India is currently in an unusual state. Despite world’s second largest populous country and with a huge young population (~65% of population lies between 15-35 years age bracket), the inclination towards Insurance has been lopsided towards denial.
The recent article in Business Standard articulates this fact. The article states that Insurance industry in India has grown from 2.71% to 3.96% in the last decade. This figure becomes further astonishing when we consider General Insurance (which includes Health Insurance) where the penetration has gone up from 0.56% to 0.78% in the last decade.
The biggest reason behind this state of denial by people of India is lack of reforms in this sector. From reforms, I am not talking in context of bringing foreign firms in India and hope the wheel will turn on its own. Rather, what is missing is greater transparency, lack of accountability and pushing the sector on every nook of the country, just the same way banking and telecom made the inroads.
If we move back to 2003-2004, Insurance industry saw several Multi National Insurance firms entering Indian markets with various products, built mostly around ULIPs and Market based. But IRDA, which is the governing authority, did not manage the products offered by the private insurers.
The charges were exorbitant, and hence, returns sacrificed. The companies built big budgeted marketing strategies and products were pushed down investors’ throats. With the slump in 2008, the fund values of these policies fall drastically by as much as 60-70% in various schemes. IRDA never took any steps to curb the loot by the insurance companies. Though it has now acted through series of steps taken between 2010 and 2013, but by then, investors’ sentiments have been jolted.
Let us try to evaluate various factors behind this negativism towards Insurance and how the sector stakeholders can manage them:
Make Plans more transparent towards Risk & Return
The biggest problem that an investor faces before buying a plan is lack of clarity on what would be his risk and return on the investment? Though plan brochure speaks about it, but it never gives a clear picture on the kind of returns. We all can see various marketing SMS / Emails speaking about getting several crores by putting few thousand bugs every month!! But the investor is now much mature after being looted in last decade and hence, shows denial towards such plans. I feel what is required here is to clearly speaking about following in the plan brochure:
- What exactly are the charges towards providing Risk Cover?? It should not be “X” Rs. per “1000” of Sum Assured. It should clearly spell out in the terms of % of his premium amount. IRDA can design a sheet with various such details for the customer, which will be signed by the investor.
- How much percentage (%) of his premium going towards investing in various segments like Equity Markets, Bonds, etc?
- What are the commission charges paid by the customer to the agent / company?
- Is his Capital guaranteed?
- The Guaranteed Returns should be % of Premium amount and not Sum Assured, as various plans speak because that creates ambiguity.
Commission should increase with policy retention and not vice versa
Currently, huge chunk of commission is given on the first premium and then it gradually decreases with each year. This push agents towards hard selling by pushing the policy inside investors’ throat without considering whether he has the appetite to digest it? Thus, IRDA should make commission structure, just the opposite. The agents should receive less commission in initial 1/3 of the policy tenure and then a gradual increase. I am pretty sure that policy lapsation wil drastically reduced and agents would be actively involved with the customers towards policy renewals.
Stringent Regulations and Penalty Clauses for Mis-selling
The insurance in India is not ‘simplified’. The agents too command higher commission stating it is a complex product. But the ground reality is that 9 out of 10 agents even don’t know the basics of insurance. The examination is easy to pass. There are set of questions which is gulped down agents’ throat before sitting out for exam. He clears it without understanding risks & rewards and then becomes “puppet” in the hands of insurance companies. During training sessions, these companies give hard core marketing lessons, often mixing projections with real returns like a fine cocktail and then this cocktail is shared with investors. But like any other hard drink, it end up as an unhealthy product for investor’s investments. Thus what is required is a more stringent guidelines on companies as well as on agents towards mis-selling.
- Put the onus on insurance companies to write more vocally in policy brochures on whom to approach in case of mis-selling.
- Define the maximum time needed to resolve complaint.
- Make financial and other punishments more stringent on both insurance companies as well as agents.
Make Insurance Affordable and push it to every nook of the country
Insurance, though is inherent need of any person on earth, yet is not projected this way among the masses. It is still a “push” product as there is a general denial tendency among masses towards insurance. What is the need of the hour is “concentrated campaign” by both govt as well as insurance companies to promote the same, especially in the lower strata of the population where it is needed the most.
IRDA should ask every Insurance company to introduce a low-cost Insurance product for lower strata of the population. Also ask the companies to allocate atleast 20% of their marketing budget in promotion of these products for say next 5 years. Simplify the products and make it as easy to sell just like any other financial product such as Banking. This is only possible, if people start understanding “What is Insurance” and for the same, what is need of the hour is the educational campaign. Once people realize that Insurance as a product is as necessary as Bank account and there are plans which are available for say, as low as 100 Rs premium for a month / quarter, then I am sure it will gain widespread and we may achieve target like 20% of the population in next decade or so.
This is my view-point on this issue. if you have any comments, then kindly contact us or email us at pcj@growyourpaisa.com
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