IC-27 Health - 1-120

IC-27
HEALTH INSURANCE
ACKNOWLEDGEMENT
This course based on new syllabus has been prepared with the assistance of
Dr.Somil Nagpal
Mr.Rachin Aggarwal
Mr.Abhishek Agrawal
Ms Richa N. Gautam
Vidya Hariharan
Mr.Kartik Jain
Dr.S.Jayaprakash
Mr.Kamlesh Manuja
Prof P. S. Nagpal
Mr.Ayandev Saha
Nidhi Sharma
C. Srinivasa Kumar
We also acknowledge Get Through Guides, Pune for their contribution in

preparing the study material.
G – Block, Plot No. C-46,

Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
HEALTH INSURANCE
IC-27
First Edition - 20110
ALL RIGHTS RESERVED
This course is the copyright of the Insurance Institute of India, Mumbai. In no

circumstances may any part of the course be reproduced.
Published by: Sharad Shrivastva, Secretary-General, Insurance Institute of India,

G- Block, Plot C-46, Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and
Printed at
ACKNOWLEDGEMENTS
Health Insurance is now the fastest growing sector in the general insurance
industry in India, and has grown at about 40% per annum over the last several
years. Over the last few years, several attempts have been made for structured
learning events in health insurance. Industry chambers like FICCI and CII have
held annual workshops around this theme, it features prominently in the
curriculum of management schools, especially those involved in insurance
courses; another prominent early effort in this direction was a one-week course
developed by the Ministry of Health, WHO India and the Institute of Public
Health which has been offered about once a year since 2006. I have been
associated with all of the above learning streams for several years, and have
increasingly realized that health insurance is a fairly complex discipline and yet
at its infancy in India, and that there is tremendous need for formal learning
programmes in Health Insurance customized to the country’s context and
requirements.
In this backdrop, it was indeed my good fortune to have been able to co-
ordinate and edit this course material for the Associateship examination of the
Insurance Institute of India. The formal qualifications offered by the Insurance
Institute of India have been enthusiastically pursued by thousands of students
every year, and I hope that a similar enthusiasm awaits the new health
insurance specialization which this material endeavours to pioneer.
I am humbled by the trust reposed in me by the Insurance Institute of India, and

am particularly thankful to Mr Sharad Shrivastava and Mr B S Rathaur in the
institute for their unfailing support in developing this course material. My
former colleagues in IRDA, Ms Yegna Priya Bharath, who was closely involved in
conceptualizing this course, and Ms J Meena Kumari, who reviewed the data and
pricing sections of this work, have been pillars of strength. I drew heavily from
our experience and association in developing a training manual and in
conducting a series of face-to-face health insurance courses for managers of
health insurance schemes in government and non-profit organizations, and I
must thank Dr N Devadasan and Dr Sunil Nandraj who pioneered the concept
and believed in it.
This publication could not have been in your hands if it had not been for the
dedicated efforts of the contributors, briefly listed on the next page. They are
all busy professionals, and have been able to devote time amidst their already
very hectic schedules, driven entirely by their passion and commitment for this
subject. Indeed, I have often required them to take time off their vacations and
weekends to be able to meet our ambitious timelines and they have always
been supportive and understanding and have delivered excellent learning
material, and on time.
Last, but certainly not the least, I must thank Garima and Meyher, for being so
considerate with me as I worked through weekends and late nights in making my
small contribution to this very noble cause- much of the time I devoted was
legitimately theirs. Belonging to a family which has been genetically passionate
about insurance for three generations now, I hope they would understand.
-Dr. Somil Nagpal

ABOUT THE EDITOR
Dr.Somil Nagpal is a well recognised face in the health insurance industry in
India. He is currently Health Specialist with the World Bank (South Asia Region),
based at New Delhi. Prior to this, he was serving the Insurance Regulatory and
Development Authority, India, and was responsible for setting up the
specialized health insurance unit in the Authority and looking after the
regulatory and developmental initiatives for the health insurance sector of the
country from 2007 to 2009. In the recent past, he has also served the Indian
Ministry of Health, the National Commission on Macroeconomics and Health,
India, and the WHO. He has been associated with several government,
regulatory and industry committees and working groups in the realm of Health
Insurance in India including several multi-stakeholder industry groups under CII
and FICCI. He has also been a Board member of the National Accreditation
Board for Hospitals (NABH) in India and is visiting faculty to Public Health
Foundation of India, Institute of Public Health and several other academic
institutions. He is a medical doctor, a postgraduate in health management, an
MBA in Finance and is a Fellow of the Insurance Institute of India.
ABOUT THE CONTRIBUTORS

Mr.Rachin Aggarwal is an MBA (Insurance and Finance) from National Insurance
Academy School of Management, Pune and is currently working at Milliman India
office as Health Insurance Data Analyst. He has been involved in various data
analysis and product pricing projects for Indian insurers offering health
products.
Mr.Abhishek Agrawal is currently working at Milliman India office as Health

Insurance Data Analyst. His responsibility includes undertaking actuarial data
analysis projects and authoring numerous data analysis, feasibility and market
assessment reports for Milliman clients in India, Hong Kong and USA.
Ms.Richa N. Gautam is Associate Vice President in a large media corporate

based in New Delhi. She has an MBA in Hospital administration and has been
associated with the health insurance industry from its early days in India, having
been the country head of a product vertical in the TPA industry. She has also
served a life insurer managing its Bancassurance relationship channel and has
also been the hospital administrator for a medical college in North India. She
has written extensively on health insurance, and has contributed to various
journals and periodicals on the subject.
Vidya Hariharan has spent the last 9 years with Swiss Re - in Zurich and India -
in the area of designing reinsurance covers for the Life and Health Reinsurance
business for the Indian and Middle East markets. She is currently part of a start-
up team, based out of Bangalore, India, working to set up an integrated health
management play in India.
Mr.Kartik Jain, Head Marketing & Direct – ICICI Lombard, currently heads
advertising, marketing communication, corporate communication, CRM and the
direct sales channels including telesales and e-commerce for ICICI Lombard
General Insurance. Kartik joined ICICI Lombard in 2002 and was initially also
involved with building the non-motor retail business, developing alliances and
launching new products including Health and Travel Insurance. He completed his
B.Tech degree from IIT Mumbai in 1991 and his PGDBM from IIM Kolkata in 1993.
Dr.S.Jayaprakash is currently working as Associate Director in MetLife, a

private MNC Insurance company in India. He has 18 years of experience in Life,
General, Health, Pensions & Reinsurance lines of Business and has worked in
various markets abroad like USA, Europe, Africa & Australia on various
consulting assignments. He holds a PhD in Management based on his thesis on
"Health Insurance". He is also a qualified Fellow of Insurance Institute (Life) and
Associate in Non-Life.
Mr.Kamlesh Manuja is Vice President (Claims and Health Partnership) in ICICI

Prudential Life Insurance Company. He has done his Bachelors in Pharmacy and
MBA (Marketing) from Mumbai University. He has an overall work experience of
12 years with brief stint in Pharma Marketing and over 10 years with ICICI
Prudential Life Insurance with exposure across Life and Health verticals of
business. He has handled various verticals i.e. Underwriting, Claims and
Network Management (Pre-Insurance and Provider management) and also has
participated in various conferences as a speaker and authored numerous articles
on insurance and risk management.
Prof P. S. Nagpal is an insurance industry veteran and has stood testimony to

the waves of nationalization and then liberalization of the insurance industry in
the country. He has held key offices in one of India’s largest non-life insurance
companies for over 34 years. In 2004, he made the switch-over to a full time
career in professional insurance education. He is now Professor and Area Head,
Non-Life Insurance in the Birla Institute of Management Technology, which is
one of India’s top rated business schools. Prof Nagpal has co-authored various
publications on non-life insurance and health insurance, including those for
WHO, Institute of Public Health and the London School of Hygiene and Tropical
Medicine.
Mr.Ayandev Saha is Manager (Claims) in ICICI Prudential Life Insurance

Company. He holds post graduate degree in Economics and an MBA (Insurance)
from National Insurance Academy, Pune, India. He has been awarded the
Director’s & Chairman Gold Medal at NIA for academic reflexes; contribution to
the academy; power of execution and congeniality. He is a regular facilitator of
training sessions; speaker and chair at conferences and seminars as well as
author of numerous articles and papers relating to the insurance industry in
particular to Microfinance and Microinsurance.
Nidhi Sharma is Product Development Manager with ICICI Lombard General
Insurance and has been with the company since May 2009. Nidhi completed her
MBA (Insurance) from the National Law University, Jodhpur and received her
fellowship from the Insurance Institute of India.
Mr.C.Srinivasa Kumar, B.Sc., MBA, FIII, DAT (Diploma in Actuarial Techniques)

has worked with LIC of India at management level in the areas of New Business,
Accounts and Policy servicing. He has also worked as Research Associate at the
National Insurance Academy and published various research papers on life
insurance and health insurance related topics in various conferences and
journals. He was co-author to two books titled “Life Insurance – Principles and
Practice”, “Elements of Actuarial Science”, published by Cengage Learning
under Insurance Education series with Dr.K.C.Mishra (Former Director, NIA,
Pune). He is presently working as Assistant Secretary, Actuarial Department,
Central Office, LIC of India.
Disclaimer: Views and estimates, if any, in this publication are of the

contributors in their personal capacity and do not represent those of any
organizations with which they are currently or previously affiliated.
CONTENT
Chapter no. Title Page no.

Introduction to Health Insurance and the
1 1
Health System in India
Health Financing Models and Health
2 21
Financing In India
3 Health Insurance Products in India 37
4 Health Insurance Underwriting 53

Health Insurance Policy Forms and
5 79
Clauses
Health Insurance Data, Pricing and
6 113
Reserving
Regulatory and Legal Aspects of Health
7 141
Insurance
8 Customer Service in Health Insurance 155
9 Health Insurance Fraud 173
10 Reinsurance 199
CHAPTER 1
INTRODUCTION TO HEALTH INSURANCE AND THE

HEALTH SYSTEM IN INDIA
Chapter Introduction
This chapter provides you with the brief introduction about the meaning of
health insurance and its purpose. It discusses about the development and
growth of the insurance industry in India. You will also get an insight into the
health system and health infrastructure of India at all the levels. This all will
further help you to understand about the operation of the health insurance
system in India.
Learning Outcomes
A. Meaning of health insurance

B. Purpose of health insurance
C. Indian insurance industry - Development and growth
D. Health system in India
E. Health infrastructure in India
IC-27 HEALTH INSURANCE 1

CHAPTER 1 MEANING OF HEALTH INSURANCE
A. Meaning of health insurance
1. Health insurance
As we all are aware that future is unpredictable and rather, uncertain.
Any person can meet with illness, bodily injury or any accident due to some
unfortunate or unexpected event at any point of time. A lot of expenses are
incurred due to such events like hospital stay, medicines, surgery, doctor’s visit
and other medical expenses.
Health Insurance provides coverage towards all or few of such healthcare needs
and medical expenses incurred by a person.
Definition
Health Insurance is a way to distribute the financial risk associated with the
variation of individual’s health care expenditures by pooling costs over time
(pre-payment) and over people (pooling).
(OECD 2004)
This definition explains how the health insurance system works. The health
insurance insures an individual from expenses incurred due to any variation in
their health. It collects an upfront contribution from an individual (commonly
known as premium in the market) and pools it over many people. Thus it works
very similar to all the other types of insurance in the market, the only
difference being that it primarily covers health expenses of an individual.
2. Commercial health insurance
The health insurance which is offered by insurance companies is commonly

known as Private Health Insurance or Commercial Health Insurance. Commercial
health insurance term is used to avoid confusion between public insurance
companies which are owned by the government and the private insurance
companies. Therefore, it will be used interchangeably throughout this study
text.
Commercial health insurance basically provides coverage to an individual

towards all or some of the health services defined under a contractual
agreement, health insurance policy made between both of them. For this risk
coverage, the individual, i.e. insured will have to make the payments in the
form of a premium to the insurer. The insurer, a non-governmental entity, will
in turn take up all or most of the risk associated for paying all such health
services which are defined under the policy.
2 IC-27 HEALTH INSURANCE

MEANING OF HEALTH INSURANCE CHAPTER 1
3. Third party in health insurance
Health Insurance is different from all other insurances such as fire insurance,
theft insurance, home insurance etc. In all other insurances, there are mainly
two parties:
a) One is insurer who provides the insurance, usually an insurance

company, and
b) Other is insured, who is covered for likely risk to his/her life, property
or health.
However, in case of health insurance, there is one more party, the healthcare
provider in the absence of which it loses its meaning. It plays a major role in
the health insurance as it is the one who decides and provides:
a) The type of health services to be used by an individual i.e. insured.
b) How much of such services are used
c) How much is the cost of those services
The involvement of this third party makes this insurance different and complex
too.
Example
Ravi met with an accident while going to his office and had serious injuries. He
was hospitalised for five days in Gandhi Hospital.
He had taken a health insurance policy earlier. So, when he received the heavy
medical bills from his hospital at the time of discharge, he was not worried at
all. When he submitted his claim to his insurer, they told him that it will take
some time for them to get all the details from his healthcare provider before
processing his claim.
The healthcare provider, i.e. Gandhi Hospital in this case is the third party
other than Ravi (insured) and the insurance company (insurer). Gandhi Hospital
will provide all the details to the insurance company about the services used by
Ravi and the cost of those services which will become a basis for the insurer to
clear the claim filed by Ravi.

CHAPTER 1 MEANING OF HEALTH INSURANCE
4. Health insurance market
Economists describe health insurance as an ‘imperfect market’ because normal

market forces do not work as expected in this case.
The imperfections in this market are mainly due to the following reasons:
a) Information asymmetry
The information available to both insurer and insured about each other is
either incomplete or not completely transparent.
The insureds mostly do not understand the exact interpretation, meaning

and coverage of their contact. Many a times, they are also unaware of their
insurer’s capabilities of covering the risk.
Similarly, insurer is also sometimes not fully aware about the likely risk to a
person’s health. So, they may also end up in pricing the risk incorrectly.
b) Risk selection
For a health insurance, both the insurer and insured will try to make the risk
selection on the basis of decision cost-effective to each of them.
The insurer will obviously select and insure the proposer with a low risk as
compared to the one with a high risk. This is also termed as ‘cherry-picking’
or ‘cream-skimming’.
Similarly, the person with a higher health risk would want to purchase
health insurance more than a healthy person with low risk.
The insurer decides on the basis of acceptance and pricing rules, which risks
they will accept and at what price, through a process known as
underwriting. Underwriting is explained in detail later in Chapter 4.
Example
A person within age group of 20-40 years is less prone to normal health risks as
compared to a person aged above 50 years. Therefore, a senior person will be
more interested in taking a health insurance to meet his medical expenses as
compared to a young aged person who will be more relaxed towards his health.
This is also known as ‘adverse selection’.
On the contrary, an insurance company will be more interested in providing a
health insurance to a young aged person rather than a senior person. Even if it
will provide health insurance to senior person, the premium will be quite high.
This is because insurance company is also aware that young people are usually
less prone towards any health risks as compared to senior people. So, it is less
risky and more profitable for an insurance company to provide insurance to the
young people.

MEANING OF HEALTH INSURANCE CHAPTER 1
c) Moral hazard
Moral Hazard is mainly related to the insured and sometimes also to the
healthcare providers. There are mainly two types of moral hazards:
i. Demand side moral hazard: It works at insured’s end. A consumer with a

health insurance will make use of and accept more health services than
he would have otherwise taken without any health insurance.
ii. Supply side moral hazard: It works at the end of Health providers. They
start suggesting and providing more health services as well to more
expensive treatment to the person having health insurance.
Various cost containment mechanisms are use by the health insurers to

minimise these moral hazards which will be discussed in the later chapters.
Example
Mahesh, aged 28 years had taken a health insurance from a private insurance
company that provides for reimbursement of the expenses incurred on health.
He is normally a very healthy person.
One day he had some food in a party which resulted in stomach disorder for
him. Usually in such cases, he will take some medicines at home and will take
some routine care to recover. But as he was having an insurance policy this
time, he thought of using it by going to an expensive hospital for check-up.
He went there and the doctor there suggested him to undergo some expensive
tests and hospitalise him for a couple of days for full recovery. Taking into
consideration his insurance policy coverage, he opted for the best room to stay
in the hospital. He ended up with a heavy amount of bill in the hospital which
his insurance company had to reimburse.
Hence, this example clearly indicates that an insurance coverage had made
Mahesh behave differently, with less consideration towards his medical bills
which he otherwise would have not incurred if he did not have any insurance
coverage to pay for his bills.
At the demand side, Mahesh incurred more expenses towards health services
than required. Similarly at the supply side, doctor also recommended more tests
and expensive treatment than required due to health insurance coverage of his
patient.
Test Yourself 1
Health insurance provides coverage for which of the below?
I. Accident
II. Medical expenses
III. Death
IV. Disability
CHAPTER 1 PURPOSE OF HEALTH INSURANCE
B. Purpose of health insurance
1. Health insurance – a cover towards unpredictable illnesses

The out-of-pocket expenditure incurred by people in India on their health is
very high as compared to the other countries. It accounts for about 71% of all
health expenditure in the country1,2
Due to this, individuals have now started taking lead in planning for their own
health expenditure especially when they can get it at an affordable cost.
Due to unpredictable major illnesses, an individual may have to incur

substantial amount of money from his savings at a short notice. According to an
estimate, every year around 2.2% of India’s population3,4 is leading towards
poverty due to such illnesses. An illness may cause a potential impact on the
finances of individuals and their families resulting in a catastrophic risk.
Hence, people realise that the planning for their health needs and taking an
appropriate step to cover that risk is required. This resulted in millions of
people opting for health insurance policy to cover against such health risks.
2. Health insurance products in India
Health insurance products available in the Indian market are primarily

dominated by hospitalisation products, which mean that these cover the high
expenses incurred by an individual during hospitalisation. These expenses are
relatively high due to increasing cost of healthcare, surgical procedures, new
and more expensive technology coming in the market and cost of newer
generation of pharmaceuticals. With these increasing costs, it is really becoming
very difficult for an individual even if he is financially sound to bear such high
expenses without any health insurance.
Therefore, a health insurance is important mainly for two reasons:
9 Providing financial access to healthcare providers in case of any

illness.
9 Preservation of savings of an individual which may otherwise be wiped

out due to illness.
1 Mahal A, Sakthivel S, Nagpal S. National Health Accounts for India. In: Rao Sujatha, editor. Financing
and delivery of health care services in India. New Delhi: Ministry of Health and Family welfare, 2005:
256-263
2 Ministry of Health & Family Welfare. National Health Accounts, India. New Delhi: Government of India,
2009
3 Peters D, Yazbeck A, Sharma R, Ramana G, Pritchett L, Wagstaff A. Better Health Systems for India's
poor. Washington: World Bank, 2002
4 van Doorslaer E, O'Donnell O, Rannan-Eliya RP, Samanathan A, Adhikari SR, Garg CC et al. Effect of
payments for health care on poverty estimates in 11 countries in Asia: an analysis of household survey
data. Lancet 2006
PURPOSE OF HEALTH INSURANCE CHAPTER 1
3. The cashless system
The cashless system of providing hospitalisation cover has immense value in

terms of personal finances. It avoids the need to arrange a large amount of
money by an individual for payment to the hospital, even if they were to be
reimbursed or indemnified later by the insurer. Thus, the cashless
hospitalisation cover minimises the need to keep surplus liquidity by an
individual to meet any health eventualities.
The health insurance portfolio is now becoming the fastest growing market
segment for the non-life insurance industry due to:
9 Increasing awareness among the people about the protective role of

health insurance, and
9 Improved focus on marketing of health insurance products by the

insurers.
Still there is a tremendous potential for this market as even today, only about
5% of the country’s population has been covered by a commercial health
insurance product (excluding mass government schemes).
Test Yourself 2
Which is the most dominated health insurance product in the Indian market?
I. Hospitalisation Insurance
II. Overseas Travel Health Insurance
III. Hospital Cash Insurance
IV.
a)
Maternity Insurance

CHAPTER 1 INDIAN INSURANCE INDUSTRY - DEVELOPMENT AND GROWTH
C. Indian insurance industry - Development and growth
1. Early development of the Indian insurance industry
The earliest mention of the insurance system in India can be found in the
research and writings of treatise such as Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra). They refer about the pooling of
resources that could be re-distributed during the period of calamities such as
fire, floods, epidemics and famine.
However, insurance in its modern form first arrived in India during the early 19th
century. Both life and non-life insurance companies came to establish in India
during this period.
The Indian Life Assurance Companies Act, 1912 was the first act introduced to
regulate the insurance companies in India. Later on in 1938, a new insurance
act was passed to bring both life and non-life insurance companies under a
single Act. This act has been revised from time to time, but does remain at the
core of insurance laws for the country5.
The regulatory structure, as well as the constituents of the industry, underwent

several changes over the next 7 decades, characterized particularly by the
following sets of events which shaped the course of the Indian insurance
industry:
a) Nationalisation of life insurance industry in 1956 to merge number of

private insurers into one Life Insurance Corporation (LIC).
Nationalisation of non-life industry similarly in 1973 to merge number of

private non-life insurers into one General Insurance Corporation (with
four subsidiary companies), all owned by the Government of India.
b) Establishment of the Insurance Regulator based on a report by Malhotra

