Claim Loading: The Compounding Impact

Health cover provides a safety net during a medical crisis However, the claim loading clause inflates the insurance premium significantly, reducing the benefit of the policy. Make sure your insurance company clarifies its claim loading clause, advises Jay Sampat.

Key Points

• The claim loading clause allows insurance companies to increase premiums after a claim is made. However, it must be remembered that health insurance is a long-term contract, and invoking the loading clause can cause the premium to go up by 200 per cent.
• One should not buy a policy that has a claim loading clause, as it can have a detrimental compounding effect, making the policy unviable in times of need.
• Claim loading gets invoked either on an individual claim or on the company’s overall claim ratio going out of sync. Additionally, it is also linked to the type of the claim - i.e., if it is periodic or one time - and the average claim per occurrence.

The World Health Organization’s statistics show that with prosperity becoming widespread, the average Indian’s life expectancy is gradually going up. As life expectancy increases, so does the need for a plan to take care of medical expenses over a longer period. One of the cheapest ways to do this is to buy a health cover. However, simply buying insurance cover will not insulate you against rising insurance costs, as there are various factors that push up the cost over time. One of these factors is what is known as the ‘claim loading clause’.

The claim loading clause allows insurance companies to increase premiums after a claim is made. This parameter does not seem important while buying a policy at a young age, as one focusses on the cheapest premiums. However, one must remember that health insurance is a long-term contract, and invoking the loading clause can cause the premium to go up by 200 per cent, creating lots of problems especially if the policyholder is an elderly person. Hence, one should not buy a policy that has a claim loading clause, as it can have a detrimental compounding effect, making the policy unviable in times of need. If a policy’s literature is not upfront about loading, make sure you have clarity regarding the same.

Insurance customers are often resentful of the loading clause, as the majority of insurance companies use the clause to hike premiums on renewal after a claim is made on the policy. This is despite the fact that the policyholder may have been paying the premium for many years without having made a claim. Thus, a typical policy, which is supposed to help the policyholder when he/she develops a health problem, can become exorbitant due to loading, especially since premiums increase with age. If you are looking to buy a health cover, you should give preference to policies without the claim loading clause. In an attempt to get an increasing share of business, new entrants such as Max Bupa have launched health insurance products without this clause.

Generally, private as well as public sector insurers incorporate a claim loading clause in their policy, which allows for an increase in premium following a claim made in the previous year. However, there is no set format for the purpose of loading, and this varies from insurer to insurer. This is why experts advise reading the fine print to understand the calculations at the time of buying the policy itself. The insurance company cannot change the structure described in the policy during the course of the contract.

However, one should not confuse claim loading with the loading of premium that comes into the picture if there is a health problem. Claim loading gets invoked either on an individual claim or on the company’s overall claim ratio going out of sync. Additionally, it is also linked to the type of the claim – i.e., if it is periodic or one time – and the average claim per occurrence. For instance, a fracture, which is a one-time affair, may not result in a premium hike but treatment for liver cirrhosis will definitely result in a premium increase. Besides, companies can choose to increase the rates for their overall portfolio or a particular segment citing medical inflation. Of course, there is also the regular rise in premiums with the age of the policyholder.

New buyers have several policies to choose from, and thus, can avoid the ones with harsh claim loading structures. As for customers who are already holding onto policies and paying premiums for a long period of time, what is the recourse? The first option is to go through the claim loading clause in your policy document and question the insurance company if it has not adhered to the provisions completely. The Insurance Regulatory and Development Authority (IRDA) has also issued guidelines related to loading on premiums for senior citizens that bar companies from increasing the premiums by more than 50-75 per cent. Secondly, thanks to the health insurance portability mechanism implemented since October 2012, policyholders have the option of switching to an insurer offering better terms. In this regard, the drawback is that since accepting or rejecting the portability proposal is the new insurers’ prerogative, those having made claims in the past, particularly senior citizens, will most likely have their proposals rejected.

Experts are of the opinion that individuals should be sure of buying a policy with a well-defined loading structure, rather than one that has kept the policy under wraps. In addition, other factors that should be considered when making a decision are related with perpetual renewal, no limits on surgeries and room rents and the claims settlement track-record.