insurers may be overcharging and leads to concerns about consumer protection. There are many countries where regulators mandate that insurers have to return a percentage of premiums if their claim rations drop below a certain threshold.

The problem with health insurance in India is that historically the claims ratio of public sector insurers is above 100 per cent while that of private sector insurers is too low. In fact, the claims ratio of many private-sector insurers would attract the attention of regulators if they occurred in foreign jurisdictions like the US (itself, not a shining beacon for quality health insurance). This is one of the biggest problems with insurance, especially for low-income families.

Many of these households are already struggling to make ends meet, so the very concept of insurance becomes unattractive. For a majority of the rural and urban low-income populace, healthcare is a reactive expense. The idea that they would have to pay out a significant chunk of their modest income for premiums on the off chance that they get sick in the future is a hard sell when that income is already being stretched thin to meet basic expenses. The value proposition of health insurance for many low-income families is therefore not worth the cost of paying hefty premiums - which is why only a fraction of out-of-pocket expenditure (which is 80 per cent of total healthcare expenditure) is paid out towards premiums. This is where the concept of microinsurance can come in.

The benefits of micro health insurance

Microinsurance is designed to help extend insurance coverage to low-income families, rural populations or any demographic that is typically left out of conventional insurance paradigms. It works by covering comparatively lower amounts for limited purposes, allowing for significantly lower premiums. There are many advantages to this model.

The first is the lack of large mandatory premiums that are priced well beyond the capacity of low-income families. Microinsurance premiums can be divided into bite-sized payments that do not compete with household needs in their monthly budgets. The amount insured can range from below INR 1 lakh to INR 5 lakh. These comparatively lower payouts mean that there are no screening requirements for pre-existing health conditions. The coverage of micro health insurance can also be agile and cover a variety of expenses, including preventive testing. It is also easy to create micro health insurance schemes targeted at the most common illnesses.

The need for innovation

It is clear that health insurance is not adequately protecting many Indians from debilitating medical expenses. This leaves them out in the cold where they either suffer, drive their families into poverty, or both. While awareness is a factor, a major reason why health insurance cannot provide for low-income families is simply the cost. Large premiums for a possible contingency do not make sense for households already struggling with basic expenses. There is a need to innovate microinsurance schemes to extend health coverage. While there are some schemes, mostly government-sponsored, there is significant scope for improvement. This is why the IRDAI is currently debating reforms to lower capital requirements for new insurers to help encourage the entry of more microinsurance providers. The future of micro health insurance is bright in India. With the correct investment of time, money and other resources, health insurance providers can innovate to reach more low-income families in every city, town and village in the country, giving every Indian the chance to cope with health emergencies.