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Health insurance needs PROPER DIAGNOSIS

IN ORDER TO ENSURE UNIVERSAL access to quality healthcare, the government has been making efforts for increasing health insurance penetration. The Insurance Regulatory and Development Authority (IRDA) recently relaxed norms for health insurance companies and reduced the reserve requirements. The IRDA has already licensed many third party administrators (TPAs) for faster and easier claim settlements and for providing cashless hospitalisation facility. Further, the FDI cap in the insurance sector is also set to be increased from 26% to 49% through the second insurance bill.

Insurers are looking forward to tap the vast and fast-growing Indian healthcare market. In fact, many insurance companies have begun to offer health insurance. However, the path ahead is not so smooth for health insurers in a country like India. The health insurance industry in India at present is a loss-making one. Though the private sector health insurance is growing at 40% annually, the level of coverage is still very low and has not penetrated rural and semi-urban areas significantly.

One of the biggest challenges — and an opportunity too — for insurance companies is to convert the huge out-of-pocket health spending (72% of the total health expenditure and 98% of the total private health expenditure) into a formal risk pooling mechanism which people have never been exposed to before. Such a conversion process is constrained due to several factors, among them the absence of reliable morbidity and health expenditure data. Also important, from a demand-side perspective, is the low level of insurance awareness, poor trust in insurance companies over reimbursement, and absence of regular and adequate income to make regular premium payment.

The process also involves tackling two important forms of market failures that are making insurers reluctant to sell health insurance — overutilisation of healthcare due to insurance coverage, and mostly the relatively unhealthy people buying insurance. One may wonder if these are not the common problems faced by insurers all over the world. However, the magnitude of these problems may be severe in India.

Perhaps, both the insured clients and healthcare providers have an incentive for over-utilisation and overprovision of healthcare, adding to the bill of insurance company. Further, at present, the healthcare insurance schemes in India are mainly limited to hospitalisation, forcing the insured persons to be admitted to hospitals even for those illness requiring only out-patient care. One solution can be including the out-patient treatment as well in the insurance package, but the resulting premium will not be affordable for majority of the Indians.

On the supply side, there are hardly any pricing criteria for healthcare services and no benchmark as to how much care is required by patients for each category of illness. Further, healthcare cost inflation is sure to rise further, All these will force insurance company to increase the premium, thus making health insurance a costlier proposition.

One possible way of controlling the over-utilisation of healthcare due to insurance coverage could be the use of co-insurance and deductibles so that insured clients also have to bear a part of his total incurred health expenditure. But this will be very hard to introduce as already the present insurance schemes cover only a part of the health expenditure and, therefore, any attempt to increase the out-of-pocket healthcare burden of insured clients would make health insurance a less attractive health-financing strategy.

In India, a majority of those buying insurance do it for investment purposes and not as an insurance product. But the health insurance schemes are without the saving component (being purely of risk pooling). This could dissuade many from getting insured. In such a situation, it is obvious that only those likely to require healthcare are interested in buying health insurance.

It is time insurance companies applied appropriate and innovative marketing strategies to overcome all these hurdles by taking the Indian reality into account.

SUKUMAR VELLAKKAL, is fellow at ICRIER, New Delhi


Why the US dollar is still resilient.

TRILLION-dollar bailouts, trillion-dollar deficits, and the largest spending bill in US history. No matter how dire the news out of the US, the dollar strengthens. It has carried on rising in spite of new bailouts for two leading financial institutions — Citigroup and AIG — a catastrophic fall in US gross domestic product and more dreadful news about the US housing market. The dollar has risen 10% against the euro so far this year, and by 7.4% against the yen. The dollar just a fortnight ago had its best performance against the yen for 13 years — rising 4%.

Plans by the US Fed to buy $300 billion of US government debt has triggered on March 18 a fall of 3.01% for the dollar — the greatest, on a tradeweighted basis, since the signing of the Plaza accord in September 1985. The dollar had rallied since summer of 2008 largely on the perverse effects of ‘deleveraging’, as investors paying down debts often sold assets outside the US and bought dollars.

With the dollar suddenly cheaper, and US goods, therefore, more competitive, other central banks are in a dilemma. In the eurozone, where the European Central Bank continues to face criticism that it is “behind the curve”, the fate of beleaguered exporters who are facing 10% rise for the euro against the dollar in March 2009 could force the central bank to intervene to pull down the single currency . Similarly, in Japan, where the Bank of Japan has already intervened in the bond market, it is likely that the BOJ may intervene directly to weaken the yen. The yen is some 35% stronger than it was in July 2007, at the dawn of the credit crisis.

The US Dollar Index, which tracks the US currency’s progress against a basket of six leading currencies, has risen to a three-year high of 88.969 on a trade-weighted basis. Longer term, however, the US Dollar Index remains well off its highs of this decade, or even the last six years. As recently as 2003, the index traded above 100, which is about 12.5% above current levels.

