Old and rusty insurance industry awaits its Uber moment in India
If life insurance policies do not provide the cover they promise, it is time to re-think
In economics, as well as in politics, there is a classical divide between strategists: growth or distribution? Jagdish Bhagwati or Amartya Sen? Republican or Democrat? GDP or Social Security? Those who pump up for growth, want free enterprise to flourish with as little interference as possible from the government. Taxes should be less and opportunities ought to be open so that everyone competes and the economy as a whole grows bigger, with everyone sharing all the benefits.
Those who frown on the growth engine theory, castigate this fixation on growth saying that in the race to grow, usually the winner takes all and the less privileged are left scrambling for crumbs.
As the stock markets get red hot and Sensex is stroking the stratosphere, we may tag stock brokers as champions of growth while insurance agents could be the proponents of social justice.
Really? An insurance policy is essentially an instrument of re-distribution. Like taxes levied on the rich and distributed as subsidies among the poor, insurance collects premiums to pay for the claims of those who are financially distressed.
It is more effective and direct than government subsidies. You pay premium regularly, and you are certain to get the money when you need it most—say, in case of a financial mishap. Unlike government schemes, there aren’t any leakages (well, at least in theory).
Insurance is, therefore, an ideal instrument to: provide financial security, prevent destitution and reduce the unforeseen financial hardships that are thrust upon families that lose their bread winner. Without any real insurance, death or disease can cripple families and even lead them into poverty traps. No welfare scheme of the government or any amount of charity from well wishers is as effective in combating a sudden onslaught of poverty caused by risky winds of lifestyle events.
But this lofty idea of insurance is compromised in practice, especially in savings-linked life insurance plans.
A thought that torments me whenever I pass by someone depressingly poor is that, compared to that person I am relatively affluent thanks to a career in insurance—a domain where the essential purpose is to lessen financial insecurity and accidental poverty. If a policeman can’t prevent a crime, a doctor can’t treat a patient or a soldier can’t fight a battle, the sense of shame is profound, as it is in my case. Somewhere along the line, we get carried away by the frenzy of the corporate world and a fake sense of purpose, forgetting our core function. Doctors may disregard their Hippocratic Oath, bankers may overlook financial due diligence, and insurers sometimes produce policies that cause, rather than relieve, their customers from facing further hardships.
When an endowment policy provides no endowment, a whole-life policy only makes you pay for many years with no apparent real returns, or a children’s education policy provides pathetic protection against children dropping out of school, one wonders if these faulty policies help people in a real sense? The fat commissions and thin returns in these policies make a mockery of financial propriety. When a family is passing through turbulent financial weather, these policies hardly provide any succour.
In every industry, products are improving and becoming cheaper for consumers: even in insurance, term plans, motor insurance and health insurance are getting cheaper and more useful.
When will the life insurance industry follow suit?
Does it require an actuary or a financial wizard to tell the industry captains that they are not creating any real value for their customers through their outdated insurance policies? Don’t the insiders know that if you choose to buy financial security through an old-fashioned with-profit policy, you are poorer than a person who does it through mutual funds or bank deposits wrapped in a layer of term cover?
Perhaps this farce would continue as vested interests fight hard to prevent change, the way older taxis or auto rickshaws did till one day Uber and Ola arrived—creating a new business model of growth with equitable distribution of benefits for all.
The old and rusty insurance businesses must shake themselves out of their reverie, and produce life insurance that’s a true vehicle of long-term and systematic savings that are far superior in risk-adjusted returns than any mutual fund or short-term bank deposit.
Poverty of thought and action then could give way to true financial security in a country where millions of families implicitly trust life insurance as a handy tool to protect them against poverty if their bread winner dies too young or the old among them live too long.
P. Nandagopal is founder and chief executive officer, OpenWorld Insurance Broking Ltd