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Monday, May 30, 2011

Riders in Insurance

Riders and their use:

Riders are add-ons to insurance policies which help the policyholder cover himself financially for an additional set of risk events (and are not to be confused with Kolkata Knight Riders!!). They are the insurance industry’s innovation for customizing the insurance policy to the extent possible, while keeping a standardized base policy available. Riders provide additional risk protection, and thus the policyholder has to pay a risk premium. In most cases, riders can only be bought in conjunction with the base policy at the time of initial purchase, and cannot be added later. Riders are optional, provide pure risk, and do not have any investment or savings element to them.

Most riders are added on to Life Insurance policies, and have a significant tilt towards health related risk. Of late, we have seen that Motor insurance policies also have begun to offer riders along with the base policy.

Since the riders are typically bundled in with the base policy, they do not have any additional administrative charges or customer acquisition charges,  leading to a low cost.  IRDA has capped that the maximum premium that is paid for riders cannot be more than 30% of the base policy cost. Any benefit arising out of an individual rider cannot exceed the basic sum insured.

The issue in India is that the insurance sales agent is competing on price, and wants to convince the prospect to buy an insurance policy by showing him low price. When a rider is added on, the price of the insurance policy obviously goes up. Thus there is not much thrust on riders at the point of sale, leading to a take up rate for riders which is far lower than its potential.

Some of the most popular Life Insurance Riders are :

a. Double Sum Insured rider (mostly in Child Policies): In the event of a death to the parent, the sum insured is paid to the child (or guardian) at the time of the death, and an additional sum insured is paid at the maturity of the policy.

b. Critical Illness Rider (or Dread Disease rider): In this rider, the sum insured is paid to the life insurance policy holder in the unfortunate event of the policyholder contracting a critical ailment such as heart attack, renal failure, cancer etc. In most cases, the sum insured is paid to the policyholder and the policy terminates. Critical illness riders become more expensive with age, as the probability of contracting a critical disease increases. In certain cases, the insurance company would refuse the rider coverage to the insured due to their health condition at the time of entry. Thus it is better to buy the Critical Illness rider at a younger age.

c. Accidental Death and Permanent Total Disability rider Through this rider, an additional sum insured is paid to the nominee (in case of death) or to the policyholder in case of a permanent total disability.

d. Waiver of premium rider: This rider triggers in when the insured becomes completely financial unproductive (say through an accident or a disease) and is at the risk of not being able to earn. Under this rider, the insurance company takes on the responsibility of paying the premiums till the policy maturity at which stage, the sum insured (or the fund value) is paid to the insured

e. Spouse Insurance rider or Joint Life Rider: Through this rider, the insured and the spouse can be covered through a single policy. Sum insured is paid to the surviving member in case of death to one of the insured.

f. Guaranteed Insurability rider: Through this rider, you purchase the option of increasing your life cover at any significant life stage (marriage, birth of children etc ) which might increase your financial liability without needing to go through a medical examination.

g. Surgical assistance benefit rider: This rider provides much needed financial assistance to the insured during the time of a medical procedure needing surgery for 43 surgical procedures.

h. Investment Guarantee Riders: In case of negative market returns, this rider guarantees claim value to the extent of premiums paid.

Some of the Motor Insurance riders are :

Zero depreciation rider: Through this rider, the car owner can ensure that in the case of any claim, he is paid the full cost of claims on parts such as tyres, bumpers, windscreen etc. In the situation where the rider is not opted for, the insurance company would only pay the depreciated value of the parts whereas you, as the owner, would have a substitution cost which is much higher for the new parts

Return to Invoice rider: This rider ensures that in case of an accident or theft where the car is a total loss, the full invoice value of the car is paid to the car owner

Payments made towards riders (except Critical Illness and Health riders ) enjoy the benefits of Income Tax exemption under section 80C of the Income Tax Act. Critical Illness rider enjoys tax benefits under section 80 D. Proceeds received in the case of a claim are tax exempt under section 10 (10 D )

We have been quoted in the Financial Express

Sunday, May 29, 2011

Indian General Insurance Sector a hidden gem

Standard and Poor's, in  a recent study on the Indian General Insurance sector has highlighted something that we always knew but did not appreciate enough: that India's general insurance sector is a goldmine, poised for excellent growth.

