Not directly. IRDA does not permit claims-based loading.
But in a quiet, covert, and devious manner.
How?
Let’s find out in this post.
What does IRDA permit and what it doesn’t?
Claims-based loading means increasing the premium because you made a claim in the policy.
IRDA Health insurance regulations do not permit claims-based loading.
This means that the insurance company cannot increase your premium simply because you made a claim in the previous year.
This is explicitly written in IRDA Health Insurance Regulations, 2016. In black and white.
Note that insurers can still increase premium as you grow older or due to general revisions in underwriting policy, but such hikes must apply equally to all policyholders of the same plan. They cannot selectively raise premiums only for those who made claims in the previous policy year.
However, while disallowing claims-based loading, IRDA left out a loophole. Copying an excerpt from Health Insurance Regulations, 2016.
Insurers cannot PENALIZE you for claiming.
But they can REWARD you for NOT claiming.
And this is the loophole insurers are using to circumvent restrictions around claims-based loading.
How Health insurance companies are bringing back claims-based loading?
Not saying all insurers are doing this. Unfortunately, my insurer is doing this.
When I renewed my health insurance premium, I noticed a strange line item in the premium receipt.
Favourable Claims Experience Discount = ~16,000
This discount is almost 50% of final premium. Effectively, in absence of such discount, the premium would have been almost 50% higher. Huge, isn’t it?
There was no such head in the previous year’s receipt. Clearly, this is newly introduced and not without a reason. Overall, the change in final premium (compared to last year) is marginal. Part of the reason is also the GST cut. However, clearly discount amount (or %) has been adjusted to keep the premium stable.
How did the insurer calculate the favourable claims experience discount?
There was no description for “Favourable Claims Experience Discount” in the policy document. However, when I searched on the insurer website, I found the following excerpt for another plan. Fair to assume this applies to my plan too.
- This is not a binary approach, where, in case of a claim, the “favourable claims experience discount” goes to zero at the time of next renewal.
- This is a laddered approach, where you start at a certain level of discount. 30% in this case. And then move up and down the ladder gradually based on the claims experience.
- If you follow the above grid, if you indeed make a claim of above 1.5 lacs, your premium will be higher by 10% (everything else being the same), just because you made a claim. If this is not CLAIMS-BASED Loading, what is. This is a deliberate attempt to quietly slip in claims-based loading into the policy without anyone noticing. Against the spirit of health insurance regulations.
- Point to Note: This practice is gaining acceptance among insurers. Do read this X thread for more on this. Other insurers may not be following the same structure, but there are other insurers as well that find merit in this approach.
- You pay for your complimentary health checkups. These days, many insurers offer complimentary health checkups every year. Now, health checkups are treated as a claim, no matter how small the cost. At least my insurer counts this as a claim. Hence, if you want to avail complimentary health checkup, your premium will be higher. With this change, health check-up is no longer a complimentary service. You pay for the checkup by way of a higher premium next year.
How could Health Insurance companies misuse this?
- Hike premiums for everyone across the board. As part of your underwriting policy.
- Give heavy “claims experience discount” to those who did not make a claim. I am not sure if insurers need IRDA approval on tinkering around with the ladder gap (rung interval). In my case, the ladder gap is 3%, It could have been 5% or 10% too.
- Those who made a claim would be forced to pay a higher premium. This is Claims based loading.
If you consider this approach and how it can be tinkered to short-change policyholders, the potential is huge. For the insurer. Not for you.
Stepping into the shoes of an insurer
Nothing is ever so black and white. That’s why it is important to consider the perspective of insurers too.
Remember insurance companies are for-profit enterprises and must make sufficient profits.
Let us say the insurance company is not making sufficient money from a health insurance plan. And why would that happen?
Because the insurer is receiving several claims under the policy. Far more than it would like.
What can the insurer do?
- Close the plan and offer everyone covered an option to sign up for a different (and more expensive) plan. This is allowed and has happened before. Hurts all the policyholders. OR
- Increase premium for everyone covered under the policy. This again hurts all the policyholders. OR
- Just charge more from the policy holders who made the claim. Think a higher premium is more palatable to customers who recently made a claim. Why? Because they saved a lot of money because of the insurance plan.
Further, note that the increase in premium is not really linked to the severity of your condition. The structure for reduction/restoration of discount is disclosed in the policy wordings. It is not arbitrary, even though the insurer can always change the structure. Additionally, the loading (reduction in discount) is not permanent. You may have made a claim which reduces the discount next year. However, if you do not make any claim in the coming years, the discount % goes back up again.
Let us say your base premium (before claims-experience discount) is Rs 50,000 and it remains that way for the next 5 years. Wishful thinking, but let’s play along. The insurer offers a discount of 30% on the premium. So, you pay Rs 35,000 net. You made a claim of Rs 10 lacs. If your insurer also has a similar discount matrix as mine, your discount % will fall to 21%.
Assuming the pre-discount premium remains the same Rs 50,000. You will get claims renewal discount of 21%. Rs 10,500. Final premium shall be Rs 39,500.
| Year | Premium | Claim Amount in the previous year | Discount % | Net Premium |
| Year 1 | 50,000 | NA | 30% | 35,000 |
| Year 2 | 50,000 | 1,000,000 | 21% | 39,500 |
| Year 3 | 50,000 | No Claim | 24% | 38,000 |
| Year 4 | 50,000 | No Claim | 27% | 36,500 |
| Year 5 | 50,000 | No Claim | 30% | 35,000 |
Note: “Sufficient” is subjective. It is not difficult to see how insurers can defend any move under the guise of making sufficient money.
What do I think of this?
If it walks like a duck and quacks like a duck, it is a duck.
No amount of disguise can hide the true intention.
Claims-based loading is well and truly back.
And, as policyholders, we need to be careful. The insurers may just be testing the waters. Once this practice finds acceptance (even if reticent) in the industry, insurers may hike base premiums (this anyways happens) and make adverse changes to the claims discount matrix on a regular basis. Double whammy to the policyholders.
My request to IRDA
IRDA must clarify what it meant by incentives to policyholders based on “Favourable claims experience”. It is clear that this incentive is being used to circumvent restrictions on claims-based loading. Through such moves, the insurers are sticking to the letter of the health insurance regulations, not to the spirit of the regulations.
The intent behind the mention of “Favourable Claims experience” must have been to reward good health and lower premium for those who don’t claim. Insurers are using this to penalize those claim.
Would request IRDA to do one of the following 2 things.
- Take note of this approach and put a stop to this practice. This is nothing but claims-based loading through back door. OR
- If IRDA allows this to continue, it must set some rules around this. You cannot allow insurers complete discretion in structuring the “favourable claims experience discount” matrix/ladder. For instance, in the example shared in this post, the discount % goes up and down gradually. However, there is no regulation around the pace of increase and decrease. What if the insurer makes it binary on the downside and uses a laddered approach on the upside? Hence, in case of a claim, the discount percentage falls to zero instantly but takes years to go back to the base discount level.
I did present this development from an insurer’s perspective too. However, given how insurers have behaved over the past many years, I just don’t trust insurers. And I am sure most policyholders would share this feeling.
Therefore, IRDA should look into these subtle attempts to bring back claims-based loading. IRDA can’t allow insurers a free run in this matter.
