Insurance & IRDA

Ramesh Dheer,a senior manager with a Gurgaon-based company for instance, thought that he had made a smart move by getting his newly bought Rs 70-lakh apartment insured.Unfortunately however;the flat got destroyed in a fire just after some time and when he lodged his claim, the insurance company refused to pay him in full.

So, what went wrong in this case? According to experts, the devil lied in the manner the house was insured. In fact,Mr Dheer had got his house insured.In Fact Mr Dheer company had got his house insured at the market value, which also included the cost of land. Usually however: the fire policy does not Cover land because land continues to exist even after a fire or flood destroys an apartment complex. So, Mr Dheer in this case was over insured and the insurance Company was within its right to pay only  For the replacement cost of the apartment.

What They Cost

Fire insurance ( Premium rates) Rs 50 per lakh,
Burglary Rs 50-100 per lakh,
Jewellery 1-1.25% of sum insured
Plate Glass 0.5-1% of sum insured
Home Appliances depends on items
Pedal cycle Rs 10 per Rs 1,000
Electronic items 1% of sum insured
Baggage Rs 1 per Rs 1,000
Personal Accident Rs 150 per lakh
Earthquake Rs 10 per lakh
Terrorism Rs 10 per lakh

"Many people incorrectly insure their homes, and even their offices or factories, either on the market value or the book value the price they originally paid for it. In the first instance, they and up taking a higher sum insured while in the second, they underinsure their property resulting in claims being paid as per the average of the underinsurance, says Pavanjit Singh Dhingra, vice president,Prudent Insurance Brokers.

In householder's insurance, therefbre, the most important thing to consider is the valuation of one's proporty and valuables. Building and EFF (furniture, fixtures and fillings) should be insured on a reinstatement basis because in the event of a loss, both would have to be repland at today's cost of constrution or replacement.

Likewise, household goods should not be insured at the purchase(book) price, as adjustment for depreciation would result in very little calm being paid. It is also not always easy to know the replacement cost. So one may have to use approximations and also keep a list of contents separately (not in the home) so that if there is a major loss, one knows what all the items were at home.

For stand-alone structures such as properties purchased more for long-term investment than as a place of residence long-term policies of 10 years can he purchased either at significant discounts or with a provision for an inbuilt annual increase in sum insured. Premium rate is less than Rs 2 per day Rar a house with an HIV (reinslatement value) of Rs 10 lakh for fire and burglary risk.

In apartment complexes, where there are many owners, it does not make sense for individual owners to insure their homes. In this case, the society or association should insure the entire complex at the reinstatement value -i.e. the present cost of constructing the same building. An apartment complex not only includes flats, but also substantial common areas and amenities. These also needs protection. Besides, group discount can be given in case of insurance for the entire apartment complex, which can reduce the premium.

This is because IRDA, the regulatory body, has decided to lift a cap on discounts general insurance companies can offer. The move will come into effect around November 15.

On January 1, 2007, IRDA had moved these companies out of a regime where the pricing of their products was controlled into a free, detariffed regime. Subsequent to this move, steep undercutting in prices of various insurance products compelled IRDA to move in again and put a cap of 51% on the discounts a general insurance company could offer its customers.

The foreign equity up to 26 per cent is allowed in the insurance sector. The entry of foreign partners has resulted in the sector attracting FDI of $543 million as on March 31. The private companies have created a niche for themselves, Bansal said while addressing a meeting of Insurance Australia Group in Sydney today.

An official release quoting him said they have been able to increase their share in the insurance market in competition with their counterparts in the public sector. As a part of the reform process, premium rates for non-life insurance products have been de-tariffed.

Bansal said in insurance sector though the growth in recent years has been significant, India is far behind the world averages and ranks 78th in terms of insurance density and 54th in terms of insurance penetration.

Bansal said Insurance Regulatory and Development Authority (IRDA) has granted registration to 37 insurance companies, which include 17 life insurance, 19 non-life insurance companies and one re-insurance company.

At present 17 insurance companies are operating in the general insurance side and 17 insurance companies on the life side.

Bansal said the banks also have entered the insurance sector in the form of corporate agencies or under referral arrangements to utilise the extensive and broad reach for marketing of insurance products.

He said IRDA has also notified micro insurance regulations facilitating insurers to tap the potential of rural markets.

He said India offers a stable investment climate as well as a huge market with a growing middle class. He said investor confidence in India was at an all-time high today. A.T. Kearney in 'The FDI Confidence Index 2005' has ranked India as the 2nd most attractive investment destination, just behind China.

The data released by the council is significant as this is the first time that such detailed data is being released on renewals. Most of the industry measures growth in terms of increase in the new business premiums or premiums paid for new policies signed up in each particular year The life insurance sector has been showing a 100 per cent growth in new premiums in recent years.

