In today’s Finshots, we tell you about the good and the bad if LIC enters the health insurance space.

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The Story

It's finally happening—LIC seems ready to jump into the health insurance space in a big way. They’re planning to buy a significant stake in an existing health insurance company (likely ManipalCigna), which looks like preparation for a full-fledged entry into health insurance. Plus, there's buzz around a possible "composite license" that might let life insurers directly sell health policies too (though initial talks suggest it might be limited to private-sector insurers).

But irrespective of how things unfold, let's imagine LIC fully enters health insurance. What's likely to happen first?

Well, for starters LIC will probably spend a significant amount of time just understanding and setting up the business. Health insurance isn't as straightforward as life insurance—it needs specialized skills and infrastructure. For example, LIC will have to invest in experts who can design health-specific products, understand actuarial calculations around illnesses and build the capability to manage complex relationships with healthcare providers—like hospitals, clinics, and diagnostic labs.

Health insurance also has a much higher volume of claims compared to life insurance. That means LIC would need systems to handle a continuous stream of claims efficiently. Once they learn the ropes, then you can start thinking about the impact. 

One of the biggest positives of LIC entering the health insurance market would be significantly better penetration—essentially, more people getting insured.

LIC has one of the strongest distribution networks in India. Imagine this massive network—14 lakh individual agents, 85 banks, 85 corporate agents, 309 brokers, and 154 insurance marketing firms (IMFs), along with thousands of common service centers. Right now, they're all selling LIC's life insurance products. But if LIC starts offering regular health insurance too, this entire network instantly becomes a powerful channel for selling health insurance policies as well.

Think about it – If you're already buying life insurance from an LIC agent, wouldn't it be convenient to buy your health insurance from the same person? Most customers don't really differentiate between life or non-life insurance—what they truly want is simple protection against medical expenses. And the demand for indemnity-based health policies (the type that directly covers hospital expenses) is huge.

And LIC could also innovate a bit here. Consider "Combi products"—policies that combine life insurance and health insurance into one simple package. A single policy might offer ₹50 lakh life cover along with ₹5 lakh hospitalization cover. If LIC could offer them at competitive prices due to their massive scale, we could see a sea change in the industry. 

But not everyone is happy about these developments. General insurance companies and standalone health insurers have expressed concerns about allowing life insurance companies to sell health policies.

One of their biggest concerns is cross-subsidization.

Think about it this way: because LIC runs a highly profitable life insurance business, it could potentially offer health insurance products at lower premiums by funneling profits from life insurance into health insurance.

For instance, imagine LIC earns ₹100 crore in profit annually from its life insurance segment. It could afford to use part of this profit—say, ₹20 crore—to subsidize health insurance premiums. So, if other standalone health insurance companies are charging ₹10,000 annually for a similar policy, LIC might offer it at just ₹8,000.

While consumers would love this cheaper pricing, it might trigger a price war. Competitors, forced to match LIC's low premiums, would see their margins shrink drastically. This could destabilize the industry and negatively affect profitability across standalone and general insurance companies.

But here's the thing—general insurance companies in India already sell different kinds of policies like health, motor, and travel insurance together. They're already cross-subsidizing these policies to offer attractive prices. And yet, this hasn't caused any real problems or major disruptions. If anything, customers have gotten better deals and more affordable policies.

So, it’s hard to argue that cross-subsidization is a net-negative. If anything, it could actually be good news—leading to lower prices and healthier competition overall. 

But there’s another argument against allowing LIC or other life insurers from selling indemnity-based health insurance and it relates to regulatory stability and investor confidence.

Here's some context: Until 2016, life insurers in India sold indemnity-based health policies—these are the kind that directly cover hospital bills or medical costs through reimbursement or cashless facilities. But in 2016, regulations changed. Life insurers were restricted to selling only fixed-benefit policies (like critical illness). 

For example, instead of paying the actual medical bills, these policies pay a pre-decided amount when a specific event happens. For example, if you have a critical illness policy and you're diagnosed with cancer, the insurer might pay you a lump sum of ₹10 lakh, regardless of what your actual medical expenses are. 

This is very different from indemnity-based health insurance, where your insurance covers the actual expenses—whether that’s ₹50,000 for a minor surgery or ₹5 lakh for a major procedure. And that’s why the 2016 rule change was significant: it forced life insurers out of the full-fledged health insurance space, leaving that business exclusively to general and specialized health insurers.

Now, reversing this policy after just a few years might seem unfair to investors. 

The only silver lining for existing insurers is that the composite license may not be granted to LIC. If that happens, LIC would have to operate like any other health or general insurance company. While they’d still have the advantage of their massive distribution network, the other benefits we discussed—like bundling health and life insurance or leveraging cross-subsidization—might not materialize.

So yeah, we will just have to wait and see how LIC decides to tap into the health insurance market. 

Until then…

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