From savings to protection

When he bought his first life insurance policy, Anand Kothari had little idea of what he was getting into. All he knew was that he had to pay an annual premium of Rs 6,000, which would reduce his tax liability and give him tax-free, lump-sum cash on maturity. And yes, it would cover his life for a piffling Rs 50,000.

This was in 1993, an era when endowment policies and moneyback plans ruled the roost, tax savings defined the size of the risk cover and LIC was an accepted abbreviation for life insurance. Not only has the insurance sector changed significantly since then, but the consumer has also altered the way he looks at risk cover. Kothari has bought three more insurance policies, but they are pure protection term plans that don't have a maturity value. The three term plans combinedly cover him for Rs 20 lakh. He has also taken accidental death and disability riders worth Rs 8 lakh. Kothari reckons these would be sufficient for his dependants in case something untoward happens to him. "I don't look at insurance as an investment. It is just a tool to cover risk," says the Surat-based marketing manager of a public sector company.

Kothari is a rarity, an informed buyer who understands the need for life cover and the objectives of insurance. His awareness about life insurance is one of the several positive outcomes of the re-opening of the sector to private participation in 2000. "Before that, I had no idea what a term assurance plan was. Only after private companies started operations did customers like me understand the various facets of life insurance," he says.

Unfortunately, most people who buy life insurance in India still do it for the wrong reasons. Despite efforts by insurance companies, the perception of life insurance as a tax-saving option persists. "The Indian consumer is still looking at life insurance as a savings and tax optimisation tool," says V. Srinivasan, CFO, Bharti AXA Life Insurance. This is the reason nearly 50 per cent of the total business of insurance companies is conducted between January and March when people make tax-saving investments. "It must be understood that the tax benefits on a policy are meant to reduce the cost of life insurance. Buying a policy only to save income tax defeats the purpose of life insurance and leads a person to make a sub-optimal choice," says Pankaj Desai, executive director, sales and distribution, Kotak Life Insurance.

The entry of private players also paved the way for the introduction of innovative insurance products. Till then, endowment plans or moneyback policies were sold the most. Predictably, the first policies to be issued by private insurers in 2000 were also endowment plans. But it was the unitlinked insurance plans (Ulips) that transformed the life insurance industry in India. "Product innovations, greater investment choices, high degree of flexibility and new health riders have truly changed the insurance landscape," says Srinivasan. Ulips had existed in the Indian market for a long time but were not a household name to the extent that they are now. "The popularity of Ulips, which gave the Indian customer a rewarding longterm investment option along with life insurance cover, can be largely credited to private players," says Desai.

When private insurance companies restarted operations, there were apprehensions whether it would be safe to enter into a long-term, big-ticket financial contract with a private entity, especially one that had a foreign partner. Political sections opposed to the privatisation of the insurance industry fanned fears that private companies could not be trusted. While misconceptions about private insurers have gradually waned over the years, they remain deeply embedded in the minds of some customers. These were revived in 2008 when the global financial system went into a tailspin and large foreign merchant bankers folded up.

However, customers such as Mayank Sharma, manager in a financial services company, are unfazed by these rumblings. Sharma feels that private insurers are more customer-oriented than the public sector LIC. "Their products are more innovative and they offer more convenience to customers," he says. For instance, the premium of his term plan from HDFC Standard Life Insurance is paid through his HDFC Bank credit card. He can also drop a cheque at any HDFC Bank branch. It is this customer orientation that has helped private insurers to steadily increase their share in the premium for new policies from 1.4 per centin 2001-2 to nearly 40 per cent in the first nine months of 2009-10.

However, for every Sharma, there is a Bibek Roy, who buys life insurance only from LIC because the government ownership gives him a feeling of reassurance.

This, despite the fact that all private insurance companies are well-capitalised and have to maintain capital adequacy and solvency margins as per rules laid down by the Insurance Regulatory and Development Authority (Irda). "The Irda has very strict rules concerning various aspects of corporate governance, product structuring, pricing and customer compensation," says Desai.

The insurance industry has grown phenomenally in the past 10 years. In 2000-1, insurance premium accounted for only 1.39 per cent of the country's GDP. This year, this figure might touch 5 per cent, indicating that more and more Indians are getting themselves insured. Yet, India continues to be an underinsured market. The average life cover per policy works out to a little over Rs 1 lakh. The challenge before the industry is not only to increase penetration, but ensure that the sum assured goes up. For this to happen, the customer must stop treating insurance as an investment and start seeing it as a risk mitigation tool.