Medical insurers tighten cost levers

BANGALORE: Faced with the challenge of rising costs, players in the Indian medical insurance market are tightening various cost levers to ensure continued profitability. Room rentals have dropped to as low as 1% of the sum insured over 2008, a move many in the industry say will have a direct impact on the cost of hospitalisation over the medium-to-long term.

This review comes after many insurance companies began re-examining medical insurance products as “group healthcare” policies to corporates are proving to be a drain leading to huge losses. Earlier, employees in many corporates used to avail the facilities under these policies even for minor ailments that did not necessitate extensive medical care.

This has led many insurance companies to resort to retail sales. According to an official with Oriental Insurance, the company is actively pursuing retail health insurance and not chasing corporate accounts. “Health insurance continues to be a focus as this accounts for nearly a third of our business but we have brought in innovations, like floater covers,” he said.

Insurers, including major PSUs, are sweetening the deal by offering incentives, such as floaters (where the unused sum insured can be used by the person who is hospitalised).

“Health insurance is one of the areas of concern for general insurance companies as the claim ratio is often over 100%. We are moving towards greater control to ensure this portfolio doesn’t bleed,” a senior National Insurance official said.

“Insurance companies and third-party administrators are now keeping a stricter ceiling on treatment rates, beyond which the insured have to pay out of their own pocket. They are also encouraging the insured to visit medium-sized hospitals instead of large corporate hospitals to bring down costs,” Jayashsree Prasad, senior manager at health management and consulting company People Health, said.

The finer print has become more important than the product itself, said insurance retailers. “Reliance General Insurance has said that the health policy for individuals cannot be issued starting March 2009. This means that the floater policy has been made mandatory. Reliance has also increased the minimum sum insured to Rs 3 lakh from Rs 1 lakh,” Sridhar AN, manager finance and customer care at Artha Health Options, said.

Sources: The Economic Times

Jeevan Varsha: Money back policy with Assured Returns

After overwhelming response to Jeevan Astha, LIC has introduced this money back policy with assured returns. This has caught the attention of investors who are tired of the prevailing uncertainty in various asset markets. But one needs to do a cost-benefit analysis to assess the policy before putting money and not get away with the policy features like assured returns along with risk cover.

This policy is nothing but a general money back policy offered for a limited period- 16th February 09 to 31st March 09. Another attractive feature of the policy is assured returns. It is already announced that the policy holder will get Rs 65 per thousand (6.5%) of sum assured (SA) for the policy of 9 years while Rs 70 per thousand (7.0%) of SA for 12 years’ policy. The rate of return offered on this policy is one amongst the maximum benefits offered by LIC so far. As it is known, returns earned on policy are completely tax-free. So, on the face, 6.5% or 7% tax free returns looks attractive.

However, comparing these returns with total cost incurred– total premium paid- raises doubts on economic viability of the policy. For example, a 30-year old person needs to pay Rs 78,497 as annual premium for 12-year policy of Rs 5,00,000 sum assured. As a policy feature premium payment term is just 9 years. So, the total premium outflow is Rs 7,06, 473.

At the time of maturity, the policyholder will get 40% of sum assured (as 10%, 20% and 30% of SA will be paid at the end of years 3,6 and 9 years, respectively) along with accrued guaranteed returns for 12 years. So, the total guaranteed amount received during the policy period was Rs 9,20,000.

Thus, the tax-free assured net gain (difference between total premium paid and guaranteed benefit) on the investment in policy is Rs 2,13, 527. The policy holder is also entitled for variable return called as loyalty addition at the time of maturity, which aligns to profit earned by LIC. So, it is as good as neglecting it.

Does this mean investment in Jeevan Varsha is a better option? To take a decision one needs to compare the policy with other fixed income instruments. To make a fair comparison, let us assume a 30-year old person invest Rs 78497- the amount equivalent to premium paid- is invested into a bank FD for 12 years which will get matured in 2021.

Subsequently, the person may open a new FD of the equivalent amount every year but with the maturity year as 2021. Thus, the person will have 9 FDs maturing in 2021 for the total sum of Rs 706,473. The total interest accrued on these FDs will be Rs 544,205 in 12 years assuming the average deposit rate of 7% per annum compounded quarterly. (The assumed deposit rate is based on the simple average of deposit rates observed in past seven years, which have witnessed swings in deposits rate to higher and lower ends.)

Yes, interest earned on FDs is taxable. Assuming person belonging to higher income tax bracket, needs to pay Rs 168159 as tax on interest earned. Yet, investment in FDs is better off as interest earnings adjusted for tax at Rs 376,046 are much higher than that of assured returns earned on Jeevan Varsha policy.

The argument could be won in favour of the insurance policy as it covers death risk. But, in such case one may go for pure term policy for risk cover. It may cost additional Rs 10145 (single premium) for 25 years policy of Rs 500,000 sum assured. Thus, an investment combination of bank FD and a pure insurance policy stands is preferable than the insurance policy with dual benefits of investment and life insurance.

Going forward, a possibility of insurance policies offering attractive assured returns could not be ruled out in such time of crisis. But, it is necessary to do a real cost benefit analysis of the scheme before blindly investing in such schemes.

Sources: The Economic Times

IRDA cracks whip on agents

ERRANT insurance agents had better watch out. In a first-ofits-kind measure, Insurance Regulatory & Development Authority (IRDA) has decided to penalise agents if life insurance policies are not renewed. The move, aimed at curtailing misselling, will entail commissions being retracted from agents and credited to the policyholder’s account.

