Life insurers' claim settlement improves

Traditional products are likely to offer lower returns due to falling interest rates

With the stock market going up in 2015-16, insurance policyholders started going back to unit-linked insurance plans (Ulips). According to the Insurance Regulatory and Development Authority of India’s (Irdai) Annual Report 2015-16, Ulips registered growth of 12.62% in premium in 2015-16, compared to 2014-15. In comparison, the growth in premium from traditional products was 11.72% for the same period.
 
Low interest rates helped Ulip sales: In the backdrop of a declining interest regime, some insurance companies have withdrawn traditional policies offering high yields and would be refiling for policies with lower yields. More are likely to follow suit.
 
“Any drop in interest rates is generally favourable to businesses, which triggers growth in equity market. So, in the medium term, it should increase demand for Ulips as the market sentiment improves,’’ says Srinivasan Parthasarathy, senior executive vice president, chief & appointed actuary, HDFC Life.  
 

Growth in Ulips is partly due to the positive stock market and partly as customers understand the product better now than earlier, says Abhijit Gulanikar, chief officer, business strategy. However, most customers look at past bonus rates and decide whether to buy a traditional policy or not.
 
IDBI Federal Life Insurance has seen a rising demand for Ulips, especially single premium policies, says Karthik Raman, CMO, head of products & strategy. “A single premium Ulip works well because customers invest only once. They cannot withdraw the money for five years due to the lock-in period. After five years, they can switch the funds, redeem or continue with the investment depending on the market conditions,’’ he says.
 
Ulips shouldn’t be the choice of product:  Though lured by a boom in stock markets, policyholders have gone for Ulips, they should ideally avoid these products. If at all they buy it, they should look at the proportion of protection and savings element while investing in Ulips. For a younger customer, whose income is expected to increase in future, a policy with high insurance cover is a good option, as the cost of cover at younger ages is low. Also, at younger ages, the funds chosen should be more weighted towards equities, says Parthasarathy.
 
Most financial planners, like Tarun Birani, founder and CEO, TBNG Capital Advisors, advise clients to only invest in mutual funds and buy only term life plans for insurance. But, some of the new Ulips are comparable to a balanced fund, provided one stays invested for 10 years or more. “In the new Ulips, the fund management charges are lower than MFs. The only drawback is that the upfront charges in the first one to five years are higher. But, over a longer term, there are chances of getting higher returns than MFs,’’ he says. There are some Ulips where the total charges are 1.5% annually, including mortality charges, commission, etc. In comparison, MFs charge up to 2.5%.
 
Claim settlement ratio: The Annual Report also says while the life insurance industry’s claim settlement ratio has increased, it continues to be better for LIC, compared to private life insurers. For private life insurers, it was 91.48%, and for LIC it stood at 98.33%. How should one evaluate this ratio while comparing policies?
 
As claim repudiations typically take place in the initial years of the policy and as private industry is relatively new compared to LIC, claims repudiation for private players would naturally be higher. “When comparing companies on settlement ratios, bear in mind the age of the companies and the products that the companies have sold in the past. A company that has predominantly sold savings product historically is more likely to have a higher settlement ratio one that has focused on term plans,” says Parthasarathy.
 
Customers must also look at the ease of making a claim and how fast the company settles the claim, not the claim settlement ratio, says Raman. “If the company says the claim will be settled in eight days, that is more comforting to the nominee than a company which will settle the claim but take a month or more,’’ he explains.
 
According to Gulanikar, while the claim settlement ratio is an important one, customers need not worry about their claims as long as they disclose their health conditions. In fact, now insurance companies cannot deny claims after three years, even if it is a fraud. So, the claim settlement ratio is no longer critical, adds Santosh Agarwal, head, life insurance, Policybazaar.com.