Life Insurance : ULIPs vs Traditional Products

Until end of August this year, the bulk of the life insurance products sold by insurance companies was ULIPs (Unit Linked Insurance Plans). Almost 70% of the new business premium earned by the life insurance companies was through ULIPs. The entire life insurance distribution machinery touted ULIPs as the ideal investment cum insurance product. While ULIPs were the flavour of the reason, there was a slightly unfortunate reason for them being pushed so much by the distributors- and that was because ULIPs had very high commissions for the person who was selling it, sometimes as high as 70% of the first year premium. Policy administration charges were high, surrender penalty was exorbitant and mis-selling was rampant. And finally, the cookie crumbled- first SEBI came down heavily saying it had a right to regulate ULIPs because they were essentially mutual funds masquerading as Insurance, and then IRDA cracked the whip laying down stringent criteria for the ULIPs. Commission were reduced,  charges were minimized, and overall transparency was improved. In an ideal world, ULIPs became a great product for the consumer. But we do not live in an ideal world.  While the ULIPs of today are far more aligned to customer interests, we find that there is no zeal and fervour to sell them on the part of the distributors. The very agents who were pushing ULIPs down the throat of unsuspecting customers do not consider ULIPS as the flavour of the season anymore. They have now fallen back upon the traditional products where IRDA has not laid down any guidelines for commission level.

Thus we find that traditional products sales have suddenly taken off. This is primarily because these products now allow the insurance agents and distributors to earn their fat commissions, and not because suddenly traditional products are better for customers than ULIPs. On the contrary, today, a ULIP is a great savings and insurance product.

If we look at the data coming out, we see that 50% of Reliance Life’s product sales are now traditional products, whereas a year ago, only 15% was through traditional products. Birla SunLife now generates 30% of their premium through ULIPS as compared to only 8% through ULIPs a year earlier. In the case of ING Vysya Life insurance, only 10% of their sale is through ULIPs now. All the insurers narrate the same story about how they are trying to reduce their reliance on ULIPs . But the real reason for the decreased importance of ULIPs is because the insurer can not pay enough commissions on ULIPs to keep the distributors happy due to the IRDA guidelines. And thus, they are resorting to selling traditional products. So next time, your friendly neighborhood agent espouses the virtues of a traditional life insurance product, do know that the real reason for the promotion is something completely different!

Claims payment record of the Private Insurance Companies

As we know, there are 20 odd private life insurance companies in India, and there is LIC which is a public sector company. LIC is the 800 pound gorilla, managing to hold on to about 75% market share even 10 years after private companies have been allowed into the life insurance space. The private life insurance companies position themselves on being more customer friendly, wider array of products etc while LIC holds on to its positioning of trust, experience and government backing. One of the key parameters on which to judge a life insurance company is their claims payment record. At the same time, we must note that given that life insurance has become more of  a savings and investment product, the returns that they provide are perhaps more important than claims payout ratios. Nevertheless, claims record is definitely not a variable to be ignored.

 
A table illustrating the claims rejection percentages of the top life insurance companies in 2009-10 is presented below:

Life Insurance Company	Claims rejection ratio (%)
LIC	1.21%
Aviva	9.75%
Bajaj Allianz	5.2%
Birla SunLife	10.62%
HDFC Life	4.67%
ICICI Prudential	3.27%
ING Vysya	4.26%
Kotak Mahindra	4.29%
Max New York Life	12.31%
MetLife	5.94%
Reliance Life	7.05%
SBI Life	14.75%
Tata AIG	12.3%

An important observation from the above table is that the claims rejection ratio of LIC is the lowest, thus implying that their record is the best as far as claims payment is concerned. At the same time, the very high percentage of claims rejection of SBI Life and Max  New York Life surely comes in as a surprise.

It must however be noted once again that in Unit Linked products that life insurance companies promote aggressively (or at least was promoting till Sep 2010) , the returns earned on the fund is perhaps a more important variable than the claims payment (or rejection) ratio. However, for non life insurance companies, which offer pure protection/insurance products with no savings or investment component, claims payment is the crucial variable along with the speed of processing of claims.