This conclusion stems from the fact that general insurance industry penetration as a percentage of GDP is amongst the lowest in India.  With a combined annual premium of Rs 40,000 crores, the Indian General Insurance sector is about 0.6% of GDP. With rising income levels, galloping growth rates in motor car ownership, increasing awareness of healthcare and healthcare related costs, greater predisposition to travel and home ownership, almost all the sectors within the general insurance industry are poised for impressive growth.

A few dark clouds loom though. The public sector insurance companies continue to bleed with significant underwriting losses ( masked by sale of family jewel investments). Third Party motor continues to be the biggest drain as far as underwriting losses go. Health insurance claims are also threatening to spiral out of control. The public insurance companies will have to get their act together as far as motor and health underwriting is concerned.

It is hoped that the government will relax the FDI norms allowing higher than 26% FDI in the insurance sector in India. This will greatly help in allowing more capital into this industry, leading to a better growth rate. It is also hoped that public policy, especially in the case of health and health insurance, will contribute towards a higher awareness for health insurance products.

At our end, we wouldn't be surprised if the non life insurance industry outperforms its more glamorous brother -Life Insurance- and becomes a 2 lakh crore industry by the turn of the next decade.

Wednesday, May 18, 2011

10 Factors to Keep in Mind before Buying a Term Insurance Plan

A term insurance plan is the purest form of a life insurance policy. Here, the sum insured is paid to the nominee if death occurs to the insured person during the term of the policy. In the happy situation that the insured survives the term of the policy, nothing is payable in most cases. In that sense, a term insurance is conceptually similar to a long term motor insurance policy. There are certain term insurance products where the premium is returned to the policyholder if he (s) survives the policy period. These policies are called Term With Premium Back policies, and would obviously cost more than a pure term for the same level of life insured.

The basic objective behind a term insurance policy is that it should substitute the financial loss that the death of a person creates for his family members. Thus by definition, a term insurance policy is crucial for a young man married with young children, whereas it might be less important for a man on the verge of retirement with a significant pool of savings and children well settled. There are ten important factors that one should look at before purchasing a term insurance policy

1. Level of sum insured: A broad rule of thumb is 15 times the annual income if one is less than 40 years of age, 10 times the annual income if one is between 40 and 45, and 5 times the annual income if one is 45 or more. If you have a significant housing loan, you should have that loan covered through an additional credit life insurance plan, where the insurance company would settle the loan outstanding with your bank if there is a death. Another approach is Sum Insured = (total loans outstanding+ amount required for children’s education and wedding) + (average annual consumption related expenditure ) *10 . One should also bear in mind that one’s earning potential and expenses are likely to increase through the years, and that we have a high rate of inflation which will continuously erode value. Rs 50 lakhs today might look like a tidy sum, but twenty years later it might not be significant at all.

2. Duration of the policy: The younger you are, the longer should be the duration of the policy that you purchase, synchronizing it with retirement age or the age at which one’s financial liabilities would most probably reduce. A rule of thumb that can be used is that the term of the policy should be equal to Desired Retirement age – Current age.

3. When should I buy: The best time to buy a term insurance plan is NOW. This is because term plans get more expensive as one gets older. The biggest risk is that one might contract certain diseases with time which makes entry into a term plan more complicated. The insurer might refuse to underwrite the risk or bump up the premiums if you have reported any medical condition. Future is uncertain while the financial liabilities are predictable, and leaving behind a set of crippling financial liabilities for one’s dependants is irresponsible and avoidable.

4. Should I buy additional protection through Riders: Riders for an insurance policy are similar to the extra toppings on a pizza. A pure insurance policy pays out only on death. But there can be situations such as a critical illness or a severe accident which can completely eliminate one’s earning power. Riders such as Critical Illness riders or Permanent Total Disability riders come to the rescue here. These riders ensure that the sum insured is paid out to the policyholder in case any of these unfortunate situations occur.

