Health insurers' underwriting results lag behind growth of business

While India's health insurance industry continues to be among the key drivers of the country's non-life insurance growth, insurers' underwriting results have not kept up with the expansion of the health business, which could lead to potential strain on companies' profit and solvency in the longer term, according to a new AM Best report.

In its Best’s Special Report, “India Insurers Face Potential Profitability and Solvency Margin Pressures as Health Segment Grows”, AM Best states that it expects India’s health insurance market to continue to grow strongly, underpinned by a rising awareness of health protection and changing demographics and increasing affluence.

In the fiscal year ended March 2021 (FY2021), retail health premiums increased sharply by 38.1% and in turn drove the significant growth of the market’s health insurance premium. However, the report notes that adequate earnings have not accompanied the rapid expansion of health insurance amid regulatory changes in India.

Underwriting results

The segment has posted some of the weakest underwriting results in India’s non-life industry over the past decade; the 10-year average loss ratio of the health insurance business is approximately 98% (FY2010- FY2020). Although this has abated in recent years, the loss ratio remains unviable at 88% in FY2020.

Another major cause of non-life companies’ poor underwriting results is the prevalence of group health insurance with limited rate adjustment capacity. In India, group health policies account for the bulk of total health insurance premiums, and in practice, non-life insurers usually price group health policies at a large discount to bundle these with other commercial insurance products. Consequently, profits from other lines of business are often used to offset underwriting losses from the health segment.

However, AM Best notes that this approach is unsustainable over the long term, as the profit margins of other lines of business have been deteriorating due to intense competition in the Indian insurance industry. India also implemented major regulatory reform in October 2020, aimed at promoting uniformity while focusing on the interests of and expanding coverage for policyholders. AM Best expects the new regulation will place considerable pressure on insurers’ profitability as it includes several changes that may raise claim frequency and severity trends.

Impact of COVID-19

According to the report, the ultimate impact of COVID-19 on health insurance claims in India remains to be seen. Over the first few months of lockdowns, health insurance claims declined substantially due to postponements of hospitalisation and other elective treatments. However, since May 2020, medical claims have started to pick up. It is likely that the recent surge in COVID-19 cases will reduce the number of regular medical claims again, although insurers may see a much higher number of COVID-19 claims as compared to 2020.

The Indian insurance regulator mandated general insurers to offer COVID-19 specific policies. While these products generated significant sales after the rollout in mid-2020, growth subsequently slowed down. As of end-March 2021, several general insurers reported loss ratios above 100% for the COVID-19 specific covers.

Given the recent surge in COVID-19 cases in April 2021, AM Best notes that the claim ratio of these specific health policies may continue to develop unfavourably, although the full impact remains to be seen.

Source: Asia Insurance Review