Premium league needs a level playing field

• Should public sector companies subsidise private sector ones?

• Should the young subsidise the old, the healthy subsidise the unhealthy?

• Should fire or marine insurance subsidise health and motor third party insurance?

In an environment that has been ‘‘opened up’’, the playing field has to be level. If OIC’s circular discourages the 55-plus from getting medical cover, just what are private companies doing? Bajaj Alliance does not give new health covers beyond 55; Royal Sundaram stops at 45 (60 for dependants); Chola’s covers end at 55 (70 for dependants). Among PSUs, United ends at 75, National, New India and OIC at 80.

Which is why OIC — and I presume this will reflect in the balance sheets of other PSU insurers as well — has an “adverse selection” (a condition when the insured select only those covers most likely to result in losses for the insuring company). While Census figures show the under- and over-40 ratio as 76:24, the numbers for OIC stand at 64:36. Which means the company has more older and riskier individuals as policyholders than young.

At a lower cost. While most private company prices are less than PSUs’ in the younger age brackets, at the 45-year line the numbers change. For a Rs 2 lakh cover at age 60, for instance, OIC charges Rs 4,206 compared to Royal Sundaram’s Rs 5,949. At age 25, however, Royal Sundaram is 34 per cent cheaper, at Rs 1,542, compared to OIC’s Rs 2,329. Cholamandalam MS charges Rs 9,140 for a Rs 5 lakh cover for 40-45 year olds, about 73 per cent more expensive than OIC’s Rs 5,281. Which, in a free, non-tariffed market paradigm, is fine — how companies run their business is their business.

So why do we expect and measure state-owned companies differently? In order to break even, OIC needs to raise its rates by over 90 per cent, on an average, over seven age categories. In a proposal to IRDA, sent earlier this year, it has tried to balance increased prices with a ‘favourable selection’. So, as part of business strategy, it seeks to reduce rates by 10 per cent to nil increase in the below 35 age group. At ages 61-90, it seeks 100-150 per cent increase.

This increase in rates will also narrow the subsidy gap that the young are paying the old. The incurred claim ratio (ICR), a number that tells us how much the company has paid policyholders as a percentage of premiums collected, stands at 111 per cent for under 40 and 171 per cent for over 40. One way to balance this equation is by increasing premiums. There is nothing immoral about this — the insurance company measures risk and decides a price to insure that risk; the higher the risk, the greater the price.

The other way to resolve the tension between increasing business and avoiding bad risk is to choose clients carefully. In the US, for instance, insurance companies divide people into four categories — preferred risk (one in eight applications are accepted, and account for 30 per cent of premium), standard risk (four out of five, 40 per cent), substandard risk (8 per cent, 30 per cent), and uninsurable (insurance declined). This system has varied premium rating factors — age, sex, occupation geography, smoker v/s non-smoker and suchlike — which ensure that the healthy do not subsidise the infirm.

What would have happened had OIC been a private sector company? Would private shareholders, thousands of investors if it was listed, have allowed it to continue to insure certain losses? Is this happening because the shareholder is a fuzzy entity called the President of India? I also wonder whether the regulator, the IRDA, would have allowed the premium hike application to languish for six months when it clears most such decisions within one month. Most important: after deciding a cap, is it the IRDA’s job to micromanage or comment on commissions being paid to agents and brokers? If not, why pick on and summon OIC?

If it looks as if I’m batting for OIC, or even PSUs, look again. For, when all these issues are examined through the lens of economic reforms, the issue that stares us in the face is this: the government has no business being in business. If it favours the private sector, the exchequer suffers; if it leans towards PSUs, ‘opening up’ remains a theoretical construct. The predictable answer to which will be: reforms don’t work. While actually, it is half-way houses that don’t. It’s about time the IRDA realised that its mandate is not to control PSUs but to regulate all insurance companies — equally.