issue focus
Towards Cover for a Rainy Day
Devarakonda V. S. Ramesh observes that it is the risk component in a life insurance product that the
applicant should be interested in, rather than the tax savings or the investment opportunity.
I
nsurance products as a breed,
predominantly, are meant for
meeting the needs of a rainy day. The
need for maintaining this objective of
insurance products is inherent in its very
business. At a time when financial
integration blurs the business contours of
various financial products, the statutory
and regulatory preferences given to
insurance products, be it by way of tax
treatments or by way of a more facilitative
regulatory approach; is to ensure that
insurance as a concept, when penetrated
deep into the society helps both the
economy and the society in the long run
to the economy, as it generates funds with
longer gestation and to the society when
it works as a larger social security
measure. Just as a scientist cannot
imagine the status of science without the
invention of a wheel, an economist
cannot imagine the prosperity of an
economy without the backing of
insurance, as, since the very primordial
state, insurance has remained embedded
in the human culture as a practice of risk
pooling / risk sharing. From such a stage,
when insurance evolved as a means of
solution to individuals and entities and as
a vocation of business to the
- Life Insurance Products
entrepreneurs, it is expected not to lose
sight of its purpose.
Keep in Mind (a non-existent?)
Tomorrow: While various forms of
financial services are available to plan for
varied contingencies of future needs;
insurance, especially life insurance, is the
only option that is available to meet
While various forms of
financial services are
available to plan for
varied contingencies
of future needs;
insurance, especially
life insurance, is the
only option that is
available to meet
unforeseen
contingencies.
unforeseen contingencies. To meet such
contingencies it is desired that a life
insurance product is always containing
the highest possible element of life
coverage that one requires and otherwise
is eligible to have. The other liquidity
features that are embedded in the life
products may only be add on benefits as a
value addition, but they themselves are
not supposed to be the key drivers of the
marketing. Keeping in view the objective
of a particular scheme, it is not unfamiliar
to find restrictions imposed. The
Employees Provident Fund, for example,
whose objective is to make available a
lump sum at the time of superannuation
does not let go any major share of the
funds except in the last 12 months prior to
the retirement. In addition to this, a life
insurance policy is also expected to take
care of the standard of living of the
dependants of a bread earner who has
taken the life policy. If such policy
proceeds are not protected enough to
cover the imminent income gap, the
irda journal May 2012
objective is apparently defeated. In one of
the surveys carried out by NBER in 2001, it
was estimated that in the event of demise
of one of the spouses, the secondary
earner suffers at least 40% decline in the
■
27
 issue focus

standard of living (Sigma 04/2004). If that Keeping the Demographics in view: The
is the case, there is hardly any need to availability of an appropriate product
estimate the suffering of standard of Suitable to the profile choice would be viewed as a potential
living in the case of demise of the lone source of business by all the stakeholders
of the jurisdiction
bread earner of the family. Hence, the of an insurance company, especially by
where the insurance
need for ensuring life coverage at all times the marketing guys, if a specific product is
during the duration of the policy contract.
products are being designed, keeping in view the underlying
There were also various schools of offered, it is ideal that patterns. At a time when potentiality is
thought advocating to bridge the 'life an insurance company abounding in rural areas, we need to
assurance protection gap' (Sigma shall have a mixture reinvent the wheel to find a widely
04/2004) to ensure that all families are of a reasonable acceptable life insurance product to our
adequately covered. Life Assurance rural lands than just marketing the one
product portfolio so as
Protection Gap is computed as 'present that is otherwise meant in general. As per
to ensure the
value of future income required to Census 2011 provisional data, the growth
availability of in literacy rates in rural areas (10.2%) is
maintain survivor's current living
standards plus the amount needed to products of varying more than in urban areas (5.1%). The
meet the debt obligations minus the sum nature at all times. higher levels of literacy rates will certainly
of: the present value of future social have an impact when driving the
security payments to survivors plus life intangible financial services like
insurance proceeds plus one-half of insurance. Further, the number of villages
financial assets'. Leave about targeting to increased by 2279 in 2011 (638588) from
European countries of France, Spain and
cover the protection needs of all families 2001 (640867) and 68.84% of the
Finland; following the stock markets crash
invariably, there is an urgent need to population (833 million) is residing in
in 2001, unit linked business declined by
ensure that all life insurance products are rural areas. These data indicate the
more than 40%. These types of external
adequately provided with reasonable life concentration of a symmetrical mass
shocks may paralyze the business plans in
coverage. potentiality. Hence, the need for a more
the short term, if the company does not
focused approach while designing
have in its portfolio a mixed range of
Diversified Product Portfolio: Suitable to products for rural masses.
products and its intermediaries do not
the profile of the jurisdiction where the
prepare to gear themselves to offer
insurance products are being offered, it is Juvenile products: In rural areas child
altogether a new breed of products. The population decreased by 7% from 2001 to
ideal that an insurance company shall
need for keeping a diversified product 2011 as per the provisional data of
have a mixture of a reasonable product
portfolio may also be appreciated based census - 2011, while in urban areas child
portfolio so as to ensure the availability of
on the following case study. population increased by 10.3%. The
products of varying nature at all times.
T h o u g h , m a r ke t s m a y n o r m a l l y perceptible presence of exclusive outlets
Mediolanum - Case Study: One of the
determine the desired products, quite for blooming buds in urban areas is what
largest Italian life insurers with EUR 3.7
often it is the product availability that demonstrates the growing concern of
Billion traditional life insurance assets
drives the actual sale by the parents on their toddlers. As per a
under management by 1997, radically
intermediaries. Keeping a mixed product research estimate, the baby care market in
transformed to Unit Linked business
portfolio of all classes of products at times India which was estimated at R15 billion
irda journal May 2012

