How Insurance Works?


Risks While Insuring Risks

What is the first emotion that comes to mind when you think about insuring risk? Is it fear? A fear of being duped? fear of being lost in long drawn paper work? Fear of not knowing who to talk to, when?

Welcome to the world of information asymmetry, or as the world knows it, insurance.

How does insurance work? Insurance works on the principle of Uberrima fides, utmost good faith – all parties to an insurance contract are to deal in good faith, providing all relevant information, to the best of their knowledge.

It is unfortunate that we seem to be evolving to a place where neither is the principle being followed in letter nor spirit. Insurance contracts are loaded with jargon that could put physicists at unease.

Lack of innovation and a stagnant penetration density is stifling a sector that seems to be stuck as being a sunrise industry for a couple of decades now. The same pie of the urban population is being split by Insurers, reducing the market share of one insurer a year, and increasing it the next, as Customers keep switching between the same set of Insurers.

Reducing solvency margins and increasing competition are goading Insurers into using fear as a technique to increase footfalls – a “solicitation” message of a new age health insurer reads 1.4 lakh cases Covid cases have been reported, have you bought your health insurance yet?

Lack of information infrastructure in turn, is contributing to the perils of a helpless Customer who thinks this new age insurer is the only one covering Covid, when the fact remains that, Covid-19 is covered under most mediclaim policies.

Some of the common reasons that make customers worry are

  1. Policy terms and conditions – Insurance literature is filled with jargon, sometimes to a fault. The circuitous language make one wonder if Insurers really want the Customers to understand the terms. Consider an example – Maternity cover is a cover that includes pre & post natal expenses covered under inpatient treatment limited to Rs. 50,000 in normal delivery and Rs. 70,000 in Caesarean section. The same policy terms also state Pre or post-natal Care Expenses shall not be considered for payment under any Pre-hospitalisation Medical Expenses or Post hospitalisation Medical Expenses paid under the Base Cover, which essentially means you will not be able to make a pre or post hospitalization claim on the Insurer’s Mediclaim policy if the Insurer is not paying for the maternity cover. Could the wording have been simpler? You bet.
  2. The Insurance Agent – It is strange that despite the overbearing, omnipresence of the  Insurance agent, you are unable to track them down when you need them.
  3. Awareness – Due to the low awareness levels, most people are drawn to insurance, especially health insurance, when they are in the sixties. That is also when they realise that most mediclaim policies have a four year waiting period for pre-existing illnesses. A simple cost-benefit analysis at that point in time serves as a deterrent for a lot of the elder folks.
  4. Trust deficit aplenty – India opened up its insurance sector to foreign participation in 2000. While we have witnessed a lot of gusto among the private participants, a lot of the players keep exiting the business on a regular basis. That leaves the existing Customers in a limbo. God forbid if you have a claim under process, the nightmare has just begun.
  5. Automation to a fault – Remember the last time you wanted to get in touch with a human being for an erroneous transaction that you noticed on your credit card. Remember the amount of time and energy you had to put in to get through to a human being? Picturize a scenario where you have to justify a particular cost on your mediclaim policy, and imagine talking to Siri or Alexa about it. Frustration cannot begin to express the emotion that one goes through. Strangely though, that seems to be the place we are headed.

Distrust is the plague that is eating up the industry. And the inherent reason for this lack of trust is fear. Some new age insurers who have understood this are fine tuning their business models to incorporate transparency, better service orientation, right technological leverage; while we are still hopeful, we feel, the insurer who alleviates Customer fears, would ride home a winner!!!

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Susheel Agarwal

Namaste. I'm Abhinay Nedunuru, a Fellow of the Insurance Institute of India with a passion to make insurance simple and crisp. I write on insurance and investment. I have a passion for teaching and training in particular to insurance. I'm currently doing my PhD from IIM in Management.