Life Insurance – the transition

June 4th, 2010

Life insurance has evolved in the past couple of decades. 2000 was the year the private companies entered the life insurance sector which marked its revolution.

For starters LIC has stopped being the synonym of Life Insurance. There over 20 more Insurance companies in the market giving stiff competition to LIC.

Earlier one chose to invest in a policy, just pay a fixed sum towards premium each year, which would reduce his tax liability and give him tax-free, lump-sum cash on maturity. The maturity amount did not take into account inflation. Neither were there numerous policies to compare and choose.

In 1993, endowment and money-back policies ruled the market. Cover was selected based on the amount of Tax saved. But now risk coverage is given due importance thus pure protection term plans have gained popularity although they don’t have a maturity value.

Very few people invest in life insurance purely for risk coverage as their prime reason happens to be investment. But thanks to growing public awareness this scenario is changing albeit slowly. Buyers understand the need for life cover (especially term insurance) and the objectives of insurance.

This is among the several positive changes from the reopening of private sector into the insurance industry although the perception of life insurance as a tax-saving option persists. This is proven as about 50% of the total business of insurance companies is conducted between January and March when people make tax-saving investments.

Also privatization has brought about introduction of numerous innovative insurance products in the market. Private insurers did start with issuance of endowment plans back in 2000. But it was the launch of the unit linked insurance plans (Ulips) that transformed the life insurance industry in India.

Recently ulips has been the popular insurance product in demand. It is the perfect combination of long-term investment option along with insurance cover.

Initially the private companies were apprehensive about long-term tie-ups with foreign partners when they started operations. Political sections used the opportunity stating that private companies could not be trusted.

These misconceptions gradually cleared over the years but in 2008 due to the global financial crisis which made the large merchant bankers fold created doubt once again.

But soon it was certain that private insurers are more customer-oriented than the public sector LIC. For instance, the premium of his term plan from HDFC Standard Life Insurance is paid through his HDFC Bank credit card. He can also drop a cheque at any HDFC Bank branch. It is this customer orientation that has helped private insurers to steadily increase their share in the premium for new policies from 1.4% in 2001-02 to nearly 40% in the first nine months of 2009-10.

This does not mean that LIC has lost its market share as they enjoy the feeling of reassurance because of the government ownership.

All private insurance companies are well-capitalised and have to maintain capital adequacy and solvency margins as per rules laid down by the Insurance Regulatory and Development Authority (Irda).

The insurance industry has grown exceptionally in the past decade. Statistic show that in 2000-01, insurance premium accounted for only 1.39% of the country’s GDP while this is about to touch 5% this year. This clearly indicates that more and more Indians are getting themselves insured.

But sadly, India continues to be an underinsured market. The average life cover per policy works out to a little over Rs 1 lakh. This means that the industry has to increase penetration and ensuring that the sum assured increases. It is imperative that the customer has to understand that insurance is not primarily an investment but a risk covering tool for the uncertainties in/of life.

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