INTRODUCTION:

Health care has always been a problem area for India, a nation with a large
population and a larger percentage of this population living below the poverty
line. In such a situation insurance becomes an important issue in the country.
But surprisingly, for a country with the 5th largest economy, insurance in
India has not been a sector that has taken off, considering its immense
potential. In this paper we see how health insurance has fared in India and the
reasons for its poor performance. We speak about how much of an effect
the opening up of the insurance sector has had on health insurance and also
compare the major policies from the new entrants to the time tested
Mediclaim. We end with an analysis of the future prospects of health
insurance in a country with an expected middle class of 500 million middle
class consumers in the next 8 years.

THE BEGINNING

Year Important Happenings

1912 Insurance Act passed
1938 Insurance Act, 1938
1956 Life Insurance industry nationalized
General Insurance industry nationalized
1972 IRDA bill passed in Parliament to allow foreign players
entry
1999 Insurance Amendment Bill 2001 passed by
Parliament
2001
 From the above table we see that the first real attempt at insurance was carried
out well before Independence, with the passing of the Insurance Act in
1912, which set down rules and regulations specific to the insurance
industry. Then there was a more fundamental shakeup in 1938 with the
Insurance Act, 1938 and this led to an insurance wing being set up, attached to
the Ministry of Finance.

At the time of nationalization of Life Insurance industry there were 176 (life
and non-life) companies in the industry. The general insurance industry was
nationalized in 1972. The next significant event was the passage of the
Insurance Regulatory & Development Authority Act, which opened up the
insurance sector to the private players. This was followed by the Indian
Insurance (Amendment) Bill 2001 which dealt with the means by which
insurers might access the new markets that had opened up and the role of
brokers in the insurance market.

OPENING UP OF THE INSURANCE SECTOR

When the insurance industry was nationalized, it was considered a

landmark and a milestone on the way to the socialistic pattern of society
that India had chosen after independence. However, with the passage of the
Insurance Regulatory Development Act (IRDA) in 1999, things are quickly
changing. The main features of the Act are:
§ It requires the Indian promoter to invest either wholly in an insurance
venture or team up with a foreign insurer, with a cap of 26% of equity for the
foreign partner.

§ The Indian promoter is permitted to divest only after 10 years to the

Indian public, through a public offering of shares, at which time the equity
structure will provide for equal participation between the Indian and foreign
partner with a share of 26% each in the share capital.
What the opening up of this sector actually does is open up a range of
untapped opportunities for the new players, considering the potential
market for buyers in the market is very high. It offers great scope for growth
as the present insurance penetration is just 1.95% (ratio of insurance
premium to gross domestic savings). For other countries, like Japan and
South Korea the rate of penetration is greater than 10%. Countries like UK
and France also have a penetration percentage closer to 10%.

The Indian Insurance (Amendment) Bill 2001 came next, which had more
changes in store:
§ Cooperative socities are being recognised to carry
business.
§ The training requirements are being modified as the existing norms are
restrictive and putting constraints on the growth of corporate agency business
in the country.
§ A portion of the premium received from a customer, can be paid as
remuneration to an insurance intermediary, which has been defined to
include insurance brokers and consultants.

This doesn't mean that public players are totally out of the market; in fact they
continue to hold strong market share positions. Multinational insurers are
keenly interested in emerging insurance because their home markets are
saturated while emerging countries have low insurance penetrations and high
growth rates.

GOVERNMENT REGULATIONS BEFORE & AFTER

NATIONALISATION

The insurance industry in India was nationalized in 1956. Before there were
only rules relating to specification of minimum equity capital
requirements for life insurance companies, stricter control over their
investments, submission of periodical returns, appointment of
administrators for mismanaged companies and ceilings on expenses on
management and agency commissions.

Nationalization brought in a more structured form to the industry. The

insurance businesses of the various domestic and foreign companies were
first brought under the central government and then nationalized under the
Life Insurance Corporation Act 1956.

Also there is the Insurance Division that keeps a close watch on the working
of Vigilance machinery in LIC, GIC and its subsidiaries. But there were still
concerns of:

(a) Relatively low spread of insurance in the country: India is one of the
most underinsured countries in the world. This can be explained partly by
the fact that India is a low income developing economy whose domestic
saving in long-term assets is not as high as that of developed economies.
To spread the habit of insurance, we need many more companies selling it.