Let us now look at the incurred claims ratios of the non life insurance companies:

Non Life Insurance Company	Incurred claims ratio
New India Assurance	89%
Oriental Insurance	99.69%
United India Insurance	78.62%
National Insurance	99.16%
Royal Sundaram	68.95%
Reliance  General Insurance	77.3%
Iffco Tokio Insurance	83.44%
Tata AIG	60.54%
ICICI Lombard	85.35%
Bajaj Allianz	71.9%
HDFC Ergo	80.73%
Bharti Axa	104%%

One data point that stands out from above is that Tata AIG General Insurance seems to be sourcing the best quality business from the underwriting point of view, whereas the claims payment ratio of Bharti Axa seems to be quite high. Alo,the claims payment ratio of the public insurers, at an overall level, is higher than that of the private non life insurers.



Claim settlement record of Indian Insurance Companies

An insurance contract between the insurance company and the insured is one of trust. The moment of truth in this relationship appears when there is a claim by the insured (in the case of a non life policy) or by the dependents (in the case of a life insurance claim). Till that moment comes, everything is hunky dory- premiums are being paid regularly by the clients, and the insurance company is only too happy receiving them. However, the moment a claim appears, an insurance company proceeds to evaluate the claim closely, as every claim paid out is an expense for the company, hurting profitability. Thus, there is a basic conflict here: the insured wants the maximum claim to be paid, while the insurance company would like to reduce the claims outflow to the extent possible.

From a customer’s point of view, it is very important to study the claims settlement history of a life insurance or a general insurance company before deciding to purchase an insurance policy from that company. During the sales process, the sales representatives will be all sugar and honey so that the prospective customer signs up. But the fact of the matter is that if the insurance company you are considering has a bad history of claims settlement, there is a high probability that you will face a claim rejection or reduction when the time comes for you or your nominees to file a claim.

We had a close look at the claim settlement data of the various insurance companies. This is what that data tells us:

LIFE INSURANCE: Apr ‘09-Mar ‘10

Life Insurance Company	Total Claims (%)	Claims Paid (%)	Claims refused (%)	Claims pending at year end (%)
LIC	100	96.54	1.21	1.41
Private Insurers	100	84.88	7.6	7.48
Total	100	95.24	1.93	2.08

NON LIFE INSURANCE :Apr ’09- Mar ‘10

Category	Public Sector	Private Sector	Total
Fire	81	73	80
Marine	76	86	78
Motor	88	80	85
Health	120	92	111
Others	57	57	57
TOTAL	88	80	86

The table above clearly reveals that the Public sector insurance companies are more generous in terms of paying claims. The life insurance data shows that LIC pays almost 97% of the claims while the private life insurance companies pay about 85% of the claims. The same pattern is revealed in the non life insurance sector also where on an overall basis, the claims ratio of the public non life companies is higher than that of the private general insurance companies. However, one needs to be careful here before jumping to a conclusion. It could very well be that in the public companies are sourcing the wrong kind of business with lax underwriting norms, whereas the private companies would be more stringent at the entry time itself. However, the worrying part is the claims denied ratio of the private life insurance companies which is over 7%. In the case of a life company, the claim is a death. There can be no ambiguity here- someone is either dead or alive. The repudiation figure of 7% seems mysteriously high here.

In the next post, we will delve deeper and look into the claims breakup at the individual private company level.

Tax Savings through Insurance Plans

Come December and the mad scramble for investment proofs starts. Your employer's HR department will demand the details of the tax saving instruments that you claim to have done to save on your income tax every month. If you are not able to furnish those tax proofs, the rebates given to you will be reversed and it might happen that your take home salary in Feb and Mar is far lower than normal. So let us try and understand how you can avail the maximum tax advantages through savings instruments.

Life Insurance is a very popular way of saving on your tax liabilities. Section 80 C of the income tax states that investments upto Rs 100000 on life insurance and unit linked plans can reduce your tax liability by Rs 30,000, thereby making the effective premium Rs 70,000. On top of that, the maturity proceeds on your life insurance policy are tax exempt. This is the govt way of incentivising you to invest in life insurance as a long term savings instrument. Most probably, you already have availed of some tax benefits through your company PF etc. So if the PF contribution is Rs 40,000 for the year, the balance amount of Rs 60,000 can be easily invested in a life insurance policy. What makes the unit linked policies more attractive now is that the charges have been drastically reduced by IRDA a few months back. Lower charges essentially mean that the investment returns will be higher for you, as you are paying less for the insurance agent's commission as well as the management fees etc of the insurance company. Also, the fact that lapsation charges have been significantly reduced makes it a safer instrument in case you cannot continue the policy in the next few years. The only question you need to consider before putting in your money in a Unit Linked policy is whether the stock markets are already at a high level (Nifty at 6000). But then, it is impossible to time the markets (pl dont believe the CNBC guys) and any time is a good time to start. In the long term, your unit linked life insurance policy should do well. Be on your guard if the insurance agent tries to sell you a non unit linked/traditional product. Chances are that he is pushing this life insurance policy only because his commissions are higher.

