Private Insurance – Can it be trusted? | How to trust a Private Insurance Company?
Well, the purpose of this article is to analyze the Pro’s and Cons of buying Insurance Products from Private Co.’s…
Background as to “Why” this Article came up!!!
A couple of days ago, one of our blog readers had dropped me a personal email asking if it is a good idea to buy Life Insurance policies from a Private Company. He also mentioned that his dad and uncle are strongly urging him to go with LIC since it is owned by the Government and not put his hard earned money in a private insurance company. It brought back memories from about 8 years ago when I bought my first insurance policy and what my dad told me. So, I thought, it would be a good idea to write an article for the benefit of all those younger generation of Indian Citizens who are being advised by their parents to forget private Insurance companies and believe that “LIC” is the only Insurance Company in India…
Why are our Parents Afraid of Private Insurance Companies?
The last generation of people in India grew up with LIC as the only Insurance Company. In fact, until 2000, there were no private players in the Indian Insurance Industry. Another important aspect is “Safety” and as per their belief, if something is owned by the Government, there is no way they will lose their money. What if the Private Company goes bankrupt? What will happen to our hard earned money in that case?
This fear is what predominantly drives their decision in favor of LIC.
Is their Fear Valid?
To be brutally honest, the answer is NO IT IS NOT VALID.
This whole article is about explaining WHY.
Things We Must Check About a Private Insurance Company
There are many things that we must check about a Private Insurance Co before taking or rather buying Insurance from them. They are:
a. The Company’s Financial Strength & Stability
b. Claim Settlement Track Record
Financial Strength & Stability
How will we check a company’s financial strength and stability? By checking its balance sheet, profit and loss statement etc. But, a majority of us either don’t have the time or the know-how to understand such financial statements. So, what is the easy way out?
Who Owns this Insurance Company? Are they a well-established and profitable group?
For ex: TATA AIG Life Insurance is a joint venture between TATA Group (From India) and American International Assurance (AIA, Hong Kong). Both of these groups have a strong track record of successful performance and profit making. So, if they both partner and have created an Insurance company, the chances of the company being financially sound are Pretty High. Isn’t it?
However, this easy way out isn’t fool proof. What more can we check, as a quicker or rather easier way to find out if an insurance company is financially sound?
The answer is: Check the Solvency Margin
What is Solvency Margin?
The solvency Margin tells us how solvent a company is. In other words, how much cash it has as reserves in order to meet unforeseen expenses/circumstances.
Basically, it is the amount the insurer has to stash away in order to pay the claims during emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning.
Why does a company need to maintain a Solvency Margin?
During the Economic Crisis a few years ago, AIG, the largest Insurance Company in USA was on the brink of a painful collapse. Had the US government not intervened, millions of US Citizens would’ve been left without Life or Medical Insurance, driving the whole US Economy into a dark hole. Thankfully it did not happen.
It is for such unplanned or unexpected situations that we keep a solid Solvency Margin. What if an Earthquake happens in some part of India and hundreds or thousands of innocent people are hurt or killed? Will the company have enough funds to pay all of the insured people? This is exactly why we have a Solvency Margin. If we keep away enough money to pay all insurance policies we are bound to pay, even in severe situations, we can manage and meet our commitments. Isn’t it?
Do you want to know what the number is in India?
IRDA Mandates that Insurance Co.’s operating out of India maintain a Solvency Margin of 150%. It means that, for every Rs. 1000/- insured by XYZ Insurance Co in India, they have to keep Rs. 1500/- with IRDA.
Now, Go back and ask yourselves, is the fear that our parents have with respect to Private life insurance cos in India, is justified?
Now, the Million Dollar Question – Does this mean that we are Totally Safe?
The whole purpose of having a solvency margin is to meet unexpected events whose chances are very very slim. And even if such events like a Terrorist Attack or an Earthquake occur, the solvency margin can take care of it. However, there is still a very small % chance that a company could fail and unfortunately we have no choice but to live with it.
The fact is, this very small % chance holds good for LIC Too. What if the Top Management of LIC elopes out of India with lakhs of Crores of LIC’s assets? Can the Government of India offset such a huge loss immediately?
You may be quick to defend LIC saying, the chances of something like that happening are very very slim. Well my friend, the same is the case with any other Private Player. The chances of them declaring bankruptcy are very very slim and even in that case, IRDA will have enough assets to settle the people who have bought insurance policies from them.
I am not trying to scare you but, did anyone even remotely think that Satyam Computers would be involved in a scandal of the magnitude that happened a few years back? Everyone trusted Satyam but the unfortunate event happened. As with all monetary decisions, we can only hope for the best, but as smart individuals we must always be prepared for the worst and plan for it…
Claim Settlement Track Record
The Claim Settlement Ratio of the Insurance Company can tell us as to how much % of Legit Insurance Claims have been settled by the Insurance Co. So, what is the Claim Settlement Ratio (CSR) of the Top Insurance Co.’s in India???
As of end of 2011 – the Claim Settlement Ratios are as follows. Note that only the top 8 are available here. The others have a Claim Settlement Ratio of less than 75%.
1. LIC of India – 97.5%
2. HDFC Life – 96%
3. Birla Sun Life – 94.6%
4. ICICI Prudential – 94.4%
5. India First Life – 90.6%
6. Aviva Life – 87.1%
7. SBI Life – 82.2%
8. Max New York Life – 78%
As Expected LIC of India has the best Claims Settlement Ratio is India but as you can see, the next 3 are very close in terms of % and have equally impressive CSR.
Private Insurance – The insurance choice
The Verdict is “Yes” buying Insurance Products from Private Cos is a good idea, provided the product you are buying is good and cost-effective. It is always a good idea to compare similar products from more than one company before choosing one.
For ex: If I were to buy Term Insurance for say 50 lakhs, I will do the following:
a. Get Quotations for my age for half my planned amount (25 lakhs) from the Top 5 companies in terms of Solvency Ratio and Claims Settlement Ratio
b. Select the 2 cheapest quotes and buy 25 lakhs worth of Term Insurance Policies from both the companies
This way, I am getting not only the best deal, but also diversifying my risk. Even in the very rare scenario that one of those insurance co.’s goes bankrupt, the other will still be around to settle me. The chances of both of them going bankrupt simultaneously are literally impossible isn’t it?