Healthy insurance

Recently, IRDA did some financial engineering and published its (draft) guidelines on settlement of personal accident and benefit based health insurance claims in instalments.

How will this impact the policy holders?

In the life insurance segment, there are already annuity products available which were designed to keep the instalment payments.

Unlike any investment linked insurance plans like ULIP or savings based endowment plans, the premium paid for higher sum insured in personal accident policies are very minimal.

For instance, for a ₹30-lakh personal accident cover, the premium will be roughly around ₹2,000 a year.

Even at a marginal premium of ₹12 per annum, the Pradhan Mantri Accident Insurance scheme offers ₹2 lakh coverage. So, the input premium is low for such products while pay-out amount is high for insurers.

However, the incidence of claims helps insurers to manage the portfolio profitably based on the risk premium calculations by actuaries. Instalment claim payout, based on the acceptance by the policyholder or beneficiary, will help to hold the outflow of funds for the insurers.

From the beneficiaries’ perspective, it will be like a pension for a period of five years that can help to insulate the claim amount by the family of the deceased from any aggressive creditors.

There are scenarios wherein such creditors may force the bereaved family to settle their outstanding in one go, after the demise of the policyholder.

Product design

Though, this can be a good option for the policyholders, certain aspects should be taken into consideration at the time of product design as well as at the operational level. As Insurers are going to retain the fund, the instalment pay-outs should be very attractive.

IRDA has already clarified that the claim amount under the instalment payout will be higher than the normal claim pay-out. However, with ease of access to many competitive products, the policyholder/beneficiary prefers to get the lumpsum benefit, as he can opt for other financial products.

A person opting for instalment pay-out, actually reinforces his trust with the insurer making the contract get extended for a period of five years. Insurers as a goodwill gesture can evaluate the risks of the family and suggest to them more risk coverage products. However, mis-selling by the agents/brokers should be avoided.

Operational issues

In the case of health benefit policies, lumpsum may not be attractive for all the cases as healthcare expenses can be unpredictable.

As it has been defined that payouts should be defined based on specific dates, a person who opts for instalment payments under health benefit policies will face constraints based on such inflexibilities should also ensure that this option is not be mis-used by fraudsters.

This option can also help insurers to clean and clear out the fraudsters in the long run.

To conclude, overall it is a win-win for both insurers and also the policyholders/beneficiaries. However, the success depends on how well it is used without mis-selling and dealing with product design and operational issues.

Saravanan is a professor of finance and accounting, IIM Tiruchirappalli, and Jayaprakash works in the insurance industry

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