Adverse Selection & Moral Hazard in

Micro health insurance

Dr Harish Sihare(MBA,PGDIRM,FIII,PHD)

Flow of Presentation……………………

• Introduction of micro health insurance

• Micro health insurance in India

• Importance: Need of hour

• Moral Hazard & Adverse selection

• Moral Hazard & Adverse selection in RSBY

• Suggestions and Solutions

• Innovations in Health insurance

Various Risk and Probable solutions………….

Early death

Living too long

Disabilities

Sickness

Unemployment.

Insurance is a Mechanism that helps to reduce the effects of such adverse situations

Healthcare for Poor

When a person experiences a bad shock to health, their medical expenses typically rise and their contribution to household income and home production (cooking or childcare) declines. (Wagstaff and Doorslaer, 2003; Gertler, Levine & Moretti, 2003; Gertler and Gruber, 2002).

According to the WHO, “Each year, approximately 150 million people experience financial catastrophe, meaning they are obliged to spend on health care more than 40% of the income available to them after meeting their basic needs.” (WHO Factsheet N°320, 2007)

Healthcare for Poor

Low income and high medical expenses can also lead to debt, sale of assets, and removal of children from school, especially in poor nations. A short-term health shock can thus contribute to long-term poverty. (Van Damme et al, 2004; Annear et al, 2006).

Solution ? …………………..

MICRO HEALTH INSURANCE

Micro health insurance is different from other traditional

products in the market as it’s being a targeted instrument for

inclusive insurance for low income households.

According to IRDA

Micro-insurance is insurance with low premiums and low

caps / coverage. In this definition, “micro” refers to the small

financial transaction that each insurance policy generates.

IRDA , in 2005 issued regulations enabling micro-insurance.

Compulsory to be done by life and nonlife insurer.

Is Micro Insurance Need of hour??

High out of pocket expenditure

94

64

80

99.89

89.5

75.13

96.5792.37

72.42

94.62

83.57 84.8

55.77

63.6 62

76

89

Out of Pocket Expenditure

Out of Pocket Expenditure

Rapidly ageing population: Worldwide

Ageing population (India)

27.3

17.47

43.12

12.11

27.8

19.6

40.75

11.85

0-14 15-24 25-54 54+

Age Group wise population in %

Male(%) Female(%)

Age Groups

Adverse Selection in insurance:

• Underwriting / Selection of standard Life.

• People with more risk are more likely to buy insurance.

• Adverse selection effect Profitability.

U/W minimizes adverse selection

Pure risk : when the outcome is always negative

Speculative risk : outcome not known, might be negative or positive

Preferred category - Usually non-smokers/non-tobacco users with

no health or occupational problems

Standard category – No health or occupational problems but may

use tobacco products

High Risk category – Those with health problems, occupational

hazards

Moral Hazard in insurance

Over utilization of health service.

Miss utilization by service provider.

“Moral Hazard & Adverse Selection from the perspective

of RSBY”

RSBY At a Glance…………………….

• Launched on April 1, 2008

• Beneficiary pays only Rs 30 as the registration fee

• PPP Model

• Death cover due to an accident @ Rs.25,000

• Compensation due to loss of earning of the earning

member @ Rs.50/- per day up to maximum of 15 days

• Covers 28states and about 80 million people

• Shared financial contribution by both central (75% ) &

state government (25%)

• Base Premium and Bidding Process.

RSBY At a Glance…………………….

was launched on April 1, 2008 was launched on April 1, 2008 • Total sum insured of Rs 30,000 per BPL family on a family

floater basis

• Pre-existing diseases to be covered

• Coverage of health services related to hospitalization &

services of surgical nature which can be provided on a day-care

basis

• Cashless coverage of all eligible health services.

• Provision of Smart Card. IT-enabled (smart card ,pre-

authorization of admissions, claim submission and approval etc)

• Provision of pre and post hospitalization expenses.

• Transport allowance @ Rs.100 per visit upto maximum of

Rs 1000

RSBY At a Glance…………………….

• Freedom of choice between public and private hospitals

• Insurance company empanelment guidelines.

• Hospital empanelment guidelines.

Process Overview

Adverse Selection & Moral Hazard in RSBY

• Social Security leading to Deliberate Adverse Selection – Direct economic burden on Scheme

• Behavior of Poor is changing.

• Claim ratio is High which shows the presence of Moral Hazard.

• Poor people think Smart card as ATM Card.

• Poor people admit to Hospital for Bread and butter.

Claim Ratio(in %)

0

10

20

30

40

50

60

70

80

90

100

Bihar Chattisgadh Delhi Gujrat Kerela Maharastra UP Punjab Nagaland Haryana

Claim Ratio(in %)

Increase in BPL Hospitalization:

0.28

0.28

0.28

2.69

2.39

1.5

Kerla

Gujrat

Haryana

%Hospitalization

2009 2005

Suggestions and solution………..

OPD should be introduced to reduce moral hazard

Gatekeeper approach

Moral hazard & Adverse selection eventually benefices

the consumer. Access to healthcare through RSBY is

morally good for the poor.

1. Disease Burden

2. Improved standard of living

3. Social Security for poor.

Innovations in Health Insurance

• Portability Act

• Disease specific policies

• Coverage of pre existing illness, pregnancy etc

• Extension of age limits

• Better off as Health Investments than Expenditure i.e. Health Saving accounts

• 100% of sum assured not in lieu with loss.

• Entrance of Preventive/ wellness health packages

Thank You