In a move that will help hundreds of thousands of individuals across the country, IRDA (Insurance Regulatory Development Authority) has issued draft guidelines during the first week of October, which would hopefully simplify the process of buying health insurance by policyholders. These guidelines when implemented will introduce a colour coding system for all individual health plans or mediclaim policies.
The regulator feels that the colour codes will help buyers in understanding the complexity of the health insurance plans and take informed decisions. The colour codes will indicate the level and extent of the complexity of the product. The covid pandemic has caused so much fear and panic among people that it has resulted in a huge increase in enquiries about the mediclaim products.
While there is so much confusion about many features of health plans, the pandemic is an opportunity for the insurance companies to grow their business. It should also help them in increasing much-needed insurance penetration in the country. The draft guidelines state that “the colour code shall be indicated in the health insurance products disclosed on the websites of insurers so that the customers can make an informed choice while buying a health insurance product”.
As per the draft guidelines, colour code green will signify that the product offered is a simple product, easy to understand and comprehend. Orange colour will signify that the product offered is moderately complex. While the colour code red will signify that the product offered is complex when compared with the other codes. Incidentally, the guidelines are applicable only to individual health products and not to group mediclaim policies as the regulator feels that institutions are normally better informed than individuals.
As per the draft, every insurance advertisement which promotes a health insurance product shall also mention the color code of that particular product. IRDA has stipulated seven parameters, based on which the products will be allocated a score between 0 and 6.
So a product with a score of less than two will be assigned green and code while an orange product will have a score between 2 and 4 and red will have a score between 4 and 6. The regulator has listed seven parameters all of which will have equal weightage based on which the various products offered by the general and health insurance companies would be scored.
The parameters are: the number of optional covers offered, percentage of co-pay, number of months of waiting period, number of treatment procedures/ diseases under sub-limits, deductibles, number of permanent exclusions, and simplicity of terms and conditions. The weighted average score of each of the parameters will be calculated by multiplying each of the parameter score with its weightage of 14.28%.
The scoring system is not new to India as SEBI had introduced Blue, Yellow and Brown colour codes in Mutual fund schemes a few years back. It was felt that displaying the colour code in the schemes would indicate the level of risk that an investor was exposed to while investing in Mutual funds. However, the colour codes have been scrapped and replaced by riskometer. This is also similar to the pictorial warning on cigarette packs meant to warn and create awareness among smokers about the dangers of smoking.
The insurance market is a market with asymmetric information. Insurance policies are bought (or rather sold) by policyholders to cover various risks or perils. The insurance company while scrutinising the proposal form has no information about the risk that the prospective policyholder carries but relies solely on the information given by him in “utmost good faith” in the proposal form.
Joseph Stiglitz, the renowned economist who got the Nobel Prize in Economics in 2001 along with George Akerlof and Michael Spence demonstrated how information problems could be dealt with on insurance markets where companies do not have information on the risk situation of individual clients. Stiglitz along with Rothschild showed that the insurance company (the uninformed party) gave its clients (the informed party) effective incentives to “reveal” information on their risk situation through screening.
The insurance companies would distinguish between different risk classes among the policyholders by offering options like copayment, deductibles, waiting period and exclusions. Because they were on a sticky wicket as regards asymmetric information, the insurance companies had introduced many features and conditions making health plans extremely complex to understand.
Since the claim ratios are generally high in health plans, the companies would find excuses or loopholes to either reduce the claim amount or reject the entire claim outright. The draft guidelines may be the first step to demystify health plans to the common man.
(The writer is a Chartered Financial Analyst and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)