Expert Zone
Straight from the Specialists
More joining the general insurance party in India
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Well, I don’t know if it should be called a party. But while there have been talks of a few exits (or shall we say strategic re-alignment) in the life insurance space, we have seen three new entrants in the general insurance space in the last few months.
We had Religare Health Insurance Company being formed a few months ago and just two days back, we had Magma HDI and Liberty Videocon general insurance companies getting their approval from IRDA.
That takes the count of general insurance companies in India to 27. Some developed countries have a much larger count of health insurance providers. If service levels can be ensured, the more the merrier it is for the consumer — more players, more competition, more innovation and hopefully better services would be offered as differentiators.
India is a big country with an extremely large spectrum of customer profiles and there is enough scope for differentiation to be created with niche products and services and maybe even on pricing. Clearly, some of the existing players have already started distancing themselves from the price-war-for-market-share game.
While the profitability of general insurance companies may not look all that attractive currently with most making mostly investment income, they definitely seem to be growing. The general insurance industry grew at a healthy 23 percent in the last year compared to the previous year. With increasing healthcare costs and awareness regarding the same, more and more of the population would start buying health insurance plans. We currently have only four (including the latest entrant Religare) specialist health insurance providers — we may see a few more wanting to tap this large market.
Even on the motor insurance side, better tracking and hence refinement would come in. This would result in much better risk-based pricing of motor insurance plans. Indicators suggest that motor insurance premiums too would rise, which again makes the market bigger and may increase the price-sensitivity as it is a relatively standard product offering. Market share too is split between a larger number of players, unlike the life insurance space where LIC has very dominant market share of 70 pct + of the annual market.
Slow death for push marketing of insurance?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Just five of the 23 life insurance companies in India (I have excluded Edelweiss Tokio as they are new entrants) could increase their premium collection in 2011-2012 over the previous year. In fact, none of the top 10 premium collectors of 2010-2011 could increase their sales in 2011-2012. Why so?
It’s strange to put a disclaimer in the middle of an article, but here I must — lower premium collections or sales do not necessarily mean lower profitability. In fact, some insurance companies might have increased their profitability in spite of lower sales and it could even be a conscious strategy.
Mind you, all this is when India is considered an under-insured, under-penetrated life insurance market. So where does the problem really lie? The common reason associated with the drop is the change in regulations and maybe even the pace of change. Frankly, all the regulatory changes in the life insurance sector in the last year have been pro-consumer — the sooner they get implemented, the better it is for the customer. Commissions paid to intermediaries for some products came under the scanner and were reduced and rightly so. And then we saw a large dip in the interest levels of intermediaries to sell those products. Should a product sell only because an intermediary makes a lot of money out of it?
Life insurance in India is a strange beast — it is sold and purchased as a favourable tax-saving tool. To buy it, you have to shell out commission levels unheard of from any financial or non-financial sector intermediary, thereby eroding much of the tax benefit. And all the signals suggest that commission levels will see further dips, thus favouring the customer.
So, then the big question arises — who will be interested in PUSHING the insurance product? Or will the industry create its own innovations and start delivering the PULL? Online term plans definitely did that and it even became cafeteria talk — that was unthinkable a few years ago. Maybe channels like Bancassurance with a lower cost of sourcing will see much larger focus. Maybe new channels with higher volumes and lower commissions would start appearing – it’s not that simple, most would say. But then again, that’s what innovation has to deliver and will.
I think the old way of selling products by heavily incentivising intermediaries is gone. The change is happening and it is happening fast. Consumers are more aware and will ask more questions and are being guided by a phenomenal amount of free and high quality information easily available today.
Tax breaks only if insurance cover is 10 times annual premium
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Tax exemption under Section 80C is one of the major drivers of insurance sales. In fact, it has become a trend to launch a new variant of single-premium plans in February-March to cater to those who just want to make some investment to avail tax benefits.
Budget 2012 set the cat among the pigeons when it mandated that to be eligible for tax exemptions, the cover provided in the life insurance product should be at least 10 times the annual premium paid. In fact, the recommendation was to make it 20 times the annual premium paid. While this seems to be the obvious thing to do considering it is an “insurance” product, a large number of life insurance plans actually provide cover only up to five times the annual premiums paid — and these are money spinners for insurance companies. The higher this multiple, the higher the insurance company would need to set aside as mortality charges and lesser would be the investment component.
Simple term insurance plans which are the best form of life insurance, and a must for every individual, provide a much higher cover multiple and hence do not get affected by this. A large number of non-term plans like money-back, child, endowment, ULIPs and single-premium plans would be affected by this though. Apart from insurance companies, there are three sets of customers who would also find this unattractive.
1) I just want the tax break — the insurance component is a bonus: It’s closer to the end of the year and I have not yet invested enough for tax purposes. I would rather maximise the investment from it rather than look for cover.
2) I do not have a regular income: I don’t want to be tied down by a policy for which I have to pay for 5 to 10 years. I just want to park some money in a single-premium plan which helps me save tax for the year.
