VANTAGE POINT

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Don’t ignore insurance

Feb 22, 2016

Our idea of insurance is woven around actions that provide mental peace. We prod children to get into a course of study that would lead to a good job. We believe that the premium we pay for that education is good insurance for the children, who would be able to earn a stable income in future. It is common to hear parents speak of education as an investment rather than a cost.

So much so, parents don't think twice about pushing children to become a ballet dancer, swimming ace and aeronautical engineer all rolled into one. The willingness to incur costs for unknown future benefits seems to come easily. But we are not able to think of simple term insurance in the same manner. We think that if we saved and invested, we would be fine.

Building long-term wealth is the preferred approach to securing our future. Most of us go about it without including adequate life insurance in the mix. A term insurance product provides actual tangible benefit against the very real risk of losing a life. Many of us dislike the product for two reasons: We don't want to think about death and we consider paying a premium and getting nothing, if one survives the policy, to be a bad idea When the desired outcomes are positive and encouraging, we are motivated into action. Fees for coaching are easier to pay. Repairs of ancestral homes are routinely done. But when the visualisation involves disease and death, we don't think about it. Long-term wealth-building strategy is incomplete without life insurance. But, we don't see its merit.

Assume that a 30-year old investor wants to build a long-term corpus of `1 crore. If he chooses to save and invest to meet his goal, he would need to put aside say, `60,000 a year (for 30 years, at an assumed return of 10% p.a.). If his life is at risk before he builds this wealth, he should have it covered, so that his family receives the corpus anyway. Term insurance cover of `1 crore for 30 years costs `10,000 a year in premium (actual rates vary between `7,500 and `14,000 depending on the terms of the policy).

To an ordinary investor with modest means, building a corpus of `1 crore takes time. Insurance is the hedge that he can offer his family, even as long-term wealth building is in progress. Term insurance enables doing it at a fraction of the cost it takes to build the actual corpus, which makes it worthwhile. In itself, the term policy seems wasted, but combined with the investment, it seems logical and less painful. The positive outcome from investments can offer motivation, providing the basis to view the term insurance as a back-up plan for the same goal, if something were to happen mid-course. An insight that is quite blatantly misused in the insurance marketplace.

Investors typically buy a "bundled" product that offers both insurance cover and investment return. The problem is that the premium required for the same benefits is much higher, due to two reasons. First, the cost of the product is higher, which leaves a smaller amount of contribution towards insurance. Second, the investment returns are lower, which leads to a higher contribution.

The better the return on investment, the greater the speed with which an investor moves to the desired level of wealth. A combination of a term plan premium of `10,000 and a lower investment of `50,000 a year would still lead our investor to `1 crore, if we increased the requisite return on investment to 11% p.a. When it comes to long-term wealth, return is the lever that matters. If investment products in the market offer a better return, an investor who combines these products with a simple term insurance will end up with a higher level of wealth and equivalent risk protection.

Therefore, products that offer a combination of insurance and investment should be able to match or better the cost and benefit of putting a term insurance and an investment product together. If their costs or investment performance is poorer, they short-change the investment goals of the investor. Investors lean on the comfort of protection offered and fail to see the poor return; or they are too taken in by the tax benefit to evaluate whether they are paying too much.

Many investors buy the wrong insurance products, which yield poor s returns, especially when they are bought at the end of the year from persuasive agents who demonstrate the tax benefits. Higher amounts are invested every year into products that offer lower return and a high cost insurance. Both cover and corpus are short-changed for tax benefit. Investment decisions that are made in the tax season tend to focus too much on tax savings. Investors routinely commit to insurance premia that they cannot keep up with and end up discontinuing ambitious policies that they bought without thought, or surrender them at a loss. Building long-term wealth requires both investment and insurance. Do not compromise that goal by settling for poor investment return and expensive and inadequate insurance cover, even if aggressive product promotions and persuasive sellers have you believe otherwise.

Source: The Times of India



Coming soon: Mother of all health schemes

Feb 16, 2016

The health ministry plans to roll out a centrally sponsored 'Health Protection Scheme' which will replace several of the existing government-supported health schemes including Rashtriya Swasthya Bima Yojana (RSBY), the government's flagship health insurance plan catering to families below poverty line (BPL).

The proposed scheme will initially provide a minimum cover of Rs 50,000 to around 8 crore families or almost 40 crore people. It will also offer special top-up benefit packages for senior citizens. "The proposal is to converge all centrally-sponsored health insurance schemes and in their place launch a new and superior centrally sponsored health protection scheme," said a senior health ministry official.

According to the proposal, the total budget for the scheme over next five years is pegged at Rs 23,415 crore. The central assistance would be given at a fixed rate of Rs 500 per family per annum for the core scheme. The state contribution is pegged at Rs 300 per family per annum.

