INTERNATIONAL BUSINESS ENVIRONMENT

HEALTH INSURANCE
INDUSTRY ANALYSIS

Table of Contents
List of Figures ............................................................................................................................... List of Tables ................................................................................................................................ Declaration ................................................................................................................................... 1. 2. 3. Executive Summary............................................................................................................. 1 Introduction ........................................................................................................................ 2 Background ......................................................................................................................... 3 3.1. 3.2. 3.3. 3.4. 4. Pre- Nationalization.................................................................................................. 3 Post- Nationalization ................................................................................................ 3 Post- Liberalization .................................................................................................. 4 Current Scenario ...................................................................................................... 4

Porters Five Forces Analysis .............................................................................................. 6 4.1. 4.2. 4.3. 4.4. 4.5. Threat of New Entrants ............................................................................................ 6 Threat of Substitutes ................................................................................................ 6 Intensity of Rivalry................................................................................................... 7 Bargaining Power of Buyers ..................................................................................... 7 Bargaining power of Suppliers ................................................................................. 8

5. 6.

Recommendations ............................................................................................................... 9 Conclusions ......................................................................................................................... 9

Appendix A ................................................................................................................................ 10 Bibliography ............................................................................................................................. 11

List of Figures
Figure 1. Timeline of Health Insurance in India ......................................................................... 3 Figure 2. Projected Growth in Insurance Penetration................................................................. 5 Figure 3. Penetration of Insurance - 2001- 10 ............................................................................. 6

List of Tables
Table 1. Trend in Health Insurance Premium............................................................................. 5 Table 2. Market Share of Private Health Insurance players ....................................................... 7 Table 3. List of Health Insurance Companies in India .............................................................. 10

Declaration
I, Mr. Sairam Kandaswami, hereby declare that the project report titled Health Insurance Industry Analysis is a record of authentic work carried out by me during the period from January, 2012 to February, 2012 in fulfillment of the course on International Business Environment. No part of the report has been copied from any published or unpublished source.

Name: Sairam Kandaswami Date: 21st February, 2012

Signature

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1. Executive Summary
The Health Insurance market is one of the fastest growing insurance segments in India. However, the benefits of this rapidly growing industry are available only to a fraction of the population. The health insurance market as a whole covers only about 15% of the total Indian population and this includes both public and private health insurance companies. The insurance penetration for this segment has been considerably low for a number of years. Given the growth and focus on the health insurance sector, this paper attempts to analyze the competitive environment prevalent in the insurance sector in India. Porters Five Forces model has been used to analyze the attractiveness of the industry. The evolution of the Health Insurance industry in India can be traced through the enactment of three separate laws. The first step in the formalization of the health industry in India was the enactment of the Insurance Act in 1938. The second major change occurred in 1972 when the insurance firms were nationalized and the General Insurance Corporation was created. This started off a phase where the public sector insurance companies played a dominant role and there were not many choices available to the public. With the liberalization of the Indian economy in 1991, a number of sectors were opened up for foreign investment. However the insurance sector remained closed till 1999 when the third bill was enacted i.e. the Insurance Regulatory and Development Act, which allowed private ownership in the insurance sector while encouraging foreign investment in the sector. It is found that although the health insurance sector was liberalized in 2000, the public sector companies still dominate the market. For the year 2010-11, around 70% of the total gross premium underwritten was contributed by the four major public sector non-life insurers. The threat of new entrants to the sector is moderate because of the high capital requirement and stringent regulations put in place by the IRDA. The threat of substitutes for the health insurance segment is minimal as apart from savings and investments, no other means can provide for the future needs of the people and these too are limited to the higher sections of society. The bargaining of buyers is moderate as the number of buyers is considerably larger than the number of firms offering health insurance. Hence, losing any single customer is not going to impact the firms greatly. However the development of IT and technology has enabled people to be informed and thus raised their power. Supplier power is considered to be high as the main suppliers to the health insurance sector are software firms providing complex algorithms. These firms are limited in number and the risk of backward integration is minimal at present. The level of competition between the private sector health insurance companies is intense and because of the lack of differentiation between the insurance products, these firms compete mainly on price. Overall, it can be surmised that the health insurance sector in India is moderately attractive. A firm with adequate resources at its disposal can take advantage of the growth potential of this industry. If the FDI cap on the insurance sector is raised to 49%, this would make the industry even more attractive and many of the top global insurance companies might be tempted to enter the Indian market. The existing foreign players can also be expected to raise their stake in the joint ventures providing further impetus to the growth of this sector.

