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Decoding Colour Code in Health Insurance Plans

As per the new IRDAI diktat, individual health plans will have three colour codes – green, orange and red, based on the complexity of products.

11 Jan 2021
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Among the several bottlenecks that have slowed the adoption of health insurance, complexity of products deserves a special mention. This is because the common man, more often than not, is not aware of the jargons used in health insurance or understands their implications in the working of a plan.

To bridge this knowledge gap, the Insurance Regulatory and Development Authority (IRDAI) has issued a fresh instruction to insurers, asking them to colour code policies based on their level of complexity. The diktat is aimed to aid consumers to know how easy or difficult it is to understand the policy.

What is the Colour Code?

The colour code of health insurance plans will be akin to traffic signals – red, orange and green. While a green colour implies that the policy is easy to understand, orange represents moderate complexity. Red, on the other hand, reflects that the policy is complex. The colours are based on a score ranging from 0 to 6.

Health insurance plans with a score of 2 or less will have green colour, while those having a score of more than 2 but less than 4 will be coloured orange. A health insurance policy with a score of more than 4 and up to 6 will be red.

How do Insurers Calculate the Score?

To calculate the score, insurers take into account seven parameters:

  • Number of optional covers
  • Waiting period
  • Percentage of co-pay
  • Number of treatments where sub-limits are applicable
  • Simplicity of terms
  • Deductibles
  • Number of permanent exclusions

All the seven parameters mentioned above would get an equal weightage of 14.28%.

Score for Optional Cover and Co-pay

A score of 0.6 would be allocated to one optional cover. So, if a health insurance policy has 6 optional covers, this parameter would get a score of 3.6. For co-pay, which represents the percentage of payment that the policyholder has to pay from his pocket, a score of 0.3 is given for every 1% rise in co-payment beyond 5%.

Score for Waiting Period

Every one-month waiting period would get a score of 0.15%. So, if the maximum waiting period is 24 months, then the score on this parameter would be 3.6. Waiting period refers to the time where the insurer doesn’t entertain claims for pre-existing ailments.

Sub-limit Score

When it comes to sub-limit, a score of 0.6 is allotted for every disease under sub-limit. So, in case a health insurance policy has 8 diseases under sub-limit, then the score allotted for this parameter would be 4.8.

Scores for Deductibles and Permanent Exclusions

For deductibles, which is the amount a policyholder needs to pay before the insurer starts paying, a score of 0.3 is given for every 1% of deductible in a policy. Hence, if a health plan has a 5% deductible, this parameter's score would be 1.5.

A score of 0.6 is given for every permanent exclusion. Therefore, if a policy has 10 exclusions, the score for this parameter would be 6.

For the final of the score towards a policy, the weighted average score of all the seven parameters would be added.

The insurance regulator has also said that health insurance companies need to indicate the colour code on their websites for products they are selling and do the same while advertising so that customers can make an informed choice.

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Among the several bottlenecks that have slowed the adoption of health insurance, complexity of products deserves a special mention. This is because the common man,

Colour Coding: A Step in the Right Direction

The colour coding system would undoubtedly help policyholders and potential customers looking to buy health insurance plans. It will give them an accurate picture of the product's complexity and prevent unpleasant surprises later, particularly during claim settlement.

The entire exercise will also increase transparency and faith in health insurance companies and can serve as a potent tool to increase penetration of health insurance in India.

It must be noted that health insurance penetration in India is yet to go to the desired levels. As per estimates, only 34% of the country’s population is covered under any health insurance scheme.

Also, the guidelines are applicable only for individual health insurance plans and not for group policies as the regulator is of the opinion that entities opting for group policies are better informed.

Health Insurance: A Necessity in Modern Times

The move from the insurance regulator couldn’t have come at a better time. The COVID-19 pandemic has brought to the forefront the need to avail a comprehensive health insurance plan that can prevent a dip in savings and ensure that funds are not a roadblock in receiving the best treatment possible.

Apart from COVID-19, people are vulnerable to several other ailments and a health plan provides the much-needed financial muscle to tackle high costs without burning a hole in the pocket. Medical inflation is rising at an alarming rate and this further makes it imperative to buy a health plan offering adequate coverage.

In Conclusion

Health insurance is a long-term investment. Therefore, it’s important to opt for policyholders to opt for products that they understand and know will serve their needs when required. By making product choice simpler, colour coding of health plans will go a long way in aiding policyholders to zero-in on the right plan suiting their needs.

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