We have started balancing our portfolio from last year” (to garner more traditional products).
“The company’s focus is to achieve a well balanced product mix, which is evident in the current share of traditional products. The share of traditional products has moved from 8-10% to over 30% in the recent past,” (and will move up further).
“We are looking to diversify our product portfolio. It may take some time, but the ideal mix will be 50:50.”
These are brave words from chief executive officers of a few private life insurance companies.
They were reacting to the impact of slowdown in the collection of first year’s life insurance premium after the new guidelines on unit-linked insurance plans (Ulips) kicked in from 1 September 2010. The new regulations led to a drastic reduction in commissions on Ulips and the sale of Ulips fell precipitously as distributors found the new commission structure unremunerative. Overall first-year premium collections have declined by 23% during September 2010-March 2011 as compared with the same period last year (source: Insurance Regulatory and Development Authority’s data on individual premiums).
Old Ulips versus traditional products
Most insurance companies have reacted to the slowdown by emphasizing on the sale of traditional insurance products. This is a regressive step since traditional policies are opaque; provide very low protection (relative to the premium) and have low long-term returns. At least the old Ulips were not bad products as long as regular premiums were paid over the term of the policy. But the issue was that Ulips were mis-sold as a short-term investment product by distributors.
Is this re-emphasis on traditional policies the right thing to do? At least I cannot think of a single circumstance where I (or any unbiased financial advisor) can recommend a traditional insurance product to anybody either as an investment product or as a protection product or a mix of both.
Does the industry have to fall back on such a product for its survival? Even if it does, is that sustainable? Can the holy grail of insurance penetration be achieved only by such “dud” products?
The arguments for traditional products
The only argument that I have heard in favour of traditional plans from my friends in the life insurance industry is that if the policyholder did not invest in this product, this money would effectively be spent on consumption (rather than saved or invested). In other words, it is contributing to the household saving ratio. Hence, low protection and low returns are better than the money being spent on consumption. In fact in an ingenious twist, the other biggest shortcoming of the product—the extremely high surrender charges—is also justified. Consumers are not even likely to get back the principal premium paid in most cases unless they continue to invest for a very long period. The argument is that consumers will continue with the investment for a long time if simply to avoid high surrender charges. Once again the “aversion to loss” characteristic of human nature comes to the insurance company’s rescue.
Possible outcome: Of course it helps that these products have a very high upfront commission structure that makes it worthwhile for the distributors to hard sell (or mis-sell) the product.
But any meteoric rise in the sale of traditional products will be self-limiting because it will lead to a backlash. There will be heightened media attention due to the cannibalization effect that such products have on clearly superior protection and investment alternatives for the customer. All that such a push, if successful, will achieve is that there will be a clamour for making this product more transparent, which will make its selling more difficult. After all, once the customer comes to know the amount of money that is swallowed up in the expenses and agents commission, will he continue to buy such products?
The option: term plans
The industry needs to break out of its two-product mould (Ulips and traditional products). There are already early signs of that happening. Apart from private life insurance companies, the Life Insurance Corp. of India (LIC) has also recently come out with its Jeevan Arogya policy, which is a pure risk health policy. This is in contrast to its earlier health insurance products that had an element of investment built in, making it expensive. The predecessor products were, at best, middlingly successful given the brand might and advertising spends of LIC. This new product indicates a sharp change in the mindset for an organization, which has yet to show a belief in pure risk products. Remember it never had a pure term life product in its monopoly days (the closest it came was a short-term seven-year convertible term plan) and also came out with a pure term product long after the private sector companies had introduced it. The new health insurance product has attractive commissions for the agents which I think is needed to compensate for the extra sales effort required to convince the non-risk-conscious Indian customers. As my good friend Milind Patki (who is a leading life insurance agent and one of the few agents who actually bother to do a needs analysis rather than blindly sell the highest commission product) told me when I queried him about why he does not sell term insurance policies: “In India, customers don’t want this insurance when they can get it, and they don’t get it when they want it.”
We are likely to see far more action on the health insurance front. There are lots of uncovered risks such as income protection plans covering temporary or permanent incapacitation due to health problems, coverage of medical expenses post retirement and medical expenses on catastrophic medical events, etc. These are all new products and will require extensive selling efforts and hence will also need to have adequate distributors margin. Life insurance companies with their retail reach through agents and bancassurance tie-ups are uniquely positioned to sell such plans and spread the message of insurance.
So even as insurers seek to maintain new premium incomes through increased emphasis on traditional plans in the short- term, we will definitely see a movement towards more sustainable growth in insurance penetration in the future which is only possible if insurance companies behave like insurance companies and not just as fund management companies.
Harsh Roongta is CEO, Apnapaisa.com
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