“The insurance industry has made a mistake in marketing insurance as investment. It is a risk product”

In a freewheeling interview to Moneylife editors Debashis Basu and Sucheta Dalal in Hyderabad recently, J Hari Narayan, chairman of the Insurance Regulatory and Development Authority (IRDA), spoke on key insurance related issues

On IRDA's attempt to reach out to policy-holders and creating awareness among consumers. 

The education initiative was started in March last year with the first conference on policyholder protection which included consumer organisations, insurance companies and other stakeholders. We obtained the procedures of dealing with consumer issues from various insurance companies, put them together in a booklet, and distributed it to people. We also put together a small war chest and agreed to meet a part of the cost of consumer education initiatives by four groups. We also started an education campaign last September through the issue of advertisements, but it got derailed by the issues over ULIPs (unit-linked insurance products). We are now trying to revive it.

I find that most insurance companies have robust grievance management systems. The life and non-life insurance segments each get around 200,000 complaints a year. We have got them to adopt a system of classification of complaints. We find that most complaints are not about mis-selling. They are about policy administration issues such as card not received, policy not sent, address not corrected and so on. About 18%-19% of them are about mis-selling which requires a proper tracking mechanism. So we are designing a system that can override their systems. It can see what each company is doing with their systems and whether they are handling it right. We will also be able to do random checks into the cases they have rejected and the reasons for their rejection. Or, if they have accepted the complaint, what was the error that led to its rejection in the first instance. This will be in place in the later part of the year and then we will have a far better way to address consumer complaints. We have to see that companies implement the systems, because fundamentally, it is they who have to do the implementation. IRDA cannot be substituting what the company needs to do; because, in law, the consumer and company are bound by a contract. Once this system is in place, we believe, it will significantly improve the manner in which consumer complaints are handled by insurers. 

On further empowering the Insurance Ombudsman.

We are looking at it. Right now, the office of the Ombudsman is the creature of a government order. Under the current law, the Ombudsman is working like an arbitrator. He mediates between two parties to the dispute. That essentially happened because the government is the owner of the company and also the representative of the complainant, in a much larger sense - since the government is responsible for the welfare of the people. That is the manner in which it was set up. We are expanding the scope of the Ombudsman's office, strictly without any remit even to private insurance companies. So we want to cover it by an enactment. I don't know how we can do that, but we have provided that it should be there in the Bill that is pending before Parliament. But fundamentally, we have to have a system that provides legal redress. It will have to be some sort of a legal system and a formal structure like a consumer disputes mechanism. That may require a separate enactment. Right now, the Ombudsman's office is a second channel for making a complaint. Today, it is working more through moral suasion.

On whether the Insurance Ombudsman can function like the Banking Ombudsman. 

As things stand, a complaint goes to the Ombudsman only if the company has not tackled it correctly. There is some merit in retaining that route. But perhaps, there is merit in looking at a situation where the case is automatically shifted to the Ombudsman after the company has had some reasonable time in which to settle the grievance. The Reserve Bank of India is a vast organisation with 20,000-odd employees. I am not very comfortable with the IRDA growing to that size. I don't think it necessarily improves the quality of regulation.

The Ombudsman operates with some informality. There is no legalese and lawyers. Right now, the Ombudsman's office is staffed by public sector employees; but, if it has a formal legal structure, it may end up growing into a huge bureaucracy with all its ills.

On how the insurance industry will cope with the new cost and expense rules effective 1st September.

Well, insurance companies are worried about having to cut down their expenses, but the fact is that their expenses were too high. They were taking a high-cost path, which I don't think is good for the industry, and now that I have closed the gate, they are worried that they will have to sit down and work, for the first time. I don't think it is going to be as problematic as they fear. The first-quarter numbers have been good, but we need to watch out for the numbers for the December quarter - that will be the test. I don't think it is going to be as dismal as they make it out to be.

On the tussle between insurers and hospitals with regard to high costs.

The hospital costs are one major issue. But the other big issue in health insurance is the fact that it does not cover pre-existing diseases and they don't pay for what can be a pre-existing condition for a certain lapse of time after the policy is in force - usually two to four years. Then there are certain exclusions in a policy like cataract, dental work, etc. And what is misleading about a health insurance is that suppose one gets a dreaded disease, like cancer or diabetes, the treatment involves long-term costs and it is difficult to build a cover in India for these long-term costs.