5. Who should I buy from: At the end of the day, an insurance contract is a contract of trust between the life insured and the insurance company. You should buy your policy from someone who you feel will honour the contract the best at the time of the claim. You can have a look at the IRDA site for the claim payment ratios of the life insurance companies. Estimates show that in 2011, about 16000 life insurance claims will be rejected. Price is also a very important variable. Term insurance rates have come down significantly over the last two years because of price competition and increased life expectancy. Thus, you have a wide choice of 20+ insurers from whom you can buy. Look around aggressively for the company offering among the lowest prices on web sites such as Companies such as Aegon Religare, ICICI Prudential, MetLife and Kotak Life have the cheapest rates.

6. Where should I buy from: Given that term insurance rates can vary by more than 50% between different companies, it is important that you do a thorough research before buying. Your friendly neighborhood agent might not be the best person to rely on for advice due to two reasons- the plan he recommends might be way too expensive, and it is most likely that he will try and push you towards buying some other product where his commission is higher. Term products have low commissions for the agents. Over the last two years, term insurance rates have com down by 40%-50% due to increased competition and lower mortality rates. In our view, the best place to buy a term insurance product is online because of the following reasons:
a. You can easily compare the features and price of the different term insurance plans
b. It is fast and simple- would not take more than 10 minutes.
c. Medical tests and all other documentation would be arranged for by the insurance company at home itself
d. Certain companies such as Aegon Religare, MetLife and ICICI Prudential have exclusive products only for online sales where the commissions are lower, and thus the product is cheaper than offline products. Sometimes, the online version might be cheaper than the offline variant by as much as 30%!
e. Online products will progressively get cheaper than offline products as the buyer profile of online policies will have a lower risk rating
f. You can easily pay the premium through credit card or through net banking

Internet and Mobile Association of India (IAMAI) estimates that about Rs 600 crores of insurance premium was paid online in 2010. While a part of that would be renewal premiums, a significant chunk of that would be new term and health insurance policies bought online.

7.What information should I disclose: It is imperative that you disclose all the relevant information truthfully. Even a small half truth might be enough ground for the insurance company to reject the claim later. You should keep the following factors in mind while completing the proposal form:
a. Disclose your medical history in detail: Don’t hide anything. If you have a pre-existing disease, mention it clearly. In case of a death which the insurance company thinks is due to a non-disclosed pre existing disease, the claim will be rejected. This is especially true in non- medical cases
b. Disclose your family medical history too
c. If you smoke or drink, state that clearly. Also state your physical parameters accurately- height, weight etc
d. State your income and occupation accurately. If your occupation exposes you to higher risk (eg armed forces, mining etc), do state it clearly
e. Mention clearly any other insurance policies that you might have
f. Make sure that you submit genuine copies of PAN Card details, birth certificate, income proof etc
g. Try and fill up the proposal form yourself and do not leave it to the agent

8. Multiple insurance policies: It is better to have two insurance policies of say Rs 25 lakhs each than to have one policy of Rs 50 lakhs. In this way, you can have the option of continuing with a lower cover if at some point you have a reduced term insurance need

9. Who should be the policy beneficiary(s): The family members who would be the most affected in case of your demise should be the beneficiaries. In most cases, it would be the spouse, children or parents. You could also allocate different percentages of the sum insured to the beneficiaries e.g 50% to the spouse and 50% to the parents

10. Pure Term insurance or savings related insurance products: The primary objective of life insurance is to provide financial protection to the nominees. It is only after the protection angle has been completed covered through a term insurance plan that one needs to look at building up savings or investment through a life insurance policy

(An abridged version of this article appeared in the Financial Express on 17th May 2011)

Tuesday, May 17, 2011

Article in Financial Express

An article on Term Life Insurance written by us appeared in today's edition of the Financial Express. The article is available under the following link:

Sunday, May 15, 2011

Max New York Life reports PAT of 283 crores

Max New York Life Insurance has reported an impressive set of numbers for FY10-11. Profit after tax has increased to Rs 283 crores from a low Rs 24 crores in the last fiscal. This growth is especially impressive given the new ULIP regulations that came into force from 1st Sep, 2010. However it would be interesting to see if they can carry forward with the same momentum in profits in the current year, given the new tighter regulations.

