Wednesday Dec 11, 2024
Wednesday Dec 11, 2024
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The phrase ‘arogyaparamalabha’, which is from a verse recited by the Lord Buddha (Dhammapada Verse 204), has a common usage in society, especially in relation to health services. Translated in English the phrase means ‘health is the greatest gift’. Regardless of belief, anyone who has suffered from any ailment would accept this as a universal truth.
However, thanks in no small measure to the advances in medical sciences, many ailments that plagued people before are now curable provided, however, there is access to quality health services. At present, for abundance of reasons, the public/free health service in Sri Lanka is incapable of meeting the healthcare needs of the people. This has forced many to resort to private health service providers; either local or overseas. However, the cost of private health care is not something that everyone can afford and hence health insurance is imperative.
A health insurance policy covers against the risk of loss to the person(s) insured due to any sickness or infirmity. The benefits provided under a health insurance policy are in the nature of indemnity or fixed pecuniary benefits (or a combination of both). In layman’s terms the former is where the insured is reimbursed the actual loss attributable to the illness and typically medical expense policies fall into this category. The latter is where a fixed amount (the sum insured) is paid out for an illness or condition stated in the policy and typically critical illness covers fall under this category.
Health insurance is also classified as short-term and long-term health insurance depending on the period the policy is in force. However, the determining period varies from one country to another.
According to an amendment brought to the Regulation of Insurance Industry (RII) Act, the insurance industry was required to segregate the life and general insurance business into separate corporate entities by the beginning of 2015. This, however, gave rise to a tug-of-war situation between the segregated life and general companies over health insurance.
The health insurance segment has seen significant growth in recent years and industry analysts predict even higher growth potential. It is the second largest sub-class within the general insurance business (the largest being motor insurance). Therefore, it is natural that the segregated life and general insurance companies would compete for a larger slice of the pie, if not, the whole pie. The situation is more intense among previous composite insurers that have divested either their life or general insurance business outside the group. Thus, the insurance industry is faced with a very pertinent question of whether health insurance belongs to the life (long-term) or general insurance class of business.
The principal legislative enactment governing the insurance industry is the RII Act and the interpretation section (S. 114) of the Act provides the definitions of both long-term insurance and general insurance business. Interestingly, the only reference to health insurance in the above definitions is found under the long-term class of insurance. Accordingly, contracts for the granting of accident and sickness benefits, and permanent health are listed as two separate sub-classes under long-term insurance.
Permanent health contracts provide specified benefits on incapacity from accident or sickness; however, the contract must be in effect for a period more than five years and cannot be cancelled by the insurer during that period (‘sickness’ is the statutory term used to denote health insurance in most commonwealth jurisdictions). Thus, the legal framework supports the contention that health insurance belongs to the long-term class of insurance.
At the onset of this controversy, several industry players, ‘big and small’, made representations to the Insurance Regulatory Commission of Sri Lanka (formerly the Insurance Board of Sri Lanka), stating their respective case as to why health insurance should belong to one class of insurance over the other. This prompted the regulator to enter into a series of discussions with the industry and subsequently the regulator issued a letter to the industry, clarifying its approach with regard to health insurance.
Accordingly, the regulator prescribed two situations, in which life companies could write health insurance, and thus giving a clear indication that, except in those situations, health insurance belonged to the general class of insurance. The first is a stand-alone health policy, where it must be in effect for more than five years. It is reasonable to infer that this refers to the above mentioned permanent health sub-class. The second is any health policy, which is offered as a rider or additional benefit to a life policy, however, the main cover must be the life cover.
This letter, although not in the form of any statutory instrument the regulator is empowered to issue under the Act, has worked in way of moral suasion and the industry seems appeased; despite the contradicting legal provisions stated above.
In answering this question, it is worth to consider how other countries treat health insurance.
The UK and Europe: The UK and other European counties, which implement the Solvency II regulatory framework, have segregated or are in the process of segregating the insurance industry into the two broad classes of long-term and general insurance. These countries have categorised contracts providing sickness benefits as a sub-class of general insurance and permanent health as a sub-class of long-term insurance. However, the regulatory framework recognises sickness as an ancillary risk to the life business and permit life insurance companies to write contracts providing sickness benefits as a supplemental policy or rider benefit. This is similar to the approach adopted by the regulator in the second situation referred above.
However, according to the guidance on Solvency II, the technical provisions or policy liabilities of health insurance pursued on a similar technical basis as general insurance should be valued as general insurance policy liabilities. Where health insurance is pursued on a similar technical basis as life insurance, the technical provisions should be valued as life insurance policy liabilities.
