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| September 30, 2016 |
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Impact 
Recently, one of the largest private sector life insurers in the country made a weak debut on the Indian stock exchanges. But a lukewarm appearance doesn't necessarily always talk about the weakness in the underlying business. There are many factors, apart from the business, such as pricing of the Initial Public Offer (IPO) and the liquidity among others, that decide the success of an issue. As far as Indian private insurance companies go, they have failed to generate meaningful returns on their substantial capital investments over the last decade, which concerns investors.
A report published by McKinsey & Co earlier this year spoke volumes about Indian life insurance industry. Here's what it said… "The industry's negative returns are no surprise, since most Indian private life insurers have chased volume by building large sales forces with significant fixed cost infrastructure and who focus on selling low-margin ULIPs."
The debuting life insurance company has approximately 82% of its portfolio in ULIPs (Unit Linked Insurance Plans). The situation of every private life insurance company in India is more or less the same. This is not to say that, the big daddy in the life insurance sector, a government-owned company, follows a unique path; along with ULIPs, it sells traditional endowment plans that are even less transparent.
If you speak to people who have bought ULIPs, a majority of them would tell you they regret their decision. So to summarise the situation, neither are newer life insurance companies generating adequate returns on their investments, nor are customers buying the bulk of these products satisfied. The question is, who gains from all activities? One word answer is middleman – the agents.
Let's understand how…
Life insurance companies have two options to grow their business. One, take short cuts and carelessly handle investors. The other is more painstaking: to have the patience to see a business growing, make genuine efforts to satisfy customers, create awareness about products, try addressing customers' requirements by offering suitable products, and build customer loyalty.
But it seems that life insurance companies in India have chosen not to take much effort to ensure 'customer delight'. All they've done is hired agents, and paid them generous commissions, as long as they generate more and more premiums. And unfortunately, a majority of insurance agents don't think much about what's best for their clients, whereby they can be optimally insured striking the correct cost-to-benefit. The myopic, commission-driven approach to expand business is self-centred and has made the insured a victim of mis-selling, with sub-optimal insurance coverage.
Agents have been rewarded handsomely for (mis) selling…
In the Financial Year (FY) 2015-16, as per the data published by the Life Insurance Council, life insurance companies in India paid commissions to the tune of whopping Rs 44,585 crore (a jump of of 4.3% over the last year's figures). By paying this massive amount as commissions, insurers have collected total premiums of Rs 6.56 lakh crore; of which, Rs 1.38 lakh crore were the new premiums and the remainder, the renewal premiums. In other words, insurance companies spent a significant 6.8% of the total premiums received towards paying commissions. However, the percentage of new premiums is lower than the share of the fee paid towards new premium of the total commissions paid. While the new premium accounted for 21% of the total premium collected in FY 2015-16, the commissions paid towards the first-year premiums constitute about 32.1%. Simply put, to secure incremental business insurance companies have paid higher commissions. The painful part is, many insurance buyers to whom the policies are missold, opt out of policies within the first few years. In the entire process, the only beneficiaries have been agents.
Banks are equally responsible for the rampant misselling of life insurance products. To earn higher commissions, they appoint dedicated staff to sell insurance policies to existing bank customers. More often, a starting point for any insurance agent to promote a product is commissions unfortunately, rather than assessing wisely what the client requires and the optimal insurance coverage he/she deserves based on the scientific approach of Human Life Value (HLV), where pure term insurance plans offer the right cost-to-benefit. But, a majority of Indians buy endowment or ULIPs – comingling insurance and investment needs.
Instead of convincing prospects to buy term insurance (policies providing you only risk coverage and no survival benefits), agents mostly misguide by asking questions such as: why do you want to spend so much on insurance and earn nothing? As the competition to grab higher market share intensifies further, the companies will become more unwilling to reduce agents' commissions any further. The buyers will have to be more careful.
The latest development is, as the Insurance Regulatory Development Authority of India (IRDA) came down heavily on ULIPs as a product category, insurance companies and insurance agents have shifted their focus back to traditional endowment policies.
The approach to follow …
The average commission paid by the insurance company on the premium amount is 4-5 percentage points higher than the average commission paid by the mutual funds on their Asset Under Management (AUM). If insurance companies create awareness among people and take proactive steps to curbing misselling, they would be able to put the larger chunk of the collected premium to the use of policyholders, as the savings in premium would generate returns.
To address life insurance needs, a pure cover offers the right cost-to-benefit
To ensure that you have an optimal life insurance coverage, follow the scientific approach of Human Life Value, where various factors are taken into account such as a number of dependents in your family, cash flows, and existing investments amongst others.
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Impact
Common Account Statement (CAS) which reflects your consolidated mutual fund holdings across all mutual fund houses, will soon start to provide more information. As directed by the Securities and Exchange Board of India (SEBI), fund houses will now have to disclose the commissions they pay, in rupee terms, to distributors for the businesses he/she solicited from you. However, recent developments suggest unlike directed earlier, mutual funds will have to divulge information about the expense ratio of a plan's scheme. Hitherto, SEBI has insisted that the fund houses would have to disclose the expense ratios of both—direct and regular plans.
Despite this relief provided by SEBI, distributors are still concerned about the future of their business. They believe since it's the first time, their clients would know the exact amount of commission a distributor receives as against the mutual fund schemes pushed or advised, it could have a negative impact on their business.
Those who take investment decisions on their own and utilise services of distributors only to manage the paperwork would feel that their distributors earn an unnecessarily higher amount. For example, a person investing Rs 20,00,000 in mutual funds would see his distributor getting Rs 10,000 as commissions just for submitting applications and coordinating with registrars occasionally for any discrepancy. Similarly, in bearish market phases, investors might see the value of their investments dropping, but the commissions their distributor received may remain more or less the same, as they are paid on the average value of the portfolio. This might make investors unhappy about the fact that although they are losing money, the distributor is unaffected. In reality, if a down phase sustains for long, even distributors will start to bear the brunt.