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2. Introduction
Health Insurance is a mechanism for people to protect themselves from the financial costs of medical care if they become severely ill and also to ensure that they have access to medical care when they need it. It is defined as the effecting of contracts which provide sickness benefits or medical, surgical or hospital expenses benefits, whether in-patient or out-patient on an indemnity, reimbursement, service, prepaid, hospital or other plan basis, including assured benefits and long term care 1. The Health Insurance industry forms a vital part of the healthcare sector in developing countries wherein the public healthcare system is inadequate. There are a number of options with regard to health coverage in India. These are Public sector systems Private sector systems Employer provided insurance schemes Member organization-based systems

Public sector or State-based systems include the Central Government Health Scheme (CGHS) for government employees and the Employees State Insurance Scheme (ESIS) for workers in the organized private sector. Private sector systems cater to the needs of individuals. Employer provided schemes are typically mediclaim benefits that firms provide to their employees and their dependents. Member organization-based systems are basically driven by NGOs and other not-for-profit organizations and primarily cater to the bottom of the pyramid population. Types of Health Insurance schemes in India: Individual Mediclaim: This covers hospitalization expenses for an individual for the sum assured amount. The premium collected for this insurance depends on the sum assured. Family Floater Policy: In this type of insurance, the sum assured value floats among the family members i.e. this insurance covers the entire family for the amount of the sum assured. Unit Linked Health Plans: This insurance combines an insurance cover with investment and pays back the amount at the end of the term. The returns on these insurance covers depend on the market performance.

In addition to individuals taking insurance cover, many of the companies these days also provide mediclaim benefits to its employees. The total expenditure on health in India is about 5% of GDP. However, the distribution of this spending is skewed with the private sector spending on health contributing close to 75% of the total expenditure. Also, insurance contributes only 1-2% of the total expenditure on health while the rest is contributed by out-of-pocket expenditure or by the government. The health insurance industry in India is one of the fastest growing and second largest non-life insurance segments. It is expected to continue growing at a CAGR of around 25% till 2013-14 (Overseas Indian Facilitation Center, 2011). This tremendous growth has attracted a number of players from the global insurance scene to India. Raising of the FDI cap to 26% further aided the growth of this sector. This report aims to analyze the attractiveness of the Health insurance sector in India. For the purpose of determining the attractiveness, we firstly look at how the industry has evolved over the years. Specifically, we look at the policies that have shaped the industry over the years. We then ascertain the attractiveness of the industry using the Porters five forces model.

IRDA Regulations Sec 2(f)

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3. Background
The history of Health Insurance in India can be divided into three phases i.e. period before nationalization of the insurance firms, post-nationalization and privatization of the Insurance industry.

Pre- Nationalization
1948 - ESIS 1954 - CGHS 1972 Nationalization of Insurance

Post- Nationalization
1986 - Mediclaim by GIC 1997 Community Health Insurance

Post- Liberalization
1999 Privatization

Figure 1. Timeline of Health Insurance in India

3.1. Pre- Nationalization The first insurance company to offer Health Insurance in India was The Indian Mercantile Insurance Ltd., established in 1907 in Mumbai. The period from 1907 to 1938 saw considerable growth in the Insurance industry in general and by 1938, there were more than 176 companies selling insurance in India2. In 1938, the Insurance Act was passed which was concerned with regulating the insurance sector in India. This Act laid down the rules that insurance companies in India were required to follow and was created to maintain strict state control over the insurance business. The Act covered the supervision of insurance companies, investments, agent commissions etc. The health insurance sector in India gained momentum in 1948 with the enactment of the Employees State Insurance Act. The scheme applies to organizations employing 10 persons or more and with employees earning up to 7500 per month. The dependents of the employees are also covered under this act. The ESIS is financed through a combination of employee, employer and State Government contribution. The medical services are provided through a mix of public care centres, ESIS facilities, NGOs etc. This scheme currently covers about 55.5 million people in the country. The next stage in the evolution of the health insurance sector came with the establishment of the Central Government Health Scheme (CGHS). This scheme covered employees and retirees of the Central Government along with Members of Parliament, governors, accredited journalists etc. The dependents of these members were also covered under this scheme. The scheme is mostly financed by the Central Government and as of 2010 covers about 3 million people in India. The medical services are provided through mostly public facilities. 3.2. Post- Nationalization The General Insurance industry in India which includes Health Insurance came under the purview of the Insurance Act, 1938. However, owing to growing number of malpractices in the industry, the Government of India decided to nationalize the general insurance industry in 1972. The General Insurance Business (GIB) Act was enacted in 1972 to nationalize close to 100 general insurance companies. All the companies were merged into four different companies. A holding company was set up by the name of General Insurance Corporation (GIC), which had four subsidiaries; New India, National, United India and Oriental Insurance.

