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Sunday, August 29, 2010

Is LIC India’s most valuable company?

When privatization of the Insurance sector started in 2000, many experts were predicting the gradual weakening and ultimate demise of Life Insurance Corporation of India (LIC0). The state owned life insurance monopoly was perceived to be slow, inefficient and behind the curve. But the situation has turned out drastically different.
In the face of intense competition, LIC has held on to its own and still commands an awesome 70% of the market share . Even more interesting is the fact that in recent months and years, this percentage has gradually creeped up. While the private life insurance companies have tended to pay higher commission margins to their distributors so that they can generate more sales, LIC has been conservative in their commission payouts and generated sustainable, profitable business.

So what then is LIC’s worth. With 2 crore policy holders, assts of Rs 11 lakh crores and 71 % market share in a growth market, LIC’s embedded value has been estimated to be at Rs 2.5 lakh crores, give or take a few thousand crores. Embedded value is essentially the present value of profits from the future, and adjusted net asset value. The recent capping on ULIP charges that IRDA has mandated will help LIC in sales as they have a huge bouquet of traditional products. On top of that, a buoyant stock market and an economy growing at 9% can only lead to an increase in valuations. Though it is difficult to establish a clear ratio between market capitalization and embedded value, India’s most valuable company by market capitalization is Reliance Industries at Rs 3 lakh crores. LIC, with an embedded value of Rs 2.5 lakh crores is not too far from that. Add in the fact that there will be a premium attached with being the leader in a growth industry, LIC can easily command a market capitalization higher than Rs 3 lakhs, were it ever to list in the stock market. And thus become India’s most valuable life insurance company!!

Compared with the valuations that Insurance companies have in China, this will not be surprising at all. China Life commands a market cap of 111 billion USD. LIC could very well have a market value of in excess of 65 billion USD, ie approximately Rs 3 lakh crores.

Friday, August 27, 2010

Factors affecting Car Insurance Premium

Among the retail consumer products offered by general insurance companies, car insurance is the most complicated in terms of the number of variables that have an impact on the final premium. Online car insurance aggregators such as PolicyTiger are working on providing an easy to use interface where the user can compare the insurance premiums charged by different insurance companies for the car of his choice.

The Car Insurance Premium has 3 components- Own Damage, which in most cases is more than 90% of the premium, Third Party and Personal Accident cover.

Now, let us have a look at some of the factors that determine the premium charged for car insurance.

Location: Under the Motor Insurance act, the country was divided into two zones- the top 8 metros and Rest of the country. The premium for a car registered in the top eight metros is a little higher than it is for the Rest of the country as the perceived risk is higher in these top eight cities- Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune, Bangalore and Ahmedabad. Even today, most general insurance companies follow the same classification while some companies have refined this further. For eg, certain companies charge higher premiums if the car is registered in Punjab or in Delhi, where the incidence of theft and accidents is higher.

Engine CC: Cars with higher engine displacement (CC) have a higher component for the Third Party part of the premium. The classification here is in terms of <1000 cc (Rs 670), 1000 to 1500 cc (Rs 800) and > 1500 cc ( Rs 2500)

Age of the vehicle: Insurers allow for a depreciation of the vehicle with age. As the age of the vehicle increases, the depreciated value reduces and the Own Damage component of the premium keeps reducing

No claim bonus: Insurers want to reward policyholders who have had no claims or fewer claims. If there has been no claims over the preceding years, insurers offer upto 50% rebate on the Own Damage component of the premium

Car manufacturer: The Insurance companies closely track their claims ratios and try to establish patterns whereby one vehicle model might have had higher claims percentage than another model /make. They factor this into the pricing and load up the premium for vehicles which are more prone to accidents. For eg, assuming all other things being same, the premium for a Mahindra Scorpio might be more than that of a Honda City.

Profession and age: Some companies offer a 5% discount if the policyholder is a Central Govt Servant, teacher, CA etc. Similarly, certain companies have varying premiums depending on the age of the driver. In developed markets of the West, even the car color has a bearing on the premium

As the market evolves in India, we expect even more variables to be added while calculating the premium for car insurance.

Tuesday, August 24, 2010

Traditional Life Insurance Products to Come under the Scanner..Eventually

Life Insurance companies have been hit hard by the cap on charges that IRDA has mandated on ULIPs.. Come Sep 1, the surrender charges, administration charges and the commission that Life Insurance companies pay on ULIPs will come down substantially. While this is good for the consumer, the worry is that in the short term, it might become unattractive for the distribution channels, and thus fewer people might have access to life insurance. The percentage share of ULIPs as a part of the overall business of the private life insurance companies is greater than 60%. Under such a scenario, the private life insurance companies have begun focusing on traditional, non guaranteed products as there has been no capping on charges on these products.