Committee in 1994 on ‘Reforms in the Insurance Sector’. Earlier interim
regulator was established in 1996 which was later formed as a statutory
authority in 2000. This resulted in a new reform in the insurance
industry.
c) Opening up of the market finally for a new generation of private insurers

from August 2000.
5 IRDA. Report of the Committee on Health Insurance for Senior Citizens, 2007.
INDIAN INSURANCE INDUSTRY - DEVELOPMENT AND GROWTH CHAPTER 1
2. Evolution and growth of health insurance in India6
a) Employees’ state insurance scheme
Health Insurance in India formally began with the inception of the

Employees’ State Insurance Scheme, introduced vide the ESI Act, 1948,
shortly after the country’s independence in 1947. This scheme was
introduced for blue-collar workers employed in the formal private sector
and provides comprehensive health services through a network of its own
dispensaries and hospitals. It is also supplemented by services purchased
from Authorized Medical Attendants and private hospitals. The scheme is
largely financed through a contribution from employers and employees,
which is supplemented by the Central and State governments. The ESIS
covers over 50 million beneficiaries as of March 20097.
b) Central government health scheme
The ESIS was soon followed by the Central Government Health Scheme
(CGHS), which was introduced in 1954 for the central government employees
working for civilian assignments. It aims to provide comprehensive medical
care to employees and their families and is partly funded by the employees
and largely by the employer (central government). In 2010, CGHS has a
membership base of over 800,000 families representing over 3 million
beneficiaries8.
c) Commercial health insurance
The commercial health insurance was offered by some of the non-life

insurers before as well as after nationalisation of insurance industry. It was
largely available for the groups in the beginning and that too for a limited
extent.
In 1986, the first standardised health insurance product for individuals and
their families was launched in the Indian market by all the four nationalized
non-life insurance companies (these were then the subsidiaries of the
General Insurance Corporation of India). This product, Mediclaim was
introduced to provide coverage for the hospitalisation expenses up to a pre-
defined annual limit of indemnity with certain exclusions such as maternity,
pre-existing diseases etc. It underwent several rounds of revisions as the
market evolved, the last being in 2007.
6 This section is adapted from Nagpal S., RSBY in the Context of the Development of Health Insurance in
India Forthcoming, 2010
7 Annual Report (2008-09) of the Employees State Insurance Scheme.
8 Internet. http://mohfw.nic.in/cghsnew/index.asp accessed on 4th April 2010
CHAPTER 1 INDIAN INSURANCE INDUSTRY - DEVELOPMENT AND GROWTH
However, even after undergoing several revisions, the hospitalization

indemnity-based annual contract continues to be the most prevalent form of
private health insurance in India today, led by the current versions of
Mediclaim. Even today, the other private health insurance products are
often termed by many people as ‘Mediclaim covers’ considering it as a
product category rather than a specific product offered by the insurers.
Today, more than 300 health insurance products are available in the Indian
market, from more than 30 non-life, standalone health and life insurance
companies.
Test Yourself 3
Which act was introduced to bring both life and non-life insurance companies
under a single Act?
I. Indian Life Assurance Companies Act, 1912

II. Indian Insurance Act, 1938
III. Life Insurance Corporation Act, 1956
IV. General Insurance Business Act, 1972
Test Yourself 4
The Central Government Health Scheme (CGHS) was introduced for:
I. Central government employees working for civilian assignments

II. Central government employees working for military assignments
III. Blue-collar workers working for formal private sector
IV. All the citizens of India

HEALTH SYSTEM IN INDIA CHAPTER 1
D. Health system in India
1. Constitutional provisions
As per the Constitution of India, the areas of Public health, hospitals,

sanitation, etc. fall in the State list. Thus, the States are largely independent in
matters related to the delivery of health care to the people in their area. Each
state has developed its own system of health care delivery and created the
necessary infrastructure. At the same time, some items having wider
consequences like population control and family welfare, medical education,
prevention of food adulteration, quality control in manufacture of drugs etc.
have been included in the Concurrent list, where both centre and the states can
issue legislation. In addition, the Centre also supports key health sector
initiatives through National Health Programmes, particularly the National Rural
Health Mission, which are funded by the Centre and generally implemented
through the State machinery.
2. Government health departments
The public health system exists at all levels of government: Central, State and
Local. However, in addition to the Ministry of Health and Family Welfare, which
is discussed in detail later in this chapter, it is important to note that there are
other important stakeholders in the government system which have significant
contribution and impact on the health sector.
These include:
a) The Ministry of Women and Child Development, which runs the

nutritional support programme;
b) ICDS (Integrated Child Development Scheme);
c) The Ministry of Chemicals which regulates the Pharma sector;
d) The Ministry of Labour, which regulates the ESIS (Employees State

Insurance Scheme) and also administers the Rashtriya Swasthya Bima
Yojana (RSBY);
e) The Finance Ministry, which houses the Insurance division, the Ministry of
Water Supply and Sanitation; and
f) The Ministries of Rural and Urban Development, etc., among many

others.

CHAPTER 1 HEALTH SYSTEM IN INDIA
3. Public health system at the national level
The official ‘organs’ of the public health system at the national level consists
of:
a) The Ministry of health and family welfare: headed by the Union
Minister of Health and Family Welfare. The union ministry has 3
departments:
i. The Department of Health and Family Welfare
ii. The Department of Medical Research, and
iii. The ‘Department of AYUSH’ (Ayurveda, Unani, Siddha and Homeopathy –

earlier known as the Department of Indian Systems of Medicine and
Homeopathy- ISM&H).
b) The Directorate general of health services: is the principal advisory
body to the Union Government in both medical and public health
matters.
c) The Central council of health: a large number of health subjects fall in

the concurrent list which calls for continuous consultation, mutual
understanding and cooperation between the centre and the states. The
Central Council of Health with the Union Health minister as the chairman
and the state health ministers as its members, works towards promoting
coordinated and concerted action between the Centre and the states in
the implementation of all the programmes and measures pertaining to
the health of the nation.
4. Public health system at the state level
a) State Ministry of Health and Family Welfare (or its equivalent, as

nomenclatures differ amongst states) is headed by the Minister of Health
& Family Welfare. The Health Secretariat is the official organ of the
State ministry of H&FW and is headed by a Principal Secretary or
Secretary.
The state governments provide funds for primary, secondary and tertiary
care institutions (including medical colleges and their associated
hospitals). State governments also receive funds from centrally
sponsored health sector programmes.
b) State Health Directorate: the directorate usually consists of the State

Director of Health & Family Welfare, the State Director of Medical
education and the State Director for ISM&H. The State Director of Health
Services or the Director of Health & Family Welfare is the chief technical
advisor to the state on all matters relating to medical and public health.

HEALTH INFRASTRUCTURE IN INDIA CHAPTER 1
5. Public health system at the district and local Levels:
a) The Chief District Medical/Health Officer (also known in some states as

the Civil Surgeon/ Chief Medical Officer) is the technical head of the
health system in the district.
b) There is also often a Health Officer with his own team, looking after
Public Health activities of Municipal Corporations and other similar local
government bodies.
Test Yourself 5
The principal advisory body to the Union Government in both medical and public
health matters is _____________.
I. The Department of Health and Family Welfare

II. The Department of Medical Research
III. The Directorate General of Health Services
IV.
a)
The Central Council of Health
E. Health infrastructure in India
Health planning in India is an integral part of the national socio-economic

planning. The Health care system in India is represented by some major sectors
or agencies which differ from each other on the basis of the health technology
applied and the source of funds for their operation. These sectors are:
1. Public health sector
We have already discussed in detail about the Public health system at the
national level, state level and district level. The public health system in rural
areas is as follows:
a) Village level: The health system does not extend up to the village level
in particular but to implement the national health policies in villages,
community volunteers have been involved to serve as links between the
village community and government infrastructure.
These include:
i. The Anganwadi worker (1/1000 population) who are enrolled under the
nutrition supplementation programme and the Integrated Child
Development Service scheme (ICDS) of Ministry of Human Resource
Development;
ii. The trained birth attendants (TBA) and the Village Health guides (an
earlier scheme of health departments in states).

CHAPTER 1 HEALTH INFRASTRUCTURE IN INDIA
iii. ASHA (Accredited Social Health Activist) volunteers, selected by the

community under the NRHM (National Rural Health Mission) programme,
who are new, village-level, voluntary health workers trained to serve as
health sector’s links in the rural areas.
b) Sub-centre (SC)9 is the most peripheral public health institution

available to the rural population. These have been established for every
5000 population (3000 in hilly, tribal and backward areas) and are
manned by a female health worker, also called the Auxiliary Nurse Mid-
wife (ANM) and a male health worker.
c) Primary health centre (PHC)10 is a referral unit for about six sub-
centres. PHCs have been established for every 30,000 population (20,000
in hilly, tribal and backward areas). All PHCs provide outpatient services,
and the majority also have four to six in-patient beds.
Their staff comprises of one medical officer and 14 para-medical workers
(which includes a male and a female health assistant, a nurse-midwife, a
laboratory technician, a pharmacist and other supporting staff).
d) Community health centre (CHC)11 is the first referral unit for four PHCs
and also provides specialist care. According to the norms each CHC (for
every 1 lakh population) should have at least 30 beds, one operation
theatre, X-ray machine, labour room and laboratory facilities and should
be staffed by at least four specialists i.e. a surgeon, a physician, a
gynaecologist and a pediatrician supported by 21 para-medical and other
staff.
e) Rural hospitals: These includes the sub-district hospitals called as the

sub-divisional / Taluk hospitals / specialty hospitals (estimated to be
about 2000 in the country);
f) Speciality and teaching hospitals: These include the medical colleges

(about 300 in number presently) and other tertiary referral centres.
g) Other agencies: Hospitals and dispensaries of railways, defence and

similar large departments (Ports/ Mines etc). They are also publicly
funded but services are often restricted to the employees of the
organization and their dependents.
9http://nrhm-mis.nic.in/UI/RHS/RHS%202011/Rural%20Health%20Care%20System%20in%20India-
%20Final%20-%209.4.2012.pdf
10 Same as above
11 Same as above
HEALTH INFRASTRUCTURE IN INDIA CHAPTER 1
2. Private sector providers
India has a very large and heterogeneous private health sector: which ranges
from voluntary, not-for-profit, for-profit, corporate, trusts, solo practitioners,
stand-alone specialist services, diagnostic laboratories, pharmacy shops, and
also the unqualified providers (quacks), each addressing different market
segments. In India nearly 77% of the allopathic (MBBS and above) doctors are
practicing in the private sector. Private health expenditure accounts for more
than 75% of all health spending in India. The private sector accounts for 82% of
all outpatient visits and 52% of hospitalization at the all India level12.
India also has the largest number of qualified practitioners in other systems of
Medicine (Ayurveda/ Siddha/ Unani/ Homeopathy) which is over 717,860
practitioners.13 These are located in the public as well as the private sector.
Apart from the for-profit private providers of health care, the NGOs and the
voluntary sector have also been engaged in providing health care services to the
community.
It is estimated that more than 7000 voluntary agencies are involved in health-
related activities14. A large number of secondary and tertiary hospitals are also
registered as non-profit societies or trusts, and contribute significantly to
provision of inpatient services to insured persons.
3. Pharmaceutical industry
India has a large pharmaceutical industry, which has grown from a Rs 10 crore
industry in 1950 to a Rs 55,000 crore business today (including exports). It
employs about 5 million people, with manufacturing taking place in over 6000
units.
The central level price regulator for the industry is the National
Pharmaceuticals Pricing Authority (NPPA), while the pharma sector is under
the Ministry of Chemicals. Only a small number of drugs (74 out of the 500 or so
bulk drugs) are under price control15, while the remaining drugs and
formulations are under the free-pricing regime, but under the watch of the
price regulator. The Drug Controllers of the States manage the field force which
oversees quality and pricing of drugs and formulations in their respective
jurisdictions.
12 Health – Human & Social Development - Tenth Five Year Plan document Vol 2, page 94. Planning
Commission. GoI.
13 Health Information of India 2005.
14
RNTCP, Govt of India. Background Papers for Joint Monitoring Mission, 2006.
15
Website of the National Pharmaceutical Pricing Authority. http://nppaindia.nic.in/index1eng.html
. Accessed 19th November 2007.
CHAPTER 1 HEALTH INFRASTRUCTURE IN INDIA
NSSO data suggests that over half of the household health expenditure is on
drugs, making it the single largest component of out of pocket spending on
healthcare. At the same time, drugs and supplies constitute only about one-
tenth of the government health expenditure. It is, however, to be remembered
that the prices paid by Government for bulk procurement of drugs is also much
lesser than the prices of the same drugs in the retail market.
With the emerging changes in the patents regime, there is a risk for upward
revision of prices, especially for newer drugs. However as of now, the cost of
drugs is still a smaller component of the inpatient bill due to which the
commercial insurers in India have still not focused their attention on controlling
costs of their pharmaceutical component.
Test Yourself 6
The most peripheral public health institution available to the rural health
population is _____________.
I. Rural dispensary
II. Sub-centre
III. Primary health centre
IV.
a)
Community health centre

SUMMARY CHAPTER 1
Summary
a) Health insurance insures an individual from expenses incurred due to any

variation in their health.
b) Health insurance is different from all other insurances as other than the
insurer and insured, it involves a third party, the healthcare provider.
c) Health insurance is considered as an ‘imperfect market’ by the economists

due to the reasons such as information asymmetry, risk selection and moral
hazards.
d) The out-of-pocket expenditure incurred by people in India on their health is

very high as compared to the other countries which resulted in more and
more people opting for health insurance policy nowadays.
e) Health insurance products available in the Indian market are primarily

dominated by hospitalisation products.
f) The insurance in its modern form was first arrived in India in 19th century
after which regulatory structure for the insurance industry has undergone
several changes. However, the Insurance Act 1938 remains as the backbone
for all the insurance laws in the country.
g) Health insurance in India began with the Employees’ State Insurance Scheme
in 1948 for blue-collar workers employed in the formal private sector and
was followed by the Central Government Health Scheme in 1954 for the
central government employees working for civilian assignments.
h) The first standardised health insurance product, Mediclaim for individuals

and their families was launched in 1986 in the Indian market.
i) As per the constitution of India, the states are largely independent in

matters related to the delivery of health care to the people in their area;
therefore each state has developed its own system of health care delivery
and created the necessary infrastructure.
j) The public health sector in rural areas is operated primarily through Sub-
centres, Primary Health Centres and Community Health Centres.
k) India has a very large and heterogeneous private health sector and it
accounts for more than 75% of all health spending in India.

CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS
Answers to Test Yourself
Answer 1
The correct option is II.
Health insurance provides coverage for medical expenses.
Answer 2
The correct option is I.
Health insurance products available in the Indian market are primarily

dominated by hospitalisation products.
Answer 3
Indian Insurance Act, 1938 was passed to bring both life and non-life insurance
companies under a single Act.
Answer 4
The Central Government Health Scheme (CGHS) was introduced in 1954 for all
the central government employees working in civilian assignments and their
families.
Answer 5
The correct option is III.
The Directorate General of Health Services is the principal advisory body the
Union Government in both medical and public health matters.
Answer 6
Sub-centre (SC) is the most peripheral public health institution available to the
rural population.

PRACTICE QUESTIONS AND ANSWERS CHAPTER 1
Self-Examination Questions
Question 1
Economists describe health insurance as ______________market.

I. A high potential
II. A competitive
III. An imperfect
IV. A sensitive
Question 2
Which was the first standardised health insurance product launched by

insurance companies for individuals and their families in the Indian market and
in which year?
I. Medipharma, 1954
II. Life insurance, 1973
III. Jeevan Aroghya, 1981
IV. Mediclaim, 1986
Question 3
Who is the technical head of the public health system at the district and local
levels?
I. State Director of Health & Family Welfare

II. Union Minister of Health and Family Welfare
III. State Health Minister
IV. Chief Medical Officer
Question 4
Who is the central level price regulator for the pharmaceuticals industry in
India?
I. Central Pharmaceutical Pricing Society

II. National Pharmaceuticals Pricing Authority
III. Ministry of Chemicals
IV. The Drug Controllers Society
Question 5
Community Health Centre (CHC) serves as a referral centre for _________

Primary Health Centres.
I. Two
II. Three
III. Four
IV. Five

Answers to Self-Examination Questions
Answer 1
Economists describe health insurance as an ‘imperfect market’ because normal

market forces do not work as expected in their case.
Answer 2
The correct option is IV.
The first standardised health insurance product in the Indian market for
individuals and their families, Mediclaim was launched in 1986.
Answer 3
The Chief District Medical/Health Officer (also known in some states as the Civil
Surgeon/ Chief Medical Officer) is the technical head of the public health
system in the district.
Answer 4
The central level price regulator for the pharmaceutical industry is the National
Pharmaceuticals Pricing Authority (NPPA).
Answer 5
Community health centre is the first referral unit for four Primary health
centres.

CHAPTER 2
HEALTH FINANCING MODELS AND HEALTH

FINANCING IN INDIA
This chapter aims to provide you knowledge about how the financing of
healthcare needs is done in any country. It will also discuss the health financing
models of some of the countries, which will help to understand the
characteristics, advantages and disadvantages of each method of healthcare
financing. Lastly, this chapter explains the health financing model of our
country and its drawbacks in terms of access and quality.
Learning Outcomes
A. Sources of funds for healthcare needs

B. Health financing models in various countries
C. Health financing system in India and its problems

CHAPTER 2 SOURCES OF FUNDS FOR HEALTHCARE NEEDS
Look at this scenario
There has been a rapid growth in the economic development of India in the past
few decades. But at the same time, social development particularly the
development of the health sector has not been paid the required attention for
with the same pace. A very less proportion of resources are allocated for the
health sector.
According to some studies commissioned by the Ministry of Health and Family

Welfare, the magnitude of health expenditure in India for the year 2008-09 was
about 4.13% of the GDP at current market prices.16, 17
However, in actual less than 1% of GDP is spent on the public health sector in
India.
A. Sources of funds for healthcare needs
Globally, the financing of the healthcare costs in any country is done through
the following four methods:
1. Government revenues and taxes
In this system, the population contributes to the Government revenues

indirectly via taxes, a share of which is then allocated by the Government for
providing healthcare care services to the people. This is therefore also known as
tax-funded system. Thus, the payment to the healthcare providers is made by
the Government on behalf of the users.
Example
In UK, all residents are enrolled under National Health Services (NHS) which is
primarily funded through the taxes paid to the Government. It guarantees basic
medical services to all residents of the UK by providing free medical treatment.
Hence, it works on principle of equal treatment and provides equal access to all
medical services regardless of the financial status of an individual.
16
National Health Accounts Cell, Ministry of Health and Family Welfare, Govt. of India. National Health
Accounts- India- 2004-05. New Delhi, 2009
17
Ministry of Health and Family Welfare, Govt. of India. Report of the National Commission on
Macroeconomics and Health, Government of India. New Delhi, 2005.
SOURCES OF FUNDS FOR HEALTHCARE NEEDS CHAPTER 2
2. Social health insurance
It is also referred to as an employment based health insurance. The employees

and the employers pay a regular contribution to the funds that are then used for
funding healthcare needs for the employees as well as their families. Additional
State support is also available in some of the cases. Moreover, the contribution
to such schemes can be in varied forms ranging from a mandatory, earmarked,
payroll-tax to a voluntary, tax-deductible contribution to a health plan.
Example
ESI Corporation set up in India for blue-collar employees is a good example of

public health insurance. It is financed through a regular contribution from both
the employees and the employers and is also supplemented by the Government.
It provides comprehensive medical care to industrial sector employees and their
families.
3. Commercial health insurance
Commercial health insurance is also known as private health insurance is a

health insurance taken by an individual, to provide coverage towards expenses
incurred on their healthcare needs.
Example
In India, currently more than 300 health insurance products are available in the
market for various healthcare needs. For example, for a normally healthy
person, basic health insurance policy is available from many insurance
companies. Similarly, for senior citizens also some specific products are
available from few insurance companies. Many other plans are also there in the
market to cover critical illnesses.
Nowadays, most of these provide cashless facilities that minimises the need to
maintain any surplus fund by any individual to meet health casualties.
4. Out-of-pocket payments
It is a direct payment made by the households to the provider for their

healthcare needs without any coverage or reimbursements.
The global picture of health spending for the year 2007, as per WHO (2010), is
summarised below:

CHAPTER 2 SOURCES OF FUNDS FOR HEALTHCARE NEEDS
Diagram 1: Composition of world health expenditures
Source: National Health Accounts, WHO (2010)
Thus, health is a large industry globally, and commands US 5.3 trillion dollars
(about Rs 240 lakh crores) of the world’s resources, and the proportion of each
sector is as follows:
Table 2.1
Source of Funds Composition (%)
Government tax revenues 35
Social insurance 25
Private insurance 18
Direct payment by patients 18
Other smaller sources 4
The percentage mentioned above clearly indicates that the share of