Max New York Life recorded a total premium collection of Rs 5800 crores. New business premium was Rs 2050 crores while renewal premium was Rs 3750 crores. The total assets under management of the company is Rs 13800 crores.

Max has mostly traditional ( non ULIP products) under their portfolio which is why they have been affected less by the new regulations. Also the fact that they have the Bancassurance relationship with Axis Bank well established will provide them additional fuel for their growth.

ICICI Lombard Group Travel Insurance to Air India Express customers

ICICI Lombard General Insurance Company has entered into a deal with Air India Express to provide travel insurance to the domestic and international passengers flying with Air India Express.

Travellers flying Air India Express can now avail of the discounted group insurance rates that ICICI Lombard has offered to Air India Express. Expenses arising out of flight cancellations, lost luggage, trip delays,loss of luggage, loss of passport etc is covered under a 15 day policy from the date of travel. The interesting bit here is that NON-PLANNED hospitalisation is also covered even though the disease might have been pre-existing. This is the risky element for the insurer as we have heard of certain cases where the insured does a planned hospitalisation in specialised hospitals in Western Europe and US and tries to pass off the expenses as a non-planned emergency hospitalisation.

While every risk can be priced, let us hope that travel insurance for Air India Express passengers is not a sure event, given the recent history of cancelled flights of Air India and its sister concerns!

Rashtriya Swasthya Bima Yojana running into issues

Rashtriya Swasthya Bima Yojana (RSBY), which is the health insurance scheme for the Below Poverty Line (BPL) families in India is running into issues due to delay in payment of premiums by the Government and the delay in claims processing by the Health Insurance companies.

The salient features of RSBY are:

1. It aims to provide health coverage to BPL families who cannot afford to pay for health related expenditures. It is a nationwide scheme.

2.It has been rolled out by the Ministry of Labour. Each beneficiary is entitled to a health insurance coverage of Rs 30,000. It is effectively free for the policyholder with them needing to pay only Rs 30 to get enrolled in the scheme

3. There is no age limit and most pre existing diseases are covered

4. 25% of the health insurance premium is paid by the State Government and and 75% of the health insurance premium is paid by the Central Government

5. The policyholder has a choice of public or private hospitals. SmartCards are issued to the policyholder and the smartcard can be used in any RSBY empanelled hospital in the country. In that sense, there is no locational constraint.

6. The policyholder is entitled to cashless claims

5. 2.5 crore smart cards have been issued across 25 states

But of late, the government and the insurers have started pointing fingers at each other regarding premium payment and health claims payment. Rs 225 crores worth of premium which has to be paid by the State Government is now pending. The Central Govt has cleared its part of the premium payment obligation. Because the take up rate of the scheme has increased very rapidly, state governments have been struggling to keep up with their obligation towards the premium payment.

On the other hand, the government has expressed concern at the high level of claims pending with the insurers. While there has definitely been a great deal of fraudulent claims, the pending claims ratio is still way too high. The four public health insurers are yet to settle 50% of the claims. ICICI Lombard has 35% claims pending while Tata AIG has 28% claims outstanding.Mr Anil Swarup, joint secretary in the Labour ministry, has gone on record saying that the four nationalised general insurance companies have been very slow in the processing of health insurance related claims under RSBY.The official guideline in RSBY is that claims have to be settled under 21 days.The private insurance companies and the 4 public general insurance companies have exactly 50% market share under RSBY.

Saturday, May 14, 2011

IndiaFirst Life to infuse Rs 120 crores of Capital

Indiafirst Life, a relatively new entrant into the life insurance space in India, has announced its plans of infusing another Rs 120 crore of capital into its business, taking the total paid up equity capital to Rs 550 crores. A JV between Legal and General, Andhra Bank and Bank of Baroda, IndiaFirst Life generated Rs 900 crores of premium in the first 500 days of its operation. Led by the redoubtable Dr NandaGopal and blessed with a strong distribution in the south and west due to its parents, IndiaFirst is poised for impressive growth. It has announced aggressive plans for expansion in Chennai and is in the process of setting up an extensive agency force.

