Insuralysis - Insurance & Analysis

Health Insurance Portability in India (effective October 1, 2011)

2011-10-05T20:54:00.000+05:30

The scheme was proposed to come into force from July 1 earlier, but was deferred for three months due to certain outstanding issues with insurance companies.

Health portability will allow consumers to change their service provider without losing the basic coverage of health insurance. As per portability rules, consumers will get credit for the time already spent for covering the pre-existing disease along with bonus accrued to him from his past insurer.

However, health insurance portability will be limited to non-life insurers, which will allow policy switch with respect to all individual policies, including family floater policies.

Even individual members, including the family members covered under group health insurance policy of a non-life insurer, will be able to migrate from a group health policy to an individual policy or a family floater with the same insurer.

MetLife and Punjab National Bank enter strategic bancasssurance partnership

2011-09-18T12:02:00.001+05:30

MetLife India and Punjab National Bank (PNB) have entered into a strategic business partnership to distribute life insurance products of MetLife. PNB has acquired a 30% stake in MetLife India's operations and a 10 year agreement to distribute its products through it's channels.

Final approval by the Govt. and financial regulators is awaited, post which MetLife would be known as PNB-MetLife India Insurance Company.

This joint venture looks like a win-win for both the parties involved. MetLife would receive a major boost to its distribution set up with PNB's more than 5000 branches and 60 million customers. This would help PNB establish itself more comprehensively in the financial services sector.

This deal also augurs well for the fledgling insurance industry in India. With 60% of PNB's branches located outside Indian Metropolitan areas, it would take life insurance to the oft neglected semi-urban & rural areas.

This deal is a testimony of the importance and effectiveness of bancasurance in the current distribution set-up. Insurance companies are constantly looking at cost optimisation and alliances with banks not only serves the purpose but contributes to profitability.

As per IRDA annual report 2009-10, bancassurance contributes 8.46% of new business premium (individual and group) and this is high for private insurers with 22.02% of new business premiums coming from bancassurance.

India Post to distribute Insurance Polices

2010-10-18T01:48:00.001+05:30

Finally, the largest network with maximum reach has been roped in to distribute insurance policies in India. Department of Post (DoP) has been allowed by IRDA, the insurance watchdog, to sell insurance policies of multiple insurance companies.

This has been a result of a study undertaken by an expert committee on 'Harnessing the India Post Network for Financial Inclusion' which had recommended that the low cost platform of India Post be used for strategic partners like microfinance institutions (MFIs), mutual funds and insurance companies.

The sheer size of the network and its reach is substantiated by the following facts:

• Over 155,000 branches - twice as large as the outreach of all commercial banks in India put together
• Nearly 16 crore people use India Post
• Savings as on March 31, 2007 - Rs. 3,23,781 crore
• Deposits in savings bank account - Rs.16,789 crore

The DoP across India has been divided into 22 postal circles and now each circle is treated as a separate unit and will be allowed by IRDA to tie up with 2 non-life insurance companies, 2 life insurance companies, 1 agricultural insurance company and 1 stand alone Health Insurance Company for this purpose.

However, IRDA has disallowed the Head/Corporate Office of India Post to engage in the distribution of the insurance products of any insurance company ("in its individual capacity it shall not obtain license to act as Corporate Agent of any insurance company")

An excellent alternative:

With the opening up of this new distribution channel, it provides an excellent opportunity for insurance companies, busy chasing banks for distribution partnership, to tie up with India post. Insurance companies are facing a scarcity on this front with successful and large banks already engaged. This distribution arrangement will provide a low cost avenue with a wider reach for insurance companies, at the same time proving to be a new source of income for department of posts.

Now the fight would be for prime circles (especially in metropolitan areas) with cap on the number of companies that each can tie up with. In the case of metropolitan areas, as noted by IRDA, the head of Circle may approach IRDA for prior approval of further division in the circle as separate units to obtain licence to act as corporate agent in view of the large population. The head of the circle would be deemed to be the corporate insurance executive (CIE) — the key executive responsible for all insurance agency dealings.

