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7^th Jan 2010

“For a common man who does not have access to expert advice for making investments, insurance as saving instrument is great and very convenient too. It is helpful as money is invested at regular intervals,’ says the Doyen of Indian Insurance industry in an exclusive conversation with Harsh Roongta and Bienu Vaghela of Apna Paisa.

In India, people perceive life ‘Insurance’ as a vehicle for investment, and only 2% of the total life insurance premium is directed towards covering risks, which is significantly lower than other comparable countries. How do you look at that?

From an individual’s perspective, it is good to buy insurance, mainly because this puts him on track, to achieve his financial goals. This is especially beneficial for people who are on the ascending curve of the income. But they have current desires to fulfill. Hence, it often becomes difficult balancing the two (expenditure and investments) thus the saving does not happen but buying an insurance policy introduces discipline in the habit of savings because more often than not it is perceived by the policy holders as necessary expenditure.

As you know an ordinary middle class person does not understand the complexities of financial systems, nor does have time and the ability to manage those instruments. Therefore it is important for such persons to invest through life insurance policies where they have some kind of regular continuous savings. This factor led to the success of SIPs (Systematic Investment Plan) and also made RDs (Recurring Deposits) another very important instrument of savings. But insurance as an instrument of saving offers additional benefit where you can determine the amount of savings you want, it is guaranteed whether you live or you don’t, which is not the case either with SIP or RD. Therefore, if you look at it in totality, and imagine a middle class person, who is not in a position to decide which way to go in terms of financial planning and is always balancing between desires and savings, insurance becomes a very effective instrument.

The nation like ours need large amounts of savings. These can come from institutions, which channelize savings for long durations. This ultimately has the cascading effect on the economic growth. Therefore it is important to engage the society in some long term savings. Thus savings element becomes important in insurance.

Does that mean that Indians are inadequately covered?

I would imagine most of the Indians are inadequately insured. In fact the concept of human life value has not been sufficiently propagated in India. Even though, various forms of financial instruments do provide incase of some Indians, adequate financial security for future, most Indians need to supplement their savings.

Going from here you see a regulatory view that the intermediation costs are way too high, moreover they are not transparent. Not just intermediation cost but also production cost of the financial product is way to high. What do you have to say on that?

There is a distinction between Insurance and Mutual Fund. Even today life Insurance, not only in Indian market, but in the entire world continues to the business of hawking, as most people don’t buy by themselves. Some where down the line banking industry moved from being a ‘sellers’ market to ‘buyers’ market.

Also Mutual Funds and Banking both have become ‘pull market’ whereas Insurance continues to be ‘push market’. The kind of resources required to paddle a pull market is different than that of paddling a push market. Therefore the compensation for intermediation between Banking, MF and life insurance cannot be compared.

If you don’t differentiate in the compensation then why would someone put that kind of resources and time? Different instruments belong to different categories, each of which have inherent strengths but have different issues too with regard to pricing and product manufacturing. In insurance you guarantee a sum where on the happening of an event, even on the average basis, calls for higher pay outs. New for these resources, the manufacturer has to adjust by receiving higher amount monies from larger number of people over a period of time. But this is not the case in Asset Management. So if you say that the manufacturing cost of the insurance product should be the same as the Mutual Fund product, it is not appropriate.

Coming back to the manufacturing costs, the main difference lies in the cost of marketing – the intermediation fees. An endowment product or a money back product cannot be compared with asset management product.

Since these instruments are of different creed and variety, the cost of manufacturing and cost of marketing, are going to be different. Now what is reasonable is determined by the market place. You suddenly can’t enforce from the top and destroy the order in the marketplace, which is going to happen in case you pick up the standard, of one instrument and enforce on the other.

Do you see the competition rising and driving down prices. Competition is not just from Asset Management Companies but also from ULIPs where redistribution charges are coming down significantly.

It is a pity that Mutual Fund industry has allowed its own space to be captured by the life insurance industry. If you look at the total collection by the asset management industry, and ULIPs, it is not even 90:10. So where is the question of competition?

They are not in competition mainly because they do not have reach and are not able to distribute this product. Moreover they do not even pay to the distributor adequately – under new rules nothing is paid by AMC. It is as simple as that. If you have no distribution network and no feet on the street, then how will you extend your reach. It is not like collecting the bulk money from a corporate guy and manage it for a short while. ULIP has been in India since 40 years. They never got popularized because of the intermediation compensation and if you attack the compensation under ULIP, this money may not come at all.

Do you think that proposed Direct Tax Code is positive for the insurance industry?

It is quite negative and MAT is going to impact the life insurance industry as companies are going to be taxed on their assets, which belong to the policy holder and not shareholders. Similarly, if you tax the investment income and do not give credit for the underwriting losses, then you are going to kill the non-life industry. If you remove the section 10 DD, which keeps life insurance as EEE, actually it is not EEE it is TEE, most of us pay tax on insurance premiums paid, life insurance will not remain attractive.

Actually, in effect, it is TEE, which is now sought to be reversed as ETT which will seriously impact life insurance industry.