Life Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%. In this short span of 15 years the growth in the Insurance Industry in India has just exploded in terms of growth and in fact, it is the fastest growing sector in India. So, at this crucial time, the most relevant question would be “Can I buy Insurance Products from Private Insurance Company’s?”
Well, the purpose of this article is to analyse the Pros and Cons of buying Insurance Products from Private Co.’s…
Things We Must Check About a Private Insurance Company
There is 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. Some ways are mentioned bellow to check the financial strength & stability.
Who Owns this Insurance Company? Are they a well-established and profitable group?
For ex: Birla Sun Life Insurance is a joint venture between Birla Group (From India) and Sun Life (Canada). 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?
What is the role of 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?
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?
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.
Let’s take an example of Satyam Computers - 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 per the analysis of 2014-2015 – 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. Birla Sun Life – 95.30%
2. HDFC Life – 94%
3. Aviva Life – 82.6%
4. LIC of India – 99.52%
5. Kotak Life Insurance - 98.29%
6. ICICI Prudential – 94.4%
7. SBI Life – 89.4%
8. Max New York Life – 93.86%
The Conclusion 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 you want to buy Term Insurance for say 50 lakhs, you can apply following way:
a. Get Quotations for Your age for half your 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, you will get not only the best deal, but also diversifying your risk. Even in the very rare scenario that one of those insurance co.’s goes bankrupt, the other will still be around to settle you. The chances of both of them going bankrupt simultaneously are literally impossible isn’t it?
Happy Insuring Yourselves!!!