Health Insurance Product and Its Conceptual Aspects

Binod Kumar Pokharel

Deputy Director, Nepal Insurance Authority

It is assumed that human beings are prone to more diseases as they grow older. Any person can meet with illness, bodily injury, or any accident due to some unfortunate or unexpected event at any point in time. A lot of expenses are incurred due to such events as hospital stays, medicines, surgery, doctor’s visits, and other medical expenses. Health insurance provides coverage for all or some of the healthcare needs and medical expenses incurred by a person. Health Insurance is a way to distribute the financial risk associated with the variation of an individual’s health care expenditures by pooling costs over time (pre-payment) and over people (pooling)- (OECD)
Health insurance is different from all other insurances, such as fire insurance, theft insurance, and home insurance, because of the existence of a third party in health insurance. The involvement of third parties makes it different and complex too. It is the one who decides and provides: The type of health services to be used by an individual, i.e., insurance,

How much of such services are used?

How much is the cost of those services?

The features of insurance asymmetry and risk selection make the health insurance market an imperfect market, where the insurer will select and insure the proposer with a low risk as compared to the one with a high risk, known as cherry-picking or cream skimming. Commercial health insurance, offered by insurance companies, basically provides coverage to an individual for all or some of the health services defined under a contractual agreement. For this risk coverage, the individual, i.e., the insured will have to make the payments in the form of a premium to the insurer. Proper medical underwriting is a key factor in health insurance, which is made to assess the health status of the individual applying for a health insurance policy. Health insurance is based on the concept of morbidity.

As we all are aware the future is unpredictable and rather, uncertain. “Health insurance in this time has become inevitable”

i. Moral hazards are a major issue in determining health insurance pricing, terms, and conditions. It comes from both sides as:

Demand-side moral hazard:

It works at the insured’s end. A consumer with health insurance will make use of and accept more health services than he would have otherwise taken without any health insurance.

Demand-side moral hazard:

It works at the insured’s end. A consumer with health insurance will make use of and accept more health services than
he would have otherwise taken without any health insurance.

Supply-side moral hazard:

It works at the end of health providers. They start suggesting and providing more health services as well as more expensive treatment to the person having health insurance.

Health insurance products:

1. Indemnity Products:

Insurance products may generally be classified into indemnity products and benefit products. An indemnity product pays the actual number of losses incurred or expenses incurred arising out of a loss caused by an insured peril. Indemnity means placing the insured in the same financial position as he was prior to the occurrence of the loss. Payment under an indemnity product is limited to the amount actually lost or the expenses actually incurred, subject to policy conditions.
/h4>2. Benefit Product:

The benefit product pays a specified sum of money regardless of the actual expense incurred. In health insurance, an indemnity product will pay the actual expense incurred for treatment. In contrast, a benefit product will pay a fixed amount on the occurrence of the event without relating the payment to the actual expense incurred.

3. Hospitalization indemnity products:

These products protect individuals from the expenditures they may need to incur in the event of hospitalization. In most cases, it also covers a specific number of days of treatment before and after hospitalization. This policy has a waiting period of 30 days for the first time it is taken. With increasing competition in the market, insurers are also coming up with a variety of new coverages for items under this category, such as:
a) Transplantation
b) Hospitalization expenses of organ donors
c) Cost of artificial limbs
d) Cost of pacemakers
e) Cost of hemodialysis
f) Coverage of ambulance charges
g) Number of days of pre- and post-hospitalization expenses
h) Reimbursement for periodic health check-ups
i) Cost of surgeries done under day care
j) Maternity
Some of the specific exclusions that are not covered by many of the hospitalization insurance policies are:
a) War/invasion
b) Venereal diseases and HIV/AIDS
c) Fertility or assisted conception
d) Cosmetic or aesthetic procedures
e) Intentional self-injury
f) Influence of intoxicating drugs or alcohol
g) Adventure sports
h) Personal comfort
i) Convenience items

4) Personal Accident Policy:

This policy protects the insured against accidental death and any form of disability due to accidents. It provides features like a lump-sum benefit payout in the event of death or permanent disablement and weekly compensation for temporary disablement. Similar to health insurance policies, policies also have exclusions like intentional self injury, participation in adventure sports, etc. Personal accident policies are offered both on a standalone basis and as a packaged product with other health insurance coverage.

5) A Critical Illness Insurance policy

Critical illness covers the insured against life-threatening critical diseases. This type of insurance covers serious and long-term illnesses that require expensive medical treatment. Dreaded diseases like cancer, heart attack, coma, or major organ failure may be quite infrequent but are associated with extremely high healthcare costs. Moreover, such costs include a substantial component that may not be covered under the hospitalization indemnity products. Critical illness policies are available on both a benefit basis and an indemnity basis.