It is headed by P Nandagopal, an industry veteran who was earlier the distribution head of Birla Sun Life and the CEO of Reliance Life. The team draws heavily from the Reliance Life team, and it would be interesting to follow the progress made by this company in the coming months and years.

Delhi High Court questions HIV/AIDS exclusions from Health Insurance

In response to a petition filed, the Delhi High Court has questioned IRDA and the Health Ministry as to why Health Insurance policies have an exclusion for HIV/ AIDS. Most insurance contracts have a clause in the health insurance policy documents which states that the policy does not cover treatment for HIV/AIDS even if the policyholder might have contracted it at a far later stage than when he (s) got admitted into the policy. In the view of the court, this tantamounts to a discrimination in a country which has the third largest number (24 lakhs) of HIV infected people in the world. If the insurance companies need to cover HIV/AIDS as a part of the standard list of ailments that are covered, one might see a little increase in health insurance premiums. One however tends to agree that there is no basis to discriminate against HIV/AIDS patients and not provide them an insurance cover.

Life Insurance Corporation appoints New Chairman

LIC has announced the appointment of Mr Rakesh Singh, additional secretary in the department of financial services, as the interim chairman. The incumbent, Mr T S Vijayan, will continue in the post of the Managing Director. The announcement from LIC, which has traditionally combined the post of Managing Director and CHairman, has taken the industry by surprise and many have read it as a demotion for Mr Vijayan. Mr Vijayan's performance report may have been adversely affected by the loan for money scandal that hit LIC housing finance a few months back. However, that is not to take away from LIC's brilliant performance in the last financial year when they increased their market share from 64.86% to 68.7 %. At a time when there was significant degrowth among the private life insurance players becasue of the changes on ULIPS, LIC exploited the field perfectly by selling more traditional products.

LIC plans to invest Rs 60,000 cr into equities

LIC plans to invest upto Rs 60000 crores in the equity markets in India. Out of a total deployment of funds of Rs 2 lakh crores across different asset classes, about 30% i.e Rs 60,000 crores would be invested into equities. The amount that LIC invests in equities has come under pressure due to the reduced sale of ULIPS, 90% of which would be invested in the equities market. Typically a long term investor, LIC is a much needed source of stability for the Indian equity markets.

Axis Bank obtains regulatory approval for Max New York Life stake

Axis Bank, which entered into a Bancassurance arrangement with Max New York Life last year, has received approvals from RBI and IRDA to acquire 4% of Max New York Life at Rs 72 crores. The stake has been acquired by Axis Bank at par and is quite obviously at a discount to Max New York Life's market value. Axis would have bargained to acquire this stake in lieu of entering the distribution agreement with Max New York Life. Previously, Axis Bank had a Bancassurance agreement with MetLife, and accounted for more than 50% of MetLife's total business.

Acquiring stake of the insurer by the bank seems to be a new trend in the Bancassurance space. As the distribution reach provided by banks becomes more crucial for insurers desperate for market share, banks will demand a bigger pound of flesh and ask for more significant stake in the insurer. PNB, one of the largest banks in India, is in the final stages of selecting its Bnacassurance partner for life insurance. Bharti Axa Life, MetLife and Aviva are in the fray. It would be interesting to see how much stake of the insurance company PNB demands.

Edelweiss Tokio Life received final IRDA approval

Edelweiss Tokia Life has received the final approval required to write life insurance policies in India. The company received the final R3 licence and is hopeful of writing policies from July 2011 onwards, subject to the products being approved by IRDA. Led by Deepak Mittal, Edelweiss Tokia Life is the 24th Life Insurance Company in India. It would be interesting to follow the product and distribution strategies adopted by Edelweiss Tokia Life, given the capping `of charges on Unit linked Policies effective Sep 2010.The Edelweiss stock has also been under significant pressure over the last few months, and this might be a positive trigger for the stock. Given that Insurance penetration is only at 4.5% in India, Edelweiss Life sees a significant potential for growth in the Indian insurance market

Monday, May 9, 2011

Life Insurance Industry Performance: Apr 2010-Mar 2011

The annual sales figure of the Indian life insurance industry for 2010-11 are now available.