Government tax revenues is highest among all these spending in the world.
However, this 35% share does not include:
9 Any contribution made by the Government to the social health

insurance, and
9 The indirect tax subsidies, often given by the Government to the private
health insurance.
Similarly, households had to directly pay from their pocket 18% of the health
costs globally, but this percentage excludes:
9 Their contribution as taxes which is spent by the government on the

healthcare, or
9 Their payments for insurance premiums that are pooled and spent on
insurance mechanisms.
HEALTH FINANCING MODELS IN VARIOUS COUNTRIES CHAPTER 2
Test Yourself 1
Which of the following sector has the highest contribution in financing of the
healthcare costs globally?
I. Social health insurance

II. Government revenues and taxes
III. Private health insurance
IV. Commercial health insurance
B. Health financing models in various countries
In this Learning Outcome, we will discuss about the health insurance schemes in
some of the countries around the world18.
1. Germany
Germany has one of the best healthcare systems in the world. In Germany, over
90 percent of the residents receive healthcare through the statutory health
insurance. It functions through non-profit sickness funds that collect premiums
from members and pay health care providers according to pre-negotiated
agreements.
Employers and employees contribute equally in the premiums, which in the first
half of the 1990s averaged between 12 and 13 percent of a worker's gross
earnings up to the income ceiling19. Hence, in simple terms, health insurance
premium is collected from employees as a payroll tax. As this is a social health
insurance scheme, premiums are set according to the earnings rather than the
risk. The premiums are not affected by a member's marital status, family size or
health. The unemployed continue to be members of their sickness fund, and
their contributions are paid by federal and local Government offices. The
contributions of retired workers are paid by themselves from their pension
funds.
Example
The health financing model of Germany is a perfect example of a public health

insurance financing model which redistributes from higher to lower income
groups, from the healthy to the sick, from the young to the old, from the
employed to the unemployed, and from those without children to those with
children. Employees who have private insurance also receive the benefit of part
of their premiums being paid by their employers.
18
Adapted from Devadasan N, Nagpal S. Expansion of ESIS as an Employment based health insurance model
for India, in Planning and Implementing Health Insurance Programs in India- an Operational Guide.
IPH/WHO, 2006.
19I
nternet. Country Reports- Germany – Health Insurance. www.countryreports.org accessed on 18.4.06
CHAPTER 2 HEALTH FINANCING MODELS IN VARIOUS COUNTRIES
2. France
France has a system of employment-based public health insurance that now

covers everybody in the nation, though earlier, certain portions of the
population lacked any health insurance.
There are three healthcare funds operating in the country that are:
a) Main one covering most of the workers
b) One for the self-employed and
c) One for the agricultural workers
The financing of the system is through employer and employee contributions in

addition to general taxes, of which the latter have been increasing in proportion
in recent years. The funds are under the joint control of employers and
employee unions, which are in turn supervised by the state. The contribution to
these funds is mandatory, and no one may opt-out of the scheme. Moreover,
they are not allowed to compete with each other nor micromanage care.
This insurance system covers a large share of all the health costs in the country,
the rest being met through out-of-pocket payments and the supplementary
insurance covers. However, many of the French citizens also opt for some form
of add-on private insurance, which pays for the various procedures and
equipment that are not covered wholly by the public insurance20.
3. United States of America
Since World War II, employment-based health benefits have been the
foundation of health insurance in the United States for the under-65 population,
providing the primary source of coverage for the vast majority of workers and
their dependents. In 2004, 159.1 million individuals, or 62 percent of the non-
elderly adult population were covered by the employment-based health benefits
system.
However, in recent years, the numbers of persons covered under employer-

sponsored health insurance have been reducing sharply, mainly due to rising
cost of providing healthcare benefits as compared to individual earnings. This
has resulted in a larger proportion of the US population without any health
insurance coverage and forecasts of continuing declines in coverage. The overall
impact on the economy is also not good due to increase in poorer health and
death of uninsured individuals.
The Government provides insurance for the elderly (Medicare) and for the poor
(Medicaid) which has been an increasing expenditure for the public exchequer.
Overall, health costs account for an overwhelming 16% of the country’s GDP and
there are growing concerns over the sustainability of this expenditure.
20
Klein E. Health of Nations- France. http://ezraklein.typepad.com/blog/health_of_nations/index.html.
Internet. 2005
4. Japan
Japan achieved universal health coverage in 1961, through the National Health
Insurance Act. The healthcare system in Japan has been considered as one of
the best in the world in terms of its accessibility and efficiency. This system
provides coverage to the entire population with a universal access to all medical
services. The coverage is provided to each individual under any one of the
following categories:
a) Society-managed health insurance (SHI)
This program covers employees of large company (with more than 700
employees) and their dependants. These employers are required to
create and operate their own health insurance plans within the
Government regulations. It covers 26% of the Japan’s population.
b) Government managed health insurance (GHI)
In this scheme, the employees who are working with small employers
(with less than 700 employees) and their dependants are automatically
enrolled under a Government operated program known as ‘small business
national health plan’. This plan covers about 30% of Japan’s population
and is financed by both, the payroll taxes and the general fund revenue.
c) National Health Insurance (NHI)
It covers self-employed, retired, unemployed and other people who are

not covered in above two plans. This plan is administered by the
Municipal Governments and is financed through compulsory premium on
the self-employed and general tax revenues.
d) Long life medical care system
This plan was introduced in 1983 for the elderly person aged 75 and
over. It also covers people aged 65 to 74 with certain certified
disabilities. It is financed through a fixed nominal amount paid by the
insured (10%), contributions from the other plans (40%) and general tax
revenues (50%).
All these plans are required to cover a range of benefits, which include dental
care, maternity care, and prescription drugs. In 2008, over 80% of the health
costs in Japan were borne by the Government and less than 20% came from
private sources (just the opposite of the situation in India).

CHAPTER 2 HEALTH FINANCING MODELS IN VARIOUS COUNTRIES
Example
Enrolment in the health insurance system is compulsory in Japan and applies to

all residents including foreigners (short-period visitors are excluded). Thus, a
person who is not a resident of Japan but have the permission to stay in Japan
for at least a year due to his studies or work is also required to join any one of
the insurance programs even if he is covered overseas under a private
insurance.
Japan’s health financing system is designed in such a way that it ensures that
every resident is covered under any one of the insurance programs available in
the country.
5. Chile
The functioning of the healthcare system in Chile21 has undergone major

reforms in the early 1980s.
The main features of this system are as follows:
a) The establishment of the National Health Fund (Fonasa) to administer

the social health insurance scheme.
b) The establishment of Health Insurance Institutions, Isapres for the

private sector players.
c) The mandatory contribution by each employee and pensioner, equivalent

to 7% of their wages towards healthcare system.
The population in Chile can opt to contribute into either of the two healthcare
system, i.e. Fonasa (public health insurance system) or Isapres (private health
insurance system). About 67% of the population in Chile is enrolled with Fonasa,
while 20% are covered under some 40,000 private plans with 18 licensed Isapres.
Thus, the healthcare system in Chile is working on dual structure, both public
and private sector working for healthcare services but on different principles.
Both schemes are regulated by the Superintendence of Isapres, under the

Ministry of Health (Government of Chile). Fonasa is funded to the tune of 50 per
cent by general tax revenues of the government, while the remaining financing
occurs through the mandatory contribution by employees and retired people.
Substantial out-of-pocket payments are, however, common, despite the high
wage contribution by the employees.
21
Rao KS. Health Insurance in India. Background Papers. National Commission on Macroeconomics and
Health, New Delhi. 2005.
6. Thailand
In Thailand22, there are three main insurance schemes that cover most of the
country’s population and are as follows:
a) The Civil Servant Medical Benefits Schemes (CSMBS)
It covers Government employees, has the most liberal payouts and covers
about 8% of the country’s population.
b) The Social Security Scheme (SSS)
It resembles the ESIS in India in many ways. It is a mandatory, tripartite

contribution scheme, where costs are shared by the employers, employees
and the Government at the rate of 1% of wages each. Thus, it offers social
security to formal sector employees (establishments with greater than 10
employees) and covers about 15% of the population.
c) Universal Coverage Scheme
The third scheme is for the informal sector, which covers all citizens not
covered under the CSMBS or the SSS.
The Thai health system uses a unique combination of provider payment

mechanisms, including capitation, DRGs and Global Budgets.
7. Financing of Health in India
Financing of a health system is closely and indivisibly linked to the provisioning

of services and helps define the outer boundaries of the system’s capability to
achieve its stated goals23. Based on two separate studies commissioned by the
Ministry of Health and Family Welfare, Government of India (National Health
Accounts Cell, 2009 and the earlier study by the National Commission on
Macroeconomics and Health, 2005), the magnitude of health expenditure in
India for the year 2008-09 was estimated as about 4.13% of the GDP at current
market prices24,25.
22
Health Systems Research Institute. Health Insurance Systems in Thailand. Report on the 8th
International Social Health Insurance Seminar. Thailand. 2002.
8
Rao KS, Selvaraju S, Nagpal S, Sakthivel S. Financing of Health in India. National Commission on
Macroeconomics and Health, Governement of India. New Delhi, 2005.
24
National Health Accounts Cell, Ministry of Health and Family Welfare, Govt of India. National Health
Accounts- India- 2004-05. New Delhi, 2009
25
Ministry of Health and Family Welfare, Govt of India. Report of the National Commission on
Macroeconomics and Health, Governement of India. New Delhi, 2005.
CHAPTER 2 HEALTH FINANCING SYSTEM IN INDIA AND ITS PROBLEMS
Test Yourself 2
The healthcare system of Germany functions through _____________ that

collects premium from members and pay it to the healthcare providers.
I. National Health Fund

II. Employee State Insurance Fund
III. Universal Coverage Fund
IV.
b)
Non-profit Sickness Fund
C. Health financing system in India and its problems
In the last learning outcome, we discussed about the health financing system in
various countries. We will now discuss about the health financing system in our
country.
1. Health financing system in India
The sources of health financing in India are almost same as indicated in the
global picture above. The tax-based public health system has already been
discussed in the previous chapter. We have also discussed about the various
forms of employment-based health coverage that already exist in India, which
include:
a) The widely recognized Employees State Insurance Scheme (ESIS) for
employees in the formal sector,
b) The Central Government Health Scheme (CGHS) for serving and retired civil
servants,
c) The schemes for serving and retired employees of the Armed Forces,
Railways, Paramilitary forces and other Government organizations, and
d) The various health coverage schemes and benefits provided by banks,
insurers, other public sector companies and the private sector employers26.
2. Public expenditure on health in India
Out of the total health expenditure in the country, the share of public or
Government spending, i.e. that of Central, State and Local Governments taken
together, is about one-fifth of the total health expenditure (NHA Cell, 2009).
As a result of this, Indian population is mostly dependent upon the privatised

healthcare system. In India, the private healthcare expenditure amounts to
around 72% and the public expenditure is around 26% of the total healthcare
expenditure.
26
Mahal A, Sakthivel S, Nagpal S. National Health Accounts for India. Background Papers- National
Commission on Macroeconomics and Health, New Delhi. 2005.
HEALTH FINANCING SYSTEM IN INDIA AND ITS PROBLEMS CHAPTER 2
Example
The per capita total health spending in India was about US $23 during 1997-
2000 (World Bank 2003). At about 1% of the GDP, India’s public health spending
appears poorly funded in comparison with countries like China, Sri Lanka and
Thailand, for which this proportion was 1.95%, 1.8% and 3.06% respectively.
3. National rural health mission
One of the most significant developments in the public health financing system
of the country in recent years has been the introduction of the National Rural
Health Mission (NRHM). This scheme aims to reduce the gap between the
healthcare available in urban areas and rural areas.
NRHM bought additional money for the health sector with the help of several
health financing innovations like 'untied funds'. These untied funds enabled the
availability and access of quality healthcare system to all people, especially
who are residing in rural areas.
These funds provide resources to health facilities and community level bodies
without earmarking to line items. They can spend these funds, within the
guidelines of the program on virtually any area where the facility requires.
NRHM also attempted integration of the vertical disease control programs under
a single umbrella.
Example
NRHM has strengthened the infrastructure of public health facilities in rural
areas in terms of equipment, structure and human resources. The other key
focus area of the mission was delegating the powers to the facilities to hire
specialist doctors on contract basis. NRHM also introduced a grassroots level link
worker in villages, the ASHA (Accredited Social Health Activist) worker, who is a
volunteer from the community, trained by the public health system and act as a
link of the community with the public health system.
4. Problems of access and service quality
The guide-lines for national health planning in India were provided by a number
of committees dating back to the Bhore committee in 1946. It laid the
foundations of a comprehensive primary health care delivery system in the
country, not too different from the National Health Service in UK and other such
tax-funded health provision models in many countries.
Over the last six decades, India did attempt to build up an extensive public
health infra-structure at primary, secondary and tertiary levels, with mixed
success.

CHAPTER 2 HEALTH FINANCING SYSTEM IN INDIA AND ITS PROBLEMS
The public health sector continues to face problems like poorly motivated
manpower, inadequacy of funding, skewed geographical distribution and other
access issues.
The problem of access to healthcare is even more pronounced in rural and

remote areas, where qualified providers from the private sector are also
conspicuous by their absence. In the urban areas, though private providers are
available in plenty, but there also they continue to be poorly regulated for
pricing and quality, despite a multitude of legislations having been enacted for
the health sector.
The absence of any significant influence from large organized purchasers of

healthcare (like insurance mechanisms or the government itself) has also
contributed to the situation where there is virtually no check on what a
provider can charge for healthcare services, and often no check even on the
quality of services rendered.
5. Need for financial protection and advantages of health insurance

mechanisms
While is a substantial awareness of health insurance being a mechanism for

financial protection of the members to meet costs of their healthcare, but it is
important to remember that health insurance also has the potential to influence
healthcare provider behaviour. We have earlier discussed about supply side and
demand side moral hazards.
Health insurance itself contributes to this risk by providing increased access to

healthcare system to many people, who would otherwise be not able to afford
such healthcare by overcoming the cost barrier.
Moreover, health insurance schemes can have a negotiating power by acting as a

large purchaser of healthcare facilities, something which an individual without
insurance otherwise cannot achieve.
However, poorly designed health insurance system can influence the healthcare
providers pushing up the costs. . This will result in reduced access to the
healthcare for the uninsured people and thus, has implications on the
accessibility, costs and quality of healthcare.
Test Yourself 3
How much is the share of government spending on the total health expenditure
in our country?
I. One-third
II. One-fourth
III. One-fifth
IV. One-sixth

SUMMARY CHAPTER 2
Summary
a) Globally, the financing of healthcare costs is done through four methods:

government revenues, social health insurance, commercial health insurance
and out-of-pocket expenses.
b) The healthcare financing in Germany is based on social health insurance

system and is mainly funded through premiums collected from employees as
a payroll tax.
c) Healthcare is provided in France through three healthcare funds: one for

most of the workers, one for the self-employed and one for the agricultural
workers.
d) The healthcare system of USA was mainly based on employment based

health benefits but due to rising cost of healthcare benefits as compared to
individual earnings, the number of persons covered under insurance has
reduced sharply resulting in a poor impact on their economy.
e) Japan has one of the best healthcare systems in the world in terms of
accessibility and efficiency. It provides coverage to the entire population
with a universal access to all medical services.
f) The health financing model of India is very poor and is mainly dependent
upon private services.
g) The public health spending in India is less than 1% of the GDP that is very
low as compared to the other countries.
h) National Rural Health Mission (NRHM) has been introduced in our country to
reduce the gap between healthcare services provided in rural and urban
areas.
i) There are lot of problems faced by the public healthcare system in India in
rural areas such as lack of healthcare facilities, transportation, long
distances, cost of services and discriminatory treatment to users.
j) An effective government regulatory mechanism and adequate public funding

is required to operate health insurance mechanisms in any country
otherwise, it can pose a threat to equity and efficiency of health systems
rather than a healthcare facility.

Answer 1
Government revenues and taxes contribute highest in financing of the

healthcare costs globally with a share of 35%.
Answer 2
The health system of Germany functions through non-profit sickness funds that
collect premiums from members and pay health care providers according to pre-
negotiated agreements.
Answer 3
Out of the total health expenditure in our country, the share of public or
Government spending is about one-fifth of the total health expenditure.
Question 1
How much is the share of the private sector in the overall world health
expenditures?
I. 25%
II. 28%
III. 15%
IV. 18%
Question 2
Which of the following health insurance program in Japan cover the employees
working in small companies with less than 700 employees?
I. Society managed health insurance

II. Government managed health insurance
III. National health insurance
IV. Long life medical care system

Question 3
Which scheme has been introduced in our country to reduce the gap between
the healthcare available in rural and urban areas?
I. ASHA
II. AYUSH
III. Arogaya Kosh Yojana
IV. National Rural Health Mission
Question 4
Which of these countries has introduced a special healthcare plan ‘Long life
medical care system’ for the elderly people aged 75 and over?
I. Germany
II. Japan
III. France
IV. Thailand
Question 5
The funding of healthcare costs for a social health insurance system is done
primarily through ___________.
I. Government revenues
II. Employer contributions
III. Both employer and employee contributions
IV. Public health organisations
Answer 1
The share of the private sector or commercial insurance in the overall world
health expenditures is 18%.
Answer 2
The employees who are working with small employers (with less than 700
employees) and their dependants are covered under Government managed
health insurance.

Answer 3
National Rural Health Mission (NRHM) was introduced in our country to reduce
the gap between the healthcare available in urban areas and rural areas.
Answer 4
Japan has introduced ‘Long life medical care system’ plan in 1983 for the
elderly person aged 75 and over.
Answer 5
Social health insurance that is also referred to as an employment based health

insurance is funded primarily through a regular contribution from the employees
and the employers that are then used for funding healthcare needs for the
employees as well as their families.

CHAPTER 3
HEALTH INSURANCE PRODUCTS IN INDIA
This chapter aims to provide knowledge about the most common and popular
insurance products available in the Indian market and the coverage and
characteristics of each of these products. We will also discuss the new
innovative health insurance products coming up in the Indian market.
Learning Outcomes
A. Attributes of Indian health insurance products

B. Innovative health insurance products in India

CHAPTER 3 ATTRIBUTES OF INDIAN HEALTH INSURANCE PRODUCTS
Look at this Scenario
In India, the health insurance sector has undergone many changes up until the
opening of the market for private insurance companies in 2001. By the end of
2009, there were over 30 insurers (including non-life insurers, standalone health
insurers and life insurers) which were together offering more than 300 different
products, though most of them being hospitalisation indemnity procedures. But
with increasing competition in the market, insurers are now coming up with a
new variety of coverage of items and innovative products to fulfill the needs of
various sections of the population.
More and more people are now looking for and opting for health insurance
products to secure themselves against the skyrocketing medical costs. In order
to make health insurance products affordable, insurers are also innovating and
focusing on new cost sharing techniques. But at the same time, with lots of
products coming in the market, it is confusing for an individual to select a
health insurance policy which will cater best to his/her medical requirements.
This chapter will discuss the characteristics of various health insurance products
available in the Indian market.
A. Attributes of Indian health insurance products
1. Health insurance products in India
General Insurance Corporation of India, which comprised of four public sector

insurance companies, was initially the largest public sector organisation that
offered health insurance products in India. Later in 2001, the health insurance
sector was opened up for the private sector players, which led to many more
companies entering the health insurance market, and all of them introduced
considerable innovations in their offerings.
We will now discuss some of the health insurance product types now available in
India are discussed in this chapter.. All the products mentioned discussed below
are available in individual (or retail) and also in group variants, where
applicable.
2. Hospitalisation indemnity products
Mediclaim was the first standardised health insurance product that was
launched in the Indian market to provide coverage for hospitalisation expenses
up to a pre-defined annual limit of indemnity. Since then, health insurance in
the Indian context has been dominated by this category - known as
‘hospitalisation indemnity’ products. These products protect individuals from
the expenditure they may need to incur in the event of hospitalisation. In most
of the cases, it also covers a specific number of days before and after
hospitalisation, but excludes any expenses not involving hospitalisation.

