Over the last few days, an advertisement placed by a body called 'Global Federation of Insurance Associations' has appeared in a number of publications. This advertisement is written in the form of an open letter to the Prime Minister, with copy to the finance, commerce and parliamentary affairs ministers. The letter is essentially an exhortation to get the amended insurance bill passed and talks almost entirely about the FDI that passing this bill will bring about and the signal it will send about India being 'open for business'.
That's all well and good, and there's also one bit about the insurance industries' customers, which goes "While the Indian market has witnessed tremendous growth, there remain high levels of underinsurance. The security a family or business achieves by insuring its most valuable assets helps supplement programmes already in place by the government to lift the living standards of the Indian people."
That's a noble thought indeed and is expressed in a manner that appears to be designed to push all the right buttons get FDI and make Indians secure. However, the basic premise here is that the insurance industry is in the business of providing insurance cover and the coming of foreign insurance companies has enhanced this activity. Is this premise correct? The unfortunate answer to that question is that no one seems to know, neither the Irda, nor the government. The sad part is that not only do they not know, they seem not to care that this measure is important.
Whenever the growth of the insurance industry is discussed, the measure used is the premiums paid by customers. This is true not only of the industry's own statements but also of media coverage and Irda's reports. The Irda also takes two metrics insurance penetration and insurance density as indicators of the 'potential and performance' of the industry. The former is the ratio of premiums paid to GDP and the latter is premiums paid per unit of population. Both are based on the implicit idea that higher premium is an achievement.
But premium payment is what the customer gives, not what he gets. These numbers are not indicative of the security the cover that is delivered. The reason that this industry exists is to deliver insurance. When a customer dies, how much money does his family get? How many customers have what amount of this cover? Premiums don't tell you that because they lump together everything that a customer pays, including what are basically his investments as well as commissions and other charges.
It's not a secret that the primary sales focus of insurance companies and agents is not insurance (in the sense of security and cover) but investment products. As such, to talk of premiums as a measure of achievement is disingenuous and for Irda to adopt such measures is disappointing.
One encouraging sign is that at long last, the scales have fallen from the government's eyes. In a recent interview with Bloomberg, financial services secretary Rajiv Takru was particularly harsh on the industry. He refused to show any sympathy for falling premiums and instead said that the industry needed to introspect and bring in corrective measures. Nowadays everyone has a ghastly insurance mis-selling story to tell and the one that Takru narrates is particularly egregious, involving an 85 year-old whose bank FDs were broken up and invested into 199 insurance policies!
Now that the government is of the view that all is not right (to put it mildly), it's time that everyone the Irda, the government as well as the media stop using premiums as a metric of whether the insurance industry is doing its job. That job is to provide cover and we must measure how many people are being covered, whether they are being covered adequately and how much are they paying for that cover. The rest of it the money collected as investments or other non-cover purposes must not confuse this core issue.
(By DHIRENDRA KUMAR, CEO, VALUE RESEARCH, Economic
Times - 24/12/2013)
Ack: CH Mahadevan