The Indian health insurance sector has expanded its footprint since it was first formally launched in 1986. Insurers have spent considerable resources gaining ground in the market, yet not many initiatives have looked back and taken stock of any insurer’s performance in terms of administrative efficiency. In response to this lack of information in the market, Milliman has recently developed Indian administrative benchmarks with industry collaboration. Milliman can help clients improve their administrative performance by conducting company function-by-function comparisons of administrative performance and staffing levels versus competitors and peers, and recommending appropriate process improvement initiatives.
Health insurance is the fastest growing segment in the nonlife insurance sector in India. The health insurance market share as a percentage of the total nonlife insurance industry has more than doubled from roughly 11% in the 2005-2006 period to 27% in the 2014-2015 period.1 Growth has been significant in the last five years following the advent of standalone health insurers and various government-sponsored health insurance schemes. The compound annual growth rate (CAGR) has been 24.6% for health insurance during the past 10 years (2005-2006 to 2014-2015). The high CAGR of the health segment has led to a noticeable rise in its share in the nonlife premiums.
Notwithstanding the level of growth, the health insurance market in India has been tarnished by poor operating results for insurers. The Insurance Regulatory and Development Authority of India (IRDA) 2014-2015 Annual Report notes a concern about persistent high incurred claims ratios (ICRs), which have been increasing over time. While the net ICR was 94% for the 2011-2012 and 2012-2013 periods, it rose to 97% in 2013-2014 and breached 100% in 2014-2015. For most players, government and group business were the two loss leaders.2,3
Against this backdrop, insurance companies face constant challenges. They must manage business acquisition costs and administrative costs as well as reduce claims costs for better penetration and growth. It is critical for insurers to monitor and control their operating expenses for a variety of reasons. Some drivers for this need are:
- According to the IRDA Annual Report 2014-15, the operating expenses of public sector insurers, nonlife insurers and standalone health insurers have increased over the last year by approximately 27%, 19% and 32%, respectively.4
- As per section 40C of the Insurance Act, 1938, no insurer can spend as expenses of management in any year an amount in excess of the limits prescribed under Rule 17E of the Insurance Rules, 1939. The rule does take into consideration the size and age of the insurer while stipulating the limits of these expenses. Currently, IRDA has granted exemptions on these limits to private insurers in the first five financial years of their operations. As per the IRDA Annual Report 2014-15, 14 insurers are noncompliant with the limits under Rule 17E.5
- For most health insurance products, efficient administrative processes with lower administrative expenses can give an insurer a competitive advantage over its peers. This fact will become even more critical to the standalone health insurers and other major players about to enter the sixth year of operations that will lose their exemptions described above.
The health insurance industry in India has had much dialogue on claims cost containment through provider networking and prevention of fraud, but dialogue around the potential savings through administrative efficiencies and costs often fails to get its due attention. The potential for administrative savings, as observed in other markets, should warrant a focused approach to a review of administrative functions. For example, the U.S. Healthcare Efficiency Index estimates that if the entire US healthcare system (a $2.5 trillion industry) moved from a paper-based and phone-based system to an electronic one, it could save $30 billion a year. Out of these, electronic payment through direct deposit instead of printing paper checks could save an estimated $11 billion every year.6 There are already successful examples within Indian health insurance of certain best practices—member updates through Short Message Service (SMS) gateways, provider portals for empanelment, tele underwriting, standardised medical underwriting, risk scoring for decision making and fraud and abuse trigger systems are all used by many insurers in India. But so much more needs to be done. All these initiatives complement standardisation and process efficiencies. However, they often remain internal developments with no formal methods to evaluate impact or savings. Understanding the current costs and productivity of each administrative function relative to the market would help develop a baseline and influence informed decision making for planning, monitoring and evaluating investments in process efficiency or information technology (IT).
Administrative costs, customer acquisition costs and benefit payment (in the form of claims payouts) are the three key expense areas for insurers. Going forward, the importance of managing administrative expenses will increase as competition continues to put pressure on overall premiums. In line with other markets, the Indian regulator also restricts the percentage of premium income that can be used as management expenses to promote efficiency and the availability of funds for benefit payments after a defined inception period. Insurers themselves have a vested interest in keeping these costs manageable. Topline focus must be complemented with cost containment in both benefits and administrative costs to achieve desired profitability and sustainability. While claims cost containment requires effective provider contracting and optimal utilisation management (and is reliant on multiple providers and other intermediaries), acquisition costs are dictated by market forces. Administrative efficiency within internal operations is one area where an insurance company can effectuate changes more directly. Tracking and managing these administrative costs can be a challenge, and identification of areas where there is opportunity to optimise administrative spending can be an even greater challenge.
Benchmarking is one of the most effective tools available to help health insurers manage their administrative efficiencies and expenses. Benchmarks can offer a company function-by-function comparison of administrative performance, expenses and staffing levels versus market competitors and peers.
Milliman has developed a set of administrative benchmarks to help insurers and third-party administrators (TPAs) understand, monitor and manage their administrative functions. These benchmarks are based on data collected from a representative sample of organisations, including standalone and private nonlife companies. The benchmarks have been developed for key functional areas and include efficiency and staffing metrics such as claims processing, underwriting, preauthorisation turnaround time and number of full-time employees required to optimise transaction processes.
Milliman's team of clinicians and health analysts based in Gurgaon is actively working with clients in India, the Middle East and Southeast Asia, providing consulting services in actuarial and operational areas. This multidisciplinary team has an understanding of best practices in administration functions across these markets and has developed evaluation tools for health insurer capabilities. The Milliman team is able to conduct comprehensive assessments structured around the common processes and sub-processes of a health insurer’s administrative operation. Using this framework, Milliman is able to provide a professional assessment of a client’s current operation and then make recommendations for actions to improve operational efficiency and effectiveness in the context of typical industry best practices.
1IRDA (2015). IRDA Annual Report 2014-15. Retrieved December 1, 2016, via https://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1
2IRDA Annual Report 2014-15, ibid.
3IRDA (2014). IRDA Annual Report 2013-14. Retrieved December 1, 2016, via https://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1
4IRDA Annual Report 2014-15, ibid.
5IRDA Annual Report 2014-15, ibid.
6CAQH (May 5, 2014). 2013 U.S. Healthcare Efficiency Index: Electronic Administrative Transaction Adoption and Savings. Retrieved December 1, 2016, from http://www.caqh.org/sites/default/files/explorations/index/report/2013Index.pdf