The data released by the council shows that unit-linked plans make up for 92 per cent of the single premium products. It also showed that the total number of policies in force at the end of 2006-07 is at 22.14 crore, which has gone up 15 per cent from 19.24 crore at the end of 2005-06.

The data also shows that the total number of group policies has grown a mere three per cent from 1.06 lakh to 1.10 lakh, while at the same time number of lives covered under the group policies has gone up by 16 per cent.

The regulator has asked Bajaj to withdraw one policy and Aviva its entire range of Ulips, as they are actuarial-funded plans. However, it hasn't stipulated a time period for the pull out. "We are not strict about the deadline, as the companies selling them will have to change their entire IT system and may require time," IRDA chairman C S Rao said .

Bajaj, which had to phase out its most popular plan, has started training its agents to sell other policies: "We have pulled out Capital Unit Gain and are now running refresher courses to reorient our agents to sell other policies offered by us," a Bajaj Allianz Life official said. The company has also filed a new policy for approval to replace Capital Unit Gain.

In order to ensure that these companies do not suffer huge losses, IRDA has said the new policies will be cleared as soon as possible. Rao explained, "We will clear the plans at the earliest. Till then, we have directed companies to get the illustrations of actuarialfunded Ulips attested by policyholders to acknowledge their understanding of the product."

IRDA has asked these plans to be pulled out on grounds that their cost structure is complex. Al though the charges are evenlyloaded, companies levy additional charges to recover their high costs in the initial years. As a result, policyholders lose heavily in case of a premature exit.

In mature markets, actuarialfunded products are not allowed. Said National Insurance Academy director K C Mishra, "In countries like the UK, Japan and Australia, actuarially-funded products are not encouraged since they are difficult to understand and are not transparent enough."

Another round of Ulip reforms also looks likely. IRDA is looking at cost structures and has expressed interest in simplifying cost heads. "Last year, we had unified cost heads. Now, we are looking to reduce cost heads to make it easier for investors," said Rao.

At a meeting attended by external affairs minister Pranab Mukherjee, finance minister P Chidambaram and law minister H R Bhardwaj, Left representatives were told that the growing segment was desperately in need of massive investment.

According to Irda chairman C S Rao, insurers cannot offer discounts on premium rates lower than 56.25% of the original tariff for class risks, which are smaller risks like household, shops and establishments etc. On the other hand, a discount on premium up to 48.75% can be offered on individual or larger risks.

"There is a need for companies to prudently underwrite risks. The caps are basically to give more flexibility to companies and they have to justify the lower rates being offered. In fact, some conservative companies, which had not dropped premiums during file and use are standing to lose and that's not the intention for detariffing," he pointed out.

The move comes within a couple of months since the market was detariffed on January 1, 2007.

For starters, to operate in the detariffed regime, all general insurers were permitted to offer up to 25% discounts on premiums on class risks and up to 35% on individual risks on lower rates filed and approved by the Irda.

The new companies include Scor of France, Australian insurer QBE, Russian Insurance Centre, Singapore Re, Samsung Life Insurance, Munich Re. Others, which already have a venture in India and have obtained permission to set up a liaison office, include Tokio Marine & Fire, UK's Royal Sun Alliance, ING Insurance.

Companies, which have a services company and have obtained permission for a liaison office, include RGA Services India and Munich Re. Besides, Sompo of Japan and Prudential of America, which are in the process of applying for a joint venture licence, have obtained permission for a liaison office.

According to industry officials, the number of liaison offices is not representative of the number of MNCs that are interested in India. There are likely to be more companies.

This is because several companies search for partners through investment bankers or management consultants. Several foreign companies, which are in the process of filing application to set up companies with local partners do not have liaison office.

In its annual report for the year 2005-06, Irda has said that it is setting up a separate health insurance department in the light of the growing importance of this segment of the industry.

"Health insurance is one of the fastest-growing portfolios of the general insurance business. In order to give a special focus to this area, Irda is in the process of setting up a separate health insurance department. The Authority is also planning to bring out separate regulations/guidelines for health insurance," Irda said in its annual report.

While the health is the fastest-growing segment, it is also an area where the regulator is getting the maximum complaints. In the case of general insurance, most grievances relate to personal insurances, with health (mediclaim) being the most prominent, followed by motor. More than 50% of the complaints in health insurance claims relate to disputes regarding `pre-existing disease'.

Today, hardly 1% of the country's population is covered under health insurance. Health insurance accounts for a mere 1.2% of the total expenditure on health in the country.

The total losses of the private insurers as on March 31, '06 stood at Rs 3,790.81 crore against Rs 2,590.32 crore on March 31, '05 forcing promoters to pump in an additional Rs 1,538 crore by increasing the paid up capital. While the competition is pushing companies to spend more, the consumer has gained by way of lower charges for term insurance and lower commissions which improves the return on his investment.

