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Embedded Value: Life insurers must sell protection first and savings later

The gap is wide and this is in spite of the government licensing 23 life insurers in addition to the public sector LIC to sell life insurance in India.

life insurance
Selling life insurance with sum assured below Rs 25 lakh is a sacrilege on the part of the insurers.

Life insurance protection was needed most by people across India during the mayhem caused by Covid-19, when they were losing not only their loved ones but also their bread-earners. But the protection provided by the life insurance policies in respect of most of the claims settled proved utterly inadequate in terms of the amount of sum assured, not enough even for immediate needs of the family left behind.

The experience during 2020 and also during the unprecedented incidence of people losing lives during the fury unleashed by the second wave of corona pointed to a serious impairment in the business of life insurance as it is carried out in India. As on March 31, 2021, the life insurers in India together paid a claim of Rs 1418.17 crore under 21,304 policies as per a statement published by the Irdai. This works out to Rs 6,65,135 per policy. If we presume that most of the deceased people had one policy only we can easily conclude that the sum paid to the family is highly inadequate for a family even with very modest living standards to meet all its expenses even for one year.

Inadequate life insurance

Then what about the cost of living in the several years to follow before the spouse or children start earning? This is an appalling scenario. Inadequate life insurance thus provides a false sense of security and points to a very serious deficiency in the selling strategies of the life insurance companies.

Selling life insurance with sum assured below Rs 25 lakh is a sacrilege on the part of the insurers. In fact, what they have been selling so far has been to satisfy their own business requirement without any sense of responsibility to the society they are thriving upon. The insurance claim paid to people is in no way adequate to protect the financial status or strength of a family in distress but is designed to pull down the bereaved family to the level of the economically weaker sections.

Mortality protection gap

The business of life insurance does have the concept of mortality protection gap which is the difference between the sum of money required by a typical household in case of the bread-earner’s death and the amount available through all financial security instruments such as life insurance and other social security funds. A study by global reinsurance firm Swiss Re has indicated that in India financial protection available to an average policyholder is only 7.8% of the net protection required. The gap is wide and this is in spite of the government licensing 23 life insurers in addition to the public sector LIC to sell life insurance in India.

Even life insurance penetration is low at 2.7% for more than a decade. Penetration rate is the ratio of total life insurance premium earned in a year to the GDP of the country for the relevant year. In spite of the liberalisation of the sector two decades ago the life insurance industry in India is yet to play the role of the financial protector of each and every Indian, whether he survives or he leaves behind his loved ones.

Insurers must focus their attention on selling protection first and savings later. They must not overlook their fundamental responsibility of providing adequate financial protection to an unfortunate family and of enabling one’s loved ones to fulfil their dreams in all circumstances.

The writer is former MD & CEO, Star Union Dai-ichi Life

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