The Indian life insurance industry is having to reinvent itself because of the extensive new regulations put in place by the Insurance Regulatory and Development Authority (Irda) to prevent customers of unit-linked insurance plans (Ulips) from being misled and fleeced. Any industry concerned with its image would be deeply worried if it is widely seen to have been thriving on penalties paid by gullible investors who were sold products they did not understand. This would turn into existential anxiety as a substantial source of revenue, mis-sold Ulips, now stood threatened.
But the industry is no stranger to accusations of thriving on mis-selling. So, while it is likely to pick itself up, it is equally unlikely to have a change of heart and adopt a narrow path of ethical selling. This will remain a permanent source of danger for investors who will likely again fall prey to the industry’s efforts to innovate new products that get round the new rules but are essentially lemons.
Decades ago, long before the life insurance sector was opened up, when as a young working person I started looking for life cover, I came up against a wall. There was nobody, absolutely nobody, willing to sell me pure life cover which involved no investment. Either they did not exist or there was precious little for agents in policies which focused on life risk. That’s the way the Life Insurance Corporation (LIC) of India formulated its schemes.
The whole focus at that time was on endowment policies, the business that LIC wanted to push. Over time, they became available in various permutations and combinations of so much of money back in so many stages. LIC, being a state monopoly, was hardly interested in educating the public; actuaries, who understood the probabilities of various risks, were mere ornaments in the organisation; and the public’s understanding of what it was getting was negligible. I owe a lot to an old public-spirited gentleman in long, white, half-sleeve shirt, worn over the dhoti like a kurta, who used to do the round of newspaper offices and explain to those in the newly opened up field of business journalism that “the cost of covering life risk is no more than 1 per cent and the public is getting a very poor return on these endowment policies”.
LIC needed all that it could make to, apart from funding socially desirable infrastructure investment, maintain its large, inefficient workforce and do the government’s bidding in supporting this industrialist or that. The wisdom in the old man’s words has come back to me periodically when I have spotted investment advice to the effect that it is wrong to mix up life cover and investment for a return. That way you get shortchanged. But the reason why people have still gone in for endowment policies is, other than there being no other option in the past, they have seen them as a way of forced saving, aided by a tax-saving sweetener.
This is the ancestry of the life insurance industry in India. The opening up of the industry and the advent of global players have brought in enormous customer focus and a sea change in customer service. But it has also introduced financial innovation and created convoluted products, mainly in the nature of Ulips. At a time when the global financial system has come to grief over complex products created by financial innovation, a late strike by the Indian regulator against similar innovation has thrown the Indian life insurance industry into the doldrums.
Life assurance in developed economies has gone through its own reform and met rising standards of transparency. This, coupled with the advent of the Internet, has led to a situation where most term life policies (pay a small premium to cover life risk for a period and get nothing if you are lucky to be alive at the end) are similar as there is not much scope for innovation there and are easily bought online. The good news for India is that term life insurance is getting a push. Two insurance firms have recently come up with new term plans and one of them, with the cheaper plan, is offering it only on the Internet, naturally, to keep costs low.
Regulation which improves markets and protects the consumer is to be welcomed. But the way Irda has gone about the task does not put it in kindly light. All hell broke loose when the capital market regulator, the Securities and Exchange Board of India (Sebi), sought to regulate Ulips as it found some of them carried barely a trace of insurance and were, for all practical purposes, investment schemes. The Union finance ministry has come out in favour of Irda but two issues remain. Considering the period for which Ulips have been around, did the Sebi move galvanise Irda into action? Further, it can fine-tune and sanitise but Ulip as an animal being more investment than insurance, Irda can hardly be the best equipped to deal with it.
This brings us to the question addressed in the last column (“Who cares for mutual funds”) which argued that if you have minimum capabilities and just a little appetite for risk, then do your own selection of leading equities and not go to them through mutual funds. Their schemes are a mixed bag and picking a good one is more difficult than picking a bunch of good equities. But if there is anything far worse than the mutual fund animal, then it is Ulips to which investors have till now turned in the eternal quest for better returns. The best mix for the lay investor is some bank or post office fixed deposits, something in public provident fund, a term life policy and a bunch of leading equities in which you stay invested for over five years.