(b) The efficient functioning of the Public Sector insurance companies.

The general perception about public sector companies was that the public
sector companies were inefficient places where nothing actually got done.
With a history like that nobody would want to take a policy from a public
sector company.

(c) The untapped potential for mobilizing long-term contractual savings

funds for infrastructure. The Indian population represents a huge untapped
potential for insurance companies. Potential for growth is huge in the Indian
insurance industry. Consider the following statistics: the middle-income
segment of the Indian population, which is a goldmine for prospective
insurance sellers, is 312 million strong. Against this, LIC services less
than 100 million policies. Only 65 million Indians have been introduced to
insurance. All these figures work out to an average of 1.5 policies per person,
which is a penetration of just 6%.

Health insurance is poised to become the second largest business for non-life
insurers after motor insurance in next three years

Current Policies available in market and the

major players
When talking of health insurance in India, the first name that comes to mind is
Mediclaim, which is GIC's health insurance policy and has been the only
policy of any real note in the country even though it may seem unattractive
to any person who has been used to a comprehensive health insurance
policy. As of now there are only two players in this field, Life Insurance
Corporation and the General Insurance Corporation (with its four
subsidiaries.)

Mediclaim is the health insurance scheme offered by GIC and Jeevan Asha
is the health insurance scheme offered by LIC.
The General Insurance Corporation (GIC) was formed by a Legislative Act; it
is a merger of more than a hundred private companies. It was then regrouped
into the 4 subsidiaries of GIC: National Insurance Company, New India
Assurance Company, Oriental Insurance Company, and United India
Insurance Company.The opening up of the sector has, however, brought in
a lot of new players:With the markets of Developed countries nearing
saturation, insurers are looking at the world's emerging markets. These
developing economies comprise 84% of world population and 22% of
global GDP but only 9% of world insurance. On the other hand is the global
insurance market, concentrated mainly in North America, Western Europe,
Japan and Oceania- containing 91% of world's annual premium
collection.Since the gestation period of the typical insurance business is
around ten years, it is high time for foreign insurers to make their presence felt
in India.

The new players will have to prove their creditworthiness. It will be a tedious
and difficult task to woo customers away from LIC and gain their trust. Their
previous track record and brand value in overseas market will not help
them much in getting immediate brand recognition in India.
 Cash-O-Nova
matter. So, being among the first will be a major Finance Forum, IIFT
deciding factor to achieve success in this
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WHY HEALTH INSURANCE

§ Recognition as an industry: In the mid 80's, the healthcare sector was recognized as
an industry. Hence it became possible to get long term funding from the Financial
Institutions. The Government also reduced the import duty on medical equipments
and technology.
§ Socio Economic changes: The rise of literacy rate, higher levels of income and
increasing awareness through deep penetration of media channels, contributed to
greater attention being paid to health. With the rise in the system of nuclear families, it
became necessary for regular health check-ups and increase in health expenses.
§ Brand Development: Many family-run business houses, have set-up charity
hospitals. By lending their name to the hospital, they develop a good image in the
market, which further improves the brand image of products from their other
businesses.
§ Extension to related business: Some pharmaceutical companies like Wockhardt and
Max India, have ventured into this sector as it is a direct extension to their line of
business.
THIRD PARTY ADMINISTRATORS (TPAS)

TPAs are essentially insurance intermediaries, which undertake the entire administration
of health plans for insurance companies. Apart from settling claims, TPAs also process
business, offer customer service and technical support.

Private players have taken the lead and engaged TPAs to help them service
policyholders who have taken health covers. Iffco-Tokio Marine General Insurance, ICICI
Lombard General Insurance, Reliance General Insurance and Royal Sundaram General
Insurance have already signed up their respective TPAs.

The idea behind hiring TPAs is to reduce the high claim ratios by eliminating fraud cases.
While TPAs' network with hospitals and interaction with doctors is expected to reduce
claims substantially, insurers also wish to improve customer relationship through their
TPAs.