3) I am a senior citizen: At my age, I am not very interested in the cover and there are no dependents. I want to save tax and don’t want large amounts of the premiums I pay to go as mortality charges. I would be better off maximising the returns from it.
Taking health insurance for granted
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Chances are you haven’t given this much thought. It would be part of some document which you signed when you joined the company. For a majority of those in the corporate world, health insurance is provided by the employer — to such an extent that you take it for granted.
Let’s do a status check, especially for those in the 25 to 40 age group working in the private sector.
How many of your friends have shifted jobs or have been forced to look for another job in the last two years?
How many of you have seen health insurance benefits being slashed in the last couple of years by your company — for example, parents not being covered any more?
How many of you have been asked to contribute some part to the health insurance premiums which your company provides?
Chances are not just one of the above, but all three would have been experienced by a large number of employees.
Can someone force an insurance product on you?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Often, you may think you are getting a great deal on an insurance product. Chances are you might not have given this much thought.
Here are some instances where insurance products are bundled and sold to you — some you may like for the sake of convenience and some which you take to avoid further hassles. This practice is called bundling of products.
Case 1 You see some advertisement which promises ‘free insurance’ for your car or ‘insurance for just 1 rupee’ when you buy a car from a dealer. The truth is that neither is the car insurance free nor is it available for a rupee. The dealer gets a healthy commission from the insurance company for the car insurance sold to you and offsets it against a discount on the price of the car which you could have bargained for anyway. Chances are you will get a better deal on the insurance if you do some comparison in the market.
Case 2 You have applied for a loan — personal, education, home, etc. You have gone through the paperwork and the numerous rounds of verification at home and in the office. And finally, the loan is getting approved. That’s when some insurance product is pitched to you for your own good — “Sir, it’s for your own good” — Well, it’s partially correct. But at that moment, you really don’t have much of a choice. You risk not getting the loan if you don’t take it, especially if the person across the table negotiating with you is incentivised for that insurance sale. The insurance is not compulsory and the loan should anyway be disbursed to you though.
Case 3 Another ad which is pretty vocal — “Free insurance with your mutual funds”. Same story again. That’s not the prime reason to buy mutual funds. There are more scenarios in which insurance plans are bundled and sold and where the customer really doesn’t have much of a choice. When buying a car, you are completely focussed on that beauty which you want to drive rather than haggle and analyse some discount which the salesman is offering.
To be fair, there are some merits in all three scenarios — sometimes it’s convenience and sometimes it might actually work in your favour if something happens to you. Some questions which need answers — Should the intermediary be in a position to unfairly influence you into buying an insurance plan? Should they be masquerading an insurance product as a discount when it’s not? Well, these practices have been there for a long period of time, but the insurance regulator has flagged it. So let’s see if you would still be taken for a ride.
Health insurance for people with HIV
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The insurance regulator recently floated a proposal which mandates all health insurance providers to put an underwriting policy in place for covering people with HIV or those working closely with HIV+ persons, such as doctors and nurses.
This will come as a relief for those affected or working in the field as chances are they would be refused a health insurance cover in the current scenario. Under normal circumstances, insurance companies would refuse outright to cover such individuals or exclude it as a pre-existing condition and not provide any benefits.
It will be interesting to gauge the insurance companies’ response to this as these plans might create a ‘bleeding’ scenario. Since the risk here is known and is no more left to chance or at least not completely, the usual models of underwriting many not work.
However, the proposal floated by IRDA is flexible and leaves it to the insurance companies to specify their underwriting norms and even to set the loading limits on such plans. The cover can also be offered by way of riders for those not affected at the time of taking the plan but having subsequently tested positive.
Currently, only Star Health, which is a standalone health insurance company, provides such a plan. In this plan, the proposal has to be initiated by government agencies or registered bodies which work closely in the field of HIV. This plan too is a restricted benefit policy with a low coverage amount.
The other problem will be to get such individuals to come forward and declare their status. Given the potential social stigma attached to it, many individuals would be extremely reluctant. The experience of Star Health Insurance Company which has run such programmes will come in handy and the industry will benefit from it.
Lack of retirement planning options
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Unlike people in developed nations such as the U.S. and Europe, people in India are known for their conservative habit of saving. The need for regular income after retirement is a concern that haunts most Indians.
It goes without saying that banks and financial institutions should be designing products to tap this huge market. And yet the real situation is quite the opposite; there is a shortage of pension plans in India and those wanting to generate a retirement corpus have to depend on LIC.
We are also seeing young India investing heavily in home purchases. While this is very good from the asset build-up perspective, it should not come at the cost of the large corpus needed to provide liquidity on retirement.
The Annuity Game The steps needed for this are quite simple. Keep adding small amounts every month/year throughout the working period and build a corpus large enough to purchase an annuity on retirement. This would be the most structured way of handling it and is more advisable than ad hoc lumpsum accumulation which may or may not fructify.