One of the interesting points to be noted here is that the regulator has barred India Post from selling customer data to insurance companies under some referral arrangement.

Natural catastrophes and insurance in India

2010-08-17T00:00:00.001+05:30

Natural catastrophe is nothing new to India. Be it floods, landslides, extreme cold or heat, they all have their seasons in India. Many lives are lost every year due to these calamities. Earthquakes and tsunami are rare but equally devastating. Its been nearly 6 years since tsunami struck us and still individual natural catastrophe covers have not yet evolved in India.

There is a strong need to insure individual property and its contents. India is yet to see a standalone insurance product for natural disasters. IRDA is now studying CAT insurance solutions to insure an individual against such natural acts of destruction. In response to this, Mr. Narayan, chairman, IRDA, mentioned that the government at present provides the bulk of financial aid through budgeted funds, which are largely given for restoration of public buildings, humanitarian relief and writing off of crop loans. Loss of individual family assets is not taken care of.

He suggested that mandating lenders to take out catastrophe insurance, irrespective of the location of the properties on which they have loaned money, was one way of increasing cover against disasters.

Classroom 3: Reverse Mortgage

2010-06-29T23:29:00.003+05:30

Reverse mortgage is a financial product that enables senior citizens (60 plus) to mortgage their real assets with a lender and convert part of the equity into tax-free regular income. This saves them from selling assets in their life-time.

Reverse Mortgage and Insurance in India

2010-06-29T23:28:00.000+05:30

Reverse Mortgage is not yet a big thing in India. And insurance companies role in this has been limited. India's largest life insurance company, LIC (Life Insurance Corporation) is now planning to enter the reverse mortgage space.

Embedded Value for Indian Insurers

2010-06-09T23:10:00.000+05:30

Indian insurance regulatory body, IRDA has signalled mandatory valuation of insurance companies on Embedded Value (EV). This could be applicable from the current financial year, i.e., 2010-11.

This new method of valuation is calculated as explained in my Classroom Series (refer Classroom 2 - EV).

Need for change:

Broadbased and transparent disclosures
Facilitate inter-firm comparisons
Assist capital market accession for insurance companies

For details, please click on 'Deccan Herald'

Classroom 2: Embedded Value (EV)

2010-06-09T11:58:00.001+05:30

Embedded Value (EV)

The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.

Formula:

Embedded Value is calculated as follows: EV = PVFP + ANAV
where,
EV = Embedded Value
PVFP = present value of future profits
ANAV = adjusted net asset value

It is a common valuation measure used outside North America, particularly in the insurance industry.

The present value of future profits considers the potential profits that shareholders will receive in the future, while adjusted net asset value considers the funds belonging to shareholders that have been accumulated in the past.

Drawbacks of EV:

As per Investopedia, Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill from its calculation of a company's worth. Goodwill includes intangible assets that increase the value of a company beyond its assets minus liabilities, such as strong management, good location and a happy workforce. Furthermore, to add to its conservatism, the EV calculation of a firm does not allow for any increase in future business.

EV in insurance:

Life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event (such as the death of the policyholder).

Future income for the insurer consists of premiums paid by policyholders whilst future outgo comprises claims paid to policyholders as well as various expenses. The difference represents future profit.

For companies, the net asset value is usually calculated at book value. This needs to be adjusted to market values for EV purposes.

EV measures the value of the insurer by adding today's value of the existing business (i.e. future profits) to the market value of net assets (i.e. accumulated past profits).

It is a conservative measure of the insurer's value in the sense that it only considers future profits from existing policies and so ignores the possibility that the insurer may sell new policies in future. It also excludes goodwill. As a result the insurer is worth more than its EV.

European Embedded Value (EEV) and Embedded Value (EV):

European Embedded Value (EEV) is a variation of EV which was set up by the CFO Forum which allows for a more formalised method of choosing the parameters and doing the calculations, to enable greater transparency and comparability.