ATTRIBUTES OF INDIAN HEALTH INSURANCE PRODUCTS CHAPTER 3
Such a cover is provided on an ‘indemnity’ basis, that is, by making good part or
all of the losses incurred or amount spent during hospitalisation. This may be
compared with the insurance coverage on benefit basis, where the amount that
will be paid on the occurrence of a certain event (like hospitalisation, diagnosis
of critical illness or each day of admission) is predetermined in the insurance
policy and is not related to the actual expenditure incurred. Thus, it covers the
hospitalisation expenses for an individual up to the sum assured.
Example
Raghu has a small family consisting of his wife and a 14 year old son. He has
taken three Mediclaim policies, one for each member of his family, from a
health insurance company for an individual cover of Rs. 1 lakh each. All the
three policies are independent, and all of them could get recovery of medical
expenses up to Rs. 1 lakh in case of hospitalisation.
Raghu was hospitalised due to heart attack and required surgery. The medical
bill raised was Rs. 1.25 lakhs. The insurance company paid Rs 1 lakh according
to the plan coverage and Raghu had to pay the remaining amount of Rs. 25,000
from his own pocket.
There are various products offering hospitalisation cover that are available in
the market from different insurers, and differ in their scope of cover. However,
most of these products provide coverage for hospital bed/room, patient’s diet,
professional fee of doctors, surgery, operation theatre charges, medicines,
consumables etc.
a) Scope of cover
With increasing competition in the market, insurers are also coming up with
variety of new coverage of items under this category, such as:
a) Transplantation
b) Hospitalisation expenses of organ donor
c) Cost of artificial limbs
d) Cost of pacemakers
e) Cost of haemodialysis
f) Coverage of ambulance charges
g) Number of days of pre-and post- hospitalisation expenses
h) Reimbursement for periodic health check-up
i) Cost of surgeries done under day care and
j) Maternity

b) Exclusions
The hospitalisation cover products from various insurers differ from each
other in exclusions, waiting periods and cost-sharing provisions. These
aspects are covered in more detail in Chapter 5.
Some of the specific exclusions which are not covered by any of the
hospitalisation insurance policies are:
a) War/invasion
b) Venereal diseases and HIV/AIDS
c) Fertility or assisted conception
d) Cosmetic or aesthetic procedures
e) Intentional self-injury
f) Influence of intoxicating drugs or alcohol
g) Adventure sports
h) Personal comfort
i) Convenience items
However, some of these products differ from each other according to the
extent of their coverage such as maternity, dental treatment, non-
allopathic treatment etc.
c) Waiting period
These policies also provide for a certain waiting period, which mostly is an
initial waiting period of 30 days before any benefits commence. For some of
the specific diseases or procedures, this waiting period is 12 to 48 months,
and such lists may also vary.
Example
Mira had taken a health insurance policy for coverage of expenses in the event
of hospitalisation. The policy had a clause for initial waiting period of 30 days.
Unfortunately, 20 days after she took the policy, Mira contracted malaria and
was hospitalised for 5 days. She had to pay heavy hospital bills.
When she asked for reimbursement from the insurance company, they denied,
because the disease (event) occurred within the waiting period of 30 days from
taking the policy.

d) Cost-sharing mechanisms
Moreover, policies also differ according to the various cost-sharing

mechanisms used by them, like sub-limits on room and ICU charges, sub-
limits on payments made for specific surgeries like cataract or
hysterectomy, co-payment for using non-network hospitals or even for
network hospitals etc. These techniques are also being provided in
insurance policies as mechanisms to contain costs for the insurer and to
provide for higher spending being shared by the insured.
Example
Somen has taken a mediclaim policy of Rs. 2 lakhs for covering costs in the
event of hospitalisation. The policy had a list of network hospitals mentioned in
it, which states that if the insured visits any of the in-network hospitals, it will
cover 90% of the expenses on occurrence of the event and 10% will be his co-
pay, i.e. he will have to pay 10% from his own pocket. However, if he visits a
hospital which is out-of-network, then the insurance company will pay only 80%
of the expenses and the insured will have to pay the remaining 20% from his
pocket.
Moreover, there was another clause in the policy stating that in case of any
hospitalisation, the company will cover room charges only up to 1% of the sum
assured for a day. It means that the insurance company will pay room charges
only up to Rs 2000 a day (i.e. 10% of the sum assured of Rs 2 lakhs) in the event
of hospitalisation.
These are examples of cost sharing mechanisms used by insurance companies.
3. Personal accident
Personal accident policies are offered both on a standalone basis and in a

packaged product with other health insurance cover. This policy protects the
insured against accidental death and any form of disablement due to accident.
It provides for features like a lump sum benefit payout in the event of death or
permanent disablement, and a weekly compensation for temporary
disablement.
Thus, unlike the hospitalisation indemnity products, this policy usually does not
provide for coverage towards cost of treatment of the insured. However, some
of these policies provide optional medical coverage, which covers certain
outpatient expenses for accidents, in addition to inpatient coverage.
Moreover, newer personal accident policies are also coming in the market with
a whole new range of innovative components - e.g. the cost of modification of
the house or vehicle to meet the medical needs of the insured after a disabling
accident.

Example
Vijay met his old group of friends one day, and the discussion came to the
various insurance policies and their benefits. One of his friends, Rahul, asked
him if he had taken any personal accident policy. Vijay asked why he needs such
a policy when he already has a life insurance policy with sufficient cover. Rahul
advised him that with the increasing number of vehicles in the city, the
accidents are also increasing, which has obviously increased this risk.
Rahul explained that a health insurance policy will cover the cost incurred in
case of hospitalisation, and a life insurance policy will cover the risk associated
with death. But if a person dies in an accident, the dependents of the insured
will get a lump sum payment from the personal accident policy, along with the
life insurance assured sum. This policy is more relevant where the accident
results in permanent or temporary disability to the insured. In such cases, it not
only covers the risk related to the partial or total disablement by providing
lump sum payment, but also provides weekly compensation in some cases.
The premium for such policies is quite low. This convinced Vijay, and he
decided to take a personal accident policy for himself as soon as possible.
4. Critical illness
Dreaded diseases like cancer, heart attack, coma or major organ failure may be
quite infrequent, but are associated with extremely high costs of healthcare.
Moreover, such costs include a substantial component that may not be covered
under the hospitalisation indemnity products. This could be because of
exceeding of the sum insured due to the very high costs involved, or high
outpatient (ambulatory) expenditure not covered under hospitalisation
insurance etc. There could also be need for additional expenses like long term
nursing care or home-based nursing.
Such expenses can be financially devastating for the household where the
critical illness occurs. Therefore, critical illness products have been introduced
to insure against such diseases and to cover the high expenditure related to
their treatment.
Critical illness benefit products provide a lump sum amount to the insured on
the diagnosis of a specific critical illness or on undergoing of certain
procedures. Thus, it does not cover the actual cost of treatment but pays only
the lump sum amount agreed irrespective of whether that amount had been
incurred or not.

Critical illness benefit products, again, are available as standalone products or

as riders to life and non-life policies, or as a component of a packaged health
insurance product. They also provide for high sum insured limits, ranging up to
several million rupees of lump sum payouts. Some of these policies have a
disease specific variant, for example, the cancer insurance policy provides
protection only in the case of cancer and not for other critical illnesses. These
policies are priced attractively for a high amount of coverage, and are on
indemnity basis and not as a lump sum payout.
Some of the critical illness indemnity products reimburse certain costs due to
critical illnesses rather than providing a lump sum payout, and are therefore
priced lower than other such products.
Test Yourself 1
Mediclaim policy covers the ____________expenses of an individual up to a pre-

defined annual limit of indemnity.
I. Doctor’s consultation
II. Medicine
III. Hospitalisation
IV. Surgery and operation theatre
Test Yourself 2
Which of the following statements about critical illness products is false?
I. They provide insurance against dreaded diseases such as cancer, heart

attack or kidney failure.
II. They cover the actual cost of treatment related to critical illnesses.
III. They are available as standalone products or as a packaged health insurance
product.
IV. They provide for high sum insured limits with lump sum payouts.

CHAPTER 3 INNOVATIVE HEALTH INSURANCE PRODUCTS IN INDIA
B. Innovative health insurance products in India
1. Daily hospital cash benefit
These are new innovative products available in the market in the form of a
fixed daily allowance, which could be used to cover the unexpected and
incidental costs associated with hospitalisation (such as travel and stay costs of
an attendant). It provides the insured with a daily cash benefit ranging from Rs.
500 to Rs. 2000 for each 24 hours spent in the hospital, which can be availed as
per the specific needs of the insured. The premium is also decided on the basis
of the daily allowance selected. This payment can be used to share any medical
or non-medical expenses which are normally not covered under hospitalisation
policies but account for a substantial part of the overall cost incurred during
treatment.
Hospital cash plans are available on a standalone basis, and also as an optional
component of some packaged health insurance policies. Thus, at a nominal
premium, this product provides a daily allowance which is in addition to the
indemnity claim and is unlinked to the actual expenditure incurred. These
products are particularly useful for persons covered for health by employers,
where employers’ health schemes may not bear many of the incidental costs
associated with hospitalisation.
Example
Most of the hospital indemnity products have a sub-limit on the room rent based
on the sum insured, such as 1% or 2% of the sum insured. In this case, if the
insured wants to avail a higher category room on being admitted, he will have
to pay from his own pocket.
But if he has taken a daily hospital cash benefit policy along with the
hospitalisation policy, he could utilise the amount of daily allowance to avail a
higher category room and also to meet other incidental expenses such as
travelling, food etc., thus avoiding payment from his pocket.
2. High-deductible hospital indemnity covers
A new option that is available for persons who are either covered by their
employers, or are already holding a hospitalisation policy but with low sum
insured – is high-deductible cover for individuals (and families). These are top-
up covers which provide coverage beyond the deductible amount chosen at the
proposal stage. This threshold ranges from Rs 1 lakh to Rs 5 lakhs and the
coverage of this product starts only after the out-of-pocket expenses or any
existing insurance cover has reached this selected deductible amount.

INNOVATIVE HEALTH INSURANCE PRODUCTS IN INDIA CHAPTER 3
These products are cost-effective because their premiums are low due to high
deductible amount, making this coverage more affordable. The higher the
deductible, the lower will be the insurance premiums, as the chances of a
person reaching the high level of deductible are very less. This plan is suitable
particularly for those persons who have a low sum insured in indemnity policies
and want to secure themselves against high medical expenses.
Example
Vaibhav has taken a basic health insurance policy with a cover of Rs.2 lakhs.
One of his close relative died due to heart attack and their family had to pay
heavy hospital bills of around Rs. 5 lakhs, which created a huge financial burden
on the deceased’s family.
This upset Vaibhav and he started thinking that with the changing environment
and life style; chances of new dreaded diseases are becoming quite high.
Moreover, with the increasing cost of healthcare, his current coverage will also
not be sufficient in case of any emergency. So he wanted to take another health
policy, but the cost of another one was not possible for him to bear.
An insurance agent suggested topping up his current plan, which will cost less
than taking a new insurance policy. So, he opted for an affordable top-up plan
with a sum insured of Rs.5 lakhs and a threshold limit of Rs.3 lakhs. It means
that in case of any emergency, the policy benefit of Rs. 5 lakhs will kick-in only
once he has used his basic health insurance policy limit of Rs. 2 lakhs and paid
Rs.1 lakh from his pocket (i.e. after reaching the threshold limit of 3 lakhs).
3. Disease management covers
For patients already suffering from chronic diseases like diabetes, new products
are now available in the market, which are based on the disease management
platform. These products include coverage for some medicines and regular
laboratory tests on OPD basis, in addition to other coverage in the product. This
category of products is still in its early stages in India and may develop further
in the days to come.
4. Outpatient coverage
Many of the health insurance products that are available in the market provide
coverage only in case of hospitalisation for at least 24 hours. But, there are
many cases of primary care or small procedures where hospitalisation is not
required or is required for less than 24 hours. In such cases, the insured has to
pay expenses from his pocket even if he has a health insurance policy.
Therefore, now insurers are making increasing efforts to include this outpatient
coverage in some form as part of the health insurance products, though these
efforts are still in the early stages and will evolve in the days to come.

As of now, if the policy offers OPD cover, it is likely to come at a sizeable

premium today, as the insurers expect that much or the entire OPD sum insured
will be utilised by the insured. This may change in future as and when insurers
are able to network OPD providers and negotiate for lower costs with them, and
find other ways to reduce the moral hazard problems in OPD coverage.
5. Investment products and health savings accounts
Yet another concept which may take off in some time, are insurance linked
savings plans, also known as Health Savings Accounts (HSAs)27 or Medical Savings
Accounts.
In countries like Singapore and China, these plans are widely used, while these
are also operational in South Africa, US and many other countries.
A deferred indemnity product, which is similar to the purpose of the HSA, has
been marketed by the public sector insurers in India as ‘Bhavishya Arogya’ since
early 1990s. Bhavishya Arogya is also a hospitalisation product, but it can be
effectively bought in younger ages to build up health protection for older age.
This product also provides an opportunity to avail tax advantages.
Life insurers have also recently launched products with Health Savings
components, and this may increase in popularity in due course. Under these
plans, a portion of the premium collected is used for risk coverage or for
meeting claims and the unutilised portion of the premium, which is not used,
does not lapse, but is accumulated as savings. These savings could be a solution
for the challenges faced by senior citizens later in obtaining affordable health
insurance.
In practice, HSAs are usually combined with a high-deductible or catastrophic

health insurance. HSAs can meet costs of frequent, low-cost episodes of
illnesses (like outpatient consultations, diagnostics and medicines, or low-cost
hospitalisation). On the other hand, the high-deductible insurance protects HSA
beneficiaries from major illnesses which could cost beyond their savings in
HSAs.
6. Senior citizens’ products
Some specific products which meet the needs of senior citizens have been made
available by public as well as private insurance companies. These products
allow entry till a higher age (even up to 80 years in some products) and a
continued renewal till ages as high as 80 or 90 years. These products
incorporate cost-sharing features like co-payments and sub-limits to keep a
check on the claims as the chances of medical claims in this age are
comparatively very high.
27 Nagpal S, Gautam R N, Singh P. The Medical Savings Account model- An option for Health Insurance in
India. Planning and Implementing Health Insurance Programmes in India- An Operational Guide. IPH/
World Health Organization. 2006.
INNOVATIVE HEALTH INSURANCE PRODUCTS IN INDIA CHAPTER 3
Due to such cost sharing features, premiums are also lower than the other
hospitalisation products available in the market for the same age group.
However, this product is still in its early stages in India as the insurance
companies are not very keen on offering cover to senior citizens.
7. Micro-insurance products
Micro-insurance products are specifically designed to aim for the protection of

low income people from rural and informal sectors. The low income people form
a sizable part of our population and usually don’t have any health security
cover. Therefore, this low value product, with an affordable premium and
benefit package, is initiated to help these people to cope with and recover from
common risks.
These products come with a small premium and typically, the sum insured is
below Rs.30,000, as required vide the IRDA micro-insurance regulations, 2005.
Mostly, such covers are taken on a group basis by various community
organizations or non-governmental organizations (NGOs) for their members. The
IRDA’s rural and social sector obligations also require that insurers should sell a
defined proportion of their policies as micro-insurance products, to enable
wider reach of insurance.
8. International coverage products
A short term option available for protection against health contingencies

occurring during international travel are the Overseas Medical Insurance plans.
These are mostly packaged as overseas travel plans by including other
components like loss of baggage and cover for flight cancellation etc.
The cost of unexpected medical treatment during an overseas visit can be very
high and could indeed be beyond the means of the overseas traveller. Overseas
medical insurance covers such unforeseen health related contingencies and
protects the insured person from high costs of medical attention when travelling
outside India.
Indeed, some countries insist on having a valid medical insurance as part of the
visa documentation. Although the sum insured is high by Indian standards (like
USD 50,000 in many products), it is in line with the expected high costs in a
foreign land. But as the probability is low and the duration of cover is short
(often in days or weeks), it does not cost a fortune to buy.
Recently, insurers have also designed comprehensive international products

which cover international medical costs as well as those within the country, and
are a form of global health cover and not just for short term travel. These
products are, however, expensive as they have to cover the possibility of high
medical costs in other countries. Therefore, this kind of products may have a
small group of policyholders, especially that of expatriates or those who travel
extensively.

9. Other innovative products
Some products are available in the market now that provide coverage for
persons with HIV, dental treatment etc. The innovations in this space are
increasing and many more innovative products will continue to be offered by
insurers.

SUMMARY CHAPTER 3
Summary
a) The health insurance sector was opened up for private companies in India in
2001.
b) Health insurance products in the Indian market are mostly dominated by

‘hospitalisation indemnity products’.
c) Hospitalisation indemnity products protect individuals from the expenditure

they may need to incur in the event of hospitalisation.
d) Personal accident policy protects the insured against accidental death and
any form of disablement due to accident, and provide for features like a
lump sum benefit payout in the event of death or permanent disablement,
and a weekly compensation for temporary disablement.
e) Critical illness benefit products provide coverage against dreaded diseases

such as cancer, kidney failure etc. and provide a lump sum amount to the
insured on the diagnosis of such critical illness or on undergoing of certain
procedures.
f) Daily hospital cash benefit is a new innovative product available in the

market to cover incidental costs associated with hospitalisation, which are
normally not covered under hospitalisation policy.
g) High deductible hospital indemnity covers are top-up covers which provide
coverage beyond the deductible amount chosen, ranging from 1 lakh to 5
lakhs, and are suitable for persons who have a low sum insured in indemnity
policies.
h) There are many more innovative health insurance products coming up in the
market such as disease management, outpatient coverage, HSAs, senior
citizen products, micro-insurance and international coverage products to
meet the specific needs of people from different sections of the society.

Answer 1
Mediclaim policy covers the hospitalisation expenses of an individual up to a

pre-defined annual limit of indemnity.
Answer 2
Critical illness products provide a lump sum amount to the insured on the
diagnosis of a specific critical illness or on undergoing of certain procedures.
Thus, it does not cover the actual cost of treatment.
Answer 3
Daily hospital cash benefit allowance is a fixed daily allowance which provides
coverage towards incidental costs associated with hospitalisation, such as travel
and food cost.
Question 1
Hospitalistion indemnity products provide for a _____________ before any

benefits commence.
I. Waiting period
II. Cost sharing by insured
III. Check-up by registered doctor
IV. Routine blood test
Question 2
Critical illness products which reimburse some of the actual costs due to critical
illness rather than a lump sum pay-out are priced ___________other such
products.
I. Higher than
II. Lower than
III. The same as
IV. Differently from

Question 3
1) Personal accident policy protects the insured against accidental death.

2) Personal accident policy protects the insured against any form of
disablement due to accident.
I. Statement 1 is true and statement 2 is false

II. Statement 2 is true and statement 1 is false
III. Statements 1 and 2 are true
IV. Statements 1 and 2 are false
Question 4
High deductible hospital indemnity cover is suitable for ____________.
I. Senior citizens
II. Persons suffering from critical illnesses
III. Persons with low sum insured in indemnity policies
IV. Person suffering from chronic diseases
Question 5
Micro-insurance products are designed to aim for the protection of

______________.
I. Minors
II. Senior citizens
III. High income people from urban areas
IV. Low income people from rural areas
Answer 1
Hospital indemnity products provide for an initial waiting period of 30 days

before any benefits commence.
Answer 2
Some critical illness indemnity products reimburse certain costs due to critical
illnesses rather than providing a lump sum payout, and are therefore priced
lower than other such products.

Answer 3
A personal accident policy protects the insured against accidental death and any
form of disablement due to accident. Hence, both the statements are true.
Answer 4
High deductible hospital indemnity cover plan is suitable for persons who have a
low sum insured in indemnity policies and want to secure themselves against
high medical expenses.
Answer 5
Micro-insurance products are specifically designed to aim for the protection of

low income people from rural and informal sectors.

CHAPTER 4
HEALTH INSURANCE UNDERWRITING
This chapter aims to provide you detailed knowledge about underwriting in

health insurance. Underwriting is a very important aspect of any type of
insurance and plays an important factor in issuance of an insurance policy. In
this chapter, you will get an understanding about basic principles, tools,
methods and process of underwriting. It will also provide you the knowledge
about group health insurance underwriting.
Learning Outcomes
A. What is underwriting?
B. Basic principles and tools for underwriting
C. Underwriting process
D. Group health insurance

CHAPTER 4 WHAT IS UNDERWRITING?

Alex aged 37 years, working as a software engineer, decided to take a health
insurance policy for himself. He went to an insurance company, where they
gave him an application form in which he was required to answer lot of
questions related to his physical built and health, mental health, pre-existing
illnesses or conditions, his family health history, habits and many more.
He was also required to submit many documents such as age proof, income
proof and previous medical records.
Then they told him to undergo a health check-up and some medical tests which
frustrated him.
Alex started thinking that he is a quite healthy person and is earning also well,
so why he has to go through all this lengthy process? Even after going through all
this process and waiting periods, insurance company told him that high
cholesterol and high BP has been diagnosed in his medical tests, which increases
the chances of heart diseases later. Though they offered him policy but at a
very high premium, which he refused.
Here, the insurance company was following all these steps as part of their
process. While providing risk coverage, they need to evaluate risks properly and
they also need to make reasonable profit. If the risk is not assessed properly
and there is a claim, it will result in a loss.
Insurance companies try to insure people who will pay adequate premium in
proportion to the risk they bring to the insurance pool. This process of
collecting and analysing information from a proposer for the risk selection is
known as underwriting. On the basis of information collected through this
process, they decide whether they want to insure a proposer and at what
premiums, so as to make reasonable profit from taking such risk.
A. What is underwriting?
1. Underwriting
Health insurance is based on the concept of morbidity. Here morbidity is

defined as the likelihood and risk of person becoming ill or sick thereby
requiring treatment or hospitalisation. Therefore, to an extent, morbidity is
influenced by age (generally being higher in senior citizens than in young adults)
and also increases due to various other adverse factors, such as overweight,
underweight, personal history of certain past and present diseases or ailments,
personal habits like smoking, current health status and also if the occupation
undertaken is known to be hazardous. Conversely, morbidity also decreases due
to certain favorable factors.

