The entry of private insurers has definitely deepened the penetration of life insurance in India. Private companies have been operating in this country for a couple of years only, but they are already selling one in ten new policies, which, given LIC’s stranglehold on the market, is not a mean achievement.
But how has the consumer benefited from this burst of competition' Has the entry of private companies improved product offerings or has the return on insurance policies gone up'
The fall in interest on safe haven assets is irreversible, and so is the cut in insurance bonuses. Insurance just can’t be as attractive as earlier in terms of return, but the consumer now has a wide variety of products to choose from.
Some of them are fairly advanced — for instance, ‘unit-linked’ products, which, by far, are the most popular in developed markets.
Though in India, traditional ‘with-profits’ products are still more popular, ‘unit-linked’ policies are fast making inroads. Consumer appetite is already skewed towards ‘unit-linked’ policies, and a number of companies that do not have these products yet, are thinking of launching them.
Most private insurance companies have, however, chosen to concentrate on traditional ‘with-profits’ products so far. They are simple in structure — there’s a ‘sum assured’ that you receive on maturity or your survivors get if you die before the policy matures, plus bonuses, annual and terminal.
Previously bonuses too were guaranteed, but now they are market-linked, which means they are based on the return on assets in which the insurance company invests your money.
If the bonuses are guaranteed you need not care what the insurance company does with your money. But if they are not, you are quite likely to demand a clear understanding of how the insurance company manages your money.
‘Unit-linked’ policies are supposed to give you a clear idea of what the insurance company is doing with your money. In fact, it even allows the policyholder to decide the broad allocation of his money in different asset classes — equity, corporate bonds, government securities and money market instruments.
‘Unit-linked’ products operate like mutual funds. The charges, for administration and the various covers — for death, critical illness, etc — that you may have chosen are deducted from the premium, and the rest is invested in a fund of your choice.
The net asset value (NAV) of each of these funds are declared regularly which gives you a clear understanding of how your savings are being managed. Being transparent, you could compare the charges and returns on investment before buying a ‘unit-linked’ policy.
What are the factors that you should consider before buying a ‘unit-linked’ policy' Insurers try to differentiate their products through one or a combination of factors — service, charges, returns, flexibility in payment of premiums, etc.
On any of these factors, however, there isn’t much to choose among the private insurers at present. But over time — say three to four years — what’s going to separate one from another is servicing, return on investment and charges.
Frankly, it’s quite confusing at present. All the private insurers have delivered stellar returns despite conservative investment strategy, charges are falling and not too many complaints have been heard about services.
“We have had rallies in both the bond and equity markets. The party is not going to go on for ever, and the current returns are not sustainable,” cautions Shivaji Dam, managing director of OM Kotak. “Only after you have a performance track record of three to four years, you could form an opinion about an insurance company based on the returns it has generated.”
True quality of services, too, would be established only after a considerable length of time. Any prudent insurer is unlikely to be inundated with claims within a couple of years, and until it has settled a respectable number of claims, it cannot establish its credibility.
“Good sales practice is another key issue. A lot of insurance companies the world over has got into trouble for not explaining a product properly or having led its policyholders to expect unreasonable returns,” says S. K. Mitra, the head of Birla Sun Life Financial Services.