To cover 8 crore beneficiary families, the total estimated cost for premium would be Rs 6,400 crore per year and the Centre's contribution is pegged at Rs 4,000 crore a year. Apart from this, the projected premium outgo on account of senior citizens is estimated at around Rs 1,000 crore per year with the Centre contributing Rs 600 crore annually.

The ministry has suggested setting up of a National Health Agency for effective implementation of the scheme as well as linking it with larger healthcare systems such as National Health Mission and other such government programmes. The proposal was discussed at a highlevel meeting on Monday.

Moreover, beneficiaries under the proposed scheme will be listed not merely on the basis of income but also based on deprivation and "identified occupational" categories as per the socio-economic caste census. The move is significant because it will expand the beneficiary base from merely people below poverty line to cover families based on socio-economic strata. Besides, the scheme is also expected to bring in place an efficient implementation mechanism.

The plan comes a year after the RSBY was transferred from the labour ministry to the health ministry with the idea of making it a part of a universal health assurance plan. Though with budget constraints and limited resources the health ministry failed to roll out the universal insurance plan at once, the latest proposal is being looked at as a major step in the direction. Meanwhile, the ministry has also hived off some other schemes like free drugs and diagnostics - which were initially part of the larger scheme - to launch them separately.

The latest proposal of having a single centrally sponsored scheme will also help the government streamline and address problems of overlapping beneficiaries and benefit packages under different schemes. "Such families that are covered under the insurance scheme of other central departments, but not covered under the core scheme, will also be eligible to be covered under the scheme but respective ministries or departments would have to provide funds for such beneficiary families to the ministry of health and family welfare," a detailed note on the proposal said.

Source: The Times of India



Irdai pushes for better governance of insurance firms

Feb 16, 2016

Insurance companies may soon have to overhaul their boards with Insurance Regulatory and Development Authority of India (Irdai) emphasising on governance compliance norms.

The chief executive of a large life insurance company said the new norms are the first step towards motivating insurers to list on stock exchanges. “A stronger board is the maiden step towards listing on the exchanges. While we already have a strong system on the boards in the industry, it is the next step towards strengthening the structure,” he said on request of anonymity.

Irdai said the objective of new guidelines is to ensure the structure, responsibilities and functions of board of directors. It has asked shareholders to elect or nominate directors from various areas of financial and management expertise such as accountancy, law, insurance, pension, banking, securities, economics, with qualifications and experience that is appropriate to the company.

The regulator said the board of directors of an insurer belonging to a larger group structure should understand the material risks and issues that could affect the group entities, with attendant implication on the insurer. Currently, industry experts said, there is no particular difference between board of an insurer which is part of a larger group and others.

The board of directors is also required to have a minimum of three independent directors. As required under Section 149 of the Companies Act, 2013, there shall be at least one woman director on the board of every insurance company. This norm has not yet been followed by all insurers.

However, insurers which have less than three independent directors, have to ensure that they comply with this requirement within one year of the date of notification of these guidelines. As a matter of prudence, not more than one member of a family or a close relative of an independent director as defined in the Companies Act or an associate (partner, director etc) should be on the board of an insurer as independent director.

Irdai has prescribed a minimum lock-in period of five years from the date of certificate of commencement of business of an insurer for the promoters of the insurance company and no transfer of shares of the promoters is permitted within this period without the specific approval of the authority.

“Retired insurance company CEOs or managing directors will not be able to understand the business needs, but also provide expertise for decision making. Hence, boards will now have more number of such people,” said the head of a mid-size private general insurance company.

The board will be responsible for defining standards of business conduct and ethical behaviour for directors and senior management and also defining the standards to be maintained in policyholder servicing and in redressal of grievances of policyholders.

The board will be required to establish appropriate systems to regulate the risk appetite and risk profile of the company. It will also enable identification and measurement of significant risks to which the company is exposed in order to develop an effective risk management system.

Source: Business Standard



Irdai may make electronic insurance mandatory in some cases

Feb 12, 2016

Insurance regulator Irdai today came out with a proposal to make it mandatory for insurers to issue electronic policies if the sum insured exceeds a specified threshold for life, health and general products.

According to the draft proposal, electronic insurance would be mandatory if the sum insured for term life insurance and general insurance policy is Rs 10 lakh or more, and in case of health Rs 5 lakh or above. For policies other than pure term, the threshold is Rs 1 lakh or Rs 10,000 single annual premium.

The draft, on which comments have been sought by Irdai till February 26, also proposes mandatory issuance of electronic policy for motor insurance and individual travel insurance (overseas).

Under the amended Insurance Act, the insurers have the responsibility of issuing electronic policies above the threshold fixed by the Irdai.