WHAT IS UNDERWRITING? CHAPTER 4
Definition
Underwriting is the process of assessing the risk appropriately and deciding the
terms on which the insurance cover is to be granted. Thus, it is a process of risk
selection and risk pricing.
2. Need for underwriting
Underwriting is the backbone of an insurance company as acceptance of the risk

indiscriminately or for inadequate premiums will lead to insurer’s insolvency.
On the other hand, being too selective or conservative will restrain insurance
company from creating a big pool so as to spread the risk uniformly. It is
therefore critical to strike an appropriate balance between risk and business
thereby maintaining the competitiveness and yet profitability for the
organisation. This process of balancing is done by the underwriter, in
accordance with the philosophy, policies and risk appetite of the insurance
company concerned. The job of the underwriter is to classify the risk and
decide the terms of acceptance at appropriate price. It is therefore important
to note that acceptance of risk is like giving a promise of future claim
settlement to the insured.
3. Underwriting – risk assessment
Underwriting is a process of risk selection which is based upon the

characteristics of a group or individual. Here based on the degree of the risk
represented, the underwriter decides whether to accept the risk and at what
price. Under any circumstances, the process of acceptance has to be done with
fairness and on an equitable basis i.e. every similar risk should be classified
equally without any prejudice. This classification is normally done through the
standard morbidity charts whereby every represented risk is quantified and
premiums are calculated accordingly.
Further, unlike clinical protocols, the insurance risk assessment is based on

prognosis. Hence based on the type of coverage, the classification is
accordingly done. As we are aware mortality usually comes much after
morbidity does. Hence, it is quite logical that the underwriting norms and
guidelines are much tighter for morbidity coverage than mortality. Therefore,
the morbidity premiums are usually steeper than mortality premiums and can
increase multifold based on the degree of risk.

CHAPTER 4 WHAT IS UNDERWRITING?
Example
An individual who is diabetic has a far higher chance of developing a cardiac or

systemic complication requiring hospitalisation than of death, and also health
episodes can happen multiple times during the course of insurance coverage. A
life insurance underwriting guideline might rate this individual as an average
cost risk. However, for medical underwriting, he would be rated higher.
Therefore, the morbidity premiums will be high and can increase multifold
based on the degree of risk.
In health insurance, there is a higher focus on medical or health findings than

financial underwriting. However, the latter cannot be ignored as there has to be
an insurable interest and financial underwriting is important to rule out any
adverse selection and ensure persistency in health insurance.
4. Factors which affect morbidity
The factors which affect morbidity (risk of falling ill) and should be considered
carefully while assessing risk are as follows:
a) Age: The premiums are charged commensurate with age and the degree
of risk. For e.g. the morbidity premiums for infants and children are
higher than young adults due to increased risk of infections and
accidents. Similarly, for adults beyond the age of 45 years, the premiums
are steeper, as the probability of an individual suffering from a chronic
ailment like diabetes, a sudden heart ailment or other such morbidity is
much higher.
b) Gender: Women are exposed to additional risk of morbidity during child

bearing period.
c) Habits: Consumption of tobacco, alcohol or narcotics in any form has a

direct bearing on the morbidity risk.
d) Occupation: Extra risk to accidents is possible in certain occupations,

e.g. driver, blaster, aviator etc. Likewise, certain occupations may have
higher health risks, like an X-Ray machine operator, asbestos industry
workers, miners etc.
e) Family history: This has greater relevance, as genetic pre-disposition

(e.g. asthma, diabetes, certain cancers etc.) does impact the morbidity
and should be taken into consideration while accepting risk.
f) Build: Stout, thin or average may also be associated with morbidity in

certain groups.

BASIC PRINCIPLES AND TOOLS FOR UNDERWRITING CHAPTER 4
g) Past illness or surgery: It has to be ascertained whether the past illness

has any possibility of causing increased debility or impairment and
accordingly the policy terms should be decided. For e.g. kidney stones
are known to recur and similarly, cataract in one eye increases
possibility of cataract in the other eye.
h) Current health status and other factors or impairments: This is

important to ascertain the degree of risk and insurability and can be
established by appropriate disclosure and medical examination.
i) Environment and residence: These also have a bearing on morbidity

rates.
Test Yourself 1
Underwriting is the process of ___________.
I. Marketing insurance products

II. Collecting premiums from customers
III. Risk selection and risk pricing
IV. Selling various insurance products
B. Basic principles and tools for underwriting
1. Basic principles of underwriting
What is not generally known to us is that in any forms of insurance whether life
insurance or general insurance, there is legal attire interwoven with several
principles of insurance, with common law and with specific laws on insurance
along with judicial pronouncements. Health insurance is equally governed by
these principles and any violation of the principles results in the insurer
deciding to avoid the liability, much to the dissatisfaction and frustration of the
policyholders. These core principles form an integral part to any insurance
contract.
a) Utmost good faith (Uberrima fides)
When one enters into a contract, in our case, an insurance contract, the
same is based on utmost good faith. In a contract both the parties are
obliged to disclose all material information which may be of importance
whether or not it is requested. Without utmost good faith, an insurance
contract would take the form of a wager or a gambling transaction. The
insurer, who undertakes to cover the risk, should be in a position to properly
understand the risk.

CHAPTER 4 BASIC PRINCIPLES AND TOOLS FOR UNDERWRITING
Any non-disclosure or misrepresentation of a material fact by the proposer

would make the contract “voidable” and the insurer can cancel the
contract. This is because the understanding of the insurer about the party to
the contract is different from what actually should have been known for
proper assessment of risk. Materiality of the information not disclosed is
judged by its relevance to underwriting of the risk.
The duty of utmost faith (Uberrima fides) has to be followed by the insured
as well as the insurer (when the latter is obliged to the insured once a claim
has been lodged under an insurance policy). The parties to the contract
must show abundant good faith, absolute and perfect openness and honesty.
b) Insurable interest
It means that a person should have a pecuniary interest in the asset he is

going to get insured and will suffer financial loss in the event of any damage
to such asset. Thus, the principle of insurable interest is the legal right to
insure and the person taking the insurance has legally recognised
relationship to the object of the insurance. In case of health, we all are
aware that the greatest wealth or asset of a person is his own health.
Therefore, a person has a legal right to insure his health by taking a health
insurance policy.
Example
Employers buy health insurance plans for their employees because they are
deemed to have an insurable interest in the health of their employees in a
pecuniary sense (which they lose by death, disablement or sickness of their
employees).
c) Indemnity
Without the existence of principle of indemnity, insurance would become a

gambling transaction in case of non-life contracts. The objective of the
insurance is to compensate the insured by placing him in the same financial
position after the loss where he was earlier; insurer pays nothing more and
nothing less. The insured cannot expect to get anything more than the loss
he has actually suffered. He cannot make a profit out of the insurance
contract. In contrast, life and personal accident insurances are not contracts
of indemnity but benefit policies. In a benefit policy, the sum insured for
the possible occurrence is paid no matter what is actually spent.
However, in an indemnity policy, one is usually compensated for the actual

costs or losses, only to the extent of the sum insured. Therefore under the
indemnity principle, the occurrence of the insured event does not entitle
the insured to compensation unless the insured suffers a monetary loss.

Indemnity in all cases will moreover, be limited by:

i. The sum insured
ii. Limit of liability
iii. Deductible under the policy
iv. Any other cost sharing provisions in the policy
Even in certain non-life contracts the full sum assured is paid, if the
assessed loss is equal to or more than the sum insured subject to satisfactory
compliance of the terms and conditions of the policy.
Example
Ricky has taken a indemnity policy for a cover of Rs.100,000 and has incurred
hospitalisation expenses due to a minor accident of Rs.40,000. In this case, he
will be compensated for the actual cost incurred, i.e. Rs.40,000 and not the
sum insured, i.e.Rs.100,000. The balance of Rs.60,000 will remain in his account
which he can use for his future coverage.
d) Contribution
These clauses are usually present in all medical insurance contracts. These
clauses apply when more than one policy covers the same loss. In most cases
each insurer’s share of the loss is based on the proportion that its insurance
bears to the total amount of insurance (‘rateable proportion’ basis).
Example
Amit has taken two hospitalisation indemnity policies, one from X company for a
cover of Rs.250,000 and another from Y city for a cover of Rs.150,000.
Amit was once hospitalised due to heart attack and incurred hospitalisation
expenses of Rs.160,000. The total compensation of Rs.160,000 was shared and
paid by both the companies on rateable proportion basis. The share of each
company was as follows:
X Company: 160,000 x 250,000 / (250,000+150,000) = Rs.100,000

Y Company: 160,000 x 150,000 / (250,000+150,000) = Rs.60,000
e) Proximate cause
The insurer is liable only if the losses have been caused by the peril insured
against. The principle of proximate cause is applied to determine as to
whether the loss was caused by a risk covered, not covered or excluded in
the policy. The rule is referred to as “causa proxima non remota spectator”
which means that the proximate and not the remote cause have to be
looked into. If the cause of the loss is a peril insured against, the assured
can recover the amount of the loss from the insurer.
CHAPTER 4 BASIC PRINCIPLES AND TOOLS FOR UNDERWRITING
Another interpretation is that the proximate cause is the dominant cause

and does not have to be the first. We might describe it as the efficient or
operative cause. If there are several causes operating, the proximate one
will be dominant one or the most forceful one operating to bring the result.
It is the duty of the insured to prove that the loss was due to the insured
peril, which is proximate. Risks excluded are usually mentioned in the policy
under “exclusions”. If the loss is directly or proximately caused by an
excluded risk, the claim is not payable.
Example
Peter has taken a basic Mediclaim insurance policy for a cover of Rs. 100,000 in
the event of hospitalisation. One day he was admitted to the hospital due to
severe abdominal pain. After all the necessary check-ups and tests, the doctor
diagnosed that his liver is damaged due to excessive alcohol consumption and
he will have to stay in the hospital for around two weeks for recovery.
When Peter claimed from his insurance company for the hospitalisation
expenses, they denied for it after analysing all the reports and causes for
hospitalisation. According to the insurer, the proximate cause for hospitalisation
was excessive alcohol drinking which was specifically excluded under the
contract; therefore it was not liable to pay any losses.
2. Tools for underwriting
These are the sources of information for the underwriter, basis on which the
risk classification is done and eventually premiums are decided. The following
are the key tools for underwriting:
a) Proposal form
This document is the base of the contract where all the critical information
pertaining to the health and personal details of the proposer (i.e. age,
occupation, built, habits, health status, income, premium payment details
etc.) are collected. This could range from a set of simple questions to a fully
detailed questionnaire according to product and the needs/policy of the
company, so as to ensure that all material facts are disclosed and the
coverage is given accordingly. Any breach or concealment of information by
the insured shall render the policy void.
b) Age proof
Premiums are determined on the basis of the age of the insured. Hence it is
imperative that the age disclosed at the time of enrollment is verified
through submission of an age proof.

Example
In India, there are many documents which can be considered as age proof but
all of them are not legally acceptable. Mostly valid documents are divided into
two broad categories. They are as follows:
a) Standard age proof: Some of these include school certificate, passport,

domicile certificate, PAN card etc.
b) Non-standard age proof: Some of these include ration card, voter ID,
elder’s declaration, gram panchayat certificate etc.
c) Financial documents
Knowing the financial status of the proposer is particularly relevant for

benefit products and to reduce the moral hazard. However, normally the
financial documents are only asked for in cases of high sum assured coverage
or where the stated income and occupation or vis a vis the coverage sought
shows a mismatch.
d) Medical reports
Requirement of medical reports is based on the norms of the insurer, and

usually depends upon the age of the insured and sometimes on the amount
of cover opted. Sometimes, the proposal form may also contain some
information that leads to medical reports being necessitated.
e) Sales reports
Sales personnel can also be seen as grassroots level underwriters for the
company and the information given by them in their report could form an
important consideration. However, as the sales personnel have an incentive
to generate more business, there is a conflict of interest which has to be
watched out for.
Test Yourself 2
The principle of utmost good faith in underwriting is required to be followed by

___________.
I. The insurer
II. The insured
III. Both the insurer and the insured
IV. The medical examiners

CHAPTER 4 UNDERWRITING PROCESS
Test Yourself 3
Insurable interest refers to ____________.
I. Financial interest of the person in the asset to be insured

II. The asset which is already insured
III. Each insurer’s share of loss when more than one company covers the same
loss
IV. The amount of the loss that can be recovered from the insurer
C. Underwriting process
Once the required information is received, the underwriter decides the terms of
the policy. The common forms used for underwriting health insurance business
are as below:
1. Medical underwriting
Medical underwriting is a process which is used by the insurance companies to

determine the health status of an individual applying for health insurance
policy. This health information collected is then evaluated by the insurers to
determine whether to offer coverage, up to what limit and on what conditions
and exclusions. Thus medical underwriting can determine the acceptance or
declining of a risk and also the terms of cover.
However, medical underwriting involves high costs in terms of receiving and

examining medical reports. Also, when insurers resort to a high degree of
medical underwriting, they are blamed for ‘cream-skimming’ and it reduces the
number of people willing to provide the requisite information and detail and to
undergo the required tests.
Health status and age are important underwriting considerations for individual
health insurance. Also current health status, personal and family medical
history enable an underwriter to determine presence of any pre-existing
diseases or conditions and eventually the probability of future health problems
that may require hospitalisation or surgical intervention.
Further proposal forms are designed in a manner to elicit information about

past treatments taken, hospitalisations and surgical interventions undergone,
which help an underwriter to evaluate the possibility of recurrence of an earlier
ailment, its impact on current or future health status or future complications.
Some diseases that the proposer may have been medicated for earlier or is on
medication presently may lie dormant for a while and recur again.

UNDERWRITING PROCESS CHAPTER 4
Example
Medical conditions like hypertension, overweight/obesity and raised sugar levels

have a high probability of future incidences of associated diseases of the heart,
kidney and the nervous system. So, these conditions should be carefully
considered while assessing the risk for medical underwriting.
Current health status and age are key underwriting factors for assessment of
insurability of an individual for health insurance. Since adverse changes in
health status generally occur post 40 years, mainly due to normal ageing
process, insurers do not require any medical examination or tests of the
proposer earlier than the age of 45 years (some insurers could raise this
requirement to 50 or 55 years too). Medical underwriting guidelines may also
require a signed declaration of the proposer’s health status by his/her family
physician.
In the Indian health insurance market, the key medical underwriting factor for
individual health insurance is the age of the person. Persons above the age of
45-50 years, enrolling for the first time are normally required to undergo
specified pathological investigations to assess health risk profile and to obtain
information on their current health status. Such investigations also provide an
indication of prevalence of any pre-existing medical conditions or diseases.
Example
Drugs, alcohol and tobacco consumption may be difficult to detect and seldom
declared by the proposer in the proposal form. Non-disclosure of these poses a
major challenge in underwriting of health insurance. Obesity is another problem
which threatens to become a major public health problem and underwriters
need to develop underwriting tools to be able to adequately price the
complications arising out of the same.
2. Non-medical underwriting
Most of the proposers which apply for health insurance do not need medical
examination. If it could be known with a fair degree of accuracy that only one-
tenth or less of such cases will bring the adverse results during medical
examination, insurers could dispense with medical examination in majority of
the cases. Even, if the proposer was to disclose all material facts completely
and truthfully and the same were checked by agent carefully, then also the
need for medical examination could have been much less. In fact, a slight
increase in the claims ratio can well be compensated for by the savings in the
costs of medical underwriting and other procuring expenses due to the
increased inconvenience in completing the proposal forms.

Therefore, insurance companies are coming up with some medical policies

where the proposer is not required to undergo any medical examination. In such
cases, companies usually create a ‘medical grid’ to indicate at what age and
stage should a medical underwriting be done, and therefore these non- medical
limits are carefully designed so as to strike an appropriate balance between
business and risk.
Example
If an individual has to take health insurance coverage quickly without going

through a long process of medical examinations, waiting periods and processing
delays, then he can opt for a non-medical underwriting policy. In a non-medical
underwriting policy, premium rates and sum assured are usually decided on the
basis of answers to a few health questions mostly based on age, gender,
smoking class, build etc. The process is speedy but the premiums are relatively
higher.
3. Numerical rating method
This is a process adopted in underwriting, wherein numerical or percentage

assessments are made on each component of the risk.
Factors like age, sex, race, occupation, residence, environment, built, habits,
family and personal history are examined and scored numerically based on pre-
determined criteria. The facts are not easy to ascertain and prejudice may color
the reports. Nevertheless, the basis of the numerical system is logical; it gives a
debit or a minus score to the unfavorable aspects of the risk, and gives a credit
to the favorable ones. Some combination of debits is much more unfavorable
than their numerical summation e.g. Tuberculosis and underweight for instance;
heart murmur and rheumatism history; albumin and high blood pressure. In such
instances a supplementary debit for association is added or the combination is
treated as a unit and conjoined debit applied according to known experience.
Example
In a numerical rating method, an applicant is assumed to start at a point of 100,

i.e. 100% of the standard risk. Then, according to his built, family history,
occupation, habits and other related factors, points are assigned to each factor
on the basis of rating manual. If the applicant is suffering from any disease such
as diabetes or high blood pressure, he will get debit points for example 25
points, which will be added to his standard risk. Similarly, if the applicant has
an occupation which is safe for any major health risks such as a professor in
university or a doctor, then he will get some credit points for it, for example 5
points which will be deducted from his standard risk.

After considering all the factors, all debits and credits are added or subtracted
to reach the final rating. On the basis of such rating, the applicant is placed
under standard, sub-standard or uninsurable risk. In the above case, it will be
(100 + 25 – 5 = 120), which means that the applicant is at an extra risk of 20%
and the policy thus will also be priced accordingly.
Very often the impairments are inter-related calling for the summation of only a
fraction of each debit, and in many cases the debit for one of the impairment
can be wholly included in that of another. On the other hand, the combination
of certain impairments might indicate a much higher extra morbidity risk than
that suggested by the simple addition of the debit for each.
a) Advantages of numerical rating method
In a decentralised system of underwriting, the numerical method has

following advantages:
i. It ensures consistency between the decisions of different underwriters

and of the same underwriter at different times.
ii. It results in a more uniform treatment of risks because the judgment of

the individual medical selector is steadied and restrained by the use of
standards.
iii. The liability to error is greatly reduced by the detailed analysis to which
each risk is subjected and eliminates personal prejudice.
iv. The work of the medical expert or referee is much lessened because
much of it can be safely entrusted to the trained underwriter.
v. A more careful analysis of difficult or doubtful cases is made possible

because past experience with reference to the doubtful points is
expressed numerically in terms of a known standard and shadings from
that past experience either favorable or unfavorable may be more
intelligently made.
vi. Greater speed is possible in the handling of a large business, because as

much as two-thirds of the business may be passed through the hands of
the trained personnel without having it brought to the attention of
medical experts/referees at all.
vii. It facilitates the work of building new statistics.
viii. It provides a working rule to assess the combined effect of a number of

impairments which has stood the test of experience.
ix. Underwriting is practically reduced to application of a formula and can

be done by persons without any special knowledge of medical science.
x. While reviewing a case, one can easily see how the decision was arrived
at.
b) However there are some deficiencies of the Numerical rating method:
i. It has not been possible to fix the percentage of increased claim

experience for all adverse features. Hence proposals with these features
have still to be referred to medical referee on the basis of special
reports obtained.
ii. The assumptions that every adverse feature results in a constant

addition to the morbidity rate and the process of equating the adverse
with favorable features will give the net extra morbidity are not always
correct.
iii. The fixing of the extra percentage for each adverse feature is also
arbitrary, though it is consistent.
In many cases, the rating manual only gives a range of debits (e.g. 25 to 50%)
against certain impairments but the actual rating depends on the underwriter's
judgment regarding the severity of the impairment and other correlated aspects
of the risk. Ratings have often to be modified by taking into account the
interaction of various aspects of the risk and in particular the probable
influence on the risk of the occupation, habits, mode of living, socioeconomic
status, moral hazard, etc. The numerical ratings arrived can only be regarded as
a guide but the selection of risk depends to a considerable extent on the
individual judgment and skill of the underwriter.
The main points requiring consideration when imposing terms to cover an extra
risk are firstly whether the extra risk is of an increasing nature, decreasing or
constant; and secondly, whether it is likely to change greatly or not. It should
also be considered whether the extra risk can be covered without an extra
premium by some other means, e.g. by levying exclusion for a stipulated period
or for a permanent term of the policy.
4. Underwriting decisions
The underwriting process is completed when the received information is

carefully assessed and classified into appropriate risk categories. Based on the
above tools and his judgment, the underwriter classifies the risk into the
following categories:
a) Accept risk at standard rates

b) Accept risk at an extra premium (loading), though it may not be allowed
in some of the countries
c) Postpone the cover for a stipulated period/term
d) Decline the cover
e) Counter offer (either restrict or deny part of the cover)
f) Levy permanent exclusion(s) under the policy

If any illness is permanently excluded, it is endorsed on the policy certificate.