Singapore: In Singapore too insurance is divided into the two broad classes of long-term and general insurance. However, the industry is not segregated and there are composite insurers providing both classes of insurance. Health insurance is divided into short-term and long-term health insurance, and given statutory definitions. Accordingly, a long-term health policy is one that is in force for more than five years and cannot be unilaterally terminated by the insurer (however, it may be terminated earlier by the policy owner). A short-term health policy is defined as any health policy that is not a long-term health policy. The definition of a long-term health policy is consistent with the definition of permanent health and the first situation of the approach adopted by the regulator referred to above.
However, an insurer licensed to carry on only long-term insurance is permitted to write short-term health policies on a stand-alone basis and such business is to be treated as part of the life business (including the technical provisions). The composite insurers have the option of treating short-term health policies as either part of their life or general insurance business.
India: In India health insurance is a class of insurance in itself and the insurance industry is segregated as life, general and health insurance. All companies can engage in health insurance, however, the scope of each is clearly defined so as to avoid any overlaps. Accordingly, life companies can offer individual health policies for a term of five years or more. But the premium should remain unchanged for at least three years. Life companies cannot offer indemnity based products either as individual or group policies. General and health companies can offer individual health policies with a minimum tenor of one year and a maximum of three years and group health policies must have a term of one year.
However, the regulations provide for ‘combi products’, which is a combination of a life insurance cover offered by a life company and a health insurance cover offered by a general or health insurance company. These products may be offered on individual or group basis. The life cover of the product is treated as part of the life company’s business and the health cover as part of the general/health company’s business. Therefore, pricing, underwriting, reserving and claim pay-outs are all managed by the respective companies and the collaboration is limited to non-core insurance functions such as marketing and policy servicing. It is mandatory for companies offering these products to have in place a memorandum of understanding that covers the modus operandi of the tie up.
The long-term/life insurance business is very important to an economy, as the life fund represents a large pool of funds available for long-term investment in the economy, and this distinguishes life insurance companies from other financial institutions that mobilise short-term savings. However, the life insurance penetration in Sri Lanka is amongst the lowest in the region at 0.5% in 2016 (measured as a percentage of total premium to GDP) and the contribution of the life insurance industry to the financial sector is only 2.2% (measured as a percentage of the total assets of the financial system)
One of the main reasons for this situation is the long-term nature associated with life insurance contracts. Ordinarily the policyholder is expected to pay a premium throughout the tenor of the policy and the benefit is received at the end of the policy period or the sum assured is paid out in the unfortunate event of the policyholder’s demise during the policy period. Due to this long-term commitment required by the policyholder, life insurance is a hard sell, especially in a country like Sri Lanka where people’s focus is on short-term benefit.
In this context, coupling life insurance with a health insurance policy works as a sweetener that is used world over and hence, an allowance is made for health insurance even in countries where the industry is segregated as referred above.
However, the health insurance business is extremely volatile and has a high claims ratio (the claims incurred as a percentage of the earned premium). Thus, where health insurance represents a significant portion of a life company’s business, it exposes the life business to the spill over risk from the health business. This would be counterintuitive to the objectives of the segregation of the life and general insurance business. Therefore, any solution must strike a balance between the overarching objective of the segregation of the insurance industry and the need to increase life insurance penetration.
The treatment for permanent health policies is more straightforward. In all of the jurisdictions referred above, including our legal framework, permanent health is classified under long-term insurance. These policies are written on a similar technical basis as life insurance and therefore the technical provisions should be valued according to the same techniques. This is in harmony with the approach adopted by the regulator referred to above.
However, a conundrum exists with regard to short-term/indemnity based health insurance policies. The Solvency II framework advocates that health insurance policies written on a similar technical basis to non-life insurance (general insurance) should be valued according to the techniques of general insurance. Thus, if a life company is to pursue short-term/indemnity based health policies, such company should maintain a separate fund valued according to general insurance techniques.
This would take the industry back to square one, especially where the health insurance business counts for a significant portion of the life company’s business. The objective of the segregation of the industry will be negated and the life business will be exposed to spill over risk from the health business. The Singapore approach of treating short-term health insurance as a part of the life business is worse off; however, the insurance industry in Singapore is not segregated and therefore, is not a relevant template for Sri Lanka.
It must be admitted, though reluctantly given the current cricket woes faced at the hands of the Indian team, the approach adopted in India serves as a better model to follow. The offering of a ‘combi product’ with a life and a health cover written by a life and general insurance company respectively, ensures the dual objectives of increasing life insurance penetration and the segregation of the life and general insurance business. The sweetener effect of the health cover draws customers to the product, yet the business risk is retained with the respective companies.
According to the understanding between with life and the general insurance company, the product can marketed and serviced by either the life or general company, or by both companies to provide more convenience to the customer. However, as practiced in India, it is wise for the regulator to spell out the dos and don’ts for each insurer in this arrangement and encourage the companies to have a written memorandum of understanding to govern the relationship.
(The writer is a Regulatory Compliance Specialist and can be contacted via e mail [email protected].)