The total healthcare spending in India is estimated at around Rs300,000 crore per year. And 75% of it is private spend; 25% is under some government scheme or the other. Of the Rs300,000 crore, as much as Rs230,000 crore is spent outside hospitals - outpatient treatment, diagnostic tests and expenses on medicines, etc. Insurance can cover only that Rs70,000 crore and, of that, the insurance coverage was only Rs7,000 crore - only 10%. The claims ratio is atrocious - around 130%, but it is coming down slowly. It didn't matter very much in the 1980s and 1990s when expensive hospitals like the Apollos of the world were not there.

On tackling issues related to the shortage of quality hospitals and medicare.

I see it, two things will happen. I see an expansion in quality hospitals. I see that today in Andhra Pradesh and Tamil Nadu. That will happen all over the country. Second, we actually have a database today where you can see the range of claims. We never had that earlier. For the past two years, we have all the claims raised by any person in a database. It is pretty robust, but still represents only 10% of the spending, which is under insurance cover. We have no information at all about what is spent by those who are not covered by insurance - that data does not exist. But, in the insured category, we can see a fair spread across hospitals in Tier-1, Tier-2 and Tier-3 hospitals; so not everybody is going to five-star hospitals. 

On how ULIPs have been sold.

I must admit that the insurance industry has made a mistake in marketing insurance as investment. It is a risk product; it is meant for safety and security; its fundamental principle is different. In fact, in a country like Canada, they don't even allow insurance to be sold within the banking facility. Maybe somewhere along the line, we lost sight of the fact that insurance is a risk cover. To confuse insurance with investment is a mistake. It would be unrealistic to expect insurance to give the kind of returns one can earn from a well-managed investment.

ULIPs came about as a half-way house from traditional insurance, in order to have some element of investment to beat inflation. I believe it was wrong for companies to get carried away and sell ULIPs entirely as an investment product. So, I am glad to say that we have taken steps to change and also clarify that insurance is a safety product and not an investment product. Let us hope that the pooling of money under such products is not adversely affected; because, if that shrinks, it will affect the money available to the economy for investments that we need. I am hoping that the balance will not be tilted too much, and I am confident that they will not; but the facts of how this will be played out will be clear about a year down the line.

On the controversy over withdrawal of cashless facility on health insurance.

There is a lot of concern expressed everywhere about the withdrawal of the cashless facility for health insurance. There is also criticism about IRDA having done a disservice by not intervening on the cashless facility issue.

The reason why I did not think it was appropriate for IRDA to intervene is because the transaction is a contract between the policyholder and the insurance company. The insurer is committed to reimbursing a health expenditure that has taken place. The cashless facility is an additional service provided, sometimes gratis, in a certain set of partner hospitals. The partner hospital is not a permanent state of affairs. It is a dynamic list that will keep changing. We have mandated that the set of partner hospitals must be made available to the
policyholders at any given point of time.

Now, the public sector insurance companies, in Chennai, Mumbai, Delhi and Bengaluru have found out that, in several hospitals, the same procedure has a different bill raised if it is a reimbursement claim or a cashless claim. They found that the difference was not just the cost of money for the delay in payments, but significantly more. That was a problem. They also discovered that the benefit of bulk buying by hospitals for things like stents, joints, tubes, etc, which was substantial, was captured by the hospitals and not passed on to the consumer. So there were significant anomalies, even within the family of those who had a cash facility or a reimbursement facility - it was not even a comparison between those who had insurance and those who did not.

So I thought the insurance companies were quite right in requiring the hospitals to fall in line or face the consequences. I did not see it as a regulatory issue but a contractual one between the hospitals and the insurance companies. On 1st July, when the insurance companies terminated the cashless facility, there were 320-odd hospitals in these four cities which were a part of the partner network. By mid-July, the number of hospitals that fell in line was 380 - a little more than the original network. Today, there are 450 hospitals who have agreed to join the network and be reasonable with their billing. I still maintain that it was not a regulatory issue. Because of the action of insurance companies, there is some amount of balancing of costs. This will improve in the long run and we do have a long way to go. 

1 decade ago
Companies Investment Plans Loan Finance Pledge Fdr Skr Bg Bank Instruments Drafts FundHolding Properties Lands 9346122200 [email protected]
1 decade ago
I strongly think the bankers should not be given the permission to sell investment products. Look at the amount of mis selling that happens at the banks.
Nipun Tulsyan
1 decade ago
Dear Mr. Narayan,

I guess your own comments are controversy to your acts.

You have been permitting the Insurance Companies to sell a product which have no Risk Coverage for a single penny.

And IRDA is a mere silent spectator.

