Expert Zone
Straight from the Specialists
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.
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.
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.
Five things to do before you turn 30 — financially
(The views expressed in this column are the author’s own and do not represent those of Reuters) 1) Start investing in Mutual Funds There is a reason why I mention this as the first point in the article. Mutual funds are by far the best starting tool for any investor. And this holds true for any type of investor — extremely aggressive ones and those who do not know much about investments.
The tough part of managing the portfolio is best left to the experienced funds managers who have adequate resources and the knowledge to best maintain the returns on their funds portfolio and manage the associate risks. They are far better informed than an individual can expect to be in most cases.
HOW TO DO IT?
Always go the SIP way, at least initially. Well, as the name (Systematic Investment Plan) suggests, you systematically invest a certain amount every month, irrespective of the market conditions. Choose one or two large-cap funds with a proven track record and then just stick to it. You can base your choice of funds on recommendations from websites like mutualfundsindia.com or taking help from your financial planners.
The amount invested every month can be as low as 500 rupees or maybe even 5 percent of your monthly salary to start with. You can start with small amounts and then gradually increase it when you get comfortable. You should have a minimum five-year horizon, the longer the better.
WHAT NOT TO DO?
Do not evaluate the portfolio every month or with every dip or rise in the stock market. Once decided on the funds (take your time in doing this), leave it for at least a year. You may want to review the performance of your funds once every year and compare it with peers to check the relative performance and then maybe make a shift, if needed.
