Many reasons are there to buy an ideal life insurance product and therefore awareness in this regard has dynamically increased among the people. Scenario is changed dramatically and people have started to approach Insurance Companies or their Agents directly and willingly. It was the time when an Insurance Agent was considered to be an unwanted fellow like an obstinate (stubborn) beggar at your thresh-hold. Now, hundreds of National and International Insurance Companies are active in this field and they are reaping a tremendous business worldwide.
My object in this Article is apart from those routine subjects on Insurance. Prior to my commencement of it, I’ll illustrate an interesting literary example of a dog masticating (chewing) a piece of bone. While chewing hurriedly, sometimes its palate, jaws or tooth- gums are injured with sharp ends of the bone and starts trickling of blood drops form the mouth. The dog becomes very happy thinking that it has got a nutritive bone, but in fact, it is its own blood.
I won’t discourage the persons already insured or willing to be insured. With my above illustration, my simple thought is just to make you understand that the Insurance Companies are not like Charitable Trusts who become helpful to you in the times of your troubles. Here is the business between the Insured and the Insurer based on ‘give and take’ theory. Insurance Companies manage the funds collected through premiums of yours and monetary benefits whatever they are, are from your paid money. In this sense, we have to understand this system, that’s it.Insurance policy is an Agreement with clauses written with connectives or conjunctions like ‘If’ and ‘then’ in the sentences. It is just like betting on cricket matches or election results. What it may be, but it has a vital importance in present time of risky human life.
In the sad events of untimely deaths, the family members of the deceased feel like having received some mysterious and timely help. Such handsome amount at a time in hands proves to be a boon in such critical times when the chief bread earner of the family passes away. But, here I am going to discuss whether these monetary benefits, which are largely highlighted while selling any plan or product to you, are really advantageous. We have to go deep and peep into the realities. We have to work out the true value of those money which we had invested in form of premiums in the past years. We have to study this issue taking into consideration the Inflation Ratio year to year increasing high and high. I put before you a Case Study of a Life Insurance Policy.
(1) Basic amount paid through premiums is more (INR 15336) than sum (INR 30000) assured.
(2) Basic excess amount (INR 15336) comes to INR 28719 counted as CII (Cost Inflation Index).
(3) INR 28719 as in above (2) and Loss of INR 17187 on maturity shown in above Table come to INR 45906.
(4) INR 45906 as in above (3) is greater than Bonus amount INR 37710 inclusive of Interim and Addl. Bonuses.
(5) Insurance Company has still INR 8196 (45906-37710) in excess with it.
(6) Insurance Company enjoys INR 45336 i.e. year-wise INR 2266.80 free of Interest.
(7) Actuarial Professionals, Bankers, Cost Accountants and Business Management Consultants can calculate what profits can be earned from the amount shown in above (6).
(8) Over and above profit as mentioned in above (7), we should not forget that company has already saved INR 8196 as in above (5).
(9) Cumulative profit as in above (8) is the gross profit of the company and we can understand that the company has to bear administrative expenses and maintain Reserve and many other funds.
(10) Financial Experts mentioned in (7) above only can calculate actual net profit also and this entire saving is considered to be against the risk factor of the life of the Insured. We may estimate it randomly and whatever it may come is, no doubt, on greatly higher side taking into consideration very little death ratio for pre-matured claim settlements..
Basic purpose of this Article is to highlight the facts that at the time of claim settlement of the policy, whatever amount the Policy holder receives is decisive in context to the Inflation. My Readers can verify the issue in question from the above Sample Case Study with the calculation as (519-150) X100/150 = 246% i.e. two and half times increase in inflation. You can evaluate the buying power of our INR 1 in the financial year 2006-07 compared to 20 years ago. We will quail with fear seeing that INR 1 of the year 1987-88 has reduced to INR 0.40 in 2006-07. Ghost of inflation quivers everywhere in the world. USA is a Capitalist Developed country and even though if above calculation is converted in American Dollar for the duration of 20 years; $ 1 will also reduce to 55 cents. Over the last 20 years, the average yearly increase in their CPI (Consumer Price Index) is around 3% (Compounded 180%) i.e.1.8 times increase in inflation compared to our two and half times.
Insurance companies should introduce such policies which can give shield against Inflation. SBI Life – Sudarshan has introduced such Plan known as “Increasing Sum Assured Plan – the COLA (Cost of Living Adjustment). SBI claims that this Plan serves as automatic hedge against inflation. It allows you to increase the Sum Assured automatically by paying an additional premium compared to the Fixed Sum Assured. Moreover, the life cover also automatically increases during the period as added protection to the family.
Now, pay attention towards the underlined phrase and judge whether the Plan gives you any protection against inflation in real meaning. Here also we will have to say ‘No’ because the purpose of getting shield against inflation with the initial same premium is not served. This is also decisive as it is just like an additional/subsidiary policy. Here is nothing new but the same as ‘Pay more and get more’. Our expectation is “Pay the same and get no more, but reasonable’ and this concept only can serve our purpose being discussed here.
To provide protection to the Insured against burning issue of inflation worldwide, the Actuarial Consultants will have to work out such Plans which can give maximum protection against inflation to the Insured.
Keeping in mind above sample case study, I suggest the following points to be considered for the solution of the issue of inflation to some extent.
(1) Premium rates should be revised to justified lower level.
(2) Bonus should be paid every year or allowed to be adjusted against premium of the respective year.
(3) Reasonable Inflation incentives which can be worked out easily with CIIs of commencing and maturing years of the respective policy should be paid with final settlement payment such as bonus is paid under an additional head of disbursement.
Summing up, the Actuarial Professionals have to keep in mind the only concept of ‘How much return is enough to the Insured’ at the time of framing Tariffs of the premiums in various plans. There should not be the exploitation of the Insured. In India, IRDA* is an authority who controls the Insurance Companies to protect the reasonable interests of the Insured. This Authority is still expected to pay more attention towards the tariffs of the premiums fixed by the Insurance Companies. Tariffs of premiums should be such moderate and reasonable that both the Insured and the Insurer can survive. Due to liberalization, many new entrants have been added in the Insurance Industry during the last decade. Services of Companies have, no doubt, raised high at International standards due to their competition, but real competition on tariffs of premiums is still expected.
– Valibhai Musa
* Insurance Regulatory Development Authority (IRDA)
This Article is presented here just like a debate on ‘Inflation and Insurance’ and the Author is not at all against this system. Many benefits are there in getting insured, but far-seeing-ness in selecting any plan or product is necessary as it is a long term contract with your Insurer to make your future bright. Comments, suggestions, queries and criticisms are highly solicited from the Readers.