Apart from this savings of Rs 1 lakh that you can make for a life insurance policy, you can save upto Rs 10,500 in tax through a health insurance policy. That is the maximum tax savings if you pay Rs 15,000 as premium for you and your immediate family, and Rs 15000 for your parents. Realistically speaking, the health insurance premiums that you pay would not be more than Rs 10000 to Rs 15000, on which you would save Rs 3000 to Rs 5000 of tax. Tax savings aside, if you do not have a health insurance policy, it is very important to consider having one. Health care costs, especially private health care in top tier hospitals, have spiked up exponentially and medical costs have the potential of financially crippling someone. In the United States, health care emergency costs are one of the leading causes of financial bankruptcy. A five day hospitalization can easily cost upwards of Rs 1 lakh. Before buying a health insurance, it is also useful to do a comparison of the premiums charged by different health insurance companies, as the rates can vary as much as 40% to 50% among companies. Sites such as www.policytiger.com can help you compare in a minute and make available the cheapest and best health insurance plan.

All said and one, one should have insurance for the sake of financial security. However, it does not hurt if there are attractive tax benefits to incentivise the purchase.

Growth of medical tourism in India

While we fret about the rising healthcare and health insurance costs in India, there is the growing trend of tourists from Western Europe, North America and the Gulf visiting India to get themselves treated. This is primarily because of the fact that healthcare costs in India still are significantly lower than in the West, and the quality of healthcare at these private hospitals is comparable to the best in their home countries. A heart valve replacement which costs USD 8000 in India could set the health insurance company back by as much as  USD 150,000 in the United States. A crude rule of thumb is that surgery in India typically costs 1/10 of what it would in the US. Another problem that many of these visitors face is that many of the procedures that they would like done are not considered critical (elective) by their local healthcare system, and thus they would not be able to avail of them under their health insurance policy in their countries. Even though aftercare can become an issue, the benefits far outweigh the negatives as far as these visitors are concerned.

 

Hospital groups such as Max, Apollo, Fortis etc have aggressive sales arms focusing purely on the medical tourism aspect. Cardiology, cardiothoracic surgery, knee replacement, and cosmetic surgeries are the most in favour as the cost differential is especially marked across these areas. Many of these hospitals have started entering into agreements with the international health insurance companies to reimburse the cost of healthcare of these visitors. In 2007, according to a study by Deloitte, India received almost  half a million medical tourists. The annual growth rate for medical tourism is estimated at 30%. McKinsey estimates that this will be a USD 2 Bn market in 2012. The global medical tourism market is worth USD 60 bn, and thus there is a big scope for India to get a larger share of this pie. The Indian government has been keen to tap this market, and has introduced one year special medical  visas for visitors.

One ill-desired offshoot of growing medical tourism is that the healthcare costs charged by these private hospitals might end going up even for domestic patients. The hospitals, which run as for profit corporate entities, do not need much time to get used to the concept of higher revenues, and will assume it as their natural right (greed, greed!). We have seen that in the IT Industry- as offshoring through India took off, IT costs that the key companies such as Infosys, Wipro, TCS charged to their Indian clients went up. At the end of the day, this is a labour arbitrage game, and with time, the differential will reduce. But that still seems quite some time away. There is something inherently seductive in getting your knee replaced, tummy tucked,  and walking around the monument of love, the Taj Mahal!

Another issue that some activists have is that most of these corporate hospitals have been set up using massive subsidies in the form of cheaper land, lower financing costs and tax breaks. Thus, in a sense, the subsidies are being transferred from the Indian tax payer to the affluent, well heeled tourist. Though there are regulations regarding the free healthcare quota that these private hospitals are subjected to, they find their way around it- like in most things in our country.