But recently, there has been a scare among the life insurance companies that once the ULIPs are out of the way, IRDA would look afresh at the guaranteed products. There have been unconfirmed reports about IRDA looking closely at the charges and commission structures of guaranteed products over the next three months. However, the IRDA chairman has come out with a statement recently that there are no plans on IRDA’s front to cap the charges that insurers apply on traditional savings cum insurance products. IRDA is of the view, at least publicly, that the traditional products such as term, money back and endowment are at a mature stage of their life cycle and there is no need to micromanage them by applying the caps on charges.

Public posturing apart, the author is of the view that the regulator will definitely keep a hawk eye on these products to ensure that the insurers, after being stifled on the ULIP front, do not misuse this category of products to go back to the commission and charge levels which IRDA is determined to bring down. IRDA would not want traditional products to provide a loophole to the current regulation that they have painstakingly eked out. On being probed that commissions as high as 80% of the first year premium were being paid on traditional products, IRDA mentioned that they will make sure that such misdeeds are tackled.

In India, because of the rush for business by private life insurers for new business, the system has bred a fat cat distribution system wherein the distributors with higher volumes of business have got used to commission levels as high as 60-70% of the first year premium. It is but natural that these channels will try and protect themselves when these income levels are threatened by the new IRDA regulation. Thus, they will find new ways to beat the system and guaranteed products offer the silver lining to them in this crisis. IRDA would do well to make sure that these products do not become a channel to exploit the average unsuspecting consumer, whose level of awareness and understanding about the life insurance products is quite low.

Friday, August 20, 2010

Life Insurance Policies might get cheaper: Reduced mortality charges

Typically, a life insurance policy has two components- protection and savings/investments. IRDA , through their latest guidelines on ULIPs have ensured that the various charges on the savings/investment component of the life insurance policy will become cheaper. But now, a further change is on its way which will benefit policyholders- the mortality charge , ie the premium that a person pays for the life cover- might also reduce.

In India, mortality charges have primarily been defined by the 1994-96 LIC table. For example, the probability of death of a 40 year old was taken as approximately 2 per thousand while that of a 60 year old was taken at about 13 per thousand. Since then, life expectancy has gone up . Data has been collected from LIC and the private insurers and this has been submitted to IRDA. Actuarial departments indicate that the death rates may have come down by 20-25 % in the higher age bracket. This might lead to a reduction of 15-20% in the mortality charges. The new tables has been prepared and takes the variables of gender , age and geography into account. Earlier, the tables only considered gender and age.

The reduction in mortality charges might not be uniform across segments. Our view is that premiums for younger people will reduce more, for middle aged people it would be less changed, and the jump in premium that we used to see for higher age brackets would reduce.

The impact of this reduced charges might be seen most in pure term policies. However, many private insurance companies had started following their own mortality tables and had reduced the premiums for pure term policies aggressively. In the light of the new change brought about by IRDA where life insurance policies have a minimum sum assured of 10 or 7 times the annual premium, this impact will also be felt on the ULIPs which are extremely popular in the market. For traditional policies, the impact could be in the form of a higher declared bonus rates.

Monday, August 16, 2010

Cashless Health Insurance…the script develops

The standoff between the public general insurance companies and the top hospitals has softened a bit, with the public insurers mentioning that they will entertain cashless claims for now. But there is a huge gulf between this public posturing and reality. For all practical purposes, the preferred hospitals are not entertaining cashless claims from their patients/customers.

The basic premise of the premium hospitals is that the patient has to pay for premium quality, and thus all hospital procedures between the premium hospitals and non premium hospitals cannot have the same price. But that is only half the truth. The public insurers argue, and justifiably so, that hospitals inflate bills tremendously when the patient has a cashless cover. The patient does not appear to be too bothered as he is not paying himself. The public insurers are now putting pressure on the premium hospitals to draw up a matrix where the expenses for the bulk of the procedures for which claims are paid are reduced by 30-40%.The hospitals are , as expected , fighting it. But sooner or later they will have to yield as their patient volumes are reducing drastically.

Another interesting development in this entire saga is that the public general insurers have now decided to set up their in-house TPA as they feel this will help in reducing their claims ratio. Some of the private insurers, for e.g. ICICI Lombard, already have their in-house TPAS. For a moment, let us step back and understand what is a TPA.