In a bid to give a shot in the arm to the health insurance sector, the Insurance Regulatory
& Development Authority (IRDA) has allowed third party administrators (TPAs) in the
health insurance sector to tie up with more than one insurer, but mandated a stringent
code of conduct.

§ IRDA (TPA-health services) Regulations 2001 has barred TPAs to advertise products
without approval of insurance companies while envisaging strict confidentiality in
information shared with insurers.
§ A TPA also has to undergo a training of minimum three months in the field of Health
insurance and have access to competent medical professionals to advise the
insurance companies and the client on various matters
§ They would have to renew their licences from IRDA every three years and inform the
authority if there is any change in shareholder patterns involving more the 5 per cent
equity.

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§ The Code of Conduct laid down by IRDA said that TPAs would have to bring to notice
of insurers any adverse report or inconsistencies or any material fact that is relevant
to the insurers business.
§ It also says that TPAs would have to bring to notice of insurers any adverse report or
inconsistencies or any material fact that is relevant to the insurers' business.

But the problem with TPAs is that the cost of these services have been factored into
health plans of all the new players and they are 30 to 35% dearer than health plans of
nationalized insurance companies. Anyway, at present TPAs do not allow individuals to
avail of health insurance policies from them. The state general insurance companies will
deliberate on whether they can absorb the cost of hiring TPAs or else whether the cost of
Mediclaim has to be revised upwards. They will also have to decide whether TPAs will
service all policyholders or be limited to a certain clientele. There are strong reasons why
some officials feel that appointing TPAs is not a commercially viable decision. For every
Rs 100 premium the insurance company collects, it spends Rs 141. Add to this the
service charges payable to the TPA and the net outgo on the said premium would only
increase. The problem gets compounded with IRDA's ruling on TPA charges. IRDA has
categorically stated that the service charge cannot be added to the premium. This
effectively means that TPA charges will have to be borne by the insurance company. The
public insurance companies are caught in a catch-22 situation. They will not be able to
increase the premium as the competition is intensifying and on the other hand it would be
difficult to shoulder the burden of TPA charges over and above the existing problem of
revenue deficit.

This doesn't mean though that there are no uses of TPAs. Since they analyze trends,
they are able to keep a check on treatment pricing levels. A TPA with a good network can
lower chances of fraud because of the steady business that it provides to the hospital.
And the most important: the entry of TPAs would also mean cashless health care
delivery to policyholders, along with trauma support and other advisory services.

A cashless scheme under a TPA is a customized health insurance scheme generally

devised as a Group Health insurance scheme and put in place by a Third Party
Administrator (TPA). Here when the insured is hospitalized he/she need not pay for
medical expenses incurred. Medical Expenses incurred are settled by the TPA directly
with the concerned medical institution as per the terms and conditions of the health
insurance package. Any amount that is not payable under the insurance scheme will be
borne by the insured himself/herself and will have to be reimbursed by the TPA.

This is quite unlike the Mediclaim policy, which is basically a reimbursement scheme
where the insured, when hospitalized, pays the medical institution, submits the claim to
the insurance company and gets reimbursed as per the terms and conditions of the
policy.

Thus TPAs are here to stay and the pros as of now seem to outweigh the cons.

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STATE COMPANIES VS. PRIVATE ONES

The final lap towards the privatization of the Health care sector in India was made with
the passing of the IRDA Bill. Till then, control of formal insurance lay with the public
sector. This bill allows for the entry of various private players into various sectors of the
insurance industry, overseen by a regulatory authority, which will control the various
entities.

It is to be assessed whether such a system will prove to be effective, in keeping with the
three moot points of health insurance policy in India.

§ Aggregate cost of providing health care in India

§ Inequitable distribution of healthcare delivery systems (all metro-centered and poorly
subsidized)
§ Quality of healthcare benefits

1. Healthcare costs because of entry of private players

Theoretically there are many reasons why entry of private entities into the health
insurance sector would spiral up costs.

Healthcare providers, like doctors, are supposed to be more informed about their
patients' health, future situation, etc. than the latter himself. This, along with prospects of
being ill and the various opportunity costs of being so makes the demand for health care
quite dependent on the treatment course suggested by the physician. In a regime of
indemnity insurance (also called 'fee-for-service'-in which the insurer pays for the cost of
covered health care services after they have been provided)), the provider may actually
sell more health care than needed.