Market Consistent Embedded Value is a more generalised methodology, of which EEV is one example

Classroom 1: Combined Ratio

2010-06-08T23:59:00.001+05:30

Combined Ratio:

This ratio is one of the important profitability ratios used by insurance companies. It is used to relate premium income to claims, administration and dividend expenses.

Formula:                  Loss ratio + Expense ratio + Dividend ratio
                             -----------------------------------------------
                                                 Earned Premiums

A combined ratio of below 100% would denote a profitable insurance company while anything greater than 100% would indicate loss.
For example, a ratio of 98% would mean 2% of underwriting profit, while a ratio of 103% would mean an underwriting loss of 3% for each premium rupees

Private life insurers to launch universal life policies

2010-06-07T20:08:00.000+05:30

Faced with the challenge of falling demand for Unit-Linked Insurance Products (ULIPs) and the ongoing jurisdiction between SEBI and IRDA, private life insurers in India are looking to diversify into traditional products by launching whole life and universal life policies.

ULIPs have been the main breadwinner for life insurance companies ever since their launch at the start of this decade. However their share of new business premium has come down in the last 3 years (from 2007-08 to 2009-10). Moreover the sum assured depends on the performance of the fund and market conditions.

This seems to have prompted life insurers to be more innovative and focus on traditional products suitable to Indian conditions and market.

Indian market: Product clutter and revenue

2010-06-07T19:58:00.000+05:30

"The 80:20 rule strongly applies to Indian insurance market. In our business, 8-10% of products contribute 90% of volumes we generate" says Mr. Yashish Dahiya, CEO of PolicyBazar, an online insurance comparison site.

As reported by Economic Times, a handful of products are contributing to a majority of premuims in the Indian insurance market. Indian insurance market is inundated with a plethora of products catering to a varied classes of consumers. As per an estimate by insurance distributors, over 50% of insurance products in the market are dormant, i.e., without any revenue generation / sales.

There are many reasons for this imbroglio. Some of them are:

Lack of product awareness among retail and SME customers
Successive launches of newer products
Old wine in new bottle - Lacking innovation
Insufficient training to agents and other distributors
Absence of alternate / new channels of distribution

While it is true that the presence of varied products would provide an opportunity to customers to choose products of their choice and the ones that suit their need of the moment, it might sometines clutter the market and provide counter-productive. This is where marketing and distribution departments play a key role in promoting the product and creating awareness amongst the customers.

In any product launch one can observe two main points:

Replicate product - to cash in on the market share of the popular product in the market
Innovative product - based on 'first to market' principle. But this too has a lead time, will soon be usurped by a rival product

In any case the role of propagating the new product cannot be undermined. In insurance where time and money are invested and closely linked to the customer's life goals, it would require professionalism (right advice) and expertise (product knowledge). Launching products at regular intervals has been a popular strategy to retain market share if not increase it. The timing of such products and their spacing while launching is very important. A fresh, innovative and meaningful product would definitely get its due more than a replicated one.

In the present market, most of the business is channel-linked and thus requires distribution channels to be robust, stable and trustworthy as financial advice goes hand in hand with selling. This would require proper training of distributors and strict adherence to competent qualifications. They should be adept with most of the products of the stable and definitely with the newly launched products. Lack of it would reduce the penetration of new products and thus reduced sales.

Alternate distribution channels would add the required reach for insurance companies and can be product specific tie-up thus developing a niche product-channel arrangement. This would require lot of groundwork in ascertaining the relationship between the two and revenue-sharing models. Once established, this could prove very effective. Ex: Bancassurance, banks for mortgage insurance (home insurance with home loans). Internet is an up-coming channel in India at present with a lot of comparator sites leading the way.