Dont be confused with your work and act Sir.
Shibajib Dash
1 decade ago
On health insurance the Chairman's plea is ultra legalistic. The Chairman even can not give a nudge to the insurance companies in the matter. When it comes to reimbursement, the time taken is nearly two months in case of speedy reimbursements. Many many patients borrow money in the event of very expensive treatments- on payment of interest. Of course far better than what it is with the case of central Govt employees.
desu sridhar
1 decade ago
what happens in india is always, we do which is harmful to the people and later admit sincerely that we are wrong, and people also forgive and forget. VERY GOOD GENTLEMENS.

Deepak K Rao
Replied to desu sridhar comment 1 decade ago
Dear Sridhar,
Well said. I totally agree with your kind opinion.
Pintu Das
1 decade ago
Is it possible to get the TOTAL amount and Number of policy holder under ULIPs by all the Insurance company ?
1 decade ago
HAHAHAHA... Amusing interview. Captain of a con industry speaking
Nagaraja K
1 decade ago
"I must admit that the insurance industry has made a mistake in marketing insurance as investment. It is a risk product; it is meant for safety and security; its fundamental principle is different. In fact, in a country like Canada, they don't even allow insurance to be sold within the banking facility. Maybe somewhere along the line, we lost sight of the fact that insurance is a risk cover. To confuse insurance with investment is a mistake. It would be unrealistic to expect insurance to give the kind of returns one can earn from a well-managed investment.

ULIPs came about as a half-way house from traditional insurance, in order to have some element of investment to beat inflation. I believe it was wrong for companies to get carried away and sell ULIPs entirely as an investment product. So, I am glad to say that we have taken steps to change and also clarify that insurance is a safety product and not an investment product. Let us hope that the pooling of money under such products is not adversely affected; because, if that shrinks, it will affect the money available to the economy for investments that we need. I am hoping that the balance will not be tilted too much, and I am confident that they will not; but the facts of how this will be played out will be clear about a year down the line."

I am happy that some one who heads the industry has spoken these words.