Also there is the problem of asymmetric information in the transaction between the
insurer and the insured. Once insured, a person feels less the need to take precautions
against ill health. However these effects are likely to have the same effect in any
scenario…public health setting or privately insured.

The major cost spiral due to private entry lies in a third more significant factor.
Under the public sector, which involves the dual functions of financing and provisioning of
services, there are a host of restrictions, especially referral to higher order care and
budgetary limits.
Looking at the special insurance programmes of the Indian govt. for its employees- under
the Central Government Health Scheme (CGHS), employees are not eligible for
reimbursements without referrals from the concerned authorities. It is the same for the
Employees State Insurance Schemes (ESIS), in the organized sector. The case of
referrals is not much for outside private players, (CGHS has only 6 of total expenditure on
private referrals), but is widespread within the public sector wherein the utilization is
highly biased towards the public hospitals and facilities.

One must remember that in India, the only significant health insurance policy is Mediclaim
and the major players are few and all public sector entities. Here the only choice that one
actually has is to decide WHOM to insure HOW MUCH for. This is quite unlike the west
where there is a staggering range of health policies to choose from, along with various

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options like HMOs (Health Maintenance Organization) and PPOs (Preferred Provider
Organizations) to aid you.

What are HMOs?

Managed health care institutions that have emerged in India, like the HMOs, which have
come up in the private sector in other countries combine the role of the insured and the
insurer and can therefore help cut costs. This has been seen to a certain extent in
countries like the USA. An HMO is a form of insurer provider that, in return for a monthly
premium, provides comprehensive health care services to its members. It is different from
any standard health care insurance provider in that the patient's are required to see
doctors only within the company's network of physicians.

A similar organization are PPOs.

A PPO (Preferred Provider Organization) is a hybrid between a normal health insurance

program and an HMO. Under these programs PPOs contract physicians on a fee-for-
service basis and allow visits to specialists without a recommendation from a primary
care physician. PPOs tend to be more expensive than HMOs.

In India, there are also certain small companies that provide what is known as 'group
insurance'. Employers sometimes provide this to their employees in which the former
pays part or the entire insurance premium of the latter (which is not much).
Insuring large groups together is a viable option when one considers that not only is the
danger of risks in the applicant pool lesser in large groups (as per the law of large
numbers) but also, the administrative costs are lower-
Close to home, GIC offers discounts over 15% for individual insurance to almost 67% for
groups of 50 thousand crores or more (Phelps 1997).

Also, employee based group insurance can be promoted (as is being done already to an
extent) by linking it to insurance-linked tax benefits. In India, since the premium can
be paid either by the employees or the employer, tax benefits can accrue to either. It
would perhaps be more feasible to promote employer-based benefits, to aid insurance,
especially if corporate income tax rates are higher than personal tax rates. The same
would hold if the employers could gain returns to scale through group insurance
administration.

Specific to developing countries, like India, is another factor that leads to extremely high
health care costs- the financial health of the health insurance companies.
Many companies in developing nations face inadequacy of even minimum capital
reserves. Plus they also lack sufficient information of the factors that affect health. Which
is why they may be charging premiums whose real cost is much less than their
benefits offered in a competitive environment.
Adding to this are the foolhardy get-rich quick solutions that these companies adopt
which are highly risk-prone, forcing governments to create expensive bailout packages
that drain the former of the need to be efficient.

There is a need to set a minimum standard of regulations and restrictions with regard to
management and personnel, solvency, capital requirement etc. along with strict control at
the national level.

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2. Quality of health care in India

Unquestionably, the quality of health care provided in India will improve with the influx of
private insurers. In the free market, as the consumer grows more informed and aware, he
desires better quality- institutions he may choose to label/certify products and services in
the health sector, such that only the reputed brands stay on in the market and the other
non-certified ones are sidelined.
As demand for health pushes up its price, the opportunities for well qualified
professionals will increase, but at the same time, so will the supply of low quality workers
(fake degrees, certificates in allopathy etc.), which may even lead to deteriorating
quality at the margin.

