The Time is Ripe for Discretionary Mutual Structures in India

Discretionary mutual structures are a concept being discussed currently in Malaysia as a way to provide coverage to sections of the population which are currently difficult to cover. Discussions have focused on Takaful and the B40 (lowest 40% income families) but conceptually this structure can apply to any situation where coverage is provided for risks which are extremely uncertain and risk management is needed in product and model design.

In India the insurance regulator gave a directive to insurers in India to comply with the HIV and Aids (Prevention and Control) Act 2017, which came in-force in September 2018. This act bans companies from discriminating against HIV positive individuals. Thus, insurers will need to provide coverage to HIV positive individuals. Whereas in the past being HIV positive was a death sentence, currently individuals can live long lives while being HIV positive. This is a condition which continues to evolve as medicines and potential cures enter the market. With such unknowns, an actuary has no choice but to price very conservatively. This however does not help either the insurer or the insured. The insurer, in pricing the premiums very conservatively, has likely ensured there will be anti- selection as only insureds who are very likely to claim will purchase such products. This could lead to experience worse than what was priced for and losses for the insurer. The insured is also not given the affordable coverage which is needed.

In a discretionary mutual structure, all HIV positive individuals would be entered into a pool (perhaps an industry wide pool). Insurers would receive a fee for managing the pool as well as for profits and the balance of the premium would be given to the pool. This pool will cover the risks of the insureds on a best-efforts basis. Should payouts be more than the pool is able to cover, then coverage is either delayed or reduced. If there is underwriting surplus, this either remains in the pool or is given back to the insured. From a practical point of view, if there is a national HIV association, this association would be given the ability to accept or reject claims on a case-by-case basis, and also discretion on whether underwriting surplus is kept in the fund or perhaps used to fund activities for the association. From a risk management point of view, this type of structure puts the authority into the hands of those with the most vested interest to help the policyholders and eliminates the exposure of the insurance companies. Of course, as experience develops and actuaries develop confidence in pricing, HIV positive individuals, accurately this segment of the population, can move into traditional insurance policies and structures.

The HIV and Aids Act is an excellent step in ensuring HIV positive individuals are being treated fairly. The concept of fairness in insurance, however, can be a challenge as we are dealing with significant unknowns. A discretionary mutual structure can provide this coverage whilst limiting the exposure of insurers, thus adding value to all stakeholders.

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