Mr Prakash P Joshi
1 decade ago
Never think of giving your hard earned money to the Life Insurance Co. by unnecessarily mixing the two totally different concepts i.e. Saving + Investment and Life Risk Cover. By doing so [As per the so called expert advise of the 'friendly' Agent] you will achieve none properly. Let Life Insurance Co. do the job of 'Covering Life Risk' only. There are many other more safe, profitable & flexible avenues available for channelising your Savings>Investment. Also never go for a 'bait' of taking a policy with 'refund of premiums paid'. ALWAYS GO ONLY FOR PURE TERM POLICY with longest possible term. Policies for Children / Pension plans / ULIPS are not profitable. If already trapped in a wrong Life policy there is still profitable solution (exit route) is available of course your 'friendly' Agent won't tell you all this.
Deepak K Rao
1 decade ago
No insurance in the world is more wrongly sold than life insurance. We will discuss about whether you require it or not, later. First, let us have some ideas on insurance which are based upon the advice of some of the world's best writers on financial planning, insurance and investment.
Life insurance should be purchased only if required and to the extent required. A. N. Shanbhag is perhaps the best Indian writer on investment and financial planning. This is what he has to say about life insurance:
"There is no substitute for life insurance.
Life insurance is not an investment.
It is a social and commercial instrument to provide financial security in the event of death of the insured.
If dependents can look after themselves comfortably without the amount insured, life insurance is not needed.
Life insurance is like a life saving drug. If you need it, you must have it irrespective of the cost. If you do not need it and you take it, it can have very bad side effects on your financial health."
So the first question to be asked is: Do you need life insurance?
The answer is simple. You need life insurance only if you have financial dependants. If no one is going to be financially affected by your absence, you do not need life insurance.
The next question is: How much life insurance do you need?
The answer is, enough to keep your financial dependants in the lifestyle they are used to, ensure that they are debt-free, and provide for their reasonably foreseeable future needs. In other words, enough to compensate your dependents for the adverse financial situation caused by your absence.
Let us take a simple example for attempting to calculate how much life insurance a person needs. Suppose there is a family consisting of husband, wife and two very young children. Let us assume that the monthly normal expenditure of this family is Rs 25,000/-. That means a cash requirement of Rs 3 lakhs per annum, to ensure that the family lives in the lifestyle it is accustomed to.
Now supposing the husband is the sole bread winner of this family. His first concern will be that the family will not have the cash flow of Rs 3 lakhs per annum, in case he should suddenly be removed from the scene. Therefore, he must calculate what size of corpus must be invested in a safe avenue of investment like a bank fixed deposit, to ensure that the family gets Rs 3 lakhs per annum. If a corpus of Rs 43 lakhs is invested in a safe avenue like a bank fixed deposit at an average rate of interest of say 7% p.a., it will provide the family with the required income stream.
However, this does not mean that the husband must rush out and straightaway purchase Rs 43 lakhs worth of insurance. There are some deductions to be made from this corpus. For example, he may already be having financial savings of say Rs 10 lakhs. His wife may have financial resources of her own of another Rs 15 lakhs. Let us say that the value of his retirement benefits, existing insurance policies and other cash flows that will accrue in case of his death amount to another Rs 5 lakhs. This total of Rs 30 lakhs must be deducted from the Rs 43 lakhs corpus envisaged earlier, since it will be available to provide the necessary income stream.
Therefore, there is an uninsured gap of Rs 13 lakhs, that is 43 lakhs minus Rs 30 lakhs. This is the amount for which life insurance must be taken. We have of course given a very simple example, assuming that this family has already taken care of its housing requirements. You can discuss with your close family members and calculate your own insurance requirements.
Going back to the example under consideration, if when doing your calculations, you find that your total liquid assets are say Rs 45 lakhs, that is more than the corpus of Rs 43 lakhs that would be required to provide income to take care of normal expenditure, then you do not have an uninsured gap and you certainly do not require life insurance.
One final point. Do not be fooled by advisors who do complicated calculations to arrive at how much life insurance you need. They will add things like child education, marriage expenses, etc., to inflate the quantum of insurance to be taken. No one can predict the future, especially the distant future. The period of vulnerability is one, two, three or a maximum of five years after a death occurs in a family, especially of a breadwinner or important earning member. Human beings are very resilient by nature and are capable of adjusting to, and dealing with, new, adverse situations, in the medium to long term. It is in the short-term that they are vulnerable and need the protection of life insurance.
When we talk about expenses based on which to calculate life insurance needs, we generally talk about normal current monthly expenses. There is however definitely no harm in a slight increase in the estimate of these normal expenses. For example, if we are talking about Rs 25,000/-worth of normal monthly expenses, you certainly can provide for Rs 30,000/- normal expenses for the purpose of life insurance requirement calculations.
However, there is no need to substantially inflate these figures or worry about providing for 10 or 20 years hence. No one can predict the future including what shape general circumstances or economic circumstances including inflation is going to take. The two simple examples are; Twelve years ago, the cost of a telephone call from Mangalore to Bombay was more than 26 rupees per minute. If anyone had predicted that the cost of this call would come down to less than Rs 2.40 per minute, he would have been laughed at and dismissed as a madman. Similarly, if someone had predicted that one day, you would have air tickets of Re 1/- (subject of course to conditions) available in India, no one would have believed the prediction.
There is already a built-in safeguard in taking only normal monthly expenses for insurance calculations. In practical terms, we have observed that the expenses of a family tend to go down immediately after the death of one of its members. This is because expenses that used to be incurred on that particular person are no longer incurred.
Further, as mentioned earlier, it is impossible to predict future inflation rates and future fund requirements. So long as the rest of the family is adequately insured for health, and to the extent required for life, the best you can do in life insurance is enable a corpus to take care of normal expenses for the next few years, say a maximum of 5 or 6 years.
It is important and most people do not realise it when they buy insurance: Human beings are extremely resilient. They tend to adjust sooner rather than later to new situations, including existing, adverse situations. The greatest period of vulnerability is generally not more than, one, two or at the most three years from the date of death of the breadwinner.
The final point for consideration is, what kind of life insurance to take?
There is only one type of life insurance that is truly beneficial for the person buying it, and that is pure term insurance. This type of insurance is sometimes also called pure insurance or term insurance. Term insurance provides compensation in case the risk, against which protection is sought, actually occurs. There is no mixing up with investment. Term insurance is extremely economical.
Going back to our example, in case there is an uninsured gap of Rs 13 lakhs and you go to an adviosor, he will actively discourage you from taking term insurance saying that you get nothing back for all the premiums you pay. He will not mention of course, that you will get protection from the perceived risk, which is the sole objective of term insurance.
If you take a 10-year term policy for Rs 13 lakhs, and if you are aged about 35 years, the term insurance premium may not be be more than Rs 5,000/- per year. If you survive the term of the policy, you get nothing back. No problem. Be happy you survived! If something unfortunate happens, your nominees get Rs 13 lakhs. Term insurance is that simple.
If having taken a term policy, at sometime in the future, you decide that you no longer need insurance; all you have to do is stop paying the next premium. This brings another important point. Life insurance should be taken when there is a need for it and should be discontinued when the need for it disappears. So, life insurance requirements should be reviewed once in a while, at least once in five years.
If you have taken a housing loan, then you must take adequate mortgage insurance, which is nothing but term life insurance, which will result in the insurance company paying off the entire housing loan in case of your untimely demise. Life insurance is too important a subject to deal with lightly.

