Insurance Article, The Insurance Times 2020, The Insurance Times May 2020

New World of Life Insurance in India

“The only constant in life is change”-Heraclitus

Things are not going to be the same again. The world is changing for better.  As Heraclitus, a Greek philosopher said change is the only constant in this world. And what is changing? Everything that we can see, touch and feel is changing. Not only that, everything that we can’t see, touch or feel is also changing. The products and services produced across the world are changing. The so called superpowers, in terms of economy are changing. The way we look at the essentials and non-essentials is changing.  What not? Everything is changing.

Survival of the fittest has been the norm of life on this earth. Whether it is business or life. Under these circumstance, is it fair for us to expect that the business we are in will continue to be the same in future? Obviously not. Then what are the areas in which the life insurance business is going to change? We will have a look at that in this article.

Life insurance is a service. We can’t see, touch or feel. We can only experience it in the form of a service. The way in which life insurance business is happening in India at present is a combination of life insurance with investment. These are two primary elements which decide the characteristics of the product being offered by life insurance companies. Till now, people are ‘largely’ buying these products to satisfy a representative of life insurance company who happens to be their friend or relative. It is said that this business is a relationship business.  If you have good relations, you will be able to get a policy. Another purpose of buying life insurance policies in India, by and large is to get the tax benefit provided by the government. If they exhaust the limit of section 80C / 80D/80CCC etc., the average customer is happy that he is getting the full tax benefit provided by the company. And most of them firmly believe that only that much is to be saved or invested to secure their life and no additional investment is required in life insurance.

Let us have a look at the products offered by life insurance companies in India. They are term insurance, endowment / whole life products and pension products. Along with the base products, they also offer riders as an attachment to the base policy at a cost. There are different types of riders such as additional term insurance, accidental insurance, permanent / partial disability insurance, critical illness insurance etc..

Term insurance is a commodity offered by all life insurance companies with different rates, which depend on the cost structure adopted by an individual company. People choose the company on the basis of advisor, brand name and a few service parameters such as customer satisfaction index and claim settlement ratio. However, the nature of this product is same, which is, money will be paid to the nominee / beneficiary on the death of the insured either as lumpsum or instalments. There is another variation where the premiums paid during the term of the policy will be refunded at the end of the policy if the policyholder is alive, which is called ROP (Return of Premium benefit).

Some interesting facts about term insurance premiums is that due to high competition among the life insurance companies, the premiums have been going down and down from 2001 since the time the private companies have come to India.  Though the cost of term insurance is going down, the share of annual premium equivalent has gone up from less than 5% three years ago to 20-25% as of now. This is good for the life insurance companies, as protection plans give the best margins for them.

Let us see how is this going to change. The term insurance plans are high risk products for the life insurance companies, and at the same time the margins are also high. How does it happen? The majority of the risk is transferred to re-insurance companies which are the ones who insure the risk of insurance companies. The re-insurance companies generally operate globally and hence the risk is balanced in case something goes wrong with a particular corner of the globe. By now you must have understood what is going to happen now onwards. You are right.. Since the pandemic affected all the countries on the earth, the equations of reinsurers is going to change. They will globally increase the cost of term insurance. As of now the cost of term insurance is very low in India compared to developed nations such as US, Singapore etc.. Since, the cost is already high in advanced countries, re-insurers will focus on the countries where the cost is low and will try to increase the rates in those countries. Consequently, the term insurance rates in India are certainly going to see a hike in the premiums very soon, if not already happened. The contribution of term premiums in the total annual premium equivalent is also going to increase and it is good for the life insurance companies as these products provide good margins for them. Now, the point is whether the companies will reduce their margins and keep the rates low for the Indian community? Very unlikely as the solvency margins are to be essentially maintained by the companies as per the regulatory provisions. At the end, BE PREPARED to pay much higher cost for term insurance in future.

The other kind of the life insurance products endowment/whole life policies.  In this again there are products which give guaranteed returns called non-participating products. These products do not participate in profits/losses of the company and returns are guaranteed over the period of the contract.  The companies carry a higher risk of the guaranteed returns over long period, the return is also very low.  However, it is guaranteed during the life of the policy and/or at maturity as the case may be. It is essential that the companies have to provide for sufficient reserves to meet these guaranteed returns. According to a report published by ‘AM Best’ rating services, 73% of 60 companies which failed in 2000-2001 was attributed to insufficient loss reserves. Apart from this, other factors such as overstated assets, under-pricing, unforeseen claims and catastrophic events also contributed to the failures of insurance companies.

The other set of endowment policies are participating policies.  They will not have any guaranteed returns, but depending on the company’s performance and valuations at the end of each financial year a profit sharing is done with the policyholders in the name of ‘bonus’.  This can vary every year and gets accumulated which will be paid to the customer at the time of maturity. In such products the level of risk for life insurance company is reduced.  However, to remain competitive in the market, few companies tend to declare higher bonus which can be dangerous for the company’s existence.