According to IRDA data, both premium for term insurance and commission have come down in '05-06 from the previous year. Insurers also point out that the losses are likely to continue as long as new business outstrips renewals. This is because commissions are paid upfront and so are the provisions toward solvency while the earnings come in substantial years.

With this year's infusion the paid-up capital of private life companies, which reflects the total investment made by promoters, has gone up to Rs 5,886 crore from Rs 4,347.8 crore in '04-05. Over Rs 4,500 crore has come from Indian promoters. Barring Reliance Life Insurance all private companies are joint ventures with the foreign shareholder holding the maximum permissible 26%.

According to the IRDA's annual report for '05-06, "The continued financial support through equity injections reflected the promoters' commitment in stabilizing the insurer's operations." Despite the losses private life insurers continued to declare bonus. This followed an IRDA dispensation in '03-04, which allows companies to declare bonus despite non-availability of actuarial surplus.

"One of the most significant outcomes of the enhanced competition has been the reduction in the rates for pure protection plans. Over 6 years, the rates have been regularly revised downwards, and are significantly lower than those prevailing prior to opening up of the sector," IRDA said in its annual report.

On commissions the report highlights the fact that as against the industry average of 22.52% (24.06% in '04-05), LIC incurred an expense of 25.26% (26.37% in '04-05) towards commission on first year premium; for the private insurers it worked out to 17.54% (17.69% in '04-05).

Life hasn't been easy for homebuyers these days. Interest rates have been steadily rising and the benchmark rate or Prime Lending Rate (PLR) has climbed to the 14 per cent level. In addition, property prices, despite being considered hot, are not showing any signs of correction. Simply put, it has made life only tough for homebuyers. If life is going to be hard-hitting for prospective buyers too, well, it is no better for those who have bought some property in recent times.

The rising rate means EMIs (equated monthly instalment) will start climbing upwards. Those who opted for floating rate have already been asked by their banks to pay more.

In such a scenario, property buyers are likely to focus more on their interest rates than other aspects of borrowing. In fact, few borrowers actually think of covering their home loan liability with an insurance policy. An insurance policy can actually offer relief from the long-term burden of a home loan even in the event of death of the prime borrower.

Insurance policies often are associated with tax planning and individuals fail to make good use of this product. Next time you think of an insurance policy, calculate the liability you have. While personal loans and credit card payments are short term liability, a property loan invariably is a long term liability, requiring you to pay EMIs for as long as 10-15 years.

As a result, not only is it important to keep enough cash in the bank account for monthly repayments, a home loan borrower should also keep enough cash till the loan is repaid. That doesn't mean you should keep cash in your savings account when you take a home loan. Instead, take an insurance policy so that your family is not burdened with the home loan repayment in the event of your death.

Term insurance

There are different products through which you can provide cover for long-term liability. The cheapest and simplest one would be term insurance.

Take an insurance cover that takes care of your home loan liability. For instance, if you have taken a home loan of Rs. 15 lakhs, your total liability over a period of 15 years may run into over Rs. 25 lakhs. As a property owner, your term insurance should be for a minimum of Rs. 25 lakhs. Even in the unfortunate event of death, this cover will come in handy for the family as it would not be burdened with any loan liability. The good thing is that term insurance comes very cheap and a 35-year-old individual can take a cover for Rs.25 lakhs by paying less than Rs. 25,000 annually.

Though you can also look at other insurance products for covering your liability, they may prove expensive when compared with term insurance policies.

Since term insurance policies don't give any survival benefits or don't assure any returns to policyholders, they are always cheap when compared with other insurance products.

But keep in mind that the premium you pay is only for a year and hence don't forget to renew your policy when it matures. Otherwise, the purpose of a term insurance product may be defeated.

On December 13, 2005, the finance ministry notified that investments in ELSS after April 1, 2005, are eligible for tax deductions. ELSSs were launched in 1992, as closed-ended funds, with a tax- saving bait thrown in, as part of an effort to draw investors to the stockmarket.

Asset management companies obviously realize the growing importance of this product in the individual portfolios of investors. Given this, recent times has seen a spate of  ELSS launched by those AMCs which did not have this product.

Mr P.P. Mohanan, State Vice-President of the Association, has urged the Centre and PSU general insurers to enlighten the public and policy holders regarding the circumstances that has led to the third party premium hike. "The premium hike was inevitable as the third party claim ratio is 250 per cent," he pointed out.

Since the third party premium was unattractive, the burden of loss-making third party insurance was mainly on the four public sector general insurance companies alone. If the freedom to fix third party insurance premium was given to insurance companies, the premium amount will be much more due to the high claim ratio, the Association said.

As per the new system, all third party motor insurance premium and claims will be managed by the Indian Motor Insurance Pool, which will be controlled by the General Insurance Corporation of India. The third party claim loss amount is to be shared by the 13 non-life insurance companies, according to their market share.