Roopsingh solanki
Replied to Deepak K Rao comment 1 decade ago
I agree to your points-that often insurance covers are inflated by agents to procure big premium-they talk about present life style expenses not to be affected even after death of bread earner-but i have seen practical examples that easy money(death claim money)has made family members to wrong paths-because kids get spoiled when they get access to big amount of money un-interrupted-this often leads to destruction of family(may not be true in all cases-but it has happened and i have seen it happening in few cases)-so insuarnce is usable when it is really needed like the children studying in engg or medical college-or daughter's marriage-but other wise it is true that sum assured calculated are always inflated bu agents-
Deepak K Rao
Replied to Roopsingh solanki comment 1 decade ago
Thanks for your kind comment on our concept of life insurance.
But I don't agree with the views expressed by you to our take on insurance. Easy money may spoil some people. It will not spoil all people. I have seen housewives who were very grateful that their husbands had taken insurance and used the money wisely and well to take care of their children and ensure that their education was completed.
No one can predict in advance how an individual will react either to power or effortless money. Responsible people will not lose their heads. Irresponsible people will probably blow it up. We cannot predict who will be responsible or irresponsible. Our duty is to advise the investor correctly and educate the investor to the best of our ability. We must then realize that there are things that we cannot control.
I am not bothered by people who behave irresponsibly. But I will be happy if even one family can deal better with the sudden loss of the sole breadwinner, just because a term policy was taken for a large amount at a reasonable premium on our advice. Also note that yourself have stated that irresponsible behaviour is not in all cases.

Deepak vyas CFP CM
1 decade ago
Mr.J Hari Narayan Stament ""The insurance industry has made a mistake in marketing insurance as investment. It is a risk product” is welcome, it seems the IRDA want to really Improve the Distribution system which has seen rampant mis selling. The mis selling in the Industry is because of .
1. Huge Incentive offered in initial year.
2. Illtrained Agent & greedy sales setup in Insurance Industry.
Though It Seems they are taking Corrective steps.
But the most Achievers in the Industry sales Positions have risen by wrong Advice. Like telling
1. High returns.
2. Less time to achieve the result.
Replied to Deepak vyas CFP CM comment 1 decade ago
I agree that present IRDA chairman is trying to streamline things in right direction and make changes which are really needed-i guess he has more ''brain''then SEBI chairman who has proved himself as a destructor of security market and retail investors-what a contradiction in between two reglulator heads-
Mayur Kulkarni
1 decade ago
"The insurance industry has made a mistake in marketing insurance as investment" - Der aaye par durust aaye !

But this 'rat race' is started by IRDA itself, by making "Premium Collection"as the only criteria to rate the performance of an insurance company.

These days insurance companies have become NBFC's gathering FD's & Recurrings and selling Mutual Fund like products, to mobilise more & more investments

Things will not change unless IRDA do not change performance rating criteria for Insurance Companies .

IRDA & Insurance companies will have to decide once & for all wether they want to do true insurance business or they want to do Banking Business ?
Dillip kumar swain
1 decade ago
everything is bakwas.because that ia irda, govt. admin. officer.
anil agrawal
1 decade ago
Most of the cases of mis selling of ULIP & other insurance products belongs to benkasurance channel or by corporate agents. The tele callers sells the products as the products of banks with fixed & high return. After some times these tele callers switched to other Bank or other job. You will not find the same person selling through bank after one year. Their mobile numbers provided at the time of selling for the services changed frequently.The vigilante eye should be kept on such type of selling.
1 decade ago
As per IRDA Charman the consumer and the company are bound by a contract. When the company flouts this norm and introduce a new condition that was not in the original contract what is the remedy available to the consumer. One of the financial wings of Shriram Group of Companies called Road Safety Club Pvt Ltd collected Rs 20000/- for Car Insurance for a period of 8 years. Those who did not make any claim in these 8 years would get their 20000 rupees refunded. Now there are as many as 59 claimants not getting their money as they have to get no claim certificates from these Insurance companies for these 8 years. This was notfound as a condition either in the application form or in the offer document. Companies flouting corporate governance rules go free without any punishment.
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