Life insurance companies can offer critical illness products in two ways:

a. Accelerated CI benefit product:

It forms a rider-to-life insurance policy. In this policy, the death benefit is accelerated, and the benefit amount (otherwise payable on death) is paid if the insured is diagnosed with any specified critical illnesses. (For example, Amit had taken a life insurance policy for Rs. 5 lakhs, which included an accelerated critical illness cover of Rs. 1 lakh at the age of 25. He was diagnosed with cancer at the age of 36, which was covered under his critical illness policy. So, the insurance company paid him Rs. 1 lakh on his diagnosis of cancer, and his life insurance coverage was reduced to Rs. 4 lakhs (Rs. 5 lakhs minus Rs. 1 lakh). He died at the age of 45, and the insurance company paid the remaining life insurance cover of Rs. 4 lakhs to his beneficiaries.

b. Stand-alone Cl product:

It is also offered now by many non-life and standalone health insurers. In this product, the benefit is payable on diagnosis of critical illness and is unlinked to any death benefit. For example, if Amit had taken a standalone critical illness policy for Rs. 1 lakh with life insurance coverage of Rs. 5 lakh, he could have received Rs. 1 lakh on the diagnosis of cancer disease, and at the time of his death, his beneficiaries could have received the entire life insurance sum of Rs. 5 lakh.

6) Health Insurance Vs. Medical Insurance:

Health insurance is comprehensive and covers pre-hospitalization, posthospitalization, ambulance charges, medical checkups, and more, whereas medical insurance is limited to hospitalization expenses for specified illnesses or accidents. Health insurance covers not only the policyholders but also the family members whereas medical insurance typically focused on the policyholder. Premiums can be customized based on individual needs in health insurance whereas medical insurance offers limited customization in premium rate. Health insurance offers various riders for customization such as critical illness covers, accidental death rider, waiver of premium rider whereas medical insurance is restricted to specific medical conditions, the riders under it have limitation in coverage.
Some Innovative Health Insurance Products Available in the Insurance Market are:

1. Dailly Hospital Cash Benefit:

These are new innovative products available on the market in the form of a fixed daily allowance, which could be used to cover the unexpected and incidental costs associated with hospitalization (such as travel and stay costs for an attendant). This payment can be used to share any medical or non-medical expenses that are normally not covered under hospitalization policies but account for a substantial part of the overall cost incurred during treatment.

2. Top Up Cover

Top Up Cover, also known as High Deductible Cover, is a new option available for individuals and families to cover expenses in excess of a specified limit, usually called a High Deductible. For instance, a top-up policy could offer a cover of up to Rs. 500000 with a high deductible of Rs. 300000. In this case, if there is a hospitalization expense of Rs. 700000, the Top Up policy will pay Rs. 400000 (700000–300000). Usually, topup policies are taken by those who already have a regular health insurance policy for a specified sum insured. These products are cost-effective because their premiums are low due to the high deductible amount, making this coverage more affordable.

3. Disease management covers

For patients already suffering from chronic diseases like diabetes, new products are now available on the market that are based on the disease management platform. These products include coverage for some medicines and regular laboratory tests on an OPD
basis, in addition to other hospitalization coverage.

4. Outpatient coverage

This coverage includes those expenses for health issues that do not occur during the hospitalization process. There are many cases of primary care or small procedures where hospitalization is not required. In such cases, the insured has to pay expenses from his pocket even if he has a health insurance policy.

5. Micro health insurance product

Low-income people usually don’t have any health insurance coverage. Therefore, this low-value product, with an affordable premium and benefit package, is initiated to help these people cope with and recover from common risks. Mostly, such covers are taken on a group basis by various community organizations or non-governmental organizations (NGOs) for their members.

6. Disability benefit plans

It is also defined as income protection plans which protects and covers the loss of income when the insured is unable to pursue his occupation due to injury or illness. Such products can be designed with different structure of benefit payments. The benefit i.e., income payment during the period of incapacity can be the same or increasing with respect to the volume of premium paid.

7. Long term care plan

Long-term care includes all forms of continuing personal or nursing care for people who are unable to look after themselves without a degree of support and whose health is not likely to get better in the future. Such a plan is classified as a pre-funded plan or an immediate plan.
Long-term care costs can be divided into three broad categories:

a) Personal care costs, like the additional costs incurred for being looked after by nurses or skilled personnel
b) Living costs like food, clothing, amenities, etc.
c) Housing costs

8. Health savings or investments linked plans

Health insurance is largely a pure-risk product without any investment returns. However, in some countries, life insurance companies have launched unit-linked health insurance plans. In this plan, the total premium is split up into a risk premium and an investment amount.
While the risk premium is allocated for health insurance coverage, the investment amount is diverted to unit-linked funds, which can pay for future health costs or for other costs like OPD.
Internationally, there are products called Health Savings Accounts (HSA) that accumulate an amount to be used when the account holder needs to spend on health care, i.e., usually at a senior age.

9. Group insurance schemes

Group insurance is the most common form of health insurance globally. Group insurance policies can be issued to various types of groups, like employer-employee groups and affinity groups. Again, the premium contribution can be either a contributory or noncontributory scheme. Under this type of product, the group should be an already existing one and must not have been formed for the purpose of insurance coverage. There should be a minimum number of members in the group (according to the insurer’s requirements). There should be a group organizer who can act as a coordinator with the insurance company. The products of this nature are not standardized as individual products but rather customized. The premium rate is not fixed as an individual policy but rather negotiable.

