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Insure the fit

November 28, 2008

It is the age of customisation. Slowdown or not, you want everything tailored to your needs. Investment products have followed this lead for some time and to great investor response (if you overlook the current period of turmoil). It is now the turn of insurers to be allowed to do the same. From 1 January 2009, insurance companies will be able to structure general insurance polices according to what they want. To be able to sell their policies, the insurers want what the customers want. Of course, they will still have to pass the Insurance Regulatory and Development Authority’s (Irda) clearance. But the regulations are set to be far more lenient, giving the insurers much freedom, including that of wording the policy documents on their own. The move will breathe life into the Rs 28,000-crore general insurance business.

For policyholders, this means they will not have to pay for bundled products that they don’t want. The biggest change will be in the way that car, health, house insurance, etc, are priced. New insurance products, which are simpler yet more effective in countering risks, should hit the market next year. The long-term effect for policyholders is also positive. They will have more choices and better say in deciding the policy premiums, customer service and handling claims.

This is the last stage of deregulating the insurance industry. The process started in January 2006 when Irda allowed the insurers to charge their own premiums for non-life policies. Now, the companies can create customised policies. For instance, the insurers will decide your car insurance premium based on factors like the driver’s age and the driving record, the kind of vehicle that is being insured, the period for which it has been used, and so on.

The freedom to word a policy will also make the business brokerdriven. Brokers will play an important role in product development and design. So if research indicates that a certain model in red is usually bought by youngsters who drive fast, the premium on such cars may be higher than for the same car in a different colour.

Product differentiation will also offer considerable scope for insurers to introduce innovative products and value-added features. As each company pursues a different business philosophy, the premiums they offer will also differ, depending on the stage of the insurer’s business, their product mix and reinsurance arrangements.

But do not assume that detariffing automatically means discounts on the existing premium rates. The amount you will have to pay for the customised covers will only be known once the products come out in the market. What you can be sure of is that your specific needs will be met. So, if you are a software professional who spends many hours hunched in front of a computer, you should be able to find a policy that covers the health risks you face: carpal tunnel syndrome, vision impairment and spinal disorders. As you can see, the possibilities of such customisation are limitless.

— Narayan Krishnamurthy

“MINDSET MUST ALTER”

Dr. Tobias Farny
Dr. Tobias Farny
Re-insurers play a crucial role in protecting insurers. Dr. Tobias Farny, senior executive, Indian sub-continent, of the Munich Re Group, one of the world’s largest re-insurers, talks about the India-specific trends.

In the first impact of freedom in wording of insurance policies.
Tobias Farny:
Insurers operate with different business models, so the price fall will depend on the way they practice risk management. In my experience, price reduction is the first tangible impact, but it must not be at the cost of weak covers. Of course, there will be a certain uniqueness to the products that will come into the market.

On the kinds of unique products that should hit the market.
Tobias Farny: Retail insurance will now come into focus. This will usher in products that cater to individual needs. They may be in health insurance, motor insurance or in personal accident insurance. But for this to take off, the consumer mindset must change. Most people look at insurance as a way to pay for financial losses. But an important aspect that can reduce the premium is prevention of loss. This should be crucial in an open-market scenario.

On the factors to consider before buying a policy.
Tobias Farny: Consider the scope of the cover, the premium you pay and the service standard promised by the insurer. Check with the existing policyholders for their experience. Finally, compare the prices across a few insurers.

 

Profit in mismatch

Peak interest rates for existing borrowers
ABN Amro13%
ICICI Bank13.5%
HDFC12.75%
* Tenure: 15-20 years
Lowest interest rates for new customers
Central Bank of India9%
Indian Bank9.5%
Punjab National Bank9.5%
Union Bank of India9.75%
* Tenure: 5 years for loans below Rs 20 lakh

Are high home loan EMIs stretching your budget? Chances are that you have taken a loan from a private bank and not from the PSU ones which have already reduced the interest rates. This is a oneof-its-kind mis-step among banks who are known to cut/raise interest rates in tandem. But don’t fret if your bank has a high loan rate. Switch to another bank even if it means paying a pre-payment penalty. This is because the interest rate difference between banks is as high as 4% in some cases.

