Concept and Types of Health Insurance Policies: formula sheet

Key formulas

Indemnity claim payable

Claim payable = lower of (admissible actual expense, sum insured remaining), after any co-payment or deductible

Applies to reimbursement cover. Never pay above actual loss.

Co-payment

Insured's share = co-payment % × admissible expense

Insurer pays the balance, subject to the sum insured.

Benefit cover payout

Payout = fixed benefit amount on occurrence of the defined event

Independent of actual expense incurred.

Section 40C rule (Insurance Act, 1938)

Every insurer must furnish details of expenses of management to the Authority in the specified manner and form

Substituted by Act 5 of 2015 with effect from 26-12-2014; the manner and form come from regulations.

Indemnity claim payable

Payable = lower of (admissible expenses, sum insured available) − co-payment, if any

Co-payment rules vary by product. Apply the policy terms given in the question.

Top-up payout (per-claim deductible)

Payout = min(claim − deductible, sum insured), if claim > deductible; otherwise nil

Applies to each claim separately.

Super top-up payout (aggregate deductible)

Payout = min(total claims in year − deductible, sum insured), if total > deductible

Claims in the year are added before the deductible is applied.

Family floater availability

Remaining cover = sum insured − claims paid in the year (all members together)

Cover is shared. Individual policy limits are per person.

Health insurance business (Insurance Act, 1938, s 2(6C))

Sickness benefits or medical and health expenses, plus personal accident and travel insurance

The statutory definition includes personal accident and travel insurance.

Claim payable with deductible

Payable = min(Sum insured, Admissible claim − Deductible)

Use when the policy has a deductible per claim. Payable is never below zero.

Claim payable with co-payment

Payable = Admissible claim × (1 − Co-payment %)

Co-payment applies to the admissible amount, after removing excluded items. Then cap at the sum insured.

Both deductible and co-payment

Payable = min(Sum insured, (Admissible claim − Deductible) × (1 − Co-payment %))

Apply the order the question states. If it is silent, state your assumption: deductible first, then co-payment.

Admissible claim

Admissible claim = Total bill − Excluded items − Amount above sub-limits

Remove excluded or capped items first. A sub-limit caps one item, such as room rent.

Life policy challenge window (Section 45)

Questioning of a life policy: within 3 years from the latest of issuance, commencement of risk, revival or rider date

After three years no life policy can be called in question on any ground. Insurer must communicate the grounds in writing.

Section 4 rule

Minimum annuity and other benefits (set by regulations) = payable on life or group policy, excluding profit or bonus

Proviso: the insurer may still convert a policy into a paid-up policy of any value or pay a surrender value of any amount.

Section 40C rule

Every insurer transacting insurance business in India → furnishes details of expenses of management to the Authority, in the manner and form specified by regulations

Heading: general, health insurance and re-insurance business. Substituted by Act 5 of 2015, w.e.f. 26-12-2014.

Section 40B contrast

Life insurer: expenses of management in a financial year ≤ amount specified by regulations

This is a cap for life insurance business. Section 40C, as supplied, is a furnishing duty on every insurer.

Section 64M(2) and (3)

Contravention of 40C with respect to expenses of management → hearing → warning; two warnings disregarded → prescribed action

These words were framed for the older expense-limit regime. Applying them to a failure to furnish details is an application of the wording, not a settled rule. The Authority acts only after giving the insurer an opportunity of being heard.

Section 64C

Existing Life Insurance Council + existing General Insurance Council = deemed Councils under the Act

The General Insurance Council covers general, health insurance business and re-insurance.

Section 64F(2) – Executive Committee of General Insurance Council

4 representatives of members (elected in their individual capacity by the members, as per bye-laws) + 1 eminent person (nominated) + 4 nominees (agents, TPAs, surveyors and loss assessors, policyholders)

Chairperson is elected from the four elected representatives. If anybody of persons fails to elect any member, the Authority may nominate a person, who is deemed to be duly elected (64F(3)).

