Personal Finance

How zone-based health insurance premium works

Sai Prabhakar Yadavalli | Updated on: Jan 19, 2022
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Zonal premiums make health insurance affordable to the middle class

Recently, Care Health Insurance joined a few other insurance companies in launching its health policy focused on zones, offering health insurance at varying premiums to customers from different zones or cities. Health insurers usually price their products based on age and gender, the number of people to be insured and the total sum insured as all these factors have a bearing on the risk borne by the insurer.

At the same time, the place of residence determines the cost of healthcare access and this is being increasingly considered in premium calculations for health insurance. Insurers over the last five years, either explicitly or implicitly, have been pricing their health insurance premia according to the zone of residence, in addition to other factors.

Why zonal pricing

Healthcare markets are divided into three or four broad categories based on average cost of treatment, based on which premiums will be charged. Premiums for those residing in Zone A cities (large metros) are higher compared to those living in Zone B cities (smaller metros) while premiums for all other regions falling under Zone C are the lowest. The zoning of regions is mostly done based on the internal database of health insurers. Generally, Delhi and Mumbai fall into Zone A with higher premiums, while other metros including Chennai, Hyderabad, Bengaluru, and Kolkata may be placed either in Zone B or C depending on the historical data on average claim size from these regions.

Zonal premiums make health insurance affordable to the middle class. Lower pricing achieved through zonal-based approach for rural regions can be the first step in addressing the gap between market demand and affordability in these regions. NITI Aayog calls the middle class the ‘missing middle’ in insurance. Falling above the cut-off for government-sponsored universal insurance schemes and unable to afford paying the premiums on their own, the middle class ends up with the least amount of insurance penetration. Offering an alternative pricing on pan-India basis and one based on matching premia with costs, zonal premium can offer a solution to this large section of population. Also, following a pan-India pricing ensures that customers from lower cost zones are cross-subsidising payments made in high cost zone, which can be avoided with zonal based premium.

In the long-run, zone-based premiums provide support to rural institutional health care network to thrive too. This can sustain healthcare investments in rural markets buoyed by a larger section of rural population which come to these institutions by virtue of being able to undertake treatment under insurance cover.

In practice

For customers of Zone B or C preferring a pan-India coverage available with Zone-A, mainly intended for older customers, the applicable zone must be manually corrected. Most insurers automatically take the place of residence into account while providing a quote for health insurance. GoDigit, for instance, charges a 10 per cent differential for each of the three zones, accounting for 20 per cent difference between the higher and lower zones. Bajaj Allianz also prices its premium at a 20-30 per cent differential for pan-India coverage compared to pin code-specific insurance. GoDigit provides zone upgrade as an add-on even as the basic policies come with zero co-pay.

Care’s zone-based health policy has avoided a co-pay condition even for treatments outside of purchased Zones (within the country). The policy launched by Care Health offers close to 25 per cent difference in premiums between the highest and lowest zones.

Points to note

Premiums based on zone are not without their disadvantages, if the right policy is not chosen. An insurance policy based on zones generally limits the payout to claims from non-covered regions. The insured person will have to go through the fine print when subscribing to such zonal policies to balance his risks. Insurance policies limit the claim-related payout by obliging the insured to pay for a portion of the medical expense under co-pay clauses or limiting the insurance obligation to a pre-defined limit for doctor consultations, room rent, ambulatory services and consultation expenses under sub-limit clauses. While zone based policies may be economical for some, a careful understanding of the associated conditions is essential. Also, one would have to upgrade within the same provider or port to a new health insurance when migrating to zone A or B from a lower zone, for optimal coverage.

Take note
Healthcare markets are divided based on average treatment cost
Premiums higher for those residing in Zone A cities (large metros)
Delhi and Mumbai fall in Zone A while other metros in B or C
Published on January 15, 2022

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