For example, ICICI Bank charges 13.5% from its existing customers who have taken a loan on a floating rate. On the other hand, Indian Bank is offering a minimum interest of 9.5% to its new customers. “If the difference between old and new rates is more than 2.5%, the borrowers can shift banks,” says Harsh Roongta of Apnaloan. PSU banks are giving both the options to customers—to reduce the EMI or the tenure at the same EMI.

“Most new customers are opting for a reduced tenure with some even settling for a higher EMI,” says the managing director of a PSU bank. Experts advise the borrowers with an outstanding loan of Rs 20 lakh to prepay some amount to the bank before transferring their loan account. This is because the loans below Rs 20 lakh get an additional benefit of 0.55% on interest rates.

— Rakesh Rai

Selling in pieces

Even the discounts aren’t bringing in the customers. So real estate developers are using innovative ways to sell their projects. Delhi-based Triveni Infrastructure has launched the ‘Fragmented Ownership Program’ to sell the shops within its existing residential projects in Faridabad. Under this scheme, the company has divided the 125-sq-ft shops into 25 units of 5 sq ft and is selling them to an equal number of people on a joint-ownership basis. The buyers must pay a minimum of Rs 50,000 for a unit.

The company is offering a rental return of 12% a month and an ‘assured’ buyback at a 30% premium after three years. At the end of this period, you can also sell your part of the property to anyone other than the developer. Is this just a strange concept or will it translate into good returns for the investors? “It may be difficult to get out of such investments as apart from the developer, there will be very few buyers in the open market,” says Anuj Puri, chairman, JLL Meghraj. If nothing else, this scheme has let the cat out of the bag—the developers are desperate for customers.

— Rakesh Rai
WORD’S WORTH

P. Chidambaram,
“The classic response to a demand slowdown is to reduce prices. Hotels, auto manufacturers and real estate developers have to reduce prices.”
— P. Chidambaram, Finance Minister

“I don't believe that the total number of jobs will go down even if the GDP growth is at 7% or less than 7%.”
— Montek S. Ahluwalia, Deputy Chairman, Planning Commission

“The industry does not have a magic wand to cut prices; what needs to be done is to make lending rates by banks cheaper. Banks are not lending to customers.”
— Rahul Bajaj, Chairman, Bajaj Auto

“There is no direction at the moment. The market is driven by global factors rather than fundamental and technical factors.”
— Vijay Kanchan, V-P, Derivatives, Dolat Broking

Source: The Economic Times, Business Standard & Business Line
 

Card controls

Your wallet is stuffed with plastic... and credit cards are not the only culprit. Instead, gift cards, travel and expense cards, food coupons, telephone calling cards and other vouchers are fighting for space. You are not the only one distressed by this plastic profusion. The Reserve Bank of India (RBI) is worried too. Fearing that such pre-paid instruments are being used for money laundering, the regulator has indicated that it may subject them to tighter safeguards.

In the offing may be scrutiny of the issuance of such cards based on guidelines such as Know Your Customer (KYC), Anti-Money Laundering (AML) and even the Combating of Financing of Terrorism guideline. All non-bank entities issuing pre-paid instruments will have to approach RBI for authorisation.They will have to maintain an escrow account with their banks to the extent of outstanding balances in the cards issued by them.

This means that the companies giving their employees pre-paid food coupons, (which can also be used for buying provisions), may have to maintain the details of the people who use them. According to the deputy governor of the RBI, V. Leeladhar, “A number of innovative payment instruments/systems have been introduced by unregulated entities. While large unregulated payment instruments present risks to the stability of the financial system, unauthorised retail payment systems, without proper management and operational structures, can undermine public confidence in the efficacy of the payment systems as a whole.”

E-retail therapy

Average online spending in the past 12 months
AustraliaUS $4,160
SingaporeUS $3,480
JapanUS $3,175
South KoreaUS $3,027
IndiaUS $2,147
Hong KongUS $1,698
Source: Visa e-Commerce Tracking survey

Move over Dubai. The Net is the new shoppers’ paradise. According to the Visa e-Commerce Tracking survey conducted in April 2008, nearly 80% of the Internet users polled in the Asia Pacific region bought something online in the past 12 months. The survey covered 3,000 people in six countries—Singapore, India, Australia, Japan, Korea and Hong Kong. On an average, Indians shopped for $2,147.