This has indeed been a tumultuous year for the industry, with the new regulations on Unit Linked Insurance Plans (ULIPs) coming into force from Sep 1, 2010. In certain cases, the private life insurance players have had a sales dip of as much as 35% post the new regulations taking effect. However, the overall dip has got masked due to the robust performance in the first half of the financial year. Gradually, the life insurance industry is finding its feet post the regulations and reported traction in sales during the month of March, 2011. The biggest beneficiary of the new regulations has been LIC, the big daddy of insurance in India.

At an overall level, the life insurance industry has reported a growth of 15% over the previous year. The industry grossed new business premium of Rs 1.26 lakh crores in FY10-11 over Rs 1.09 lakh crores in FY 09-10. However, most of this growth was accounted for by LIC which recorded a 22% increase in premium to Rs 86,444 crores from an earlier 70,891 crores. In the process, LIC increased its market share of the overall life insurance market by 4% from 64.86 % to 68.7%.

The private life insurance players, with a combined premium of Rs 39,381 crores and a market share of 31.3%, reported only a 3% growth in new business premium in this financial year. However, that tells only part of the story. In the last 6 months since when the ULIP regulations came into force, the private life insurance industry would have had a significant de-growth which has been hidden by the stronger performance prior to the regulations taking effect.

The New business premium and the market share of the private players is as follows:

Company New Business Premium in (Crs) Market Share
ICICI Prudential........7861............................6.3%
SBI Life................7571............................6.0%
HDFC Life...............4065............................3.2%
Bajaj Allianz...........3462............................2.8%
Reliance Life...........3035............................2.4%
Birla Sunlife...........2077............................1.7%
Max New York............2060............................1.6%
Tata AIG................1331............................1.1%
Kotak Mahindra..........1253............................1.0%
Canara HSBC OBC Life....823.............................0.7%
Star Union Dai-ichi.....759.............................0.6%
Met Life................704.............................0.6%
ING Vysya...............660.............................0.5%
Shriram Life............575.............................0.5%
Future Generali Life....449.............................0.4%
IDBI Federal............445.............................0.4%
Bharti Axa Life.........362.............................0.3%
Aegon Religare..........275.............................0.2%
Sahara Life.............91..............................0.1%
DLF Pramerica...........74..............................0.1%

Clearly, the top 5 private players are ICICI Prudential, SBI Life, HDFC, Bajaj Allianz and Reliance Life while there are 14 life insurance companies at a market share of less than 1%. A detailed look at the business premiums of the private companies throws up a list of companies which have had a significant increase in premium, while at the same time, a few have lost ground. IndiaFirst Life has recorded a significant increase of 250% premium growth, though on a significantly low base. DLF Pramerica and Aegon Religare have also shown an increase on a low base, but the most impressive increases are for Canara HSBC Oriental, HDFC Life and ICICI Prudential Life , all of whom have recorded increase of +25%.

DLF Pramerica...........98%
Aegon Religare..........83%
Star Union Dai-ichi.....46%
Shriram Life............37%
Canara HSBC OBC Life....29%
HDFC Standard...........25%
ICICI Prudential........24%

However, a few private life insurance companies have registered significant degrowth. MetLife, which lost the Axis Bank relationship, registered a decrease in premium income of as much as 34% (it is in the final shortlist for the PNB Bancassurance relationship, and could possibly make up the lost ground). Birla SunLife’s new business premium was 30% less than last year, while Bajaj Allianz Life Insurance had a 22% decrease.

It would be interesting to see how the life insurance industry performs in the current financial year, which would be the first full year since the watershed regulations on ULIPs took effect. In the long term, the changes brought about would be healthy for the life insurance market in India. The pensions product, which used to account for 30% of the market and for all practical purposes was killed by the new regulations, would also come back to life in this financial year as IRDA is planning to bring about changes from its earlier guidelines. All in all, it promises to be an interesting year ahead.