Published in Mint on 6th August,2014, Written by Kapil Mehta
Term life insurance is a difficult concept. There are no returns if you live but a large payment to the family if you die. Term life accounts for less than 10% of sales in India compared with over 35% in the US. Apart from being an excellent insurance product, term insurance sales are the finest indicator of the life insurance industry’s maturity. A high proportion of term indicates that the sales force is sophisticated enough to explain this difficult concept. If many buyers purchase term insurance, it shows they understand the value of life insurance.
There are two obstacles to overcome when selling term cover. First, insurers must get better at underwriting. That’s the process by which an insurer assesses an application, decides whether to issue the insurance and sets a price. Second, customer and intermediary fraud must reduce.
The rigid underwriting that life insurers follow results in several good applications being declined. A rich businessman applied for a term cover of Rs.30 crore. The proposal was rejected because he had travelled to the Ivory Coast and Ghana last year. For some reason this was considered risky. I argued the case: It was just a two-day visit; he will never go there again; crossing the road in Delhi is as risky; these countries play better football than India. The insurer firmly rejected the case.
A 35-year-old bought term insurance a year ago for a premium of Rs.8 lakh. Earlier this year, the same insurer introduced a cheaper term plan that would have cost this gentleman Rs.5 lakh. A neat saving of Rs.3 lakh. The person applied to the insurer to cancel the initial policy and purchase a new one. I was horrified when the insurer refused to accept his application because its information technology system did not allow for a term policy to be cancelled. So, it was the old expensive insurance or nothing at all. I escalated this to the company’s chief executive officer, who allowed the application. In this fracas, the person is now uninsured because his old insurance has lapsed and the new one is yet to be issued. I have requested the person not to die before the new term plan is issued.
An entrepreneur who has set up a successful chain of speciality restaurants was denied a cover of Rs.3 crore because his salary was low. But what of the significant business value that the entrepreneur has created and owns? A former colleague set up a Rs.100 crore-fund to invest in start-ups. The insurer was willing to insure the founders of the companies the fund invested into but not the investor.
It takes so much effort to pursue these cases that most buyers give up. Why do insurers shy away from non-standard risks? There is a sameness to term insurance underwriting across insurers. If your application is rejected by one insurer, you can be certain that others will have the same response. This is because most risk is reinsured with a handful of reinsurers who set prices and drive underwriting. Effectively there are not 24 insurers competing but just five reinsurers. Developed markets are different. Insurers retain more risk and compete on underwriting. An insurer’s preferences are known and drive business. One insurer has lower rates for smokers, another will underwrite hypertensives and yet another will issue insurance to people in disaster-prone areas. In one case, a US insurer gave preferred rates to cigar smokers because these smokers were wealthy with access to quality healthcare.
Fraud is a big issue. In many cases intermediaries urge the buyer to hide information saying they will “take care” of the claim. This does not work. Claims where material information is not disclosed, are not paid. Buyers are also to blame. A senior executive wrote in his application that he does not smoke. Wisely, the insurer did a cotinine test and found nicotine. I asked the buyer why he had lied and was told that a couple of cigarettes a day is not considered smoking; at least in Europe. In this case, the insurer gracefully agreed to issue the insurance at higher smoker rates.
In 2013, there were 78 death claim related complaints filed with the insurance ombudsmen. Fifty one of these were dismissed because the applicant had withheld material facts. It is astonishing that a buyer will commit fraud and then actually appeal for justice! Fraud reduces over time as insurers emphasise upfront underwriting rather than claim-stage investigations. Over time, buyers realize that hiding material information harms them because their claims do not get paid.
Insurers must look at their sibling general insurers to see how they have grown health and personal accident insurance. The key to market development has been a vibrant corporate business; and a flexible underwriting approach that considers inputs from buyers and intermediaries. Life insurers should inculcate these.
Four years ago, the largest US term insurance distributor visited India to see if he could build a similar pure term business here. I was disappointed to see him conclude that the market was not ready. That should change now. It’s about time we pressed forward on this important life insurance product.