In view of the mandate under the Act, the regulator has proposed Irdai's (Issuance of electronic insurance policy) Regulations, 2016 mandating electronic insurance policies beyond stipulated sum insured or premium limit.

"Every insurer shall issue in electronic form insurance policies that fulfil the criteria ... In terms of sum assured or premium. Electronic policies may be issued by the insurers either directly to the policyholders or through the registered Insurance Repositories," the draft said.

It further said that policies issued in electronic form should be deemed compliant only with digital signature.

"Only such policies shall qualify as e-insurance policies," Irdai has proposed.

The policyholders who wish to avail the facility of electronic insurance policy could do so by registering their choice with the insurer. There would be charges for the conversion.

Regarding discount on electronic insurance policies, the draft said an insurer could offer discount in the premium rates "in accordance with the rates filed under the Product Approval guidelines".

Creation of an e-proposal form similar to the physical proposal form has also been proposed.

Further, every insurer would mandatorily issue e-insurance policies in disaster prone and vulnerable areas.

Based on the information provided in the proposal form, the insurers may either accept or reject the proposal.

In case the proposal is rejected the insurers would have to communicate that to the prospect through e-mail.

Source: Business Standard



Budget 2016: Un-tax my insurance, requests the average insurance buyer

Feb 12, 2016

“Unbreak my heart”, crooned Toni Braxton in a clever play on words. Unfortunately there is nothing too clever about the tax regime on insurance in India. World over, insurance and pension funds are the long term drivers of the economy, bringing in capital for the core sectors of the economy. Insurance and pension funds are long term in nature, and these industries promote thrift and sound financial ideals in a population.

Consider the following two facts:

1. Today India needs massive and consistent funds in the infrastructure space to promote growth and reduce poverty. While banks play an important role in extending credit lines, it is insurance and pension funds that fund government initiatives and invest in long tenure instruments, providing a powerful source for government outlays.

2. India has no social safety net. Most of the population is left to the vagaries of employment and the weather. Rising health costs have bankrupted homes and loss of loved ones has destroyed families. The insurance and pension industries attempt to fill this gap, a gap appreciated by the prime minister himself in the recently rolled out Bima Yojanas.

It therefore follows that the government must be doing everything in its capacity to encourage this inflow into insurance and pension funds. Sadly, this does not appear to be true. While on the one hand the government encourages investment in the insurance sector, on the other hand it taxes the products so heavily as to make the business difficult to do. Let us consider the issues one by one.

Service Tax: By its very definition this tax must be applied if a service is offered. To apply service tax on annuity or pension premiums and protection premiums (term life, health and so on), is a travesty of the tax. The cover provided is a product: why should that be taxed, pushing up the cost of ownership by almost 15 percentage points? One can understand tax being applied, if a service is sought on the policy, like an address change or the like and the company charges a fee for effecting the change. Pushing up the cost of ownership of a protection product, especially in a country that has virtually no state-sponsored safety net is illogical. By the same logic, one should be paying service tax on the entire amount invested in a mutual fund rather than (as is currently done) on the management and advisory fees!

Taxing Policy Returns on Maturity: For long, insurance policy maturity returns were not taxed. A few years back, these were bought into the tax net for short duration policies. The ostensible reason was to prevent money laundering – although it defeats me as to why a smart person would launder money through an insurance policy. Insurance policy returns are lesser that what a savings bank account will offer you, primarily because most (up to 80%) of the premiums are invested in government securities offering guaranteed but fairly low returns. On the one hand the returns to the policyholder are low and he has already indirectly contributed to the economy through his premiums being invested. To add insult to injury, he is taxed on the meagre outcomes as well! Should we not at least consider bringing it on par with long term mutual funds (which have no taxes) or bonds, where after three years there are no taxes?

Income Tax on Annuity and Pension Payouts: To me this represents the abdication of reason. Differential tax treatment on pension payouts is a critical need both to encourage long term savings and to provide an inflation-protected means of living to senior citizens. If revenue is the sole consideration, exemptions up to specified amounts must be provided. We can introduce an age cut-off, say 60 years by which most Indians retire, before which proceeds will be taxable. After the age of 60, proceeds should be tax exempt. The benefits to the government in terms of long term funds collected and to the citizenry in terms of alleviation of post retirement penury are immense. Some wisdom in this aspect will actually increase investments providing long term investible funds for the nation and also provide a much needed fillip to the insurance industry that is currently suffering from a prolonged bout of distress in terms of business performance.

Rationality in taxation can encourage behaviour changes and even lead to an increase in savings rates. Lack of vision and the inability to go beyond immediate revenue considerations is almost always a dangerous combination. A combination of service tax and income tax is a double whammy that will have long term repercussions on an industry that is the life blood of long term finance needs.

Source: MoneyControl.com



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