As a result of this move, many investors may prefer to switch to direct plans to save costs. According to many distributors, this has been the real threat. PersonalFN is of the view that, investors should be encouraged to invest in direct plans without any doubt. But before educating them enough about basics of mutual funds investing, pushing them towards direct plans may not achieve anything.
PersonalFN firmly advocates—investors need to be educated first. Instead of imposing new norms frequently to strengthen the process, the regulator could try and create a predictable environment. Today, less than 10% of Indians invest in mutual funds. So you can easily guess what the real potential of the market could be. Despite these macros, mutual fund houses have been exiting relentlessly. Why? It is up to the regulator to figure out answers to such tough questions.
The strategy to earn commissions without caring about the investors' interest is worrying. Leaving aside all fears, if one analyses the situation today, it seems the regulator is hesitant to take strong action against "copy-pasted" New Fund Offers (NFOs); and this is strikingly strange. SEBI has spoken strongly against the practice of launching new schemes, but hasn't taken any concrete action against mutual fund houses. Imposing a ban on the NFO factory would be the first step to safeguarding investors' interest.
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Impact
Technology seems to be at its best nowadays. Visitors of any Playstore would agree to the wonders Apps can do for you. From your pulse rate to the pulse of the financial markets, Apps are available on every subject. They are created to make life easy and do things that were once the monopoly of experts or artisans; now possible with a variety of Apps. For example, earlier you needed an expert to tell you which mutual fund scheme to invest in. Lately, web-based platforms have reduced our reliance on experts to an extent, as these started offering a list of top rated funds. This substantially reduced our universe of available options, making it simple for you to select the mutual fund scheme right for you. Apps are taking this process one step further.
Advantages of using Smartphone Apps for investing in mutual funds...
Genext Apps not only offer you recommendations on the mutual fund schemes you should invest in and along with that, they allow you to analyse and compare schemes based on various parameters. Moreover, they facilitate transactions, more importantly in paperless form, that too within few minutes of you downloading an App. Even the tedious process of Know Your Client (KYC) can be completed just using your smartphone.
Some Apps offer Value Added Services such as cash flow management and financial budgeting. In the recent times, these robo Apps have proliferated, and a whole host of new ones will hit the market in the future. Therefore, it is important for you to understand which App is better for you. Well, you might get attracted to relying only on reviews and star ratings, but that approach won't assist you every time. As a smart investor, you should know how to segregate a fantastic App from an ordinary one.
To read more about this story and Personal FN's views over it, please click here.
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Impact
With rising income levels and massive development of intercity expressways, car ownerships are growing like never before. Consequently, the number of road accidents are rising, mainly due to a reluctance to follow safety measures while driving. Opting for comprehensive motor insurance policies has become the need of the hour. Until now, people driving rashly and paying little attention to road safety warnings were paying the same premium as those who drive safely and honour road-traffic rules. The good news is, drawing a distinction has become possible now - thanks to the advent of technology in the mechanical and telecommunication sector and product innovations in the insurance industry
The insurance companies providing motor insurance have been running pilot projects to see the acceptance to the concept of Pay As You Drive (PAYD), as well as its viability.
What is it?
Telematics insurance or black box insurance is a variation within motor insurance that allows you to pay a premium as per the quality of your driving and car usage.
How it works?
A device called black box is fitted into a vehicle and is linked to GPS. This lets the insurance track your car and analyse your driving behaviour. So the device will let your insurer know how many times you broke traffic rules, cut lanes, applied emergency brakes, and overused accelerator among others. The insurance companies will be able to store this data for their future use and based on your calibre, would assign you a score. Higher the score, higher will be the possibility of getting good discounts on motor insurance premiums.
Apart from availing of discounts on premiums, telematics devices can also help you improve the life of your vehicle as they will alert you on the performance of the vehicle and when there's the need to run a maintenance check. And that's not all. These devices will help immensely in case your vehicle meets with an accident. You can get medical aid and roadside assistance to tow your car faster. Let's not forget, tracking the stolen vehicle would become incredibly easy. The device manufacturers believe, modern black box devices will help insurance companies reduce costs associated with settling insurance claims. This is clearly a win-win situation for both, insurers as well as policy buyers.
To read more about this story and Personal FN's views over it, please click here. |
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Speaking at the Annual General Meeting (AGM) of the Association of Mutual Funds in India (AMFI) for the last time before his term ends, SEBI chief, U.K. Sinha advocated mutual fund houses to promote direct plans. However, while he said that, he also clarified SEBI's stance on distributors. "If I was anti-distributor, then why would I have allowed extra incentive to mobilise collections for Beyond Top 15 towns and the transaction fee that distributors can collect?"
According to Mint dated September 28, 2016, the proportion of direct plans in the total AUM of equity-oriented schemes was 14% in December 2014, which now has improved to 18% in June 2016. Reiteration by the SEBI chief to promote direct plans shows its commitment to protecting investors' interest, and the clarification about the stance of SEBI on distributors shows that it is not anti-distributors either. Such a balanced approach may help to promote the growth of the mutual fund industry.
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Human-Life Approach: A human-life approach is a method of calculating the amount of life insurance a family will need based on the financial loss the family would incur if the insured person were to pass away today. It is usually calculated by taking into account a number of factors including but not limited to the insured individual's age, gender, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
(Source: Investopedia)
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Quote : "Stocks aren't lottery tickets. There's a company attached to every share."- Peter Lynch
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