New products, no doubt, would run high on expenses and may eat into the profitability of other products, but if managed well, could prove to be a star product in terms of reach and revenue generation

Capital efficiency of Indian insurers tested

2010-06-02T23:09:00.001+05:30

New capital disclosure norms coming into effect next month would test Indian insurnace companies' capital efficiency. The new rules would require the companies to provide a detailed break-up of capital required for various businesses and the amount of capital that they might lose under various situations

This poses a unique challenge to Indian insurers as they will need to conserve capital in a market with excellent growth potential. There is a clear deficiency of capital management financial tools such as securitisation or reinsurance of their businesses. This would imply constant supply of capital by the insurers. (reported by Economic Times citing Ernst & Young)

Globally focus shifts towards DISTRIBUTION

2010-05-31T23:11:00.000+05:30

Insurance companies across the world are focusing all their efforts in terms of money, time and technology on 'Distribution'.

As per a survey conducted by Accenture, IT Consultancy on 125 insurers globally, it has been found that over the next three years insurers will be spending USD 84 mn. on mobile technology and digital marketing. The focus is clearly on improving distribution strategy. Sales through mobiles and internet are sure to receive a fresh impetus by this.

While distribution is one side, product development is another side of the same coin. Customisation and innovation are at the heart of product development.

US Healthcare Bill - Opportunities and Challenges for India

2010-04-18T22:09:00.001+05:30

The landmark Healthcare reform bill passed in US is set to change its healthcare system. The US Healthcare reform bill extends coverage to an additional 32 million Americans at the cost of nearly a $ trillion.

SEBI and IRDA fight over ULIPs

2010-04-11T23:00:00.000+05:30

Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA) have locked horns over ULIPs sold by life insurance companies in India.

Multi-year insurance for two-wheelers

2010-04-03T13:55:00.000+05:30

Multi-year insurance or long term insurance is worth considering when it comes to motor insurance for tw-wheelers. This would help reduce the number of uninsured two-wheelers plying on Indian roads. The insurance term could vary from a three-year to five-year or ten-year policy.

Motor insurance lapsation is high for two-wheelers when compared to cars or other light motor vehicles (LMVs). Cost is the main reason for this. Small premium amount and commission amount does not interest the agents to follow-up on renewals. Depending on the age of the vehicle and its past claim record the insurance amounts to anywhere between Rs.500 to Rs.800. In most cases the only time the consumer would have paid attention to insurance is at the point of sale, where the showroom vehicle comes with first year insurance.

With the present structure of annual renewals, the onus of renewing lies with the owner of the vehicle. Once the customer fails to renew within the renewal date, it is observed that they are all the more reluctant to renew it with a penalty of late fees and in turn increasing the number of lapses.

One way to address this issue would be to bring into practice the sale of long-term / multi-year insurance policies for two-wheelers.

General Insurance Council (GIC) in partnership with other non-life insurers is working on developing such lomg-term cover for two-wheelers. The vehicle owners wil have an option of paying the entire premium at one go. Mr S.L. Mohan, Secretary General, GIC, mentioned that providing discounts for long-term insurance will further bring in lot of uninsured vehicles under the purview of insurance.

Both third party (TP) and own damage (OD) aspects of vehicle insurance (comprehensive cover) needs to worked out by the actuarial team in designing this product and to arrive at an affordable long-term insurance premium amount.

Third-party (TP) cover protects accident victims (other than the owner and the rider) while the own-damage (OD) portion insures the bike in case of an accident. Premium for a bike priced at Rs 50,000 is about Rs 900, which includes TP as well as OD. If there are no claims, bike owners receives a no-claim bonus on the premium to the extent of 20% in the first year and keeps on increasing by 5% for every claim-free year to a maximum of 50% discount. All these needs to be incorporated in the new long-term policy.

Mr Vijay Kumar, head motor insurance at Bajaj Allianz General said: “Currently, TP premiums are fixed by the regulator and is uniform across India. However, experience show that there are geographical locations where incidences of claims are very high. This makes the portfolio loss making. Insurers should be offered some lee-way so that they can factor in such high incidences in the premium while working out the long term policy.”