IRDA Website History of Insurance. http://www.irda.gov.in

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Even today, health insurance in India is assumed to comprise of just the Mediclaim policy, which was introduced by the General Insurance Corporation (GIC) in 1986. The premium is based on a combination of factors such as age, risk and the benefits chosen. Generally, this policy operates on an indemnity basis i.e. the insurance policy holder pays for the medical treatment up-front and the insurance company reimburses the amount at a later date. It covers people aged between 5 and 80 years. The coverage for the year 2010-11 was 17 million. This was the first voluntary insurance scheme enacted by the public sector health insurance firms in India. 3.3. Post- Liberalization From the early years of the Health insurance industry in India, the industry operated as a monopoly. After the enactment of the GIB Act in 1972, no private health insurance company existed in the country. In 1991, many of the sectors in the Indian economy were opened to private investment; however the insurance sector was kept out of bounds. In 1993, the Malhotra Committee was set up to make recommendations about the future course of insurance in India. The committee put forth its recommendations in 1994 and this led to the creation of an interim body i.e. the Insurance Regulatory Authority. The committee recommended liberalization of the insurance industry in India through which it can be opened up for the private sector, both domestic and foreign. In 1997, another report was submitted by the Mukherjee Committee. On the basis of the recommendations in this report, the Government awarded greater autonomy to the nationalized insurance players in selection and restructuring the boards and flexibility in the investment norms. In the year 1999, the insurance sector was opened up for private investment both domestic and foreign. This was achieved by passing the Insurance Regulatory Development Bill, which also resulted in the creation of a regulatory body, Insurance Regulatory and Development Authority (IRDA). The authority was aimed at protecting the interests of the insurance policy holders by regulating and promoting the growth of the insurance sector. The bill also allowed foreign insurance firms to hold up to 26% stake in an Indian insurance firm and required them to have a capital of 100 crores and a business plan for the operations. This was followed by a set of regulations made by the IRDA that sanctioned the formation of Third Party Administrators (TPAs) in 2001. TPAs are intermediaries put in place to connect the insurance companies, health care providers and insurance policy holders. The basic role of the TPAs is to provide cash-less service to the policy holders during hospitalization. The late 1990s also saw the growth of community-based health insurance firms which were focused on providing health insurance services to the lower income groups. These are basically not-for-profit organizations which are aimed at reducing the inequity in the distribution of insurance based medical care. These are mostly run by trust hospitals or NGOs and funded through a combination of government grants, donations and patient collection. 3.4. Current Scenario Health Insurance is one of the most rapidly growing insurance sectors in India. The amount of premium collected in the health insurance sector increased from 3208.70 crores to 11479.70 crores i.e. CAGR of 29%. As of 2010-11, the health insurance sector contributed 23.35% of the total premium underwritten for the non-life insurance sector. The Indian health insurance market is on an upsurge providing lucrative growth avenue for both the existing players as well as the new entrants. According to the RNCOS report, the health insurance market is one the fastest growing and second largest non-life insurance segment in the country. The

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premium in this sector is expected to grow at a CAGR of over 25 per cent for the period spanning from 2009-10 to 2013-14.
Table 1. Trend in Health Insurance Premium3

The level of penetration in the health insurance sector in India is very low with only about 3-4% of the population covered by private insurance schemes. However, with the amount of information available to the general public and the efforts put in by the government to provide Universal Health Cover, the insurance penetration is expected to grow to around 8% by 2013.

Figure 2. Projected Growth in Insurance Penetration4

Market Structure The health insurance market in India is dominated by the state-owned non-life insurers i.e. New India, United India, National and Oriental Insurance. Together these firms occupy around 60% of the total market share. The public sector firms have registered a growth rate of around 30% Y-o-Y. ICICI Lombard leads the pack of private health insurance players with a market share of around 12%. Most of the private insurance companies make up 1-2% of the total market share. In the next sections, we try to analyze the attractiveness of the health insurance sector using Porters model. We also make certain recommendations to improve the penetration of health insurance in India and reduce the monopoly of the state-owned firms.

