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What Ails the Indian Insurance System

By V. Venkateswara Rao, a retired corporate professional and a freelance writer

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Life Insurance covers the mortality risks of people and General Insurance provides protection for the possible losses to trade, property and vehicles on account of risks like fire, natural calamities, marine risk, accidents etc. Health Insurance covers hospitalization expenses, sometimes only for specified diseases. Currently, there are 24 Life Insurance, 28 Non-Life or General Insurance and 6 standalone Health Insurance companies in India. The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance industry in India.

Life Insurance products consist of pure ‘Term Policies’ wherein only mortality risk is covered and ‘Hybrid Policies’ wherein risk protection as well as financial savings are bundled together. In the life insurance sector in India, state-owned Life Insurance Corporation of India (LIC) dominates the industry with 67% market share. The balance 33% market share is commanded by the 23-private sector life insurance companies.

Though the insurance industry in India is growing at a healthy 10% compounded annual growth rate (CAGR), its penetration level (measured as the percentage of insurance premium to GDP) is still very low, 2.6% for life insurance and 0.7% (less than 1%) for general insurance. The penetration levels are abysmally low in rural areas, because of poverty, lack of awareness and poor distribution reach.

After the foray of private sector companies into life insurance industry, several innovative products (broadly categorized into Term Plans, Endowment Plans, Money Back Plans and Unit Linked Insurance Plans or ULIP’s) have been introduced. Though the number and variety of products available are plenty, the industry is plagued by the non-curable disease of mis-selling. Driven by sales targets and commissions, many a time, insurance agents sell products which do not suit to the requirements or to the risk & demographic profile of populace. Such mis-selling and over-selling leads to premature surrender of insurance policies, often at a loss, by the insured persons and presents a low ‘persistency ratio’ for the industry.

Life Insurance industry in India is facing difficulties in attracting large number of new customers due to its low returns and long gestation products. Excessive interference by Government in the administration of LIC, forcing it to bail out loss making banks and financial institutions (like IDBI Bank and IL&FS) and to subscribe to unattractive IPO’s of public sector companies is the main reason for the low yields that LIC is generating for its policy holders. Lack of scale of operations and high marketing expenses are the reason for the low returns offered by private sector life insurance companies. Delays in settlement of claims and poor grievance redressal mechanism hugely inconveniences the customers of life insurance industry.

All is not well in the fast-growing health insurance industry either. Incurred ‘claims ratio’ is defined as the percentage of the total premium collected that is paid out as claims by an insurer. When the claims ratio is very low, it indicates that the insurer is charging excessively from the customers. The claims ratio of standalone private health insurers in 2016 was significantly low at 58%, indicating high premiums being collected. The group insurance businesses and government-funded health insurance schemes, mostly underwritten by public sector health insurers, with claims ratio of above 100%, raise a different set of concerns of cross-subsidy of government-health insurance schemes and the financial un-sustainability of government health insurers.

Motor vehicle insurance remains the largest source of premiums earned for General Insurance industry. However, limited increases in the regulated third party (TP) insurance tariff rates for motor insurance and the associated high incurred claims ratio have put strain on General Insurance industry’s profitability. The claims ratio spent for motor insurance in India is above or near to 100%, bleeding the finances of General Insurance companies.

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