According to the latest available data from Tariff Advisory Committee, about 2 crore two-wheelers were insured in 2007-08. Although there is no published data on the number of two-wheelers plying on Indian roads, close to 4.5 crore two-wheelers have been sold in the past seven years, according to the Society of Indian Automobile Manufacturers (SIAM). Each year about 75 lakh new two-wheelers get added to Indian roads; 84 lakh vehicles have been added so far this financial year.

Micro Insurance - Bottom of the pyramid

2010-03-30T13:02:00.000+05:30

Insurance for low income people with affordable premiums, covering their basic necessities

Television - Influential insurance distribution channel

2010-03-28T23:33:00.000+05:30

Television can act as an important distirbution channel in years to come. Recently in India (March 2010), HomeShop 18, India's leading TV shopping channel, has tied up with Bajaj Allianz to enter into the distribution of insurance services on its channel.

New Pension Scheme and Insurance

2010-03-17T20:03:00.000+05:30

The launch of NPS and its role in Indian context makes interesting comparison with insurance and other related financial services areas such as mutual funds, other saving instruments.

Insurance in particular is closely linked with pensions and saving for the future. NPS too aims to do the same but with a slightly different operating model. Is India ready for NPS? How will this affect insurance? are some of the questions which need to be looked at.

Social marketing & Insurance

2010-02-28T22:52:00.000+05:30

Websites such as facebook, linkedln, twitter etc. have proved to be important tools in internet marketing. Social websites auch as these not only help in spreading the word, popularly known as 'Word of Mouth', but are influencing customer decision-making. It is also spreading awareness.

Aggregators - The way forward for insurance sales

2010-02-24T23:05:00.000+05:30

Aggregators will prove to be an effective mode of distribution for insurance companies. Direct channel of insurance distribution, encompassing internet (online) and telemarketing are increasing their presence in the market and companies in their effort to cut costs and expenses, are launching such initiatives.

Also known as comparators in France.

Aggregators are particularly active in UK, more so in P&C. Motor insurance is oft referred to in a aggregator.

Insurance product innovation in sports

2010-02-17T11:41:00.000+05:30

Insurance is serious business and the products they offer reflect this seriousness as it deals with contingencies which need not be pleasant to think about. Yet there is no stopping certain interesting product innovations in the insurance arena.

Two such interesting product innovations related to sports were observed recently.
1. Football fans to get insurance cover: Banco Bilbao Vizcaya Argentaria, second largest bank in Spain has tied up with Spain's football league to provide free accident cover up to 500,000 fans attending matches. The cover will pay €25,000 (£22,000) for an adult in case of death or permanent disablement due to injury at a match. The only requirement (in terms of eligibility) is for the fans to be in possession of a valid ticket. This is applicable to anyone watching Primera Liga or second division matches. Cover would also be offered to official club fans for their travel to and from matches. (As reported by The Guardian)
This is infact a good move keeping in mind the frequent clashes between rival fans in the stands and outside stadiums. Invariably it is the innocent fans who get hurt for the acts of a few miscreants. While it augurs well for the fans, it needs to be seen how the insurance companies manage the pricing and premium charges. Would they include it in the ticket price burdening the fans or would they charge the football association / club needs to be ascertained...

2. Unit Linked Insurance Plan for Indian Premier League (IPL): Bajaj Allianz Life Insurance planned to introduce a ULIP with returns linked to the performance of the IPL team

Multiple year insurance cover

2010-02-01T21:21:00.000+05:30

Insurance cover for long-term for our vehicles is an excellent idea.

IPO listing of insurance companies

2010-01-26T00:44:00.000+05:30

IPO listing of insurance companies

Product innovation - To sustain market share

2010-01-20T21:16:00.000+05:30

Product differentiation and innovation is a must in an emerging market, more so to sustain market share