Foundations of Health Insurance and the Nature of the Cover
What the domain tests
IC-28 opens with the foundations of health insurance as a class of business: how medical costs are pooled, why the product rests on indemnity, and where it sits in Indian insurance law. The vocabulary set here is used in every later chapter, so examiners test definitions precisely.
Core rules
- Health insurance meets the cost of defined medical treatment. Indemnity contracts reimburse admissible expenditure up to the sum insured; the insured cannot profit from a claim.
- Fixed-benefit contracts pay a pre-agreed amount on a defined event - a listed critical illness, each day in hospital, an accident - irrespective of the actual bill.
- Cover is normally a one-year contract. Renewability is promised, but premium and terms can be revised for the whole class of business, not for one person alone.
- Health insurance is a distinct class of business under the Insurance Act, 1938 as amended. Standalone health insurers hold a licence to transact only health; general and life insurers may also write health and benefit cover.
- The insured knows more about his health than the insurer, so the business carries adverse selection before cover and moral hazard after it. Waiting periods, pre-policy checks and claim controls exist for these problems.
Worked example
A policyholder holds an indemnity policy with ₹5,00,000 sum insured plus a hospital cash policy paying ₹2,000 per day for up to 30 days. She is in hospital five days and the admitted bill is ₹90,000. The indemnity policy pays the admissible ₹90,000 after exclusions, sub-limits and co-pay. The cash policy pays 5 × ₹2,000 = ₹10,000. She receives more than the bill. This is not double recovery: hospital cash is a benefit contract, not contribution-linked to indemnity, so each policy responds on its own terms.
Traps that cost marks
- Calling every health policy "indemnity". Hospital cash, critical illness and personal accident are benefit contracts.
- Assuming renewal is guaranteed at the same premium; renewability and rate stability are different promises.
- Treating moral hazard as fraud. Moral hazard is behaviour; fraud is deliberate intent to deceive.