This becomes an additional exclusion apart from the standard policy exclusion
and shall form the part of the contract.
Expert individual risk assessment by underwriters is vital to insurance companies

as it keeps the insurance system in balance. Underwriting enables insurers to
group together those with the same level of expected risk and to charge them
the same premium for the protection they choose. The benefit for the
policyholder is availability of insurance at a fair and competitive price whereas
the benefit for an insurer is the ability to maintain the experience of its
portfolio in line with the morbidity assumptions.
5. Use of general or standard exclusions
The majority of policies impose exclusions that apply to all their members.
These are known as standard exclusions or sometimes referred to as general
exclusions. Insurers limit their exposure by the implementation of standard
exclusions.
Examples of standard exclusions in most of the health policies include:
a) All disease / injuries which are pre-existing when the cover incepts for
the first time.
b) Any disease contracted by the insured person during the waiting period
from the commencement date of the policy.
c) One-year or two-year exclusions (waiting periods) for expenses on

treatment of diseases such as Cataract, Benign Prostatic Hypertrophy,
Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele;
Congenital internal disease, Fistula in anus; Piles; Sinusitis and related
disorders are not payable until the first or second year of the policy from
the time of policy commencement.
d) War and kindred perils and nuclear weapons materials.
e) Circumcision unless necessary for treatment of a disease.
f) Vaccination or inoculation or change of life or cosmetic or aesthetic

treatment of any description, plastic surgery other than as may be
necessitated due to an accident or as a part of any illness.
g) Cost of spectacles and contact lenses, hearing aids. These may be

termed as normal maintenance expenses.
h) Dental treatment or surgery of any kind unless requiring hospitalisation.

i) Convalescence; general debility, run down condition or rest cure,

congenital external disease, or defects or anomalies, sterility, venereal
disease, intentional self-injury and use of intoxicating drugs / alcohol.
j) Any treatment related to HIV, AIDS or sexually transmitted diseases.
k) Charges incurred at hospital or nursing home primarily for diagnostic, X

Ray or laboratory examinations or other diagnostic studies not consistent
with or incidental to the diagnosis and treatment or the positive
existence or presence of any ailment, sickness or injury for which
confinement is required at a hospital / nursing home or at home under
domiciliary hospitalisation as defined.
l) Expenses on vitamins and tonics unless forming part of treatment for

injury or disease as certified by the attending physician.
m) Treatment arising from or traceable to pregnancy, childbirth including

caesarean section (can be deleted; if maternity benefit is covered) and
also voluntary medical termination of pregnancy during the first 12
weeks from the date of conception.
The above list is not meant to be exhaustive. Also, it is not meant to be specific
to any one insurer. Each insurer will structure its products in such a way as to
offer an apparent competitive advantage over products available from its
competitors. Whenever more information becomes available on the risks
presented by the general incidence of particular medical conditions; insurers
will consider whether to add or remove those medical conditions from its range
of standard exclusions. Such decisions are based on their estimation of the risks
and the ability to price the products accordingly.
Test Yourself 4
Which of the following statements about medical underwriting is incorrect?
I. It involves high cost in collecting and assessing medical reports.

II. Current health status and age are the key factors in medical underwriting
for health insurance.
III. Proposers have to undergo medical and pathological investigations to assess
their health risk profile.
IV. Percentage assessment is made on each component of the risk.
V.

Diagram 1: Underwriting process

CHAPTER 4 GROUP HEALTH INSURANCE
D. Group health insurance
1. Group health insurance
Group insurance is underwritten mainly on the law of averages, implying that

when all members of a homogenous group are covered under a group health
insurance policy, the individuals constituting the group cannot anti-select
against the insurer. Thus, while accepting a group for health insurance, the
insurers take into consideration the existence of a few members in the group
who may have severe and frequent health problems. Hence, excepting for group
cover, if such individuals having severe and frequent health problems were to
be underwritten on an individual basis, they would be construed either
substandard or uninsurable risks.
Underwriting of group health insurance requires analysing the characteristics of

the group to evaluate its conformance with the insurance company’s
underwriting guidelines as well as the guidelines laid down for group insurance
by the insurance regulators.
Standard underwriting process for group health insurance requires evaluating

the proposed group on the following parameters:
a) Type of group
b) Group size
c) Type of industry
d) Eligible lives for coverage
e) Whether entire group is being covered or there is an option for members

to opt-out
f) Level of coverage – whether uniform or stratified
g) Composition of the group in terms of sex, age, single or multisite

locations, income levels of group members, employee turnover rate,
whether premium paid entirely by the group holder or members are
required to participate in premium payment
h) Difference in healthcare costs across regions in case of multi-site

locations spread in different geographical locations
i) Determining preference of the group holder for administration of the

group insurance by a third party administrator (of his choice or one
selected by the insurer) or by the insurer itself
j) Past claims experience of the proposed group

GROUP HEALTH INSURANCE CHAPTER 4
Example
A group of members working in mines or factories is at higher health risk than a

group of members working in air-conditioned offices. Also the nature of diseases
(thereby claims) are also likely to be quite different for both groups.
Therefore, the insurer will price the group health insurance policy accordingly
in both the cases.
Similarly to avoid adverse selection in case of groups with high turnover such as
IT companies, insurers can introduce precautionary criteria requiring employees
to serve their probationary period before becoming eligible for insurance.
Due to highly competitive nature of group health insurance business, insurers

allow substantial flexibility and customisation in benefit designing of the group
insurance plans. In employer-employee group insurance plans, the benefits
design is many a time developed and deployed as an employee retention tool by
the human resources department of the employer. Often, the flexibility also
stems from the need to duplicate or improve on the existing ‘richer’ benefits
already being provided in the existing group insurance plan by another insurer,
in a pitch to capture and shift business.
2. Underwriting other than employer- employee groups
Employer-employee groups are traditionally the most prevalent groups offered

for group health insurance. However, as health insurance gains acceptance as
an effective vehicle of financing healthcare expenditure, different types of
group aggregations have evolved. In such a scenario, it is important for group
health insurance underwriters to take into consideration the homogeneity and
cohesiveness of the group composition while underwriting the group.
In addition to employee-employer groups, insurers have provided group health

insurance coverage to varied type of groups such as: labour unions, trusts and
societies, multiple-employer groups, franchised dealers, professional
associations, clubs and other fraternal organisations.
Governments in different countries have been buyers of group health insurance

coverage for vulnerable sections of the society. In India, governments both at
the central and state level have aggressively been sponsoring group health
insurance schemes for the poor e.g. RSBY, Yeshaswini etc.
Though basic underwriting considerations for such diverse groups are similar to
generally accepted group underwriting factors, additional aspects include:
a) Size of the group (small group size may suffer volatility)

b) Differential healthcare cost in different geographical regions
c) Risk of adverse selection in case all group constituents do not participate
in the group health insurance plan
d) Persistency of members in the group
CHAPTER 4 GROUP HEALTH INSURANCE
In an effort to rationalise canvassing of group insurance by the insurers to the

mushrooming ‘groups of convenience’, the insurance regulator in India has
issued group insurance guidelines with a view to rationalise the approach to be
adopted by insurers in dealing with various groups. Such non-employer groups
include:
a) Employer welfare associations

b) Holders of credit cards issued by a specific company
c) Customers of a particular business where insurance is offered as an add-
on benefit
d) Borrowers of a bank and professional associations or societies
The rationale of the group insurance guidelines is to restrict formation of groups

for the sole purpose of availing insurance with advantage of of flexible design,
coverage of benefits not available on individual policies and cost savings. It has
been observed that such ‘groups of convenience’ have often led to adverse
selection against the insurers and eventually high claim ratios. Group insurance
guidelines by the regulatory authority, thus, help in responsible market conduct
by the insurers not only in instilling underwriting discipline but also in
canvassing group insurance schemes and setting up administration standards for
group schemes.
3. Use of genetics in underwriting
This is a controversial application of the science of Genetics, but underwriters

of the future may be able to study the genetic information of individuals for
health risk assessment. Human DNA (Deoxyribonucleic acid), is the ‘blueprint of
life’, which contains the genetic instructions used in the development and
functioning of living organisms, provides an innovative and effective tool to
underwriters and actuaries in assessment of the health status of an individual.
Genetic abnormalities can be broadly classified as inherited or acquired

(resulting from mutations caused by aging or the environment). Public concerns
about using genetics in underwriting relate to fears of denial or cancellation of
coverage by insurers on receiving an individual’s adverse data about his / her
genetic composition and affliction. Apprehensions are also raised about the
privacy of genetic information as this tells not only about the individual but also
his/her family lineage – both past and future, and its social and economic
impact. Further, extensive application of genetic information may also evolve
into ‘cream-skimming’ by insurers in risk selection and underwriting of
individual health insurance risk.
Until public concerns are suitably addressed and safeguards for privacy of
genetic data are put in place, use of genetic information for underwriting of
individual health or life risk is presently not permitted in almost all global
insurance jurisdictions.

GROUP HEALTH INSURANCE CHAPTER 4
For instance, in Britain, for the time being, only one predictive genetic test is
approved for now to be used in insurance underwriting, that of Huntington’s
disease for use in determining premiums for life insurance policies over
£500,000. This, of course, will be an evolving area and will also be an upcoming
task for insurance regulators to comprehend and regulate.
Test Yourself 5
1) In a group health insurance, any of the individual constituting the group

could anti-select against the insurer.
2) Group health insurance provides coverage only to employer-employee
groups.

III. Statement 1 and statement 2 are true
IV. Statement 1 and statement 2 are false

CHAPTER 4 SUMMARY
Summary
a) Health insurance is based on the concept of morbidity which is defined as

the risk of a person falling ill or sick.
b) Underwriting is the process of risk selection and risk pricing.
c) Underwriting is required to strike an appropriate balance between risk and

business thereby maintaining the competitiveness and yet profitability for
the organisation (insurer).
d) Some of the factors which affect a person’s morbidity are age, gender,
habits, occupation, built, family history, past illness or surgery, current
health status and place of residence.
e) The core principles of underwriting are: utmost good faith, insurable

interest, indemnity, contribution and proximate cause.
f) The key tools for underwriting are: proposal form, age proof, financial
documents, medical reports and sales reports.
g) Medical underwriting is a process which is used by the insurance companies

to determine the health status of an individual applying for health insurance
policy.
h) Non-medical underwriting is a process where the proposer is not required to

undergo any medical examination.
i) Numerical rating method is a process adopted in underwriting, wherein

numerical or percentage assessments are made on each component of the
risk.
j) The underwriting process is completed when the received information is

carefully assessed and classified into appropriate risk categories.
k) Group insurance is mainly underwritten based on the law of averages,

implying that when all members of a homogenous group are covered under a
group health insurance policy, the individuals constituting the group cannot
anti-select against the insurer.

Answer 1
Underwriting is the process of risk selection and risk pricing.
Answer 2
The principle of utmost good faith in underwriting has to be followed by both

the insurer and the insured.
Answer 3
Insurable interest refers to the pecuniary or the financial interest of a person in

the asset he is going to get insured and can suffer financial loss in the event of
any damage to such asset.
Answer 4
Percentage and numerical assessment is made on each component of the risk in

numerical rating method, and not medical underwriting method.
Answer 5
In a group health insurance, when all members of a group are covered under a
group health insurance policy, the individuals constituting the group cannot
anti-select against the insurer.
In addition to employee-employer groups, insurers have provided group health

insurance coverage to varied type of groups such as: labour unions, trusts and
societies, professional associations, clubs and other fraternal organisations.

Question 1
Which of the following factor does not affect the morbidity of an individual?
I. Gender
II. Spouse job
III. Habits
IV. Residence location
Question 2
According to the principle of indemnity, the insured is paid for __________.
I. The actual losses to the extent of the sum insured

II. The sum insured irrespective of the amount actually spent
III. A fixed amount agreed between both the parties
IV. The actual losses irrespective of the sum assured
Question 3
The first and the primary source of information about an applicant, for the
underwriter is his ________________.
I. Age proof documents

II. Financial documents
III. Previous medical records
IV. Proposal form
Question 4
The underwriting process is completed when ___________________.
I. All the critical information related to the health and personal details of the
proposer are collected through the proposal form
II. All the medical examinations and tests of the proposer are completed
III. The received information is carefully assessed and classified into
appropriate risk categories
IV. The policy is issued to the proposer after risk selection and pricing.

Question 5
Which of the following statements about the numerical rating method is

incorrect?
I. Numerical rating method provides greater speed in the handling of a large

business with the help of trained personnel.
II. Analysis of difficult or doubtful cases is not possible on the basis of
numerical points without medical referees or experts.
III. This method can be used by persons without any specific knowledge of
medical science.
IV. It ensures consistency between the decisions of different underwriters.
Answer 1
The morbidity of an individual is not affected by their spouse’s job, though their
own occupation is one of the important factors which can affect their
morbidity.
Answer 2
According to the principle of indemnity, insured is compensated for the actual

costs or losses, but to the extent of the sum insured.
Answer 3
The primary source of information about an applicant, for the underwriter is his
proposal form or application form, in which all the critical information related
to the health and personal details of the proposer are collected.
Answer 4
The underwriting process is completed when the received information is

carefully assessed and classified into appropriate risk categories.

Answer 5
The correct answer is II.
A more careful analysis of difficult or doubtful cases is made possible by

numerical rating method because past experience with reference to the
doubtful points is expressed numerically in terms of a known standard and
shadings.

CHAPTER 5
HEALTH INSURANCE POLICY FORMS AND CLAUSES
This chapter aims to provide you with an understanding of health insurance

contract, proposal forms used for various health insurance products. You will
also learn about common and standard clauses in an insurance contract,
common nomenclature and definitions for some of the critical illnesses such as
cancer, heart attack etc.
Learning Outcomes
A. Health insurance contract

B. Health insurance proposal form
C. Policy clauses for various health insurance products
D. Common clauses in all health insurance products

CHAPTER 5 HEALTH INSURANCE CONTRACT
To play any game, knowing the rules of the game are very critical. Also it
enables the player or observer of the game to appreciate the rules, respect its
sanctity, enjoy the game in a better manner, pass critique on the method of
play like an expert, appreciate the facts, involve himself for the improvement
of the game and also ensure that a rule of one game is not mixed up with
another without proper judgment. For example, one cannot apply the rules of
tennis in cricket and play cricket with a tennis bat. However, when children do
play cricket matches with a cricket bat and tennis ball, even though a slight
deviation is applied, still the philosophy of cricket is not tarnished but it allows
many more to participate without fearing any wounds which a cricket ball may
cause. Similarly, the set of rules for health insurance policies are the forms and
clauses, and this chapter covers the same. Some questions which this chapter
aims to answer include
a) What forms the basis of health insurance?

b) Why are so many questions asked during the purchase of health
insurance policies?
c) What are the common clauses that are applicable for health insurance?
d) What is the need for common definitions and initiatives taken on that
front?
A. Health insurance contract
1. Health insurance contract
Health insurance policy is actually a contract between the insurer and the
insured. The word contract is derived from the word ‘Contrahere’- which means
‘to draw together’ and it stresses the importance of mutuality in the use of the
particle or subject, more than the word ‘Agreement’. That’s why insurance
policies are popularly known as insurance contracts rather than insurance
agreements wherein the mutuality of both the parties are stressed based on the
principles of ‘Uberima Fides’ viz. Utmost Good Faith not only at the time of
initiation of the contract but also at the time of execution or termination of
contract.
Definition
Webster dictionary defines contract as “a binding agreement between two or

more persons or parties; especially: one legally enforceable”.
A contract is supposed to have mandatory elements like:

a) Offer and acceptance
b) Consideration
c) Capacity to contract
d) Legality of form etc.
HEALTH INSURANCE CONTRACT CHAPTER 5
Diagram 1: Mandatory elements of a contract
Insurance contracts are based on the product features offered by the insurance
company. The product mentions the benefits offered in the event of any loss or
the happening of the insured event, specific terms and conditions governing the
product, consideration (premium) and other inputs in the form of declarations
expected from the insured etc.
Example
A health insurance contract is based on the principles of contract law and the
provisions of the insurance contract. It has all the mandatory elements of a
contract.
a) Offer and acceptance: Health insurance policies offer the benefits of

providing coverage in the event of hospitalisation/ illness for a premium
that is required to be paid by the customer.
b) Consideration: The extent of premium is determined by the inputs &

declarations provided by the customer about their age, health status etc.
c) Capacity of contract: Both the parties, insurer and insured should be

legally capable of entering into a health insurance contract.
d) Legality of form: When a customer buys a health insurance policy; it means

that he is signing a contract with the insurance company to cover his illness
based on a mutual consent.
The mutual consent comes in the form of the proposal by the customer and its
acceptance by the insurer.
2. Insurance contract vs. other contracts
One may wonder why in the case of insurance, the customer normally does not
have much say other than accepting most of the conditions of the product.
Sometimes the conditions are written in difficult legal language that it may be
very difficult for a person to understand as well. As insurers cover the risk
based on the laws of probability, law of large numbers and other principles of
insurance, the insurance company contracts are slightly different from the other
contracts.

CHAPTER 5 HEALTH INSURANCE CONTRACT
In general, insurance contracts are different from the other contracts through
the following ways:
a) Unlike other contracts, the customer may never see the copy of the
contract till he receives the policy (though ideally it should not differ
much from the content of the prospectus which the customer should see
beforehand).
b) While in other forms of contracts, the buyer should beware ‘caveat
emptor’; however this rule stands modified in insurance contracts by the
principle of ‘utmost good faith’ from both the sides.
Diagram 2: Insurance contract Vs. Other contract
Test Yourself 1
Health insurance is ___________ between the insurer and the insured.
I. An agreement
II. A contract
III. A deal
IV. A mutual consent

HEALTH INSURANCE PROPOSAL FORM CHAPTER 5
B. Health insurance proposal form
The proposal form of any health insurance application form can be segregated
into two main parts:
9 Details of the applicant

9 Declaration by the applicant
As mentioned earlier, the details provided in the proposal form, build the basis
for an insurance contract and the applicant is expected to provide the same
with ‘utmost good faith’. The details given provide the basis for the
underwriting of the proposal and the acceptance of the risk by the insurer.
1. Details of the applicant
The applicant details section usually covers the following minimum questions:
a) Name of the applicant with father’s/husband’s name
b) Date of birth
c) Sex
d) Age (in completed years)
e) Occupation
f) Sum insured/ plan opted for
g) Address & telephone number
h) PAN details
i) Details of the hospitalisation/illness/disease at present or in the past/
last 4 years
j) If it is a family floater policy, then the details of the members with their
relationship will also be asked.
Many people think that why insurers ask for more information than required for
a bank account, or for a new mobile phone connection? The underlying principle
is that the data becomes more vital in case of health insurance as it forms part
of the underwriting process and also the ‘insurance contract’ wherein in other
cases; it is just a requirement to register the details of the customer under
Know Your Customer (KYC) norms.
A person is likely to know more things about himself when compared to others,
which is part of the information asymmetry of health insurance from the
insured’s side. The insurance company is entering into an insurance contract to
protect his health related risks by trusting his statements in the proposal, which
is assumed to be given on the basis of ‘Utmost Good Faith’.

CHAPTER 5 HEALTH INSURANCE PROPOSAL FORM
Health related risks can be judged to some extent on the basis of insured’s age,
occupation, place of residence etc. Based on the past data also, it is assumed
that human beings are prone to more diseases when they grow older. Hence age
becomes a very important factor while calculating the premium. That’s why the
standard premium tables of an insurance company are classified on the basis of
age.
Example
The proposal form requires an applicant to fill up the details of his current
occupation. By knowing the occupation of the customer, an insurance company
is in a better position to forecast any of the occupational hazards. For example,
drivers are at a high risk of accidents, persons working in chemical factories
may be at a high risk of respiratory diseases.
Similarly, the proposal form also requires the customer to fill up the details of
his current diseases and the treatment undergone in the recent past, say last
four years at least. This will enable the insurance company to understand the
health status better. It does not mean that the health insurance companies
insure only healthy individuals or there are always customers who have
undergone treatment in the past. The information provided in the form will help
the insurance company to estimate the severity of the diseases, scope of the
treatment in future, incidence of such treatments that may occur/reoccur in
the near future, approximate cost of such treatments etc.
The details of the family members are asked in case of a family policy or a
family floater policy. The family floater policy is typically a single sum insured
within which the whole family is covered. In other words, the sum insured is
shared amongst the members of the family instead of each member having
separate coverage limits. The floater policy usually covers only the immediate
family of the primary insured person and not distant relatives. Hence, the
relationships are also captured along with the health details of the members.
Even for the individual insurance, family health data helps the insurer to
understand any hereditary diseases in the family.
Insurers also insist for medical examination of the insured if the age of the
insured is beyond a particular age, say 45 years or 50 years. Moreover if any
specific health condition has been described in the proposal form by the
proposer, the insurer may, as a part of the underwriting process, can ask for a
detailed medical examination irrespective of the age of the proposer.

HEALTH INSURANCE PROPOSAL FORM CHAPTER 5
2. Self-declaration of health status by the applicant
Self-declaration of health status includes specific questions about any illnesses

in various systems of the human body. The following is only an indicative list
and may vary from one insurance company to another.
a) Neurological diseases
b) Mental diseases
c) Paralysis
d) Fainting episodes/blackouts
e) High blood pressure
f) Heart diseases including ischemic heart disease
g) Circulatory disorders
h) Diseases pertaining to uterus, ovaries etc. (for women)
i) Fistula, Piles
j) Ophthalmological diseases like Cataract
k) Respiratory diseases
l) Allergic diseases
m) Diabetes
n) Cancer
o) Cerebral diseases like paralytic strokes etc.
p) Tuberculosis, AIDS, HIV etc.
The reason for asking so many questions instead of a simple question about an
individual’s overall health for a health insurance is to:
i. Record the facts in detail which forms basis of the contract.
ii. To enable the customer to think through various diseases so that he can
provides the necessary information
iii. Arrange for further medical examination if any needed to estimate the
severity of the disease etc.
3. Comparisons of health insurance questionnaires with personal accident

insurance, life insurance and group insurance
For individual policies, health insurance questionnaires may look somewhat

similar when compared with the proposal forms used for life insurance &
personal accident insurance. Though, the weightage for different underwriting
factors may vary.
However in group insurance (whether it is for life or health), there are usually
no specific health questions recorded from the individual member of the group,
rather, the risk and the premiums are determined on the basis of the claims
experience and the nature of the group.

