Following the devastation caused by cyclone Hudhud in coastal Andhra Pradesh and Odisha, insurance companies have been flooded with claims. Insurance premium is the price the customer pays to address uncertainty. Risk-averse consumers pay huge premia to get life, health, vehicles, property, etc, covered. It should be clear that there is a moral hazard involved here—people who are insured against a specific hazard cease to exercise caution to avoid the hazard. On the other side, insurance companies gain by premia paid on their policies.
What is the ideal situation for both parties? The ideal one for companies is not to end up with the eventuality of having to ‘settle a claim’, but to continue to receive premium payments (the hassles of getting an insurance claim settled are all too familiar). The ideal one for customers is not to land in a substantive situation which requires compensation—such as meeting with an accident or the possibility of eventual death or disability, loss of luggage during travel, sudden ill health requiring hospitalisation and possibly surgery, and/or destruction of property by fire or other natural disaster. The other aspect of the ideal situation for customers is to make the best use of the premium they pay the company so that it gets converted into an investment, which is anyway happening with most companies resorting to ULIPs which give investors the benefits of both insurance and investment under an integrated plan.
How can the above ideal situation be accomplished by the companies—both life and general insurance? Life insurance companies should take steps to preserve the long life of their customers. They should offer periodic advice to their customers on good health, regular exercise, good diet and visits to doctors for preventive check-up (notwithstanding the likes of the Society for Less Investigative Medicine!). If life insurance companies were to facilitate such counselling, the welfare of customers unambiguously increases. Such counselling, and other lifestyle changes, will go a long way in increasing life expectancy of the customers, which eventually defers the payment that life insurance companies are liable to pay their clients upon their death.
What should general insurance companies (those who deal with vehicle insurance) do? They should do everything possible to protect the vehicle and ensure safety of its passengers. They should remind customers about periodic check-ups, ideal speed, importance of driving licence, conformity to traffic rules, and safety tips for prevention of accidents. Such counselling can reduce the incidence of accidents and eventual injury/death to the driver, resulting in the avoidance of a payout by the company.
What should travel insurance companies do? It is in their own interest to ensure that the travel of the customers is uneventful—without baggage loss or the loss of valuables. They should assist customers with related aspects of their travel—such as timely reminders regarding travel documents, flight schedules, precautions regarding weather or other conditions about the destination, foreign exchange and provide them with expert tourist services in their port of destination. Such assistance will help customers manage travel seamlessly. If everything goes well, it will prevent companies a payout.
Similarly, firms dealing with home and mortgage insurance should guarantee that the house is in good condition and risks are taken care of. Financial planners/insurance advisors must help home-owners pay up the mortgage whenever there is an increase in the household’s disposable income. Further, the fire safety of the property should be periodically assessed. These companies have a role to play even with the government—it would be worth their investment to assist the service providers with equipment that can tackle fire, predict floods, earthquakes and tsunamis. This would be to the companies’ own benefit as it enhances the resilience of the insured property.
A look at the websites of leading insurance companies in India reveals that they do not make an attempt to engage in such customer education. The websites of most companies merely warn how customers should be aware of spurious and fake calls.
While the above helps the insurance industry to avoid a payout, what about the customers who pay a premium for every insurance policy they buy? All the above suggestions are for insurance companies in their own self-interest and for human good as well, since customers are happy in a business-as-usual scenario and when they are not subject to uncertainties, for which an insurance claim settlement would be necessary. Companies, on the other hand, are complacent since they do not have to ‘settle claims’, which they are not too happy to do anyway.
The author is professor, Institute for Social and Economic Change.
Views are personal