It is here that we need to look at the options of managed care. The developments would
be in the direction of developing a strong information base and accreditation system for
the providers. In India too we have certain similar schemes like SEWA** and
Tribhuvandas (run through NGOs) and these models need to be examined carefully.
However we need to realize that the arguments for Indemnity insurance are very
different from those for HMOs.

There are certain constraints on the latter that may actually be a case for indemnity
insurance. The quality of services offered by HMOs may be compromised to make the
package sold affordable, by empanelling ill-qualified practitioners, etc. There is need for
much harsher control for this to be prevented.

3. Equity Implications of Private Health Insurance

Potentially, the entry of new private players into the market may actually worsen the
equity balance in the economy, in terms of distribution of spending on health.
One reason is that insurers may indulge in risk selection and screen off any potentially
high-risk clients. Such a process will pose an unfairly large burden on those who are sick
and need risk protection.
Exacerbating this will be lack of a suitable buffer in terms of good quality public health
insurance. Public facilities may actually deteriorate with all qualified personnel moving to
the better paying private market.
Though there has been an argument advanced that provision of better quality and higher
cost insurance may lead the rich to adapt to it, leaving the lower priced policies to the less
well off. However, we find that such a trend is highly insignificant in terms of the
percentage of the elite moving away, considering the many subsidies they receive on
these very public policies.. The only way this will happen is if the quality differences
between the private and public sectors are very large and the premium on private
insurance very cheap, which is an extremely unlikely situation.

Worldwide concurrence is that inequality will worsen with market opening up, until the
regulatory authorities address these problems with measures like limiting the number of
policies that will be on offer, controlling price, etc. However, this negates the very point
of opening up of the health insurance sector.

In the liberalized insurance market, there will be multiple distribution channels, which
will include agents, brokers, corporate intermediaries, bank branches, affinity groups and
direct marketing through telesales and Internet. Some channels will be cheaper than
others. Hence there will be competition among the channels. The new insurers will

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operate with the help of multiple distribution channels Finance Forum, IIFT
but the existing insurers may be
forced to operate only with the help of agents.
Hence, intense competition will grow
among the old and new insurers in the market to win
the consumers. This will pose a
great challenge to the insurers in
the liberalized insurance market.

THE GLOBAL COMPARISON

Comparison of India's existing health scenario vis-à-vis other nations going

through a similar liberalization phase;

The Indian insurance scenario pales into comparison when compared with other
countries of the world where most of the developed countries have a large portion of
government involvement in this sector. The quality and availability of government-funded
healthcare in India is an area of concern. With the advent of newer technologies, the cost
of healthcare has become prohibitive for a large segment of the population. The
government and the people are using various health financing options to meet rising
health care costs. Health insurance recently becoming being an affordable option, the
potential and opportunity for insurance companies has immensely brightened.

In countries such as Korea, Taiwan, and Sri Lanka, after the insurance sector was
opened up, premia grew at thrice the rate of GDP growth. Clearly then, India can benefit
from the entry of private players.

Even overall, India still has a low insurance penetration of 1.95 per cent, that makes it
51st in the world. Despite the fact that India boasts a saving rate of around 25 per cent,
less than 5 percent is spent on insurance.

The following data indicates the status of select Asian Countries, with reference to their
National incomes and their Health expenditure both in public and private sectors.

Table: National Income and Health expenditure of Select Asian Counties (in US Dollars)

Country Per Per capital % of Public sector % of Private % of

capita total health GNP Health the sector T.H.E.
income expenditure expenditure public Health Private
GNP per capital sector Expenditure sector
per capital
1 2 3 4 5 6 7 8
3/2 5/3 7/3
Korea 2,370 148.37 5.1 17.87 12 130.49 88.
Malaysia 1830 58.51 3.5 44.97 77 13.53 23.
Thailand 810 32.79 3.8 9.94 30 22.38 73.
Papuang 720 26.18 3.8 23.68 91 2.49 9.
Philippines 560 14.09 2.4 3.76 27 10.33 7.3
Indonesia 490 10.42 2.4 3.90 37 6.52 63.
Sri Lanka 400 9.18 2.3 5.32 58 3.85 42
China 300 11.04 4.0 2.13 19 8.91 81
India 290 12.51 4.3 4.63 37 7.87 63
Burma 200 6.41 3.2 2.29 36 4.12 64
Bangladesh 160 3.80 1.7 1.12 40 2.68 60
Nepal 150 2.11 1.4 1.28 61 0.83 39
Source: National Seminar on Health Insurance. (Asia Insurance Post - March 2001)
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A reason for this could be that unlike in the other countries, insurance is sold more as an
instrument of savings in India than as a product offering protection and security. This is
explained further into the paper.

