It was once said, only partly in jest, that there were only two certainties in a typical Indian household — death and a life insurance policy. No Indian family could do without having a life policy, and this was irrespective of where they stood in the financial pecking order.In fact, a life policy was seen principally as a savings mechanism — with its regular instalments over the course of the scheme — rather than as protection if something untoward were to happen to the insured (as is the case in the West and elsewhere). Moreover, these policies came with tax breaks, which in the Indian context can be a compelling reason.
The same sentiment has been shared by significant numbers of expatriate Indians who feel a life policy would be enough of a fin-ancial guarantor to their families. But since August last year, things have never been the same for India's life insurance marketplace.
It was at that time India's Insurance Regulatory and Development Authority (IRDA) mandated a change in the lock-in period for unit linked insurance plans (Ulip) from three years to five.
"It was to stop the flight of investments in Ulips as investors became wary and uncertain," said Alok Kumar, the Dubai-based resident manager at LIC International, the overseas arm of the government owned Life Insurance Corporation (LIC)."Most of the private [insurance] companies started feeling the heat of redemption and they approached the IRDA to do something about it."Besides changing the lock-in period, the IRDA asked insurance companies to wind up all existing Ulips available for sale as on that date."Not just that, the new policies had to offer minimum guaranteed assurances for policyholders. Moreover, "The IRDA has introduced lock-in periods to prevent "mis-selling" and this deters a certain category of investors who were using Ulips as proxy to the capital markets," said Ambareesh Baliga, chief operating officer of Way2 Wealth.
"NRIs in general tend to take their cues from their resident counterparts as rupee-denominated products cannot be sold in overseas markets and they tend to buy their policies during their visits back home."With the Indian equity markets treading lower, a state of animated flux surrounds the Ulip situation.In a recent report, the US-headquartered insurance rating firm A. M. Best reckoned the "biggest hurdle for the life market is changing regulation. New business premiums have fallen as a consequence, and it is anticipated that there could now be a shift of product mix to traditional health and pension protection products, but these can be more capital intensive and result in heightened pressure on capitalisation."
Now, a year since the great regulatory makeover for life policies, how are expatriate Indians coming to terms with the changes? Are they less inclined to consider taking out life insurance policies given its reduced emphasis as a savings mechanism?"Marketing life insurance policies to NRIs has always been a hard sell; they have access to all kinds of information available in the market," said Kumar. "The buying behaviour of NRIs — as a class — is different from what we see in India.
"They mostly look for other additional riders like critical illness cover, partial and permanent disability benefit, whole life risk rider, pension benefits, etc. As far as LIC is concerned, our policies come with the USP of repatriation to India in case the client desires so."
Given its entrenched role in the market built up over decades, LIC will not be too fazed by last year's changes to the Ulip schemes and its consequent impact on policyholder expectations. That, however, does not necessarily apply to the private life insurers.
For them, Ulip may well spell oblivion, at least for the smaller players.
"Private life insurers have failed to meet breakeven targets indicated at the time of obtaining their licences as they suffer from high procurement costs," the A. M. Best report said.
"Private life insurers are reducing the number of offices and agents for the first time since the liberalisation of the insurance market in 2000.
What's with the Indian insurance sector's fascination for unit linked insurance policies?
These investments came to the fore only over the last decade as insurance companies sought to ward off competition from the then higher yields offered by equities, mutual funds, exchange traded funds and even derivatives.
As a counter measure, insurance companies started to put their weight behind Ulips since the early part of the last decade. Incidentally, it was also the time when new players were entering the marketplace following the opening up of the insurance sector in 1999.
The new regulations on unit linked insurance policies (Ulip) mandated by the Insurance Regulatory and Development Authority are taking a toll on new business generation in India, according to market sources.So much so, the overall insurance sector is down 35 to 40 per cent in the current financial year, the sources add. Also, as per the IRDA norms, an insurance company can declare an end of year bonus only if it has registered a profit for the period.There are problems on the distribution side as well.
"Insurance as a financial product is always sold and rarely bought and hence the distributor plays a very dominant role in the sales chain," said Ambareesh Baliga of Way2 Wealth.
"The IRDA in recent times has reduced distributor commissions; the slashing has meant that a lot of smaller agents have exited the business. As per recent reports nearly one million existing agents have moved out."
Worst hit by all the changes are the private insurers, most of them global insurance majors in joint ventures with leading Indian corporate houses such as Reliance and Birla groups.
"India was supposed to be the exception to the general malaise that has hit the global insurance with such unprecedented force this year," said a senior official with one of the country's leading private insurers. "That it has not exactly panned out the way we hoped for at the start of the year is unfortunate.
"It's going to be difficult trying to wean the perception of life insurance policies as only savings schemes. And it will take a long time… a very long time."
Market sources are even hopeful the IRDA will bring about some "favourable and structural" changes in designing Ulip products looking at the way the market has tanked since August last year."You cannot compare the way life insurance policies are marketed in the West and in India," said Alok Kumar of LIC International. "In the West, the markets as well as customers are more or less knowledgeable to a great extent."In India, even informed customers may be enticed by an attractive projection and end up taking a Ulip not on its strength or his/her need but on certain other considerations."
From / Gulf News