Section 64L(1) – Functions

Advise insurers on conduct and service; advise Authority on commission and expenses; report prejudicial insurers; incidental acts notified in Gazette

Fees under 64L(2) are as per Council bye-laws; may be waived for a year with Authority's approval.

Section 32D

Insurer carrying on general insurance business must underwrite minimum % of third party motor risks, as specified by regulations

Authority may, by regulations, exempt an insurer primarily engaged in health, re-insurance, agriculture or export credit guarantee. No exemption without such regulations.

Section 64E

Authority of each Council = its Executive Committee

Section 64R(2) lets a Council delegate powers under clauses (a), (b), (c) of 64R(1) to the Executive Committee.

Quick revision

• Health insurance pays or reimburses defined medical costs against a premium.
• Always classify a policy type first when you read a case.
• Check coverage first, then exclusions, before deciding if a claim is payable.
• Section 4: the insurer pays a minimum annuity and other benefits as set by regulations, excluding profit or bonus.
• Section 4 does not stop an insurer from converting a policy into a paid-up policy or paying any surrender value.
• Section 40B: a life insurer cannot spend on management expenses in a financial year more than the amount specified by regulations.
• Section 40C: every insurer must give the Authority details of management expenses in the manner and form set by regulations.
• Section 64C: the Life Insurance Council and General Insurance Council are deemed constituted as the councils under the Act.
• Section 64M: after contravention of Section 40C, the Authority may warn after hearing the insurer; action follows only if two warnings are disregarded.
• Section 32C: insurers must serve rural, unorganised sector and backward classes, and the policies include crop insurance.
• Section 32D: a general insurer must underwrite the minimum percentage of motor third party business set by regulations.
• Under Section 32D, the Authority may exempt insurers mainly in health, re-insurance, agriculture or export credit guarantee.

Common mistakes

• Saying a benefit policy reimburses the actual hospital bill. Fix: Remember benefit cover pays a fixed agreed sum, whatever the bill is.
• Paying an indemnity claim above the actual loss. Fix: The sum insured is only a ceiling. Pay the lower of admissible expense and the balance sum insured.
• Treating critical illness cover as reimbursement of hospital bills. Fix: Critical illness usually pays a fixed sum on diagnosis of a listed illness. Hospitalisation pays actual admissible expenses.
• Assuming each member of a floater has the full sum insured. Fix: A floater has one shared sum insured. Subtract claims by all members.
• Treating deductible and co-payment as the same thing. Fix: Deductible is a fixed rupee amount. Co-payment is a percentage of the admissible claim. Write the definition in one line before calculating.
• Applying co-payment to the full bill including excluded items. Fix: Always remove excluded and over-limit items first. Co-payment applies only to what is admissible.
• Saying section 40C fixes a percentage cap on expenses of management. Fix: Quote the current text: insurers furnish details of expenses to the Authority in the form specified by regulations. Mention the cap only for life business under 40B.
• Including bonus or profit in the minimum benefit under section 4. Fix: Write that the minimum annuity and other benefits exclude any profit or bonus.
• Placing health insurers under the Life Insurance Council. Fix: Remember that 64C puts general, health insurance business and re-insurance under the General Insurance Council.
• Stating a fixed percentage for third party motor business under section 32D. Fix: The Act says the minimum percentage is as specified by regulations. Do not give a number.

Exam tips

• Always state the indemnity versus benefit distinction with a one-line example; examiners reward it.
• In numerical MCQs, apply co-payment before checking the sum insured cap.
• For law, write Section 40C as a reporting duty to the Authority on expenses of management, as per regulations.
• Tie answers to risk transfer, moral hazard and adverse selection in case-based questions.
• Match the policy to the need in case questions, then justify it with one fact from the case.
• For numerical questions, show the order: base cover, deductible, then top-up payout.
• Quote the statutory definition of health insurance business, including personal accident and travel, in theory answers.
• Say that benefit-based policies pay a fixed sum, and indemnity policies pay actual expenses.