Health Insurance Sector can be Developed only when there are:

1. Transparency

Transparency is the prerequisite for any form of insurance, including health insurance. The clarity of information at the time of the sale process is important to avoid dissonance later, at the time of claims. Customers need to have transparency of information at every stage of the policy lifecycle. All the touch points, like the website, emails, letters, branches, and call centers, should be information-driven, clearly informing the customer what he or she needs to know.

2. Customer centric service

Customer-centric services hinge on delivering on the promise undertaken by the insurance companies to deliver their commitment to quality service. Service processes must be designed by empathizing with the customer. Insurance, being a matter of solicitation, does not restrict itself only to pre-sale services but extends to post-sale services and renewal as well.

3. Ability to settle genuine claims promptly

It is mainly at the time of claims that policy terms and conditions assume significance. If the same is explained to the customer, then the claim process becomes smooth and hassle-free with minimal dissonance. The claim settlement process of an insurer shows the ability of that insurer to put in place a robust claim assessment process that ensures that genuine claims are cleared quickly and fraudulent claims are identified and blocked.

4. Consumer education

Consumer protection and consumer education complement each other. Consumer education not only helps the individual understand the product and risks involved better, but is also a necessity to understand market efficiency.

5. Robust technology

Technology plays a major role in making the process easy, quick, and frictionless. A robust system should allow the complete tracking of all details and status updates via SMS and email to keep the customer abreast of the progress of their requests. Regardless of the channel through which the policy may have been purchased, companies are now offering their customers 24×7 access via a single toll-free
number, providing the insured with confidence that the insurer is just a call away.

6. Fair treatment

Fair treatment at every stage, both before and after sales, makes insurance attractive to the customer and keeps his confidence. Health insurance is the most varied product based on requirements, needs, lifestyle, and standard of living; pricing plays a major role. With clear and unambiguous terms and conditions, the price should be adequate—neither too high, making it unattractive for the customer, nor
too low, thereby endangering the insurer’s solvency. Insurers must aim to deliver a structured and fair basis for determining health benefits and payouts.

7. Health data repository

In the health insurance industry, asymmetric information—a situation involving a transaction where one party has more information than the other—leads to adverse selection, wherein individuals with high healthcare costs are more likely to buy insurance. The unavailability of reliable information undermines the underwriting capabilities of the insurance companies, leading to increased insurance costs. Hence, it is essential to build a dependable source of information at the industry level with respect to claims, medical treatment costs, and health cases.

8. Grievance redressal

Policyholders must be provided with an inexpensive and speedy mechanism for complaint disposal. Policyholders may have complaints against insurers in respect of either their policies or their claims. The literacy for the grievance redressal station should be spread effectively so that new customers can also reach that station for the grievance of the contract.

Sources of Funds for Healthcare needs:

Globally, the financing of healthcare costs in any country is done through the following four methods:

Government revenues and taxes:

In this system, the population indirectly contributes to government revenues via taxes, a share of which is then allocated by the government for providing healthcare services to the people. This is therefore also known as a tax-funded system. Thus, the payment to the healthcare providers is made by the government on behalf of the users.

Social health insurance:

It is also referred to as employment-based health insurance. The employees and the employers pay a regular contribution to the funds, which are then used to fund healthcare needs for the employees as well as their families. Additional state support is also available in some of the cases. Moreover, the contribution to such schemes can be in varied forms, ranging from a mandatory, earmarked payroll tax to a voluntary, tax-deductible contribution to a health plan.

Commercial health insurance

Commercial health insurance is also known as private health insurance is a health insurance taken by an individual, to provide coverage towards expenses incurred on their healthcare needs.

Out-of-pocket payments

It is a direct payment made by the households to the provider for their healthcare needs without any coverage or reimbursements.
The family floater policy is typically a single sum insured within which the whole family is covered. The floater policy usually covers only the immediate family of the primary insured person and not distant relatives.


A health insurance program enables the policyholder to access quality health care services without placing a financial burden on them. Health insurance products help prevent people from falling into poverty due to health care costs associated with unexpected diseases,
accidents, or catastrophic events. In Nepal, most of the general insurance companies are offering various health insurance products; however, the demand from the general public is not so encouraging. Only some corporate houses and organizations are using this type
of product. Insurance companies also did not pay serious attention to searching the health insurance market. On the other hand, the government of Nepal has also been providing some restricted health package programs in the name of the social protection program of the
government since the last couple of years, which are also not free from various limitations.

However, there is a huge virgin area in the health insurance sector, which also expands the access to insurance coverage in Nepal. There is no time now to wait for both the insurance regulator and insurer to design a health product that can meet the demand of the general public. For this, Nepalese insurance regulators and insurance companies can take evidence from a southern neighboring country where the health insurance market covers nearly thirty percent of the whole insurance market, which is nearly equal to the motor insurance market.


The original article appears on the 56th Anniversary issue of Nepal Insurance Authority which can be accessed on

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