model raising the share of unit linked

also works like a risk management tool for in 2008 is expected to reach R28 billion by
business and reducing the share of
insurers as vagaries of markets may quite 2012. The reasons attributed for this
traditional insurance business to EUR 1.4
often affect a class of products irrespective phenomenon are an increase in
Billion. Following the fall of stock markets
of the status of a company. For e.g. In the disposable incomes, birth rate and
in the year 2002 the profits dropped.

■
28
- - - - - - - - - - - - - - - - - - - - - - - - - - - irm
increased working women population.
These market estimates did not cover the
projected financial needs of these new
entrants. In order to capture a major
share, there is a need for specific juvenile
insurance products that cater to the needs
of their various life stages. While owing to
moral hazard related issues the need for
juvenile insurance is quite limited, if the
duration of policy is for a significant period
covering various contingencies
depending on their lives, there will be a
chance of a major leapfrog into this
market segment and also thus infusing
the awareness on insurance.
Innovation could be only instantaneous,
but not panacea: Though innovation is
the breed of growth, it necessarily need
not be a driver for winning the loyalty of
customers in the long run. For an
intangible financial product like life
insurance, the fundamentals of the
product, that is ensuring an assured life
coverage, would stand firm like a ramrod
amidst the vagaries of businesses at all
times to come. Though it is a natural
demand for innovation to meet the
changing needs; an insurance product
may only need steady, but incremental
improvements. Except in case of a
regulatory or statutory change, there is no
need for a radical short term opportunistic
innovation. Innovation may also prove
fatal, if other markets/instruments
underlying an innovative product do not
develop/mature simultaneously. The
basic tenets of an informed choice to a
customer are complete only when a
reasonable portion of a given product's
prospective policyholders understand the
functioning or the latent intricacies of it. It
is more relevant in case of products where
the underlying instruments in which the
savings portion is promised to be invested
are proposed to be placed in altogether
new breed of securities, or securities that
are yet to be evolved. Though, a fair
degree of reliance is expected from the
insurer's point of view, the play is only fair
if the policyholders have a reasonable
understanding of the functioning of the
products behind the veil. Failure to
achieve this may boomerang as an
alleged mis-sale perforce.
Products may turnaround the brand
visibility of the company: A product that
withstands the tests of the time may
turnaround the brand of the company. On
the lines of Xerox becoming a generic
name, there could be similar cases in
insurance in future, if targeted.
Gauge the targeted market segment:
What is it that shall come first? Is it the
ability of the market segment to
assimilate the product range being
marketed? Or is it the producer that shall
assess the understanding levels of the
The basic tenets of an
informed choice to a
customer are complete
only when a reasonable
portion of a given
product's prospective
policyholders
understand the
functioning or the latent
intricacies of it.
-i
market segment before leapfrogging into
the market? Historically, as part of
business ethics, for any given product, it is
the deliverer who shall gauge the pulse of
the segment and then shall accordingly
customize the product. And in its
endeavor to introduce the innovation,
only a graded approach fulfills the long
term objectives of the market. If it is
otherwise, that is, if it is the market
segment to assimilate the product range
at the outset, it only ends up in mob
psychology inflating the numbers.
Till a stage where the market is driven by
independent financial advisors, there is a
case to identify the market segment and
design the product. In the absence of
higher levels of awareness about the
products available, a need may be felt by
the regulator, on the lines of 'Commission
for Financial Literacy and Retirement
Income' (formerly retirement
commission) of New Zealand to run a
consumer focused website for offering
impartial financial information, if ring-
fencing a product or a market segment is
a dire step. It is estimated that this website
of New Zealand experiences over a
hundred thousand new hits a month. The
more the complexity, the more could be
the regulatory interventions to safeguard
the interests of retail customers. It is said
that today's practice is tomorrow's legacy.
Except if the best practices are established,
there cannot be legacies in future to
inherit, for with no comfort none can
practice.
irda journal May 2012
The author is Deputy Director (Life),
IRDA. The views expressed are
personal.
■
29