The term “insurance”, in common parlance, is the protection of the economic value of an asset. The key term here is protection, but the questions is, for how long the economic value of an asset is to be protected? There would hardly be any debate to this question, since it is a natural instinct of every human being to protect the financial loss the near and dear ones might have to undergo due to any unfortunate or unforeseen event. This protection, or compensation of financial loss, can be done through life insurance.
To be precise, life insurance should be purchased keeping in view the long-term perspective. Buying a life insurance policy or inducing someone to buy life insurance for a shorter period of time defeats the very purpose of life insurance, which, as the name suggests, is a long-term objective. However, what constitutes short-term and long-term?
The IRDA (Non-Linked Insurance Products) Regulations, 2013, and IRDA (Linked Insurance Products) Regulations, 2013, clearly stipulate that the minimum term of such a policy should be for five years for individual product.
So, does a five-year policy term fulfil the long-term objective of a life insurance? Prudence dictates that the answer would perhaps not be in the affirmative. One may, however, question whether it would be convenient for older persons to go for life insurance for a five-year term—say, those between the 55-60 years age bracket? Then again, for this age group, are life insurance products more suitable or do pension products make more sense? Moreover, has proper pitching been done to customers before selling a product?
In January 2017, the IRDA constituted a committee to make recommendations on the amendments to be carried out on the regulations of 2013 pertaining to Non-Linked and Linked Insurance Products. Accordingly, the committee submitted its detailed report, dated December 7, 2017, with a review of the regulatory provisions and its recommendations. Surprisingly, the committee has recommended that the minimum coverage term restriction of five years should be removed for life insurers to match different customer needs and emerging channels. This implies that insurers can design life insurance products for a term less than five years once the new regulations are framed. However, will this not defeat the long-term objective of life insurance?
Offering life insurance products with lower policy term may help customers having low and unsteady income. However, this group of customers primarily consists of the informal sector workers, for which micro insurance appears to be a better fit. According to the International Labour Organisation, micro insurance is a mechanism to protect the poor people against multiple risks (accident, illness, death in the family, natural disasters, etc) in exchange for insurance premium payments tailored to their needs, income and the level of risk. Micro insurance is aimed primarily at the developing world’s low-income workers, especially those in the informal economy who tend to be under-reserved by the mainstream commercial and social insurance schemes. In fact, the report on “Unorganised Sector Statistics” by the National Statistical Commission (2012) states that, in India, more than 90% of the workforce and about 50% of the national product are accounted for by the informal economy. The report further adds that a high proportion of socially and economically underprivileged sections of the society is concentrated in informal economic activities, and that the high levels of growth of the Indian economy during the past two decades are accompanied by increasing informalisation. This huge workforce in the informal sector remains untapped and, hence, the importance of micro insurance is undeniable.
The regulator may play a pivotal role by regulating the minimum term of a life insurance policy taking into consideration the long-term perspective. Further, the maximum age at entry may also be regulated, which would be suitable for a customer to enter into a life insurance contract for the overall benefit of the life insurance industry.
Arunava Dey is researcher, Indian Institute of Management, Indore