CHAPTER 5 HEALTH INSURANCE PROPOSAL FORM
The group is insured based on the master policy contract entered between the
insurance company and the group organiser (which can be an employer-
employee group or an affinity group) based on the details of the members
provided.
Some of the details that are usually recorded are:
a) Nature of the group

b) Number of members
c) Age group of members
d) Income details
e) Nature of work
f) Geographical spread etc.
Diagram 3: Health insurance proposal form
Test Yourself 2
Which of the following is the most vital factor in calculating the premium for an
individual health insurance policy?
I. Job / Profession of proposer

II. Area of residence
III. Age in completed years
IV. Plan opted for

POLICY CLAUSES FOR VARIOUS HEALTH INSURANCE PRODUCTS CHAPTER 5
C. Policy clauses for various health insurance products
1. Hospitalisation indemnity plans
This product is offered on individual as well as on group basis. Typically this

policy will reimburse the following benefits:
a) Hospital costs:
9 Accommodation costs, nursing care, operation theatre expenses

9 Specialist consultations and physiotherapy received as in-patient
b) Specialist fees:
9 Surgeon’s and anaesthetist’s fee for in-patient and day care

operations
9 Physician’s fee for in-patient treatment
9 Cost of medicines, diagnostics tests etc.
Pre-existing conditions (conditions the insured had before taking out the
insurance) are usually excluded from coverage for a defined period (In 2008,
the General Insurance Council decided to cap the waiting period for pre-
existing conditions to 4 years which is discussed later in this course).
c) These products generally exclude the following:
9 Drug abuse
9 Self-inflicted injuries
9 Out-patient treatment
9 HIV/AIDS of sexually transmitted diseases
9 Cosmetic surgery (unlinked to burns or cancer)
9 Preventive treatment/ immunisations etc.
9 Maternity and termination of pregnancy
Usually, the condition for eligibility for this benefit payment is that the
insured has to be hospitalised for at least 24 hours. This is, however, waived
for certain defined day-care surgical procedures where due to technological
advancement, the patient can undergo surgery and be discharged on the
same day (which earlier would have taken a much longer period of
hospitalisation).
Some insurers operate no-claim discount (or no claim bonus) scales for their
individual policyholders or offer health check benefits for claim-free
policies.

CHAPTER 5 POLICY CLAUSES FOR VARIOUS HEALTH INSURANCE PRODUCTS
Example
Rakesh had taken a health insurance plan in the year 2010 with coverage of Rs.
1 lakh in the event of hospitalisation. There were few clauses in his health
insurance contract for no claim bonus which he has not paid attention at that
time. He came to know about these clauses after completion of the first year
which pleasantly surprised him.
His first year of the policy was a claim free year, i.e. he had made no
hospitalisation claims from his insurance company. So, the insurance company
has increased his basic sum insured by 10%, i.e. Rs.10,000 as a claim free bonus
in the next year which increases his total coverage to Rs.110,000.
His next year again was a claim free year; therefore as a bonus, company
provided him with a free health checkup and also increased his basic sum
insured, i.e. increasing his coverage up to Rs.1.2 lakhs.
Recently, these products have seen the introduction of many cost sharing
provisions like:
i. Sub-limits on specific components of the hospital costs

ii. Co-payments (also called ‘co-insurance’) where a defined share of the
costs are borne by the insured and
iii. Deductibles (also called ‘excess’) where the initial defined amount of
hospital costs are borne by the policyholder after which the coverage
starts.
These help to reduce moral hazard, and contribute to lower overall costs for
the insurer, which also means that the reduced insurer liability can flow to
the customer in the form of reduced premium.
Diagram 4: Cost sharing provisions in Health insurance contract

2. Critical illness policy
Thanks to medical advances, more and more people are surviving major diseases
like cancer, strokes, and heart attacks etc. Medical care has increased life
expectancy resulting in people surviving critical illnesses that would have
previously resulted in death. This, however, continues to require high amount of
medical costs, reduced ability to work and a major change in lifestyle. Thus,
the financial security of the individual and his family is severely threatened
when a person is diagnosed with a critical illness. The critical illness policy
eases the financial pressure by providing a lump sum payment on diagnosis of a
covered condition (or on undergoing a covered procedure). The proceeds are a
cash benefit and thus can be used by the insured for any purpose.
In the Indian context, life insurance companies offer this product in two forms:
a) Accelerated CI benefit product, as a rider to a life insurance policy

b) Stand-alone CI product (also offered now by many non-life and
standalone health insurers)
In the accelerated CI product, the death benefit is accelerated and the benefit
amount (otherwise payable on death) is paid if the insured is diagnosed of any
specified critical illnesses. Under the second type, the benefit is payable on
diagnosis of critical illness and is unlinked to any death benefit.
Example
Raghav had taken a life insurance policy for Rs.3 lakhs which included an
accelerated critical illness cover of Rs.1 lakh at the age of 25. He was diagnosed
with cancer at the age of 36 which was covered under his critical illness policy.
So, the insurance company paid him Rs.1 lakh on diagnosis of cancer and his life
insurance coverage was reduced to Rs.2 lakhs (Rs.3 lakhs – Rs.1 lakh). He died
at the age of 45 and the insurance company paid the remaining life insurance
cover of Rs. 2 lakhs to his beneficiaries.
However, if Raghav would have taken a stand alone critical illness policy of
Rs.1 lakh along with the life insurance coverage of Rs.3 lakhs, then he could
have received Rs.1 lakh on the diagnosis of cancer disease and at the time of his
death, his beneficiaries could have received the entire life insurance sum of
Rs.3 lakhs.
i. The list of covered critical illnesses in any product varies across insurers
and insurers often design products based on the following factors:
9 It is a condition perceived to be serious by potential customers,

incurs high cost and can hamper their lifestyle.
9 Each condition covered can be defined clearly especially in terms of
its ‘payout point’ at which the benefit amount becomes payable.
9 Sufficient data is available to price the product.
The last mentioned data may not be easy to find in India but currently
Indian insurers are pricing the products based on reinsurers’ data. Initiatives
have also been underway to standardise the nomenclature and definitions of
critical illnesses in India so that the products are comparable and can be
more readily understood by the potential customers. In many markets (UK,
Malaysia etc) the definitions of the conditions are already standardised by
industry agreement or regulatory action. In India also, IRDA has moved
forward in this direction in consultation with the industry.
ii. Common conditions which are covered in critical illness policies are:
9 Cancer
9 Coronary artery bypass grafting (CABG)
9 Heart attack/ Myocardial infarction
9 Kidney failure
9 Major organ transplant
9 Stroke
iii. Some other common conditions which are additionally offered in CI

policies nowadays are:
9 Alzheimer’s disease
9 Multiple sclerosis
9 Aorta surgery
9 Benign brain tumor
9 Motor neuron disease
9 Paralysis/Paraplegia
3. Other benefit products
Benefit products are increasingly being offered by insurance companies actively

in the Indian health space, which offer lump sum payouts irrespective of the
expenses incurred. Some examples include the following:
a) Hospitalisation daily cash allowance: or its variants allowing higher cash

allowance for accidents or ICU stay (benefit of Rs.X in addition)
b) Convalescence or recuperation benefit: in case of continuous

hospitalisation for more than X days at a stretch, the policy provides a
lump sum cash benefit.
c) Surgical benefit: provides pre-determined cash benefit for undergoing

the covered surgeries, though regardless of actual expenditures.
d) Personal accident benefit and disability benefit

None of the reimbursement or indemnity health insurance policies meet 100 per
cent of the expenses incurred due to a hospitalisation. For instance, the
expenses on attendant’s food, visitor charges, etc., are not covered by the
policies. The customer will be out of office during hospitalisation and there are
chances that he will incur loss of pay. The allowances are expected to offset his
loss of income and other such incidental costs.
The principle of ‘contribution’ is only applicable to indemnity policies and not

to the benefit type covers. Thus, a person may hold two policies of benefit type
from two different companies, and his payable amount from each insurer does
not get reduced, rather the two will get added.
4. Disability benefit plans or income protection plans
Disability benefit plans are also known as income protection plans (IP). This
product protects and covers the loss of income when the insured is unable to
pursue his occupation due to injury or illness.
Such products can be designed with different structure of benefit payments.

The benefit i.e., income payment during the period of incapacity can be level
or increasing. Nowadays many insurers are offering increasing level of benefit
payment to suit the increasing level of salary or inflation. The benefit
escalation may come with increased premium or level premium throughout the
policy term.
Example
As we all know that life is uncertain, a person who is earning good and living
happily with his family can instantly lose his ability to earn income due to a
sudden accident or illness. A normal health insurance policy can help a person
to pay his medical bills, but it would not help him to replace his income which
he lost due to not attending his job.
A disability benefit plan can help in such condition by providing income to a

person when he is unable to work due to accident or illness to meet his daily
expenses.
In India, this product is currently available only as a component of

comprehensive personal accident policies from some of the non-life insurers or
is available from life insurers as a rider to life insurance products, called as
“Accident and disability benefit rider”.
In either case, this provides for a fixed income (related to the sum assured
under the insurance policy) during the period of incapacity due to accident (but
not due to ill health) subject to a maximum payout period as laid down in the
policy. Illness related IP covers are yet to find their way in the Indian market.

5. Long term care plan
Long-term care includes all forms of continuing personal or nursing care for
people who are unable to look after themselves without a degree of support and
whose health is not likely to get better in future.
The long-term care costs can be divided into three broad categories.
a) Personal care costs like the additional costs incurred for being looked
after by nurses or skilled personnel
b) Living costs like food, clothing, amenities etc
c) Housing costs
LTC insurance has evolved with an aim to indemnify the insured for the
additional costs incurred when they are in need of long-term care. It is a new
concept and is still evolving in developed markets. LTCI plans can be classified
based on method of funding.
a) Pre-funded plans
Under these plans, the insured will pay the premium when the insured is in
healthy condition. The premium payment can be for a certain period or for
life time. The benefit payment is dependent on claim definition. The claim
trigger may be defined based upon impact on Activities of Daily Living
(ADL’s) or more restrictive definitions can be used. The more restrictive the
definition, the lesser will be the premium as there will be less likelihood of
incidence of claim.
b) Immediate needs plans
These plans are purchased by a lump sum payment when the insured is
requiring long term care. The severity of disability will decide the quantum
of benefit. The more is the disability, the more will be the benefit as the
expected survival period requiring long-term care will be lesser.
This product concept is relatively new. The market for this product is
developing rapidly in developed markets. In India the market for this
product (at the time of writing this course) is yet to be developed. However,
with development of nuclear families, changing culture, and developing
economy the product will find market in the coming years.

6. Health savings or investments linked plans
Health insurance in India is largely a pure risk product without any investment
returns. Recently, some life insurance companies have launched Unit Linked
Health Insurance plans. In this plan, the total premium is split up into risk
premium and investment amount. While the risk premium is allocated for the
health insurance coverage, the investment amount is diverted to the unit linked
funds which can pay for the future health costs or for the costs like OPD not
covered in the risk component. The products may also offer other benefits like
hospitalisation allowances, critical illness benefits etc.
Internationally, there are products called as Health Savings Account (HSA) which
accumulate an amount to be utilised when the account holder needs to spend
on health care, i.e. usually at the senior age. These products encourage savings
for expected high costs of medical care in the future. Individuals are personally
conscious of costs so help reduce moral hazard and may mobilise greater funds
for health.
However, savings alone are generally not high enough to protect a person from
unexpectedly high cost diseases or chronic conditions. To avoid this, HSA’s are
often offered together with a catastrophic health insurance plan to cover rare
but high cost events.
7. Group insurance schemes
Group insurance is the most common form of health insurance globally. Group
insurance reduces adverse selection and offers the customer the advantage of
collective bargaining power with respect to the features of the product,
premium discounts etc.
The critical factors to be considered while issuing a group policy are:
a) The group should be an already existing one and must not have been
formed for the purpose of insurance coverage.
b) There should be a minimum number of members in the group (according

to insurer’s requirements)
c) There should be a group organiser who can act as a coordinator with the
insurance company.
Group insurance policies can be issued to various types of groups like employer-
employee groups and affinity groups. Again, the premium contribution can be
either contributory or non-contributory schemes. In contributory schemes, the
beneficiaries (employees or members) also contribute to the premium and in
non-contributory schemes, only the employer or the affinity organisation
contributes to the premium. Normally, employee premiums are paid by the
employers for availing the corporate tax benefits and it also serves as an
attractive feature for recruiting the people from the market and for retaining
them.
Example
Group insurance is also available to groups other than the employer-employee

groups but they should not be formed solely with a purpose of taking advantage
of insurance coverage. For example, a credit card company can offer health
insurance coverage plan to its members as an add-on benefit.
The amount of coverage in such groups is decided on the basis of certain

criteria, which can be age, years of membership in the group or the income of
the members. In case the coverage is based on the income of the members such
as farmer’s society or milkman’s society, then it can be fixed as a fixed multiple
of the income of each member of the group.
8. Difference between group and individual policies
There are some key differences between the group and individual policies which
are summarised below:
a) Product
Individual plans usually have standard terms and conditions whereas group
insurance policies are usually customised or tailor made and the terms and
conditions can be fine-tuned according to the nature of the group. For
example, the group policies may cover maternity and pre-existing diseases
from day one.
b) Premium
The premium for the individual products can vary from the group insurance.
During the tariff era, where premium for fire and engineering insurance was
fixed by tariff, insurance companies experienced very low claims ratio in
fire portfolio and used to cross-subsidise the group health insurance
premium as a marketing strategy for fire business. This led to a very high
claims ratio in health insurance portfolio. However, after detariffing, there
has been a gradual correction in group health insurance premium. In fact,
increasingly the true costs of group health insurance are becoming apparent
to corporate consumers and they are exploring ways to reduce the costs of
insurance coverage for their employees/members, including cost sharing
mechanisms like deductibles, introducing contribution of premium from
employees to cover their dependant parents etc.
c) Medical records
When purchasing an individual health insurance policy, a person has to

usually answer a health questionnaire and undergo lots of medical
examinations. An insurance company can accept, deny or add some
limitations while providing coverage on the basis of such data.

However, most of the group health plans are provided without any medical
examination or records. This is because insurer is pooling the risk by
covering large number of people, which helps to maintain balance between
people with poor health and those with good health.
d) Underwriting
In group health insurance, every person in the group is included in the plan
and no one can be denied coverage on the basis of any pre-existing health
conditions. But in an individual health insurance plan, insurer has an option
to choose or deny the coverage on the basis of pre-existing health
conditions.
Table 5.1
Difference between individual and group health insurance

Individual health
Group health insurance
insurance
Product terms and
Standardised Customised
conditions
Premium High Low
Medical examination Required Not required
May deny coverage to
All member in group are
Underwriting people with Pre-existing
covered irrespective
health conditions
Limited (For additional Comprehensive (For e.g.
Insurance coverage coverage, need to Pregnancy and child birth
purchase separate plans) are usually covered
Test Yourself 3
Which of the following hospitalisation costs are normally not covered under
hospitalisation indemnity plans?
I. Accommodation costs
II. Surgeon’s fee
III. Radiotherapy charges
IV. Maternity costs
Test Yourself 4
Disability benefit plan usually replaces __________of a disabled person’s lost

income.
I. All of
II. 60%
III. 50%
IV. 40%

CHAPTER 5 COMMON CLAUSES IN ALL HEALTH INSURANCE PRODUCTS
D. Common clauses in all health insurance products
Based on the health insurance products currently available in India, some of the
common insurance clauses are discussed in this Learning Outcome. Any of these
clauses may be modified and/or adapted by insurance companies according to
their requirements and so this section should be seen only as a general listing to
help understand health insurance product conditions. However, an inquisitive
student can read in detail about the various definitions and other health
insurance clauses used for health insurance products on insurer’s websites.
1. 24 hours hospitalisation
Expenses on hospitalisation are generally admissible only if the same is for a

minimum period of 24 hours. However, there is an exception for cases of
specialised treatment which can now be undertaken in a shorter time (less than
24 hours) due to technological advances called day care procedures. It usually
includes hemodialysis, chemotherapy, eye surgery, D&C, angioplasty, hernia,
hydrocele, surgery related to ENT etc. (this list is only indicative).
2. Limits of usage
a) Hospitals where treatment under insurance cover is taken:
i. Should be duly licensed and registered

ii. Should be under the supervision of a registered medical practitioner, and
iii. Should have the prescribed minimum number of in-patient medical beds
e.g. minimum 15 for Metros & larger cities, and 10 beds in smaller towns
etc.
Such conditions ensure that the treatment is provided at a standard and

established place and scope for frauds is reduced.
b) Room rent: Often, to balance the costs of medical necessity and luxury,
as also to control costs for insurers, some limits for room charges are
imposed, say 1% of sum insured etc.
Example
Swati has taken a health insurance policy with a cover of Rs.1 lakh recently
which has a clause for limits on usage of some hospitalisation expenses such as:
9 Room rent limit: 1% of the sum insured

9 ICU charges: 2% of the sum insured subject to maximum of Rs.10,000
9 Doctor’s fees: 3% of the sum insured
9 Cataract operation: Rs.20,000 per eye
9 Angioplasty: Rs.60,000

COMMON CLAUSES IN ALL HEALTH INSURANCE PRODUCTS CHAPTER 5
3. Limits of indemnity
It is the maximum liability for any or all of the claims made during the policy
period. It can be availed during the period of the policy by the insured person
for hospitalisation or any other claimable events. This is stated on the policy
schedule and is also called the sum insured.
Example
Karan had taken a mediclaim policy for a cover of Rs.2 lakhs. Unluckily, it was a
very bad year for Karan health-wise. He met with an accident and had a few
fractures in his body. He had to undergo surgery for it and was later hospitalised
for 15 days for recovery. The bill raised by the hospital was Rs.185,000 which
was paid by his insurance company. He left with a coverage of Rs.15,000.
Few months later, he was again hospitalised due to a heart attack and the bill
raised by the hospital this time was Rs.25,000. As his balance indemnity limit
was only Rs.15,000, the insurance company paid that amount and the balance
amount of Rs.10,000 had to be paid by Karan from his pocket.
4. Domiciliary hospitalisation benefit
This benefit was previously offered in mediclaim products and now is also
included in some of the newer hospitalisation policies. It implies medical
treatment for a period exceeding three days for such illness which in normal
course would require care and treatment at a hospital/nursing home as in-
patient but actually taken whilst confined at home in India due to any of the
following circumstances:
a) The condition of the patient is such that he/she cannot be moved to the
hospital/nursing home, or
b) The patient cannot be moved to the hospital due to lack of any place in
the hospital.
Example
Puneet got caught by swine flu spreading widely in his city. All the hospitals in
the city were mostly occupied by such patients, so he didn’t get a bed in any of
the hospitals. His condition started deteriorating, so the doctors suggested his
family to start the treatment at home by making arrangements for all the
necessary set-ups of a hospital at his home. The treatment continued for six
days. Puneet’s health insurance coverage had a clause for coverage of
domiciliary hospitalisation costs which fully covered all his expenses during this
treatment.

5. Cashless hospitalisation procedure
Cashless is a facility offered to the health insurance customers through insurers’

in-house channels or through Third Party Administrators (TPA) who coordinate
with the customer and the hospital to ensure that the admissible bills are not
required to be paid in the hospital by the customer and are directly settled by
the TPA/insurer in due course.
Admission should be in a listed hospital which is in the empanelment list of the

insurer/TPA (network hospital) and is subject to the pre-authorisation being
granted by the insurer/TPA. The TPAs will validate the incidence reported by
the claimant and after satisfaction, will issue a pre-authorisation letter to the
hospital guaranteeing the payment. The TPA may not necessarily approve all the
claims and may require more information or documents. Denial of cashless does
not affect the admissibility of claims and the customers can submit the claim
papers later to the insurer/TPA for reimbursement.
6. Deductible
Deductibles are a cost sharing mechanism. These are the initial amount of an
admissible claim which must be first borne by the insured before the insurer
starts paying for the claim.
Example
Girish has taken a health insurance policy which had a clause for deductible of
Rs.10,000. This clause means that the first Rs.10,000 of every admissible claim
will have to be borne by Girish and excess, if any will be paid by the insurance
company. For example, if Girish has incurred hospitalisation expenses of
Rs.25,000, then he will have to pay first Rs.10,000 from his own pocket as
deductible and then the insurance company will pay excess sum of Rs.15,000.
7. Co-payment or co-insurance
In the Indian context, both of these terms are used interchangeably to reflect
the percentage of risk that the insured is required to bear.
Example
The health insurance policy taken by Vikas has a co-payment clause of 20%. It
means that the insurance company will not bear the entire expenses. Vikas will
have to pay Rs.20 from his own pocket for every Rs.100 claimed. Therefore, if
Vikas will incur hospitalisation expenses of Rs.15,000, then he will have to pay
20% of it, i.e. Rs.3,000 from his own pocket and the insurance company will pay
his share of 80%, i.e. remaining expenses of Rs.12,000.