A TPA ( Third Party Administrator) is an organization that processes insurance claims. They sometimes handle the whole gamut of services such as claims admission, claims administration, interacting with the hospitals and claims payout. TPAs are paid by the Insurance Companies, and thus at a fundamental level, their loyalties lie with the insurance company. TPAs essentially connect the policyholder, the insurance company and the hospital, and thus are a crucial element in the entire insurance process. TPAs were set up first in 2001, and their core purpose was to act as an intermediary between the policyholder and the insurer. They play a very important role during the entire cashless hospitalization process. Policyholder cards are issued by the TPAs, and once the policy has been issued, the TPA remains the central point of contact between the insured and the company. Cashless claims are disbursed by the TPA to the hospital.

Now the four public sector insurance companies would like to set up an in-house TPA, and have invited expressions of interest from various parties. 25% stake in this TPA entity would be with the external entity and the balance stake would be with the insurance companies. The insurers feel that this will help in reducing the claims ratio which is in excess of 130%. The frauds that are committed might go down as the controls would be tighter. The other factor that would come in is that there would be economies of scale achieved- currently the four public companies work with as many as 30 TPAs. Because they are fragmented, the TPAs do not have bargaining power with the hospitals. One big entity would be able to squeeze out far better rates from the hospitals. This new entity would be operational by July 2011 and over a period of 2-3 years, the public health insurance companies would look at transferring their entire business to this entity.

Tuesday, August 3, 2010

Basics of Term Insurance

Term insurance is the purest, simplest and perhaps the most useful form of life insurance. Under a term insurance policy, the policyholder pays a premium for a fixed term ( which is typically between 5 and 30 years) . If the policyholder survives the duration of the policy, the risk cover comes to an end. If something untoward happens during the term of the policy, the sum insured is paid out to the policyholder’s dependants.

Life insurance policies can be bought by people for various needs- savings, protection, investment and retirement. Strangely, In India, in all the excitement about ULIPs and insurance as a long term investment option, the very basic fact that insurance at its core needs to provide protection has been ignored to a large extent. And term insurance products have not been able to find their place in the sun. This is essentially due to a quirk in the distribution system where distributors are more interested in selling policies with higher annual premium as the commissions are higher. Term insurance is typically very cheap- a 35 year healthy male would be able to buy a 10 year term insurance of Rs 50 lakhs paying an annual premium less than Rs 10000.

Term insurance is also a product which is very easy to compare on the internet. Prices can vary widely between different insurance companies, and the price as well as other features can be compared in a matter of minutes. Also, this is a product that can be bought very easily online. Most life insurance companies in India offer online term insurance sale in India.

With the new IRDA guidelines on ULIPs, the protection component on all insurance policies have been enhanced to a minimum of 10 times ( or 7 times) the sum insured depending on the age of the insured. This is a welcome move and will make the insured more aware of the fact that there is a term insurance component in his policy, without it being just a pure savings or investment policy.

Another variation of term products is a product called Term with Premium Back. This is primarily done so that the insured, if he survives the term of the policy, is returned all the premiums that he has paid at the end of the policy term. This is popular in India because people feel that they will at least get their money back. But the fact is that there is no free lunch, and the premium for the same degree of cover is far higher for Term with Premium Back then it is for a pure term policy.

How does one judge the level of term insurance that one needs : various rules of thumb are used. At a basic level, 10 times the annual income if one is below 45, and 5 times the annual income if one is above 45, might be a good starting point. But then, it is difficult to generalize well.

As a term insurance product is a form of pure insurance, there is no surrender value, paid up value or loan available against term policies.

Term insurance premiums are a function of the person’s age, gender, policy term, general health and lifestyle habits. The older the person is, the higher will be the premium. The premium for a lady is lesser than it is for a gentleman the same age as female life expectancy rates are typically higher. The longer the duration the policy, the higher is the annual premium as the life insured will be insured at a stage when he is older, and thus has a higher probability of a negative event. Smokers typically have a far higher premium than non smokers. If one is obese or has preexisting diseases, then the premiums go up. For most high value term policies above 35 years of age, a medical test is required.

Term insurance can also be bought along with riders such as Accidental death and disability (ADD), Critical Illness (CI), Permanent Total Disability etc. Each of the riders has their own benefits and cost, and the user has to choose judiciously and buy what is useful.

Who should buy term insurance?

Term insurance policies are suitable for people who wish to obtain maximum insurance coverage at a minimal cost. Ideally a term insurance policy should be bought early and is best suited for the age group of 25-50. Term insurance should also be bought for credit protection- if one has taken a huge loan for an asset, it is wise to cover one’s life for the loan amount so that if something happens to the loan holder, the burden of the loan does not fall on the family members.

What to look for in term insurance policy before buying?

Choosing the best term insurance policy is very easy. As term plans just offer pure risk cover, a good comparison between the products of various insurance companies can be done on the basis of the premium charged for the same insurance cover. One should also consider the tenure or term of cover that you can buy. Finally, the term insurance that offers the maximum term at the lowest possible cost should be bought.