In case the companies resort to the practices such as under-pricing connected with rapid expansion, entry into new areas and delegated underwriting etc. can also put them in trouble. It is pertinent to note that a rating agency for country-specific factors which could adversely affect an insurer’s ability to meet its financial obligations places India at a risk level of CRT – 4 measured on a scale of 1 to 5 where Country Risk Tier 1 (CRT-1), denoting a stable environment with the least amount of risk, to Country Risk Tier 5 (CRT-5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. This indicates that the companies operating in India have to exhibit a higher level of caution in factoring the risks into their pricing and valuations.

Current situation of the pandemic in India, though is not alarming has caused a huge damage to the GDP, which is estimated to be at 1.90%.  As it is India has the lowest per capita income with second highest population numbers in the region. This can become even worse as we see the negative impact of Pandemic in various components such as financial, economical and social life. A lot of money is being spent on the well being of people living below poverty line and also on providing medical facilities for all those affected by the pandemic.  The slowdown in economy can result in loss of jobs, lowering of per capita income, more spending on medical expenses and rise of inflation.  These factors can reduce the disposable income and can result in lower level of savings. The demand for the products which have a savings component can come down and the pure insurance component can go up.  This will change the equations of financial inflows through new business and also investment earnings of life insurance companies. This can result in lower amounts of bonus declaration which will again be unattractive to the people who want to save money through insurance products.  The life insurance premiums in India are more or less on par with US (2.88%) at about 2.74% of GDP.  China has insurance penetration of 2.33% whereas UK has a penetration of 8.32%. This may not remain so as the term insurance component goes up and the savings kitty comes down, especially in India.

Another component of life insurance business in India is pensions. These are again divided into two types known as defined benefit and defined contribution.  Now, defined benefit is out and only defined contribution schemes are prevalent in India and most of the life insurance companies have products under the banner of retirement plans. One can start accumulating the corpus from the time he/she starts earning and plan for a regular income called annuity from a particular age.  These can be termed as annuity plans more than pension plans.  In India annuities are taxable as per the Income tax guidelines.

Annuity plans typically will have long time horizon, if we look at from the point of view of accumulation and payment to the policy holder from a particular age and as long as he/she is alive.  Of course, this depends on the option the customer chooses before the annuity payment is started by the company from among 5 to 8 or 9 options. This is a product which should become more attractive for the customers, because it spans over an entire life of a customer.  One can invest in lumpsum and get guaranteed returns over a period of his entire life and of spouse and get back the corpus also, depending on the options one exercises. The annuity payable will be same throughout the period and hence again a high risk proposition for the company, which means that the companies have to carefully factor in all risks that may arise due to longevity, interest rates, investment returns and general financial condition of the economy over a longer period of time.  Here again the risk factors as mentioned by ‘AM Best’  have to be considered while arriving at the rate of return to be given to the customers.  However, these kind of pandemics can turn in favour of the insurance companies, because of the adverse effect it has got on the senior citizens of above 65 years.  But general economy and the falling interest rates can adversely impact the guarantees given by the insurance companies, and hence they will keep on revising the guaranteed rates downwards from time to time.

As we started learning that things are going to change, we have seen the products and price variations due to the pandemic.  However, the processes of administration, servicing and marketing also have to undergo a huge change.  Adoption of ever growing internet users and availability of data at affordable prices can trigger the next revolution in these aspects of life insurance. Younger generation uses the internet for various purposes ranging from learning to entertainment.  However, sooner than later they will be using it to make investment decisions through data interpretation, virtual discussions and electronic agreements. In due course of time even the government will have to provide for recognising the electronic agreements as official documents.  The repositories will have a major role in safeguarding the data and use it for the benefit of both insurers and the customers from time to time.

With the advent of 5G coming around the virtual discussions will replace personal discussions with more impact. As mobile internet, smart phones and 4G changed the way the customer and companies are interacting with each other, 5G is going to change the entire thing once again. While many other industries have taken advantage of these technology innovations and built new revenue streams, most of the insurance companies are struggling to provide basic digital services to their customers. Now the time has come to embrace the technology and support the business processes. 5G technologies are going to streamline the Internet of Things (IoT), especially for consumer usage.  The world is constantly changing, though some “groundbreaking” innovations do little to change it. Then something like 5G services come along and completely change the foundation of how our world operates. 5G will change us, on a worldwide level. This technology becomes a necessity after the pandemic impact on the insurance industry, for the companies to service their customers in a better, faster and innovative methods. As of now we can’t see what it can do to us but the WORLD IS CHANGING….

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