The chief attraction for online shopping seems to be convenience and value as nearly 90% respondents said that they preferred the Net because it helped them find the best prices and allowed them to shop any time. About 76% of the Indian respondents, the highest in any country, bought digital entertainment online. Music downloads (63%) were the biggest hit. “With almost four out of five Net users buying online, people in the Asia Pacific region are taking full advantage of the global shopping experience,” says Mohamad Hafidz, Visa’s regional head for e-Commerce in Asia Pacific.

TELLING FIGURES

Numbers speak louder than words. Money Today highlights some numbers that have a short- or long-term personal finance implication.

Rs 398 crore
is Sebi’s earnings from fees and other charges in 2007-8, an increase of 98% over the previous year. This is because of the stock market boom last year.

50%
of the total turnover in the cash segment of the National Stock Exchange is accounted for by Mumbai, Thane and Delhi.

88%
was the increase in the number of investors to whom mutual funds paid interest for delayed redemptions or repurchases.

Rs 30,600 cr
was the value of gold bought by investors between July and September 2008, a 66% increase over the same period last year. This is because investors seem to think of gold as a safe haven.

 

Evolving with time

How the term plan works
Annualised premiumMinimum: Rs 2,000 p.a. for regular premium
Rs 10,000 for a single premium
Sum assuredMinimum: Rs 5,00,000
Entry ageMinimum: 18 years
Maximum: 55 years
Maturity ageMaximum: 75 years
Premium pay termIncreasing: Single / Equal to policy term
Decreasing: Single / 11 years (except 10-year plan)
Policy termMinimum: 10 years
Maximum: 30 years (increasing);
20 years (for decreasing)
Premium payment frequencySingle, yearly, half-yearly, quarterly, monthly

The life insurance needs tend to vary with time as the number of financial dependants may change or your contribution to their wellbeing. But your term plan always remains the same—a fixed life cover for a fixed price. Now you can change the status quo. Aegon Religare has launched two new term plans— Increasing Term Plan and Decreasing Term Plan—that allow you to opt for a fixed, increasing or decreasing cover.

Take the increasing-cover plan. At 5% additional cover every year, a Rs 10 lakh cover will be worth Rs 15 lakh in 10 years and you don’t have to pay any extra amount. This is a good concept as it attempts to index your life cover with inflation. The policies have been structured on the lines of ‘cost of living adjustments’ (Cola). Some other insurers also offer products that follow this principle, but as these two plans bundle it with a pure risk term plan, it is a low-cost, high-value proposition. Similarly, instead of a mortgage protection cover, you can opt for the decreasing cover that closely matches your home loan outstanding and covers the outstanding loan accordingly.

— Rakesh Rai

Early loss

First came the hefty price. Then the record discount. Now they are talking of compensation. The Honda Civic Hybrid, the country’s first hybrid car (running on both petrol and electricity) is now available at 60% of its launch price—a fall from Rs 21.5 lakh to Rs 13.6 lakh. But is it unfair to those who bought the car at the original price? The company spokesperson says that they are yet to take a call on it. Unfortunately, early-bird buyers have no option when such drastic cuts happen. “There is nothing legally wrong with a huge discount as it is the manufacturer’s decision. But the brand loyalty suffers,” says Virendra Jain of Investor Helpline. But if the existing customers raise their voices, companies may be forced to take notice. This is what happened with Apple when it slashed the price of the iPhone. It was forced to offer a rebate of $100 to the customers who had paid the original price of $399.

YOUR VERDICT
We bring you the results of Money Today online poll on select and current investing issues.

Our question
Do you think Barack Obama will impose curbs on outsourcing?

Your answer
67%
Yes, sooner or later
30%
No, he won’t offend India
3% I don’t know

Despite obvious concerns, experts feel that the current recession will prevent Obama from taking drastic steps.

Conducted between Nov 14 and Nov 21. Total responses: 165


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