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Hard Questions for the Insurance Industry

Insurance companies make money at the cost of their clients

It is now apparent that there is a broad swell of opinion that there are deep problems in the Indian insurance industry and in the interest of the public it needs to be fixed.

All of us who have been vocal about this problem have largely focused on the high-cost and high commission investment products that the insurance companies are selling. However, there is another aspect to this, which relates to the quantity and quality of insurance that is being delivered to the customer.

I don’t know whether you have noticed, but the Indian insurance industry’s achievements are always measured either by the premium they have collected or by the number of agents they employ. Whether in media articles, press release or websites, the refrain is always about the crores of premiums collected or the number of people who became agents.

I think this is a Freudian slip. The insurance industry exists not to collect money, but to provide insurance, and we need to answer questions on the delivery and match it with the premium. This needs to be publicly researched. Consider that the industry was opened up to provide insurance to under-insured masses. A decade later, we are on the verge of another round of opening-up. Perhaps, it’s time for some hard numbers on the insurance that is being delivered.

This is important because the nature of insurance products leads to people being drastically under-insured.

The nature of commissions and compensation is such that there is a huge incentive for insurance companies and agents to divert more of the premia towards investment and away from cover.

A typical ULIP-based insurance product would involve a life cover of just about Rs 10 lakh for an annual premium of around Rs 1.25 lakh. Now think of an urban family with one 32-year old bread winner who earns perhaps Rs 6 lakh a year.

The annual premium of Rs 1.25 lakh would about saturate the savings capacity of this family. Yet, if this family’s earning member were to be hit by a truck tomorrow morning, the cover of Rs 10 lakh would sound like a joke. The reason is that of the premium paid, only a fraction goes to provide life cover, the rest is frittered away in high commissions.

In reality, the premium that this family could have afforded can easily pay for adequate life cover. For about Rs 25,000 a year, this 32-year-old can buy Rs 40 lakh worth of term cover, which sum would definitely be meaningful if he dies.

However, to get the right insurance package, you need to be knowledgeable, confident and truly persistent. To measure the impact of liberalisation, we need to know the number of Indians who have meaningful amounts of life cover, not the premium amounts or agents involved.