Thus we find that the Indian insurance industry has yet to catch up with its Asian
counterparts much less with world giants like the US or UK. Part of the distance can be
gone though, through the entry of private companies, which we now analyze.

THE DESIRED STRATEGIES

Strategies that need to be focused on to propel the health insurance sector to the
forefront, in India:

Taking a look at the various steps and strategies that need to be followed by companies
that hope to conquer the Indian health insurance market, we see that the four main
challenges facing the industry are product innovation, distribution, customer service,
and investments. Unit-linked personal insurance products might find greater
acceptability with rising customer awareness about customized, personalized and flexible
products. Flexible products and new technology will play a crucial role in reducing the
cost and, therefore, the price of insurance products. Finding the niche markets, having
the right product mix through add-on benefits and riders, effective branding of
products and services and product differentiation from competitors' offering will be
a few challenges faced by new companies.

Inarguably the potential market for insurance buyers is tremendous in India and offers
great scope for growth. While estimating the potential of the Indian insurance market we
are often tempted to look at it from the perspective of macro-economic variables like the
ratio of premium to GDP (which is indeed comparatively low in India) but the fact is that
the number of potential buyers of insurance in India is certainly attractive. However, this
ignores the difficulties of approaching this population. New entrants in other mass
industries such as consumer products or retail banking have discovered this after burning
their fingers. Much of the demand may not be accessible because of poor distribution,
large distances or high costs relative to returns.

Also, most new entrants have a tendency to target the business of existing companies
rather than expanding the market, this is myopic. This not only leads to intense
competition for the new players and their much of their effort is spent on trying to capture
existing customers by offering better service or other advantages. Yet, the benefits of this
strategy are likely to be limited. For example, 50% of the current demand for general
insurance comes from the corporate segment. The corporates are likely to shop around
for the best rates, products and service. Nevertheless, the corporate segment, as a whole
will not be a big growth area for new entrants. This is because penetration is already
good here, companies receive good service because of their size and rates are tariff-
governed. In both volumes and profitability, therefore, the scope for expansion is modest.
A better approach may be to examine specific niches where demand can be met or
stimulated, like targeting the chief wage earners and more importantly, moving to rural
India.

The main thrust of a new insurer's strategy should be to stimulate demand in areas that
are currently not served at all. For example, Indian general insurance focuses on the

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manufacturing segment. However, the services sector, though not yet having taken full
flight, still takes up a large and growing share of India's GDP This offers immense
opportunity for expansion.. Insurers could respond with various liability covers embracing
all sorts of claims. For example, revenue from remote processing activities in information
technology is estimated at USD 50 billion in the next ten years. Imagine the tremendous
returns on insurance in this sector.

In case there are products, which are already prevalent in different markets but not
adequately being served here, they can be customized to the Indian markets and
used to expand the markets. Life insurance products provide a good example. Life
Insurance products have to compete with savings and mutual funds and hence should
offer various dimensions of risk/return/flexibility so they can be linked to stock market
indices, inflation etc. making them more competitive and appropriate risk/return appetite
for different investors at present there are no such products. A similar situation exists with
health insurance.

In India, policies are inflexible. They compete with investment and savings options like
mutual funds. It is imperative that they should offer comparable returns and flexibility and
there is immense scope of developing pure insurance products with flexibility.