IRDA Annual Report 2010-11 KPMG. (2011). Emerging Trends in Healthcare 2011. Mumbai: KPMG

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4. Porters Five Forces Analysis

4.1. Threat of New Entrants The insurance industry all over the world and especially in India is highly regulated. The government of India has put a cap on the amount of investment that foreign companies can make in the insurance sector (26%). This restricts the amount of competition that Indian insurance firms face and also allows them to gain valuable expertise from their foreign partners. A major portion (about 60%) of the health insurers in India have been created by forming an alliance with a large foreign insurance company. The Insurance Regulatory and Development Authority (IRDA) aims to protect the interests of the policy holders ensure growth of the Insurance industry. The presence of a regulatory authority acts a deterrent for many of the firms in the financial sector from trying to gain a foothold in the insurance sector. The insurance sector requires large initial capital outlay which includes considerable expenditure on advertising. As seen in figure 3 below, the insurance penetration in India has been low for a long time and this provides opportunities for insurance firms to grow their business. The sustained levels of growth in the insurance sector as a whole and the health sector in particular can attract a number of new firms to the industry. The government of India has also been discussing the raising of the FDI cap to 49% for some time now. The ratification of this act will result in more foreign firms entering the market and the existing ones raising their stake. The threat of new entrants in the health insurance sector can be considered to be moderate.

Figure 3. Penetration of Insurance - 2001- 105

4.2. Threat of Substitutes The threat of substitutes is very low in the health insurance sector. The only substitutes that can be loosely connected to health insurance is the fixed deposit savings that are put aside by people for future needs. However, this is restricted to middle and upper classes which have a higher disposable income. The lower classes are protected using means such as micro-

IRDA Annual Report 2010-11

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insurance which do not have any substitutes. The threat of substitutes can be considered to be weak in the health insurance industry 4.3. Intensity of Rivalry The health insurance sector in India consists of three separate groups: the life insurance companies, the non-life insurance or general insurance companies and the solely health insurance focused companies. As the products that each of these groups offer do not vary greatly, the companies compete fiercely on price, advertising and insurance bundles. The failure of an insurance company can deeply affect the insured population. As a result, IRDA is responsible for ensuring that the insurance companies maintain adequate capital to meet their needs. This results in higher exit barriers for these insurance companies and helps in maintaining the level of competition in the industry. Putting the public sector insurance companies aside, the health insurance sector is characterized by a number of equally balanced competitors with similar resources at their disposal. This increases the level of competition within the industry.
Table 2. Market Share of Private Health Insurance players6

Insurer Royal Sundaram Reliance IFFCO-Tokio TATA AIG ICICI Lombard Bajaj Allianz Cholamandalam

Market Share 5.91% 8.38% 5.91% 3.65% 42.26% 11.20% 4.89%

As seen from the above table, ICICI Lombard is the clear market leader in the private health insurance segment. However, all the other players in the segment are equally matched and if we include the public sector insurance companies, the bargaining power of firms like ICICI Lombard also reduces considerably. The intensity of rivalry in the health insurance sector in India can be considered to be strong. 4.4. Bargaining Power of Buyers

Health insurance is purchased by individuals to protect them from bearing the costs of illness and disease in the future. For the insurance firms, the impact of losing any single customer is negligible. Also, with the increase in the number of firms providing health insurance to its employees, giving employees mediclaim benefits has become a norm. This puts further pressure on the firms and reduces their bargaining power further. The switching costs associated with changing an insurance provider before the maturity date is also very high. In India, most companies pay the customer a surrender value which is based on the excess of the premium amount over the cost of insurance. The customer thus loses out on a major portion of the premium payment that has been made to the company.

IRDA Annual Report 2010-11

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The wealth of information available on the internet has increased the buyer power to a large extent. Since, majority of the people in India consider insurance as desirable rather than essential, they have a tendency to look for the best deal rather than the best plan. This results in the private health insurance firms competing with each other on price. This increases the buyer power considerably. The bargaining power of buyers can be considered to be moderate. 4.5. Bargaining power of Suppliers The insurance industry today is heavily reliant on software technologies to manage all stages of delivering the policy. Most often, this requires complex software logic which is provided only by a limited set of players. As a result the bargaining power of the suppliers is considerably high. Another factor that reduces the bargaining power of suppliers is the backward integration by the players in the industry. For now, the health insurance firms do not handle their IT needs through internal IT teams. Majority of the work is outsourced to IT services firms. As a result, the suppliers to the industry have greater bargaining power. As the risk of a core IT services company forward integrating into the insurance sector is almost non-existent, insurance firms outsource a major portion of their processing work to these IT companies. Any form of outsourcing is associated with substantial switching costs that may be due to contractual obligations or the cost of finding a suitable replacement. This increases the supplier power in the insurance sector. Overall, the bargaining power of suppliers in the health insurance sector can be considered to be strong.

