Apollo Munich Optima Restore & Lessons in Insurance Product Development

Imagine a doubles team where one member is from sales and the other from underwriting. Not the perfect pairing, I presume. And yet, when I look at Apollo Munich Insurance’s Optima Restore product, I see such a pairing. On the face of it, the Optima Restore policy seems to be a sellable (sales) and potentially profitable (underwriting) product for Apollo Munich.

This afternoon, I was talking to one of my insurance distributors and he happened to mention that his telemarketers are finding Apollo Munich’s Optima Restore a bit difficult to sell. He put it quite lucidly - "the product is a bit too unbelievable". At first I thought he was all praises, but then I figured he was actually a bit dismayed. Apparently since the benefits of this policy are so unique, prospects are hesitant of applying for this plan and are going back and forth to Apollo Munich’s website to understand the plan. 

Why is Apollo Munich’s Optima Restore - sellable?

The product offers two key “marketable” features -

1. The Restore option - The policy allows the restoration of the entire sum insured at no extra charge if the individual uses up his/her sum insured in the middle of the policy period.

2. The Multiplier benefit - The policy gives a no-claim-bonus of 50% of basic sum insured if the insured has a claim-free 1^st year. And if the 2^nd year also goes claim-free, then a 100% NCB is awarded to the insured member.

The key point to know for consumers here is that the restored sum insured cannot be used for any claim for an illness/disease (including its complications) for which a claim has been paid in the current policy year. This means, if you used up your sum insured for a heart-related illness - then post restoration of the sum insured, you cannot use it for any heart-related illness. (Policy wordings of Optima Restore)

Benefits of Apollo Munich's Optima Restore Plan 

The policy is quite standard which one would expect in any other no-frills health insurance product in India. The other benefits include -

• In-patient and day-care procedures
• Pre-hospitalization for 60 days
• Post hospitalization for 180 days
• Domiciliary Treatment
• Organ Donor
• Emergency Ambulance
• Lifetime renewal

An important exclusion (which is a deviation from their regular advertising pitch) of the policy is - pregnancy is not covered under this plan. This exclusion is important for newly weds to consider because the family floater option for the Optima Restore plan is very inviting. (the possibility of using up the sum insured between 2 members is higher than 1 member)

Why is Apollo Munich’s Optima Restore - potentially profitable?

The premium for the Optima Restore is at a premium i.e. more than a regular Apollo Munich plan. This is obvious because of the Restore and Multiple Benefits. 

The closest product with similar benefits (barring the two) is Apollo Munich’s Easy Health Standard Policy. The premium charged for the Optima Restore over Easy Health averages about 25%.

Now this may not sound high to most. So lets look at what Apollo Munich’s underwriters might have unearthed in developing this product. I opine that the underwriters must have analysed their claim frequency chart and found that a large portion of claims made are for less than 50,000 rupees. So while everyone (including me) have policies that run into lacs of rupees, the severity of claims tends more towards the Rs. 20,000 to Rs. 50,000 band. 

By my reckoning, over 70% of claims falls in the Rs. 20,000 to Rs. 50,000 band. This means, the over-3-lac claim are quite fewer, maybe just 5% (or lower) of total number of claims received. This frequency of less than 5% allows the underwriters the comfort of offering a restore option as only x% of the 5% would eventually use it within a single policy year.

How did the underwriter price it? (a theory)

Here’s the schematic for a simple health plan.

a) Number of lives = 10,000

b) Premium of Easy Health Individual policy = Rs. 3,000

c) Total premium = Rs. 3 crores

d) Frequency of total claims = 6%

e) Total claims = 6% of 10,000 = 600

f) Average claim amount = Rs. 30,000

g) Total claim = Rs. 1.8 crores

h) Claim ratio = Rs. 1.8 / Rs. 3.0 = 60%

Now, here’s the Optima Restore calculation as I see it (lets assume sum insured of 3 lacs)

i) % of claims tending towards Rs. 3 lacs = 5%

j) Number of claims expected to cross Rs. 3 lacs = 30

k) Average claim amount (over 3 lacs) = Rs. 1 lacs

l) Total claim (extra as defined in point k)) = Rs. 1 lac * 30 = Rs. 30 lacs

m) Total claims = Rs. 1.8 crs + Rs. 30 lacs = Rs. 2.1 crores

n) Additional premium charged = 25%

o) New premium = 3,000 * (1 + 25%) = Rs. 3,750

p) Total premium = Rs. 3.75 crores

q) Claim ratio = Rs. 2.10 / Rs. 3.75 = 56%

If my theory is plausible, Optima Restore not only increases the premium collected for the insurer but also reduces the claim ratio which improves the combined ratio of the insurer.

In my opinion, the insurer has spreads the cost of their two additional features over the entire population and has able to create “marketability” and potentially improved his/her profitability. Remember - everyone is paying the premium of 25% but only 5% of 6% i.e. 0.30% of the population is going to avail of the Restore benefit. So the product that is getting all of us excited is going to be availed by 3 out of every 1,000 people who enroll for it ! 

Overall, the Optima Restore products is a marketer’s delight and a good example of why “listening to customers” is crucial in the development of new products, in attaining excellent service delivery and in designing brand communication. I expect more innovations to head for India in the health insurance business.

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