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Revamping Life Insurance Sector

                                                                 -Jagendra Kumar

Life insurance serves three purposes: risk mitigation, saving and tax planning. By choosing an appropriate mix of insurance products, you not only insure yourself and your assets against misfortune but also save tax and plan a future stream of revenues to meet your financial goals. Over the last five years, life insurance premiums in India have grown at a CAGR of 21% driven by the higher savings rates and low penetration. In 2004, Indian insurance companies mobilised over $21 billion, nearly three times as much as in 1999. This kind of capital mobilisation provides worldwide crucial resources for investment in infrastructure, corporate business, long term bonds, and municipal projects.

Ethical Selling

Life insurance companies are training their agents to be ethical. What they can do is create a framework for promoting ethics in an organisation. While a course can provide the tools, a company would have to incorporate systems to promote ethical behaviour. Taking an ethical stand may result in loss of a prospect but ultimately word gets around and results in new business. Life insurance companies have introduced courses on ethics for their sales force. It is a healthy trend.

Invest-Insure-Enjoy Factor

Private insurers are designing and launching new covers ideally suited to individuals looking for some life cover with some capital appreciation. In addition to life cover and a reasonable rate of returns, the new features include single premium facility, high value rebates in cases where sum insured is over Rs 5 lakh and an increase in the sum assured with each passing year. The investment under these policies qualifies for tax deductions under Section 80 C of the Income Tax Act for premium up to Rs 1 lakh per year. Apart from the same, all death benefits of the life cover are tax free according to direct tax norms. ‘Dhan Vriddhi’ of SBI Life is an illustration of the new factor.

Revamping the Regulations

Currently, the Regulator is planning to revamp its regulations in many spheres. Unit-linked insurance policies are being pushed with advisors trying to ride the bull phase of the market. However, the regulation itself cannot stop misselling or unethical business practices. There is a need for industry players to enhance surveillance and to put in place a set of best practices to be monitored by the companies and its association.

Government Policy

The Government still dominates the market, with price controls, limits on ownership and other restraints. Compared to some major emerging markets, India’s insurance market remains small. South Africa and South Korea, with a fraction i.e. 1/20th of India’s population, do at least twice as much insurance business as Indian companies did in 2005. Major policy and institutional issues have to be addressed and changed. Insurance is a capital intensive industry. It is also a long-gestation business. India’s insurance industry needs capital, and a major source of capital would be from foreign investors, who have a 26% cap to contend with. India needs to raise the cap on foreign direct investment to attract capital for the industry.

Over 60% of the insurance industry’s financial assets are locked in government securities. Investment guidelines for insurance companies prescribed by the Regulator must be changed to allow and promote access to insurance funds by the corporate sector and infrastructure projects. Health is an area that is underserved by the insurance industry. India as an economy has a high health spending but poor health outcomes. Another area where the insurance industry is not doing its job is helping mitigate the risks for personal and business losses from natural catastrophes. In the past decade, India and China accounted for 1/4th of the global economic losses from natural disasters. Insurance availability in India for natural catastrophes is almost negligible.

Ping-An Benchmark

Some insurers use appraisal value methodology to calculate the total value of the life insurance companies in India. The appraisal value consists of (a) Embedded value, which is the sum of the net assets of the life insurer and the value of in-force book, which is the present value of distributable cash flows from policies already on books. (b) Value of further new business, which is the present value of distributable cash flow from new policies yet to be sold. None of the Indian life ventures have disclosed the embedded value in their businesses. Hence, to calculate the value of in-force book, few companies are using Ping-An (23118.HK, HK$12.O-V) as a benchmark. Ping-An is a relatively good proxy to calculate this value as it is also a high growth business with a significant proportion of value coming from new business. Ping-An gives the value of its in-force business written since June 1999, when the guaranteed returns were discontinued. These policies make up almost 58% of the total premium received in 2004. On this basis, companies calculate the ratio of the value of in-force business to the total premium received. The same ratio is used to calculate the value of in-force business for the private insurers in India.

The Government is all set to table the much-awaited bill seeking to amend the Insurance Act. The regulatory body would hold a high level round table meet with industry honchos to decide on the final recommendations which are to be sent to Finance Ministry. Meanwhile, the code of conduct needs to be promoted in the organisational culture and be institutionalised through practices at all levels. Ethical standards have significant implications on other areas of operation such as product development, pricing, disclosures, advertising, investment management and internal marketing of an organisation.