Health insurance is a segment with great potential because existing Indian products are
insufficient. By the end of the GIC's Mediclaim scheme covered only 2.5 million people.
Indian products do not cover disability arising out of illness or disability for over 100
weeks due to accident. Neither do they cover a potential loss of earnings through
disability

DISTRIBUTION ISSUES

Another major issue to contend with is distribution. It will be a key determinant of success
for all insurance companies regardless of age or ownership. The nationalized insurers
currently have a large reach and presence. New entrants cannot-and do not-expect to
supplant or duplicate such a network. Building a distribution network is extremely
expensive and time consuming. Yet, if insurers are to take advantage of India's large
population and reach a profitable mass of customers, new distribution avenues and
alliances will be imperative. This is also true for the nationalized corporations, which must
find fresh avenues to reach existing and new customers. There would be substantial
shifts in the distribution of insurance in India. Many of these changes will echo
international trends.

Worldwide, insurance products move along a continuum from pure service products to
pure commodity products. Then they can be sold through the medical shops, groceries,
and novelty stores etc. Once popularity and awareness of the products are attained, then
they can move to remote channels such as the telephone or direct mail. In the UK for
example, retailer Marks & Spencer now sells insurance products. At this point, buyers
look for low price (and the Indian consumer, especially so, being extremely cost-
sensistive). Brand loyalty could shift from the insurer to the seller. Recognizing this trend,
the financial services industry worldwide has success-fully used remote distribution
channels such as the telephone or the Internet to reach more customers, cut out
intermediaries, bring down overheads and increase profitability. This is the very direction
Health should take.

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Here we need to stress that for the public sector health insurance players,
liberalization is theoretically an excellent concept. With a strong presence, a wide
network and considerable brand equity, they are in the right position to tap profitably the
very same segments that the private sector will, while improving their product and service
offerings.

Thus, many new Indian private insurance players will need to cope with the challenges of
working with a joint venture partner. They will be competing with large and well-
entrenched government-owned players. They have to overcome regulatory hurdles,
change the attitude of new recruits and satisfy some very high customer expectations.
Also, the players will have to consider the Indian market as a long-term investment, and
maintain clear-cut objectives and constant monitoring at all levels.

ALL insurers in a liberalized Indian market will have to address a host of 'other'
issues.

Importantly, they need to make use of information technology to service a larger

customer base, more efficiently and to bring down costs. This can complement and
supplement distribution channels effectively and can also help improve customer service.

In today's highly competitive financial services environment, effective organizations will

employ technology in a strategic role to achieve competitive edge. Technology will play
an increasing role in aiding design and administering of products, as well in efforts to
build life-long customer relationships.

Companies will also have to bring together various related but separate providers
into their systems to ensure seamless servicing.

For this purpose they need to also build strong relationships with their intermediaries
(agents). It is also required that these agents undergo high levels of training, for better
service and flexibility.

On more specific lines to gauge and increase profitability and to exploit fully the potential
of different customer ad product segments, companies need to use methods like data
warehousing, management and mining. Understanding the customer better will allow
insurance companies to design appropriate products, determine pricing correctly and
increase profitability.

REGULATION - THE CATALYST

The government plans to review the capital requirements for standalone health insurers
in March 2003. The government assumes an 18-24-month timeframe after the issue of
the first license for changeover issues to be resolved. This is one area where India does
not have much progress to date. A lot needs to be done to lure foreign investment.

According to projections by a Confederation of Indian Industry (CII) expert group, the total
volume of life insurance premium, which stood at Rs 215.81 billion in 1998-99, will more
than double to Rs 592.51 billion by 2004-5, and rise nearly seven times by 2010. In
general insurance too, the CII expects premium income to double by 2004-5.

Insurance '02: A Seminar On the Emerging Issues In The Indian Insurance Sector 20
 Health Insurance in India: The Emerging Paradigms Cash-O-Nova
Finance Forum, IIFT

Therefore, there was an insurance reforms committee set up in April 1993 which
eventually led to the IRDA Bill 1999 and the Indian Insurance Amendment Bill 2001.
these also contained provisions about TPAs.
The life fund can be utilized for financing the infrastructure industry as well as to provide
support to other industries in the country. Hence, the insurance industry is likely to play a
key role in changing the economic landscape of the country.

RURAL-URBAN MIX

It must be borne in mind that India is a predominantly rural country and will continue to be
so in the near future. New players may tend to favor the "creamy" layer of the urban
population. But, in doing so, they may well miss a large chunk of the insurable population.
A strong case in point is the current business composition of predominant market leader
• the Life Insurance Corporation of India. The lion's share of its new business comes from
the rural and semi-rural markets. In a country of 1 billion people, mass marketing is
always a profitable and cost-effective option for gaining market share. The rural sector is
a perfect case for mass marketing.

