Premium league needs a level playing field

The government has no business being in business, the IRDA8217;s mandate is not to control PSUs but to regulate all insurance companies equally

The underreported July 7, 2006 circular by The Oriental Insurance Company OIC on zero commissions for its Mediclaim policy for individuals over 55 is the result of a typical half-way reforms trap, a three-sided prism that takes the clean white concept of market and colours it in hues of morality, subsidies, social justice. Side 1: reversal of the level playing field argument, being made by an incumbent, state-owned company. Side 2: 40,000 incumbent agents and brokers seeking to revoke their money trails. Side 3: 350,000 policyholders, who need health insurance the most and at the cheapest price. This circular has everything that helps turn reforms into a four letter word. It has more to do with the process of opening up a sector, with the way PSUs are transformed into delivering social justice than with servicing policyholders and investors.

Read beyond the order and you see three questions underlying it:

8226; Should public sector companies subsidise private sector ones?

8226; Should the young subsidise the old, the healthy subsidise the unhealthy?

8226; Should fire or marine insurance subsidise health and motor third party insurance?

In an environment that has been 8216;8216;opened up8217;8217;, the playing field has to be level. If OIC8217;s circular discourages the 55-plus from getting medical cover, just what are private companies doing? Bajaj Alliance does not give new health covers beyond 55; Royal Sundaram stops at 45 60 for dependants; Chola8217;s covers end at 55 70 for dependants. Among PSUs, United ends at 75, National, New India and OIC at 80.

Which is why OIC 8212; and I presume this will reflect in the balance sheets of other PSU insurers as well 8212; has an 8220;adverse selection8221; a condition when the insured select only those covers most likely to result in losses for the insuring company. While Census figures show the under- and over-40 ratio as 76:24, the numbers for OIC stand at 64:36. Which means the company has more older and riskier individuals as policyholders than young.

At a lower cost. While most private company prices are less than PSUs8217; in the younger age brackets, at the 45-year line the numbers change. For a Rs 2 lakh cover at age 60, for instance, OIC charges Rs 4,206 compared to Royal Sundaram8217;s Rs 5,949. At age 25, however, Royal Sundaram is 34 per cent cheaper, at Rs 1,542, compared to OIC8217;s Rs 2,329. Cholamandalam MS charges Rs 9,140 for a Rs 5 lakh cover for 40-45 year olds, about 73 per cent more expensive than OIC8217;s Rs 5,281. Which, in a free, non-tariffed market paradigm, is fine 8212; how companies run their business is their business.

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So why do we expect and measure state-owned companies differently? In order to break even, OIC needs to raise its rates by over 90 per cent, on an average, over seven age categories. In a proposal to IRDA, sent earlier this year, it has tried to balance increased prices with a 8216;favourable selection8217;. So, as part of business strategy, it seeks to reduce rates by 10 per cent to nil increase in the below 35 age group. At ages 61-90, it seeks 100-150 per cent increase.

This increase in rates will also narrow the subsidy gap that the young are paying the old. The incurred claim ratio ICR, a number that tells us how much the company has paid policyholders as a percentage of premiums collected, stands at 111 per cent for under 40 and 171 per cent for over 40. One way to balance this equation is by increasing premiums. There is nothing immoral about this 8212; the insurance company measures risk and decides a price to insure that risk; the higher the risk, the greater the price.

The other way to resolve the tension between increasing business and avoiding bad risk is to choose clients carefully. In the US, for instance, insurance companies divide people into four categories 8212; preferred risk one in eight applications are accepted, and account for 30 per cent of premium, standard risk four out of five, 40 per cent, substandard risk 8 per cent, 30 per cent, and uninsurable insurance declined. This system has varied premium rating factors 8212; age, sex, occupation geography, smoker v/s non-smoker and suchlike 8212; which ensure that the healthy do not subsidise the infirm.

What would have happened had OIC been a private sector company? Would private shareholders, thousands of investors if it was listed, have allowed it to continue to insure certain losses? Is this happening because the shareholder is a fuzzy entity called the President of India? I also wonder whether the regulator, the IRDA, would have allowed the premium hike application to languish for six months when it clears most such decisions within one month. Most important: after deciding a cap, is it the IRDA8217;s job to micromanage or comment on commissions being paid to agents and brokers? If not, why pick on and summon OIC?

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If it looks as if I8217;m batting for OIC, or even PSUs, look again. For, when all these issues are examined through the lens of economic reforms, the issue that stares us in the face is this: the government has no business being in business. If it favours the private sector, the exchequer suffers; if it leans towards PSUs, 8216;opening up8217; remains a theoretical construct. The predictable answer to which will be: reforms don8217;t work. While actually, it is half-way houses that don8217;t. It8217;s about time the IRDA realised that its mandate is not to control PSUs but to regulate all insurance companies 8212; equally.