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5. Recommendations
The Health Insurance sector in India is expected to continue growing at a sustained pace for the next few years. As seen in this report, the industry is moderately attractive and large insurance companies and diversified companies can reap the rewards of entering this industry today. The low penetration in the health insurance sector is primarily because of the lack of awareness regarding the benefits associated with insurance. Increasing the public expenditure on health should be first step taken as this will increase the share of the public sector in health related expenditure and also ensure equitable distribution of the benefits of these schemes. The level of competition between the private sector health insurance companies is high but these companies only occupy a small portion of the total market for health insurance. Taking up measures that would encourage more participation by the private sector and also looking into the issues and challenges involved in raising the FDI cap to 49% needs to be looked at. The Universal Health Insurance Scheme implemented by the government to provide greater protection to the poorer sections of the society has been largely ineffective as it is the restricted to the public sector insurance companies and the loss making proposition does not elicit favourable reactions from these companies. To ensure the success of the scheme, publicprivate partnership should be encouraged and suitable incentives should be provided to the firms to increase their willingness to be involved with the project. The administrative costs associated with health insurance are high i.e. over 35%. Following is the approximate distribution of administrative costs - 15% commission to agent, 5.5% fee to the TPA, companys administrative expenses 20%. Because of these costs, insurance companies are forced to maintain high premiums which are unaffordable to the poorer sections. The government should intervene and reduce the number of players involved in executing a single insurance policy. This will bring down the costs and increase equity.

6. Conclusions
This report was aimed at analyzing the Health Insurance sector in India and to determine the attractiveness of the industry. It was found that the health insurance sector has a number of factors that favour new and existing firms entering the industry. These include lack of substitutes, low market share of private players, lack of buyer power etc. The insurance sector is expected to continue growing at a CAGR of 25%, which makes it favourable for private players, domestic and foreign to enter the industry to reap the benefits. The low penetration of health insurance is another factor that adds to the future growth potential of this industry. Lastly, a set of recommendations were made to improve the insurance penetration and equity in the distribution of health care services across all sections of society.

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Appendix A
List of Health Insurance companies operating in India
Table 3. List of Health Insurance Companies in India7

Insurance Company

Ownership

Ownership Structure Indian Partner Foreign Partner Lombard (Canada) (26%) Royal Sun Alliance (UK) (26%) Allianz AG (Germany) (26%) AIG (USA) (26%) Tokio Marine (Japan) (26%) Mitsui Sumitomo (26%) None None None None None AXA Group (France) (22%)

ICICI Lombard Royal Sundaram Bajaj Allianz TATA AIG IFFCO Tokia Cholamandalam Reliance New India Assurance United India Oriental Insurance National Insurance Bharti AXA

Private for Profit Private for Profit Private for Profit Private for Profit Private for Profit Private for Profit Private for Profit Public for Profit Public for Profit Public for Profit Public for Profit Private for Profit

ICICI Bank (74%) Sundaram Finance (74%) Bajaj Finserv (74%) TATA (74%) IFFCO (74%) Murugappa Group (74%) Reliance ADA (100%) Government of India (100%) Government of India (100%) Government of India (100%) Government of India (100%) Bharti Enterprises (78%)

The share percentages indicate total domestic and foreign share, not the share of a single firm

Private Health Insurance in India: Promise and Reality. USAID. India & Public Disclosures of Companies

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Bibliography
Reports: Commission on Macroeconomics and Health. Health Insurance in India. New Delhi: Government of India. IRDA. (2011). IRDA Annual Report 2010-11. Hyderabad: IRDA. KPMG. (2011). Emerging Trends in Healthcare 2011. Mumbai: KPMG. Articles: Claxton, G. (2002). How Private Insurance Works: A Primer. CA: The Henry J. Kaiser Family Foundation. Kannan, N., & Thangavel, N. (2008). Overview of Indian Insurance Sector. Academic Open Internet Journal . Mavalankar, D., & Bhat, R. (2000). Health Insurance in India. Ahmedabad: IIM Ahmedabad. Web References: Overseas Indian Facilitation Center. (2011, November 24). Healthcare in India. Retrieved February 14, 2012, from OIFC: http://www.oifc.in/Sectors/Healthcare Health Insurance Market Scenario. Retrieved January 22, 2012, from Altius Directory Web Site: http://www.altiusdirectory.com/Insurance/health-insurance-market-scenario.php