8. Waiting period
The initial period within which any claims made will not be entertained.
Normally, all the new policies come with a minimum 30 days waiting period
wherein the insured person cannot make a claim for the diseases contracted
during the first 30 days. This is to avoid someone taking a policy in order to get
a hospitalisation claim immediately after purchase of the policy. The waiting
period does not usually apply to accidental injuries, or to renewals of policies.
9. Pre-existing illness
This gains importance in the light of the exclusion to the policy that is
applicable for the pre-existing illnesses. This has been the subject of many legal
interpretations, a lot of consumer grievances and considerable media attention.
In recent years, subsequent to a consensus of the General Insurance Council,
insurance companies have started covering pre-existing illness after the
completion of 4 policy years. An insurance company may choose to reduce 4
year period but cannot increase the same..
Example
Lisa, aged 40 years is working as a financial consultant. She is a patient of high

blood pressure and takes regular medication for it. She decided to purchase a
health insurance policy for herself. After lots of research, she settled for a
health insurance plan with a clause for an exclusion period of 12 months for his
pre-existing disease of high BP. During the first year of her policy, no claims
related to high BP were entertained. However, her other claims during the
period which were not related to pre-existing diseases such as hospitalisation
due to malaria and other diagnosis tests were covered.
10. Exclusions
The insurance company normally indicates various scenarios that cannot be

entertained for claim payments. The rationale behind is to avoid staged or
fraudulent claims, misuse insurance for profit motive and to keep costs of
claims low, and thus controls insurance premium costs. However, customers
usually do not fully understand the excluded conditions and this could be a trust
issue between the customer and the insurer.

Some of the common exclusions (list is indicative and not exhaustive) are:
a) Pre-existing illness
b) Diseases contracted during initial waiting period
c) Expenses on treatment of specific ailments for a specific period like

hernia, fistula, and cataract etc. (which are covered after the waiting
period is over)
d) Injury or disease due to war, war like operations and similar scenarios
e) Cosmetic surgery, plastic surgery
f) Dental treatment
g) Abuse of drugs/alcohol usage
h) Naturopathy treatment
i) Non-medical expenses for personal comfort like television, telephone,

toiletry items etc.
11. Cancellation clause
Usually, this clause can only be invoked by the insurer for reasons of fraud,
moral hazard, misrepresentation or non-cooperation of the insured. Similarly,
the customer may also cancel the policy based on the policy conditions and the
insurance company is supposed to refund the premium on short-term cover
scales of the insurer. However the company is liable for any claim, which arose
prior to the date of cancellation.
12. Renewability clause
After much discussion in this direction and as required by the regulator, the
industry’s stand generally is that the health insurance products will ordinarily
be renewable. However, the insurer is not responsible or liable for non-renewal
of policy due to non-receipt or delayed receipt of the renewal notice to the
insured. Also, the company may revise the premium rates, terms and conditions
of the policy at the time of renewal. Renewal of the policy is not automatic and
the premium due must be paid by the proposer to the company before the due
date. The insurer normally sends renewal notice but not sending it will not
tantamount to deficiency in services.

13. Standardisation initiatives
In a unique multi- stakeholder initiative in India, the insurance industry,

regulator, hospitals and industry chambers (FICCI and CII), along with other
stakeholders, have come together to undertake certain standardisation
initiatives for the health insurance industry, since 2007.
Some of these are discussed below.
a) Standardisation of definitions
There are differences in the definitions of certain terminology used in health

insurance and in the nomenclature and definitions of critical illnesses
adopted by the different insurers which can create confusion in the minds of
consumers and the industry. Lack of standard definitions also means that
products are difficult to compare, and the availability of standard
definitions thus can ensure better comparability and uniformity in the
understanding of health insurance products.
b) Standardisation of forms
The majority of the insurers and TPAs require mostly the same information
in their pre-authorisation and claims forms. However, each of them uses
different formats and this means that a typical hospital would be expected
to keep stock of 30 or 40 different forms and understand them well. If the
forms would be standardised, they will be better understood, more
complete and more accurate. This was therefore taken up by the multi-
stakeholder working groups to develop and suggest to the industry for
standardisation of forms for pre-authorisation and claims which could be
used by all insurers and TPAs.
c) Standardisation initiatives on the non-medical expenses
Insurance companies providing hospitalisation indemnity covers generally

exclude certain categories of expenses in their policy terms and conditions.
However, there is no detailed listing of such excluded expenses, and the
interpretation of these exclusions is highly varied across different payers in
the industry. There are many cases when various items under the claims
filed by hospital providers or individual policyholders are repudiated by the
insurers but are disputed by the claimants. This is, thus, one major cause of
acrimony between insurance companies & healthcare providers and also
causes a lot of confusion in the minds of consumer. Hence the stakeholders
from the insurance, TPA, medical providers joined together to come to a
consensus on the list of non-medical expenses to evolve an exhaustive list of
such items.

In February 2013, IRDA has brought out ‘Guidelines for Standardization in

Health Insurance’ which among other thing cover above 3 items – key
definitions, standard forms and list of non-payable items. Refer Annexure at
the end of book for details.
d) Standardisation of treatment guidelines (STG)
The aim of these treatment guidelines are to:
i. Reduce claim disputes substantially by providing a reference framework

for payers to process medical claims for these conditions. This in turn,
helps in reducing the needs for moving back and forth of queries
between payers and providers.
ii. Enable increased automation of claims handling, resulting in faster claim

processing and reduction of TATs (turnaround time) for a significant
proportion of claims.
iii. Help in setting appropriate grades/levels of payout for different types of

surgeries in fixed benefit plans and setting scientific and reasonable sub-
limits for different procedures in reimbursement plans.
iv. Provide a framework for costing and for development of appropriate

price range for these conditions in different situations.
The guidelines also provide the essential investigations which need to be

carried out in case of a particular condition, as also any specific additional
ones, which may be opted for in case of specified circumstances. The
guidelines also include a detailed discussion on implants or other surgical
consumables, including specific recommendations which meet quality
expectations at a reasonable cost to the system.
Conclusion: there are no ideal product types and ideal clauses. Insurance
companies keep on researching and inventing new product types and innovative
clauses to attract the customers. Students should keep on reading and
analysing the policy clauses and conditions of various products floated by the
insurance companies to appreciate the Unique Selling Proposition (USP) of the
products in the offering.

Test Yourself 5
Which of the following clauses related to health insurance contract is incorrect?
I. Treatment can be taken in any hospital/nursing home.

II. The minimum number of beds in the hospital where the treatment is taken
should be 15.
III. Minimum 24 hours hospitalisation is required except for few specialised day
care procedures.
IV. The treatment should be done under the supervision of registered medical
practitioner.
Test Yourself 6
All of the following are common clauses of a health insurance contract except:
I. Deductibles
II. Renewal
III. Cancellation
IV. No waiting period
Test Yourself 7
___________ is a state of unconsciousness with no reaction to external stimuli

or internal needs.
I. Cancer
II. Coma
III. Heart attack
IV. Paralysis

CHAPTER 5 SUMMARY
Summary
a) Health insurance policy is a contract between the insurer and the insured.
b) Insurance contracts are based on the principle of ‘utmost good faith’

whereas all other contracts are generally based on the principle of ‘caveat
emptor’ (let the buyer beware).
c) The proposal form of any health insurance is divided mainly into two parts:
details of the applicant and self-declaration of health status by the
applicant.
d) Hospitalisation indemnity plans typically reimburse the hospital costs and

specialist fees.
e) Cost sharing provisions such as sub-limits, co-payments and deductibles are

introduced by insurance companies to reduce moral hazard and to lower
overall costs for the insurer.
f) A critical illness policy eases the financial pressure of an individual by

providing a lump sum payment and is available both as stand-alone products
and as a rider to life insurance policy.
g) Disability benefit plans, also known as income protection plans (IP) protects
and covers the loss of income when the insured is unable to pursue his
occupation due to injury or illness.
h) Long-term care plan indemnify the insured for the additional costs incurred
during the need of long-term care, and includes all forms of continuing
nursing care for people who are unable to look after themselves without a
degree of support and whose health is not likely to get better in future.
i) Group insurance reduces adverse selection and offers the customer the
advantage of collective bargaining power with respect to the features of the
product, premium discounts etc.
j) The common clauses which are found generally in all health insurance
contracts are 24 hours hospitalisation, limits of usage, indemnity, cashless
facility, deductible, co-payment, waiting period, pre-existing illness,
exclusions, cancellation and renewability clause.

Answer 1
Health insurance is a contract between the insurer and the insured.
Answer 2
Age plays a vital role in calculating the premium of an individual health

insurance policy. The standard premium tables of an insurance company are
also therefore, classified on the basis of age.
Answer 3
Maternity costs are normally not covered under hospitalisation indemnity plans.
Answer 4
Disability benefit plan usually replaces 60% of a disabled person’s lost income.
Answer 5
The treatment under insurance cover should be taken in a hospital that is duly
licensed and registered.
Answer 6
The waiting period of minimum 30 days is one of the most important clauses of
a health insurance contract wherein the insured cannot make a claim for any
disease contracted during the waiting period.
Answer 7
Coma is a state of unconsciousness with no reaction or response to external

stimuli or internal needs.

Question 1
Insurance contracts are different from other contracts because

______________.
I. It protects the asset

II. It covers uncertain losses
III. It does not result in profit for any of the parties
IV. It is based on principle of ‘utmost good faith’
Question 2
Self-declaration by the applicant in a proposal form includes ____________.
I. Specific questions about any illnesses in the various systems of the body of
the customer
II. Questions about occupation and income details
III. Questions about health conditions of all family members
IV. Questions about financial condition of the customer
Question 3
Critical illness policy eases the financial pressure of an individual by providing

__________________ on diagnosis of covered condition.
I. Reimbursement of actual cost

II. Lump sum payment
III. Daily cash allowance
IV. Specialist healthcare services
Question 4
1) Every person in the group is covered in a group health insurance plan.

2) Group health insurance plans have standard terms and conditions.

III. Statement 1 and statement 2 are true
IV. Statement 1 and statement 2 are false

Question 5
The objective of an exclusion clause in a health insurance contract is to

____________.
I. Avoid staged or fraudulent claims

II. Avoid misuse of insurance for profit motive
III. Keep costs of claim low
IV. All of the above
Question 6
______________ is the maximum liability for all the claims made during the
policy period.
I. Cashless
II. Indemnity
III. Fixed amount
IV. Lump sum payment
Answer 1
Insurance contracts are different from other contracts as they are based on the
principle of utmost good faith. In all other form of contracts, the principle of
‘caveat emptor’ is followed, i.e. the buyer should beware.
Answer 2
Self-declaration by the applicant in a proposal form includes specific questions

about any illnesses in the various systems of the body of the customer.
Answer 3
Critical illness policy eases the financial pressure of an individual by providing

lump sum payment on diagnosis of covered condition.

Answer 4
Every person in the group is covered in a group health insurance plan and no
one can be denied coverage on the basis of pre-existing health conditions.
Group insurance policies are usually customised or tailor made according to the
nature of the group.
Answer 5
The correct answer is IV.
The objective of an exclusion clause in a health insurance contract is to avoid

staged or fraudulent claims, misuse of insurance for profit motive and to keep
costs of claim low.
Answer 6
Indemnity is the maximum liability for any or all of the claims made during the
policy period and is also called as sum insured.
References
1. Health Insurance Product Brochures and application forms of various

insurance companies
2. Insurance Act, 1938
3. FICCI Report on “Standardisation Initiatives by FICCI Health Insurance
Group”, 2009
4. Jayaprakash, “Life, Health and the Right Cover”, Businessline, April 2008

ANNEXURE CHAPTER 5
Annexure: Suggested critical illness nomenclature and definitions
Few critical illness nomenclature and definitions are discussed below, though
their language is very technical and may not be easily understandable by a
common person, but these are used generally by most of the insurance
companies in their insurance contract for encouraging standardisation.
1. Cancer of specified severity
A malignant tumor characterised by the uncontrolled growth & spread of

malignant cells with invasion & destruction of normal tissues. This diagnosis
must be supported by histological evidence of malignancy & confirmed by a
pathologist. The term cancer includes leukemia, lymphoma and sarcoma. The
following are excluded:
a) Tumors showing the malignant changes of carcinoma in situ & tumors

which are histologically described as pre-malignant or noninvasive,
including but not limited to: carcinoma in situ of breasts, cervical
dysplasia CIN-1, CIN -2 & CIN-3.
b) Any skin cancer other than invasive malignant melanoma
c) All tumors of the prostate unless histologically classified as having a

Gleason score greater than 6 or having progressed to at least clinical
TNM classification T2N0M0
d) Papillary micro - carcinoma of the thyroid less than 1 cm in diameter
e) Chronic lymphocyctic leukaemia less than RAI stage 3
f) Microcarcinoma of the bladder
g) All tumors in the presence of HIV infection.
2. First heart attack of specified severity
The first occurrence of myocardial infarction means the death of a portion of

the heart muscle as a result of inadequate blood supply to the relevant area.
a) The diagnosis for this will be evidenced by all of the following criteria:
i. A history of typical clinical symptoms consistent with the diagnosis of

Acute myocardial infarction (for e.g. typical chest pain)
ii. New characteristic electrocardiogram changes
iii. Elevation of infarction specific enzymes, Troponins or other specific
biochemical markers.

CHAPTER 5 ANNEXURE
b) The following are excluded:
i. Non-ST-segment elevation myocardial infarction (NSTEMI) with elevation

of Troponin I or T;
ii. Other acute Coronary Syndromes
iii. Any type of angina pectoris
3. Open chest CABG
The actual undergoing of open chest surgery for the correction of one or more
coronary arteries, which is/are narrowed or blocked, by coronary artery bypass
graft (CABG). The diagnosis must be supported by a coronary angiography and
the realisation of surgery has to be confirmed by a specialist medical
practitioner. Excluded are:
a) Angioplasty and/or any other intra-arterial procedures
b) Any key-hole or laser surgery
4. Open heart replacement or repair of heart valves
It covers the actual undergoing of open-heart valve surgery to replace or repair

one or more heart valves, as a consequence of defects in, abnormalities of, or
disease of affected cardiac valve(s). The diagnosis of the valve abnormality
must be supported by an echocardiography and the realisation of surgery has to
be confirmed by a specialist medical practitioner. Catheter based techniques
including but not limited to, balloon valvotomy/valvuloplasty are excluded.
5. Coma of specified severity
It is a state of unconsciousness with no reaction or response to external stimuli

or internal needs. This diagnosis must be supported by evidence of all of the
following:
a) No response to external stimuli continuously for at least 96 hours;
b) Life support measures are necessary to sustain life; and
c) Permanent neurological deficit which must be assessed at least 30 days

after the onset of the coma.
The condition has to be confirmed by a specialist medical practitioner. Coma

resulting directly from alcohol or drug abuse is excluded.

ANNEXURE CHAPTER 5
6. Kidney failure requiring regular dialysis
End stage renal disease presenting as chronic irreversible failure of both kidneys
to function, as a result of which either regular renal dialysis (hemodialysis or
peritoneal dialysis) is instituted or renal transplantation is carried out. Diagnosis
has to be confirmed by a specialist medical practitioner.
7. Stroke resulting in permanent symptoms
It is any cerebrovascular incident producing permanent neurological sequelae.

This includes infarction of brain tissue, thrombosis in an intra-cranial vessel,
haemorrhage and embolisation from an extracranial source. Diagnosis has to be
confirmed by a specialist medical practitioner and evidenced by typical clinical
symptoms as well as typical findings in CT scan or MRI of the brain. Evidence of
permanent neurological deficit lasting for at least 3 months has to be produced.
The following are excluded:
a) Transient ischemic attacks (TIA)
b) Traumatic injury of the brain.
c) Vascular disease affecting only the eye or optic nerve or vestibular

functions.
8. Major organ /bone marrow transplant
a) The actual undergoing of a transplant of:
i. One of the following human organs: heart, lung, liver, kidney, pancreas,
that resulted from irreversible end-stage failure of the relevant organ,
or
ii. Human bone marrow using haematopoietic stem cells
b) The undergoing of a transplant has to be confirmed by a specialist

medical practitioner. The following are excluded:
i. Other stem-cell transplants

ii. Where only islets of langerhans are transplanted
9. Permanent paralysis of limbs
It is a total and irreversible loss of use of two or more limbs as a result of injury
or disease of the brain or spinal cord. A specialist medical practitioner must be
of the opinion that the paralysis will be permanent with no hope of recovery
and must be present for more than 3 months.

CHAPTER 5 ANNEXURE
10. Motor neurone disease with permanent symptoms
Motor neurone disease diagnosed by a specialist medical practitioner as spinal

muscular atrophy, progressive bulbar palsy, amyotrophic lateral sclerosis or
primary lateral sclerosis. There must be progressive degeneration of
corticospinal tracts and anterior horn cells or bulbar efferent neurons. There
must be current significant and permanent functional neurological impairment
with objective evidence of motor dysfunction that has persisted for a
continuous period of at least 3 months.
11. Multiple sclerosis with persisting symptoms
There should be a definite occurrence of multiple sclerosis and the diagnosis

must be supported by all of the following:
a) Investigations including typical MRI and CSF findings, which

unequivocally confirm the diagnosis to be multiple sclerosis.
b) There must be current clinical impairment of motor or sensory function,

which must have persisted for a continuous period of at least 6 months;
and
c) Well documented clinical history of exacerbations and remissions of said

symptoms or neurological deficits with at least two clinically
documented episodes at least one month apart.
d) Other causes of neurological damage such as SLE and HIV are excluded.

IC-27 Health - 1-120

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IC-27 Health - 1-120

Uploaded by

Copyright:

Available Formats

IC-27

We also acknowledge Get Through Guides, Pune for their contribution in

G – Block, Plot No. C-46,

First Edition - 20110

ALL RIGHTS RESERVED

This course is the copyright of the Insurance Institute of India, Mumbai. In no

Published by: Sharad Shrivastva, Secretary-General, Insurance Institute of India,

I am humbled by the trust reposed in me by the Insurance Institute of India, and

-Dr. Somil Nagpal

ABOUT THE CONTRIBUTORS

Mr.Abhishek Agrawal is currently working at Milliman India office as Health

Ms.Richa N. Gautam is Associate Vice President in a large media corporate

Dr.S.Jayaprakash is currently working as Associate Director in MetLife, a

Mr.Kamlesh Manuja is Vice President (Claims and Health Partnership) in ICICI

Prof P. S. Nagpal is an insurance industry veteran and has stood testimony to

Mr.Ayandev Saha is Manager (Claims) in ICICI Prudential Life Insurance

Mr.C.Srinivasa Kumar, B.Sc., MBA, FIII, DAT (Diploma in Actuarial Techniques)

Disclaimer: Views and estimates, if any, in this publication are of the

Chapter no. Title Page no.

3 Health Insurance Products in India 37

4 Health Insurance Underwriting 53

8 Customer Service in Health Insurance 155

9 Health Insurance Fraud 173

INTRODUCTION TO HEALTH INSURANCE AND THE

A. Meaning of health insurance

IC-27 HEALTH INSURANCE 1

A. Meaning of health insurance

As we all are aware that future is unpredictable and rather, uncertain.

2. Commercial health insurance

The health insurance which is offered by insurance companies is commonly

Commercial health insurance basically provides coverage to an individual

2 IC-27 HEALTH INSURANCE

3. Third party in health insurance

a) One is insurer who provides the insurance, usually an insurance

a) The type of health services to be used by an individual i.e. insured.

b) How much of such services are used

c) How much is the cost of those services

IC-27 HEALTH INSURANCE 3

4. Health insurance market

Economists describe health insurance as an ‘imperfect market’ because normal

The insureds mostly do not understand the exact interpretation, meaning

4 IC-27 HEALTH INSURANCE

i. Demand side moral hazard: It works at insured’s end. A consumer with a

Various cost containment mechanisms are use by the health insurers to

B. Purpose of health insurance

1. Health insurance – a cover towards unpredictable illnesses

Due to unpredictable major illnesses, an individual may have to incur

2. Health insurance products in India

Health insurance products available in the Indian market are primarily

Therefore, a health insurance is important mainly for two reasons:

9 Providing financial access to healthcare providers in case of any

9 Preservation of savings of an individual which may otherwise be wiped

3. The cashless system

The cashless system of providing hospitalisation cover has immense value in

9 Increasing awareness among the people about the protective role of

9 Improved focus on marketing of health insurance products by the

IC-27 HEALTH INSURANCE 7

C. Indian insurance industry - Development and growth

1. Early development of the Indian insurance industry

The regulatory structure, as well as the constituents of the industry, underwent

a) Nationalisation of life insurance industry in 1956 to merge number of

Nationalisation of non-life industry similarly in 1973 to merge number of

b) Establishment of the Insurance Regulator based on a report by Malhotra