A number of analysts had predicted the continued demise of the US dollar, thanks to the financial-sector bailout and weakening economy but its sharp upside has surprised many. The dollar’s recent climb is part of a massive reversal of long-standing investing trends (due to the global economic slowdown) such as buying emerging-market stocks or wagering on rising commodity prices.

Besides, many European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by inter-bank borrowing and via FX swaps, exposing them to funding risk. When heightened credit risk concerns crippled these sources of short-term funding, the chronic US dollar funding needs became acute.

Given the dollar’s credentials as safe haven, its unchallenged role as global reserve currency, plus the fact that the market continues to give US fiscal and monetary policy action the benefit of the doubt, buying the dollar on dips remains the strategy of choice.

The dollar’s strength partly reflects the weakness of other currencies. Faith in the yen as a haven has been eroded by a flurry of dismal Japanese economic data while concerns over European banks and their exposure to problems in central and eastern Europe have seen the euro and, to some extent, the Swiss franc fall from grace.

The ability of central banks in Brazil, Russian, India, China and Saudi Arabia, which over the past few years have accounted for at least 30% of net treasury buying, to finance the ballooning US budget deficit is limited by the fact that their currency reserves are either falling — as in Brazil and Russia —or no longer rising, as in China.

Aside from the actions of global reserve managers, activity from US mutual funds shows an unwillingness to increase their allocations to foreign markets. This matters because US fund managers hold $30,000 billion of domestic and foreign securities, compared with the estimated $7,000 billion of foreign currency reserves managed by the world’s central banks.

Having increased their share of overseas assets from about 12.5% at the start of the decade to a high of 26% last summer, risk averse US funds reduced that share to 23%, where it has remained so far in 2009. I see further reductions in the proportion of their portfolios held in overseas markets and the subsequent repatriation of capital will help the US to continue to fund its current account deficit and thus support the dollar this year.

Besides, long-term portfolio allocation data for all US investors shows global shocks historically have caused US investors to steer away from overseas markets for several years. This time risk-averse American fund managers are unlikely to behave any differently in their response to the global economic slump.

The process of European banking sector de-leveraging is likely to generate significant US dollar demand over the months ahead, which will lend support to the US dollar against many other currencies. Dollar demand has also been reflected in the rise in purchases (and hence the price) of US treasury bonds, seen as the safest haven of all. The most recent data shows that such holdings of treasury bonds increased by about $100 billion over the past four weeks. Other countries are also feeling the effects (even more than the US) and so are slashing interest rates to try and boost domestic economic activity; so, the expected yield differential with the US is falling. With this trend set to continue, investors will continue to flock to the dollar.

I believe the world could see some growth return by the last quarter of 2009 and continuing through the first half of 2010. The actions of the Federal Reserve could stoke US inflation and ultimately undermine the dollar. However, this is probably a story which will continue to play itself out till 2010. Currently, the Fed thinks a rise in inflation is a lesser evil than further falls in house prices. When you’re competing against the likes of Europe, the US dollar suddenly doesn’t look so bad. Or rather, the US dollar is the prettiest pig in the herd.

Inflation may enter negative zone by Mid June 2009.

INFLATION, which is at 2.4% for the week ended February 28, is expected to fall further. It is likely to reduce below 1% mark next week and closer to zero by end of March.

Thus, the new financial year 2009-10 is likely to begin with negative inflation. Experts feel this spell of negative inflation may persist for a few months and we may see 4-5% of negative inflation by July end. Does this mean India will see ‘deflation’ and its distortionary effects?

To a large extent, this spell of negative inflation is statistical in nature than a structural phenomena says Edelweiss Securities economist Siddhartha Sanyal.  It is largely attributed to the high base effect. Last year, there was a steep surge in commodity and fuel prices in the corresponding months, which peaked out in August 2008. Once this high base effect wanes in later months of 2009, inflation may enter into a positive territory feels Yes Bank’s chief economist Shubhada Rao.

Not just a high base effect but also slowing consumption demand is influencing inflation numbers says Crisil’s senior economist D K Joshi. According to Mr Joshi, negative inflation i.e.: deflation is scary when it co-exists with decline in output. Unlike other developed countries, Indian economy is actually witnessing a growth. So,  occurrence of negative inflation may not have disastrous impact on the economy in general at this juncture.

However, according to Ms Rao, the extent of impact of deflation on the overall economy depends on the pick up in the overall demand in the forthcoming months. During the months of negative inflation, a very little demand is expected from the private sector but a huge investment demand is expected in terms of large government’s spending on infrastructure development. It may push the overall demand and put a floor under the price. Also, possibility of more stimulus provided by newly elected government may lead to some support for demand in India says Mr Sanyal.

Waning of base effect coupled with resilient demand will push the overall inflation into the positive territory. Also, the sustained rise in prices of food articles, which are not influenced by recession, or slowdown in the economy may help inflation to enter into positive zone once again. But, the prices of industrial goods may be suppressed for a little longer on account of slowing industrial activity feels Mr Sanyal. So, the real concern lies for manufactured products.