So then, what are the structured options available to the customer:
EPF – It is the best, safest and forced form of accumulation. The emphasis on “forced” is what makes this a very good bet. The flipside being that a large number of self-employed and semi-organised sectors do not have access to this route.
No mad rush for life insurance IPOs
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Last week, the regulator finally released the long-awaited draft for insurance companies to raise capital through an Initial Public Offer (IPO). As soon as this announcement was made, the entire industry was caught in a frenzy trying to decipher every word.
Judging by the reactions of some industry big guns, although they are relieved it is finally out in the open, it may be a while before we see them rushing to float their IPOs.
Here’s my extract of the guidelines of issuance of capital by life insurance companies:
At present, there are only 23 private life insurers in the country plus the state-owned LIC. IRDA guidelines say that only those companies which have completed 10 years of business can propose to raise capital through a public issue. So, there would be 11 private players who fulfil this criterion as on January 2012.
The next roadblock for these IPO aspirants is that the ‘Embedded Value (EV)’ of the company should be at least 2 times their paid-up Equity Capital. Simply put, EV = Present Value of Future Profits (PV) + Adjusted Net Asset Value. Greater clarity on how EV is calculated would be required but assuming a conservative estimate, the “PV” part would be for the Profits generated in future from the existing business setup. Now this can be a dampener, as the future growth plans cannot be factored in to arrive at the valuation. It is unlikely the regulator would allow any fancy mathematics here.
If you look at analyst reports for insurance, they always include some multiple of the new business profit made in the current year which is in allowance for future new business. The regulator has insisted that the EV should be prepared by an independent actuarial expert and reviewed by another independent actuary. Because of these guidelines, cash-rich companies may be less keen to list themselves. However, the companies who still want to go ahead with their IPOs will need to sit tight and hope for a good valuation from external analysts.
Insurance industry players go online — reluctantly
(The views expressed in this column are the author’s own and do not represent those of Reuters)
From the year 2000 onwards, the Indian insurance industry saw a number of private players entering through the gates thrown open by the government. Public sector player LIC had already gained an edge by being a pioneer in the life insurance space. With an army of agents, LIC was way ahead of these latecomers and found itself settled comfortably.
It was evident that LIC relied heavily on its strong agent base. The latecomers, in their struggle to make a mark in the newly opened insurance market, followed suit. It was a herculean task for these private players to ape the insurance giant and more than a decade later, they still find themselves striving to gain substantial market share.
Getting exceptionally good agents on board, training them, retaining existing agents has been a constant struggle faced by the industry as a whole. The industry also explored other distribution channels like brokers, corporate agents and bancassurance but is still constantly being haunted by profitability issues.
PRODUCT SIMPLIFICATION AND DESIGN For starters, companies must focus on designing simple and easy-to-understand products. Some policies that exist in the markets today are so complex that even a fairly financially literate person would not be able to fully understand it. For some strange reason, instead of working on designing simpler products, the industry has and continues to depend on intermediaries to sell their complicated products. This activity is self-defeating and extremely expensive. The innovations, if any at all, are trips to Paris instead of Colombo or Goa, for the top-performing intermediary. Wait for a couple of years and we could see incentives like a trip on Richard Branson’s space flight.
A century ago someone said that Insurance is “Sold” and not “Bought”. It is a “Push Product” and not a “Pull Product”. Design a complicated and opaque product and make it available only through limited expensive channels and yes, it will always be a “Push Product”.
So what products do we need — Very Simple, Easy to Understand, Easy to Explain & Easy to Buy.
With all due respect sir , You sat it will always be a push product – can it not be changed ?.
Now, as you say again people are buying products online with no agent forcing them or coaxing them. is this not a sign that insurance can be bought too.
Another case of insurance regulation – good or bad?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Motor insurance is the only insurance product in India mandated by law. This means that any one owning a vehicle is bound under the Motor Vehicles Act, 1988 to have a third-party motor insurance policy.
Clearly then, this product is an important contributor to the business of general insurance companies. As a result of the late privatisation of the insurance sector, there seems to be an underlying rift between public sector and private sector insurance companies. Public sector insurers have had ample time to capture the market, while the late entrants are still struggling to make their mark.
One critical issue in the insurance industry is the much debated third-party motor insurance pool. The motor pool, operational since April 2007, is a corpus of premiums gathered from all general insurance companies, and this corpus is managed by the General Insurance Council.
As a rule, every player must mandatorily contribute to this pool depending on their market share, irrespective of the underwriting done by them.
Although the regulation of tariffs in the general insurance space was withdrawn in 2007, third-party motor insurance continues to be regulated. Owing to huge losses in the motor insurance segment, companies have been demanding an increase of around 150 pct in the premiums. However, in April 2011, the regulator rolled out a hike in the range of 10 to 65 pct in an attempt to provide some relief to insurance companies.
Even so, private insurers are nearly asphyxiating because of the motor pool. Public insurers like New India Assurance own a greater market share and are alleging that they are being asked to contribute disproportionately to this pool and are knocking on the regulator’s door to do away with the motor pool altogether.