One of the main complaints against life insurance agents has been that they sell regular premium policies, commissions for which are in the range of 25-35%, by passing them off as single-premium policies, which attract 2% commission. The regulator has now asked insurance companies to claw back commission paid out in policies where premium from the second year onwards is less than the first year. In industry parlance, claw back refers to the recovery of commission already paid to agents.

Since prospective buyers are reluctant to commit large annual payments for 15-20 years, unscrupulous agents position a regular premium policy as a one-time investment scheme, similar to a mutual fund. They also inform the policyholder that she can invest more money in the scheme in the forthcoming year and that, even if she chooses not to, she could exit the policy after three years. The flip side of such sales is that the buyer usually does not pay the second-year premium. Since charges in an insurance policy are front-ended into the first-year commission, the policyholder ends up with a negative return by not paying renewal premium. IRDA, in a recent circular, said: “For the current year (FY09), where products had provided for more than 25% reduction in subsequent premium, the difference of premium should be treated as a single premium and the commission clawed back and invested in the policyholder’s account.”

This means if a policyholder pays Rs 100 as premium in the first year, against which Rs 35 is commission paid to an agent, and renewal premium of Rs 60 in the second year, the company will have to treat the second-year shortfall (100-60) as single premium in the earlier year and recover the difference. In other words, commission on Rs 40 would be recalculated at 2% instead of 35% and the difference recovered.

The circular has rattled insurance companies that are now worried that this directive could be misused by customers to leverage a rebate of commission from agents. “All that a policyholder has to do is to not renew the policy. The commission on the shortfall would than be recovered from the agent and transferred to the policyholder’s account,” an insurance official said. According to an insurance chief executive, the directive does not allow companies to deal with disputes between policyholders and agents on the merits of the case. “If a company does not claw back commission, the policyholder may go to court on the ground that the company has not been following IRDA’s directives,” the official explained.

Source : www.insuremagic.com

MFs draw up flexible plans to help investors graduate to equities

ICICI PRU, HDFC MF HIT MARKET WITH ‘SWITCH PLAN’; UTI TO ENTER SOON

IN an attempt to give investors the best of both worlds, mutual fund houses have begun offering flexible asset allocation plans that allow unitholders to keep increasing their exposure to equities while starting off in a debt fund.

These funds, which essentially bear resemblance to dynamically managed funds, allow investors to balance their investments in favour of equities while gaining advantage of the current interest rate trend through investment in fixed income.

Also known as ‘switch options’ in distributors’ parlance, these plans help investors to move money steadily into equity funds. While ICICI Prudential MF, through ICICI Prudential Income Opportunities Fund- systematic transfer plan STP, and HDFC MF, through HDFC Flexindex Plan, have already launched switch plans, UTI MF will soon launch a fund that will enable investors to shift investments across debt and equity schemes.

“Though valuations have fallen steeply, it is dangerous for investors to go on a share-buying spree. A switch plan MF scheme is better way to steadily increase their exposure to equities at different price levels,” said UTI MF chief marketing officer Jaideep Bhattacharya.

“Investors in switch funds derive post-tax investments benefits; in specific fund structures, investors need not mention investment horizon as well,” added Mr Bhattacharya.

Switch plans enjoy the flexibility to invest entire net assets in equity or debt instruments after the swap period (about one year in most cases). In certain funds, investors decide the quantum of fund that is released periodically into equity assets. An example for this is the HDFC Flexindex Plan. The plan allows investors to select four BSE Sensex levels, on attaining which investors can transfer appropriate amounts (from the minimum investment — Rs 50,000) into any pure equity funds managed by the fund house.

The ICICI Prudential Income Opportunities plan is bundled with a systematic transfer plan, wherein a certain sum of money (from a minimum investment of Rs 20,000) goes into the ICICI equity fund selected by investor. Investors can opt for a 52-week or 12-month STP and benefit from the changing macro environment. At the end of the switch period, the entire fund (plus the gains from investing in debt, if desired so by the investor) would be invested in equities.

“The year 2009 will be for rebalancing allocation systematically in favour of equity. Debt will continue to give above average returns, but we feel equities will do well towards the end-year. By investing into a switch fund, investors will be able to participate in the best of times of both debt and equities,” said ICICI Prudential MF head-retail sales Vikram Kaushal.

Usually, there are no separate load structures for switches done in these schemes. The transfer of the amounts from the source scheme will not attract any exit load and the subscription in the target scheme shall be subject to payment of entry load. There could be varying exit loads (depending on the amount invested) for premature redemption from the target scheme.

Source : www.insuremagic.com

Premium above Rs. 50k should not be paid in cash, says IRDA

The Insurance Regulatory and Development Authority (Irda) has asked insurance companies to strictly adhere to anti-money laundering (AML) guidelines and has asked them not to accept premiums worth more than Rs 50,000 in cash.

Irda said the premium of more than Rs 50,000 must only be accepted through banking channels such as cheque, credit card or demand draft. Insurance companies have also been advised to evolve lower threshold level for cash acceptance.

In addition, if the premium exceeds Rs 50,000 in a month, insurance companies have been asked to examine all the angles of money laundering closely.

Irda has observed certain instances where AML norms are being selectively interpreted by insurance companies by splitting insurance policies to one or more entities and hence, defeating the spirit of AML guidelines.

Source : www.insuremagic.com