In today's Finshots, we tell you why LIC has never dabbled in health insurance before and what seems to have changed its mind now.

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The Story

LIC (Life Insurance Corporation) seems to be interested in entering the health insurance industry.

But wait... LIC is India’s largest financial institution. It manages close to ₹30 lakh crore in assets (out of India’s ₹40 lakh crore insurance industry). It sells 3 out of 4 life insurance policies sold in the country. It’s much bigger than the 23 private sector life insurance companies put together. And it is a profitable entity which has consistently delivered value to its shareholders and customers.

Then why hasn't LIC ever sold a single health insurance policy? What’s holding it back?

Well, technically speaking that statement is not entirely true. LIC does in fact sell health insurance products or at least products that pay for medical expenses. It’s just that the form factor is different. Take for instance the LIC’s Arogya Rakshak plan. The sales brochure notes that this plan “provides fixed benefit health insurance cover against certain specified health risks and provides you with timely support in case of medical emergencies and helps you and your family remain financially independent in difficult times.”

So how come nobody talks about it?

Well, that’s the thing about the form factor. If you read the print carefully, you’ll see that the plan provides a “fixed benefit”. This means they pay out a predetermined amount regardless of the actual expense. For instance, if you have to undergo a coronary artery bypass surgery, an Arogya Rakshak plan with a sum assured of ₹2 lakhs will payout the full amount irrespective of the actual medical expenses. On the flip side, most health insurance products you know are indemnity products. They won’t pay out a fixed pre-determined sum. Instead, they’ll look at the actual medical bills and only pay for expenses related to the hospitalisation (up until the sum assured).

This flexibility is very important if you want to make a dent in the health insurance market. You don’t want to be in a position where you’re paying out fixed sums willy-nilly. Instead, you want to make sure that you only pay for the losses customers incur during the course of their hospitalisation. You also want to be in a position to customise these products or introduce variations — say health insurance plans for senior citizens, or women, or plans for Cancer/Heart patients. And finally, you want to specialise in this industry.

LIC however cannot do any of this. It cannot sell indemnity products or introduce customisations because regulation prohibits it from doing so. The Insurance Regulatory and Development Authority of India (IRDAI), has distinct regulations for life insurance and general insurance (which includes health insurance). Companies need separate licences to operate in these sectors. LIC meanwhile is primarily licensed as a life insurer and as a consequence, its presence in the health insurance market has been limited to the occasional fixed benefit plans like Arogya Rakshak.

Now you could ask — Why hasn’t it tried its hand at procuring a general insurance license and start selling “proper” health insurance products?

Well, here’s the funny thing. LIC used to be a composite insurer. It sold life insurance policies but also dabbled in general insurance through a subsidiary, Oriental Insurance. But then in 1972, the government decided to take over all general insurance companies and create 4 entities that would specialise in general insurance alone. Hence, the bifurcation — life and general insurance. Life insurance companies sell life insurance policies. While general insurance companies sell health, travel, motor, marine and other similar products.

LIC cannot do both.

But then, things are changing. There’s been a lot of talk about the government reintroducing composite licences. If the regulations are amended accordingly, then LIC could do health insurance, life insurance and everything in between. And while we don’t know when the government will tweak existing insurance laws to support this, LIC seems to be setting the groundwork to move quickly when it happens.

The company has said that it is looking at pursuing inorganic growth. That is to say, it is not looking to build out the health insurance division from scratch. Instead, it is likely to pick up a stake in existing health insurance businesses to make inroads in this industry.

And it makes sense to get into health insurance at this moment in time. Most families in India are a single medical bill away from poverty. And even as more people transition into middle and upper-middle-class income brackets, there is always the risk of financial ruin if a critical illness were to inflict even a single member of the family. Also, since the pandemic, people have become aware of the risks surrounding such a catastrophic event. It explains why you’re seeing a steady uptick in health insurance penetration in India. At Ditto, we have been beneficiaries of this trend. We are seeing more people take an interest in buying medical insurance policies to protect their downside and they often ask us if LIC is an option they could consider.

So far, we’ve had to turn them down. But maybe if the regulations become favourable and the company takes up health insurance seriously, it could offer serious competition to the incumbents.

Until then…

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