Indian consumers need to crossover between pure protection & savings
14 July 2009

Over long periods most reasonably priced ULIP Plans score over Mutual Funds. Yet the distributors sell exactly the reverse way - ULIPs are being marketed (by the distributors) as 3-year plans and Mutual Funds are being marketed as long-term plans. What impact will this have on consumers?
It takes 8 years to break even and in eighth year most ULIP plans become cheaper than Mutual Funds. ULIPs should be thought long term where 8 years is minimum that is why we decided that in 7th year we would allow payment holiday. I support customer flexibility but the distributor should not misuse it.

Distributors need to keep earning commissions for five years otherwise why would they churn. One should not use malpractices to prove a point and the issue is that generically ULIPs are targeted with 15-20 years time horizon. Moreover you cannot time the market. People think ULIPs are all about equity but it is lot about debt funds, bond funds, balanced funds, liquid funds and growth funds. I cannot understand this absolute obsession with the notion that ULIPs is equity linked only.

No entry loads on Mutual Funds, will there be a shift?
It is surprising to note that entry load may have gone but the distributor can’t be left with nothing, he will charge otherwise distributors will go out of business. They cannot survive on just trail commissions. The net impact on the customer is unlikely to change. The distributors need to survive otherwise they are only going to sell ULIP, which is again not good for the industry.

Are people remaining under insured by opting for ULIPs only?
Protection market has got different flavours say in the form of term market and riders. The rider attachment on our products is 17-18%. Right now the premium collection on term policies is 4% of total premium collection. But given the fact that there is almost 7-8 times difference in the total number of premium ticket size, my guess is that 10% - 12% policies are pure term (in number of policies). Then there is sum assured which is the ultimate test. The maturity of distribution in India is relatively low as compared to the many other markets where the protection size is 20-30%. As a consequence what tends to happen that when there is opportunity of sale, the distributor tries to maximize the premium. By selling a term policy you tend to reduce the premium, so while the commissions percentage may be as good but absolute commission is low. Therefore to develop a term market you need to go out of traditional distribution channels. You at ApnaPaisa are putting up a very good channel, which can help in creation of term market. License should be given to people who wish to sell it across the counters or on portals like yours. You can create electronic contract by going online, give health declaration and have the policy. Now the most fascinating part – our research reveals that a customer in India has strong inclination towards money back in an insurance policy. Till now we thought that this was the problem with the distributor, but we were amazed to find that the consumers, do not want to change.

How do you plan to address that?
The fact is that term is being bought and not sold. Also people want to avail dual benefit in insurance - protection and savings. AXA global survey on pensions and retirement planning had an interesting revelation that after bank deposits, the next most important instrument for retirement planning is life policy and not mutual funds or pension or superannuation plans. Indian consumer has to cross over between pure protection and savings. This way the opportunity for the Indian insurers lies in the face of life insurance.

You mentioned about riders.
Riders are very profitable. In Bharti AXA we are going to have rider attachments in 30-40% of our products by the end of this year and will ensure that attachment happens on every single product. That is the way by which protection part of the business can be enhanced.

Talking of New Pension Plan (NPS)…don’t you think it is going to pose competition to retirement planning schemes of life insurers?
The impact will not be significant, as they have to get their distribution act together. In a diverse country like India, distribution is the key. NPS has good intentions behind it. Even insurance is in the development phase, and over a period of time sophistication will seep in. Talking of NPS, it should have been backed by extensive distribution coverage. Indians are used to distribution-oriented schemes. It will create challenges but then evolved financial markets always had this kind of challenge.

A lot of Life Insurance companies are entering the Health Insurance bandwagon. How do you view this?
It is profitable to be in health segment; moreover it is relatively under penetrated market.

Many new players are set to enter Indian market, how it will impact insurance sector?
Every new entrant enters the markets on simple graph – graph of marginal utility. New entrants believe that there is still market to be picked up and money made. Moreover it will lead to much better education of the customer in terms of understanding insurance. Developing markets like India and China have the capability to absorb, around 30 odd players.

The statistics, which we picked up from IRDA – the claim repudiation ratio of the every single private company is high, whereas LIC has the lowest. What does this reflect?
It is a reflection on inadequate health declaration done at the time of purchase of policy but it has nothing to do with underwriting standards, which are quite high.

What message would you like to give to our readers?
My message to any person using the web is that web is a fascinating way of gathering information. It is interesting to look at different features before buying insurance to make an informed choice. Web media can play an effective role in garnering customer feedback. And it is never too early to plan insurance.