Competition in rural areas tends to be kinder than that in urban areas, which are usually
cutthroat and the generally smaller policy amounts in rural areas would be more than
offset by the higher volume potential in these areas in contrast with urban areas.
Identifying the right agents to harness the full potential of the vibrant and dynamic rural
markets will certainly provide results.

Rural insurance should be looked upon as an opportunity and not an obligation.

Two aspects that need to be developed so as to allow health insurers to penetrate the
rural market are:

• A smaller bundle of innovative products in sync with rural needs and perception
• An efficient delivery system

In this light, the suggestions of the IRDA bill are extremely useful. We need to set up
cooperative societies that will encourage targeting the rural secotr. Also, insurance
agents need to be trained to sell health insurance to the rural layman, considering that
the bucolic population in India is more susceptible to falling ill, as rgard to the helth -
conscious urban one.

Insurance '02: A Seminar On the Emerging Issues In The Indian Insurance Sector 21
Health Insurance in India: The Emerging Paradigms Cash-O-Nova
Finance Forum, IIFT
 CONCLUSION

Competition will surely cause the market to grow beyond current rates, create a bigger
"pie," and offer additional consumer choices through the introduction of new products,
services, and price options. Yet, at the same time, public and private sector companies
will be working together to ensure healthy growth and development of the sector.
Challenges such as developing a common industry code of conduct, contributing to a
common catastrophe reserve fund, and chalking out agreements between insurers to
settle claims to the benefit of the consumer will require concerted effort from both sectors.

The market is now in such an evolving phase that one can expect a lot of action in the
coming days. The current impediments for foreign participation - like 26% equity cap on
foreign partner, ill defined regulatory role of IRDA (Insurance Regulatory development
Authority- the watchdog of the industry) etc.—are expected to be removed in the near
future as the government realizes the importance of health and insuring it. The early-
adopters will then have a clear advantage compared to laggards in gaining the market
share and market leadership. They will need to make sure right now that all their
infrastructure is in place so that they can reap the benefit of an "unlimited potential."

Once the initial groundwork is done and the government's sticky policies are 'undone' ,
there will be no stopping health insurance from becoming one of the most robust sectors
of the Indian Economy.

The Indian healthcare insurance industry is worth INR 60,497 crores with a compounded annual growth rate of
approximately 42.3 percent between 2008 and 2015. The market penetration is will be 3 folds higher in 2015. The
main factors of growth are increased awareness. According to World Bank Report, 99% of Indians will face financial
crunch in case of any critical illness. Hence the need for Health Insurance

Rising healthcare costs have increased need for health insurance Supporting Demographic
Profiles (Prospering Middle Class, increasing disease state, population) Detariffing of the
general insurance industry (whichhas increased emphasis and efforts by insurance
companies towards health insurance and otherpersonal lines of business)Rationalization of
premium rates (e.g. trend of upward revision in respect of Group Health Rising healthcare costs
have increased need for health insurance Supporting Demographic Profiles (Prospering Middle
Class, increasing disease state, population) Detariffing of the general insurance industry (which
has increased emphasis and efforts by insurancecompanies towards health insurance and other
personal lines of business)Rationalization of premium rates (e.g. trend of upward revision in
respect of Group Health
Market Drivers
Current Impact (2008-2011

Market Drivers
Current Impact (2008-2011
Figure 1

Figure 2

Recommendations

exposure through media (TV, Radio and Internet). In this case, the traditional model
is more generic and

there is a need to reinvent the messages based on target groups to achieve the
business objectives

There is a demand for new products in the market with optimal pricing. Preventive
care, out patients coverage and long term care needs to be addressed with utmost
flexibility in options such as continuity/renew-ability and portability
Companies should understand the nitty-gritty of the market to increase their market
share.

 Fraud Control
 Cost & Inflation Factors
 Localization Trends
 Quality Standards – Region wise.
 Managing the divergent expectations of the insurer, the insured and the provider

Competitive Structure (Cont…)